UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-3445
--------
THE MERGER FUND
---------------
(Exact name of registrant as specified in charter)
100 SUMMIT LAKE DRIVE
---------------------
VALHALLA, NEW YORK 10595
------------------------
(Address of principal executive offices) (Zip code)
FREDERICK W. GREEN
------------------
THE MERGER FUND
---------------
100 SUMMIT LAKE DRIVE
---------------------
VALHALLA, NEW YORK 10595
------------------------
(Name and address of agent for service)
1-800-343-8959
--------------
Registrant's telephone number, including area code
Date of fiscal year end: SEPTEMBER 30
------------
Date of reporting period: SEPTEMBER 30, 2005
------------------
ITEM 1. REPORTS TO STOCKHOLDERS.
- --------------------------------
THE
MERGER
FUND(R)
ANNUAL REPORT
SEPTEMBER 30, 2005
November 16, 2005
Dear Fellow Shareholder:
As previously reported, The Merger Fund(R) showed a gain of 5.9% in its
fiscal year ended September 2005. A healthy level of M&A activity provided the
Fund with a tailwind during much of this period, but we did encounter a few
pockets of turbulence that weighed on our results. More specifically, of the
approximately 200 arbitrage situations in which we held positions during fiscal
2005, 12, or about 6%, were either terminated, renegotiated or put at risk by
issues that remained unresolved at the end of September. In fiscal 2004,
roughly 10% of our investments fell into the "troubled" category. We'd like to
think that this year-over-year improvement was due entirely to better deal
selection on our part, but a long career in merger arbitrage has taught us that
a little luck doesn't hurt, either. Rounding out the list of the most important
drivers of the Fund's performance, arbitrage spreads-the percentage profit to be
made on successful deals-were generally a little more favorable in the 12 months
ended September. Because many arbitrageurs use borrowed funds to enhance
returns, the upward trend in short-term interest rates has led to higher rate-
of-return requirements and wider spreads on newly announced deals.
As is customary in these annual reports, we have included a series of charts
which reflect the nature of the arbitrage opportunities in which the Fund has
recently invested. Chart 1 shows that as of September 30, friendly transactions
represented more than 98% of the dollar value of our equity holdings, while
unsolicited, or hostile, takeover attempts accounted for less than 2%. The
latter figure, which is down from 5% a year earlier, indicates that hostile
deals continue to make up a relatively small percentage of total M&A activity.
Many would-be acquirers apparently have concluded that friendly takeovers are
hard enough to get right and that hostile deals are even more problematic. Such
concerns are well-founded. As we have noted on numerous occasions over the
years, for a hostile takeover attempt to succeed, the stars must be in perfect
alignment for the bidder, and such opportunities come around about as often as
Halley's Comet. Not only are target companies routinely protected by poison
pills, staggered boards and other takeover defenses that have withstood legal
challenge, but many companies have also chosen to be legally domiciled in states
whose corporate-governance statutes are especially unfriendly to hostile
suitors. Presumed by the courts to be acting in their shareholders' best
interests, corporate boards are generally free to reject unsolicited offers out
of hand, even richly valued bids that would have the support of those very same
shareholders. Only a highly motivated acquirer willing to wage a protracted
battle can hope to prevail against the "just say no" defense, and even with such
a commitment, victory is not assured; at the eleventh hour, a white knight may
agree to pay more and steal the prize. In last year's annual report, we wrote
about Oracle's dogged pursuit of PeopleSoft, an effort that eventually succeeded
but only after the buyer invested 19 months in the process. This year's award
for the most-persistent suitor goes to Omnicare, which finally was able to
acquire rival NeighborCare after a struggle that lasted 14 months. To put this
award in perspective, however, there were very few other candidates.
Chart 2 shows that approximately 88% of the acquisitions in which the Fund
has recently invested are strategic in nature, meaning combinations that involve
a corporate buyer-typically operating in the same industry as the target-whose
objective in doing the transaction is to enhance shareholder value on a longer-
term basis. The rest are financial deals, mostly going-private transactions in
which an investor group that includes the target's management uses large amounts
of borrowed money to buy out the public shareholders. In most cases, the goal
in such highly leveraged deals is to pay down debt and then either sell or IPO
the company, ideally within a relatively short time frame of just a few years.
At the end of September, financial transactions represented about 12% of our
arbitrage investments, up from 7% a year earlier and the highest level since we
started keeping this statistic in 1996. Although there are multiple
explanations for the fact that financial players now account for a bigger share
of M&A activity, at the top of the list is the vast pile of cash available for
leveraged deals. Buyout firms are estimated to have access to as much as $150
billion in uncommitted equity capital. These funds, in turn, can be leveraged
several times over with debt financing. And the increased willingness of
financial buyers to work together on certain deals-seven private-equity firms
took part in the $11 billion purchase of SunGard Data Systems-means that even
larger targets can be pursued, with the result that relatively few publicly
traded companies are too big to be taken private. These "club" deals also help
to avoid bidding contests among private-equity shops. Another reason for the
upturn in going-private deals is that a growing number of corporate executives
have become frustrated with the burdens of public ownership, including
compliance with Sarbanes-Oxley, an unprecedented degree of scrutiny by
regulators and the financial press, shareholder activism and Wall Street's
obsession with short-term results. For these executives, the choice between
continuing to operate in a goldfish bowl and taking a shot at making serious
money with a successful LBO may not be that close a call. From a merger-
arbitrage perspective, we tend to prefer strategic deals to LBOs because the
latter have historically been a little more accident-prone, and we adjust our
rate-of-return requirements accordingly.
Chart 3 shows the type of consideration to be received by the selling
company's shareholders in transactions in which The Merger Fund(R) held
positions at the end of September. This year's chart shows that when it comes
to deal-making, cash is king. Mergers and acquisitions involving at least some
cash make up 73% of the Fund's portfolio, while all-stock transactions account
for just 13%, down from 33% two years ago. The growing preference for cash can
be explained by the same factors that we discussed in last year's annual report:
the reluctance of many acquirers to issue new shares at what they consider to be
unattractive price levels; the fact that takeovers are often more accretive to
the buyer's bottom line when done as all-cash deals, especially when borrowing
costs remain relatively low; the upturn in going-private transactions, in which
the target's shareholders receive only cash; and the preference of some sellers
for cash deals, whose value is unaffected by fluctuations in equity prices.
Another factor is at work this year. Corporate balance sheets are bulging with
cash, and using a portion of it to make acquisitions may be a strategically
attractive option for many companies. Spending excess cash for takeovers can
serve another purpose, as well. Cash-heavy balance sheets sometimes attract
activist shareholders who demand large stock buybacks or special dividends,
options that may not be in the company's best interests on a longer-term basis.
In evaluating potential arbitrage investments for the Fund, the mix of cash and
stock to be received is generally not that important to us, but deal terms do
impact our hedging strategies. When investing in stock-for-stock mergers with
fixed exchange ratios, we attempt to lock in the arbitrage spread by selling
short the acquirer's shares at the same time that a long position is established
in the target. In this way, the Fund is hedged against a decline in the
acquirer's stock price prior to the close of the transaction.
Chart 4 shows our investments grouped by economic sector. The Fund's
holdings continue to be fairly well diversified, with no sector accounting for
more than 20% of the portfolio. For the second year in a row, healthcare deals
represent the largest percentage of our investments, while the financial-
services sector, historically a fertile area for M&A, has moved into second
place. The biggest change from fiscal 2004 is the decline in the Fund's
exposure to telecommunications, a sector which last year represented 18% of our
holdings but now accounts for just 4%. The past year saw a number of large
telecom mergers, but few of these deals appeared to offer compelling arbitrage
opportunities, and we chose to invest elsewhere. The consumer non-durables
sector, which includes food and beverage companies, clothing manufacturers and
suppliers of other consumer staples, now represents the Fund's third-largest
exposure, up from just 6% a year earlier. Because we take a "bottom- up"
approach to deal selection, the issues that are specific to a given merger or
takeover play a much greater role in our analysis than such "macro" factors as
the sector in which the companies operate. Having said that, we do attempt to
diversify our investments by industry group in order to make the Fund less
vulnerable to systemic risk, or the risk that unexpected industry-specific
events could adversely impact a number of pending deals at the same time.
Chart 5 shows the Fund's arbitrage investments grouped by the geographic
region in which the target company is domiciled. At the end of fiscal 2005,
approximately 86% of the deals in our portfolio involved U.S.-based targets,
while 14% involved targets located in Canada, Europe and Asia. A year earlier,
non-U.S. deals accounted for about 9% of our investments. Although The Merger
Fund(R) has the resources and expertise to invest globally, we recognize that
foreign deals play out against a different political, corporate-governance and
regulatory backdrop than comparable transactions in the U.S., and the Fund won't
invest overseas unless we have done our homework and have a firm handle on the
risks involved. Speaking of risks, the Fund routinely hedges the currency risk
in cross-border deals, so that fluctuations in exchange rates rarely have a
material impact on our returns.
Chart 6 shows the total dollar value of mergers and acquisitions in the U.S.,
by quarter, since 1991. The chart indicates that M&A activity has recovered
smartly from the depressed levels of 2002 but remains well below the record pace
seen in the 1998-2000 period, when the annual volume of corporate
reorganizations averaged close to $1.5 trillion. Of the many reasons for the
recent strength in deal-making, probably the most important is the return of
confidence to corporate boardrooms. A few years ago, executives had to deal
with the aftermath of 9/11 and the attendant economic and geopolitical
uncertainties. At about the same time, a wave of accounting scandals raised
questions about the adequacy of Corporate America's financial controls, and
directors were reluctant to greenlight acquisitions until they could be assured
that their own house was in order and that the financial statements of potential
targets could be relied upon. Now that the U.S. economy has shown its
resiliency-even in the face of record trade and budget deficits and soaring
energy prices-and accounting-related concerns have been addressed, executives
are better able to focus on how to position their companies for the long term.
This is a process that often involves consideration of mergers, acquisitions or
some other type of corporate reorganization. Investment bankers have another
reason to be optimistic these days. An increasing number of newly announced
transactions are being well-received by investors. Transformational deals that
take the acquirer in an entirely new direction or acquisitions dependent on
aggressive assumptions regarding revenue synergies are still a hard sell, but
straightforward combinations that promise realistic cost savings are now often
given the benefit of the doubt, especially if the takeover premium is not too
generous. Absent an external shock to the system, we expect that M&A activity
will remain strong and that the Fund will have a good supply of new deals in
which to invest.
Sincerely,
/s/Frederick W. Green
Frederick W. Green
President
CHART 1
PORTFOLIO COMPOSITION
BY TYPE OF DEAL*<F1>
Friendly 98.5%
Hostile 1.5%
CHART 2
PORTFOLIO COMPOSITION
BY TYPE OF BUYER*<F1>
Strategic 87.5%
Financial 12.5%
CHART 3
PORTFOLIO COMPOSITION
BY DEAL TERMS*<F1>
Stock with Fixed Exchange Ratio 9.1%
Stock with Flexible Exchange Ratio 4.1%
Cash & Stock 26.7%
Cash 46.0%
Undetermined 14.1%
*<F1> Data as of September 30, 2005
CHART 4
PORTFOLIO COMPOSITION
BY SECTOR*<F2>
Healthcare 20.4%
Financial Services 19.0%
Consumer Non-Durables 16.3%
Consumer Services 10.1%
Media & Entertainment 9.6%
Technology 6.8%
Energy 6.7%
Business Services 4.3%
Telecommunications 3.8%
Capital Goods 2.6%
Transportation 0.4%
CHART 5
PORTFOLIO COMPOSITION
BY REGION*<F2>
United States 86.5%
Europe 6.9%
Canada 5.3%
Asia 1.3%
*<F2> Data as of September 30, 2005
CHART 6
MERGER ACTIVITY
1991 - 2005
Year 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 $225.6564 $131.2077
Source: Securities Data Corp.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE MERGER FUND AND THE S&P 500
Date The Merger Fund S&P 500
---- --------------- -------
9/30/95 $10,000 $10,000
9/30/96 $11,121 $12,033
9/30/97 $12,325 $16,900
9/30/98 $12,426 $18,429
9/30/99 $15,074 $23,553
9/30/2000 $17,961 $26,682
9/30/2001 $18,666 $19,579
9/30/2002 $17,099 $15,568
9/30/2003 $19,131 $19,366
9/30/2004 $19,512 $22,053
9/30/2005 $20,659 $24,755
AVERAGE
ANNUAL TOTAL RETURN
------------------------------------
1 YR. 3 YR. 5 YR. 10 YR.
----- ----- ----- ------
The Merger Fund 5.88% 6.51% 2.84% 7.53%
The Standard & Poor's 500 Index (S&P 500) is a capitalization-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. This chart assumes an initial
gross investment of $10,000 made on September 30, 1995. Returns shown include
the reinvestment of all dividends. Past performance is not predictive of future
performance. The graph and table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Investment return and principal value will fluctuate, so that your shares, when
redeemed, may be worth more or less than the original cost.
THE MERGER FUND
EXPENSE EXAMPLE
SEPTEMBER 30, 2005
As a shareholder of the Fund, you incur two types of costs: (1) redemption fees
and (2) ongoing costs, including management fees; distribution and/or service
fees; and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds. The Example is
based on an investment of $1,000 for the period 4/01/05 - 9/30/05.
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, and other
extraordinary expenses as determined under generally accepted accounting
principles. You may use the information in this line, together with the amount
you invested, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading entitled "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds. Please note that the expenses shown in the table are meant
to highlight your ongoing costs only and do not reflect any transactional costs,
such as redemption fees. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 4/1/05 VALUE 9/30/05 PERIOD 4/1/05 - 9/30/05*<F7>
----------------- -------------- ----------------------------
Actual +<F3> (1)<F5> $1,000.00 $1,028.00 $8.80
Hypothetical ++<F4> (2)<F6> $1,000.00 $1,016.39 $8.74
+<F3> Excluding dividends on short positions and interest expense, your
actual cost of investment in the Fund would be $6.91.
++<F4> Excluding dividends on short positions and interest expense, your
hypothetical cost of investment in the Fund would be $6.88.
(1)<F5> Ending account values and expenses paid during period based on a 2.80%
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 1.73%,
multiplied by the average account value over the period, multiplied by
183/365 (to reflect the one-half year period).
THE MERGER FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2005
SHARES VALUE
------ -----
COMMON STOCKS -- 116.68%
APPAREL MANUFACTURERS -- 3.79%
592,800 Reebok International Ltd.(i)<F16> $ 33,534,696
1,311,600 Tommy Hilfiger Corporation(a)<F8>(i)<F16> 22,756,260
--------------
56,290,956
--------------
BANKS -- 8.70%
697,520 Amegy Bancorporation, Inc.(e)<F12> 15,784,878
568,882 Bayerische Hypo-und Vereinsbank AG(a)<F8>(e)<F12> 16,020,417
2,179,053 Hibernia Corporation -- Class A(g)<F14> 65,458,752
541,799 Westcorp(i)<F16> 31,911,961
--------------
129,176,008
--------------
BROADCASTING -- 3.26%
1,541,200 Lin TV Corp -- Class A(a)<F8>(g)<F14> 21,499,740
493,850 SBS Broadcasting SA(a)<F8>(i)<F16> 26,845,686
--------------
48,345,426
--------------
BROKERAGE SERVICES -- 1.93%
5,773,944 Instinet Group Incorporated(i)<F16> 28,696,502
--------------
BUILDING PRODUCTS -- 0.94%
250,000 York International Corporation(i)<F16> 14,017,500
--------------
CABLE TV -- 3.82%
1,849,000 Cablevision Systems Corporation(a)<F8>(g)<F14> 56,708,830
--------------
COMPUTER SOFTWARE -- 6.00%
176,951 Macromedia, Inc.(a)<F8> 7,196,597
5,795,000 Siebel Systems, Inc.(i)<F16> 59,862,350
601,098 SS&C Technologies, Inc.(i)<F16> 22,024,231
--------------
89,083,178
--------------
CONSUMER FINANCE -- 7.11%
474,984 E-LOAN, Inc.(a)<F8>(h)<F15> 1,990,183
2,673,700 MBNA Corporation(h)<F15> 65,879,968
1,113,500 Metris Companies Inc.(a)<F8>(h)<F15> 16,290,505
388,010 Providian Financial Corporation(a)<F8>(g)<F14> 6,860,017
215,300 WFS Financial Inc.(f)<F13> 14,466,007
--------------
105,486,680
--------------
DATABASE MARKETING SERVICES -- 0.79%
1,108,413 infoUSA, Inc.(f)<F13> 11,771,346
--------------
DEFENSE ELECTRONICS -- 0.98%
354,275 Engineered Support Systems, Inc.(f)<F13> 14,539,446
--------------
DEPARTMENT STORES -- 2.15%
318,700 The Neiman Marcus Group, Inc. -- Class A(i)<F16> 31,854,065
--------------
DIAGNOSTIC TESTING -- 0.97%
329,500 LabOne, Inc.(a)<F8>(f)<F13> 14,333,250
--------------
DIALYSIS PRODUCTS & SERVICES -- 3.09%
968,500 Renal Care Group, Inc.(a)<F8>(i)<F16> 45,829,420
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 6.33%
1,619,830 The Gillette Company(d)<F11>(e)<F12> 93,907,214
--------------
DIVERSIFIED ENTERTAINMENT -- 2.36%
1,937,800 Time Warner Inc.(g)<F14> 35,093,558
--------------
EDUCATIONAL PRODUCTS -- 2.93%
892,611 School Specialty, Inc.(a)<F8>(i)<F16> 43,541,564
--------------
ELECTRONIC EQUIPMENT -- 0.84%
1,039,200 Leitch Technology Corporation(a)<F8>(f)<F13> 12,398,885
--------------
FOOD & BEVERAGES -- 6.66%
1,055,119 Dreyer's Grand Ice Cream Holdings, Inc.(e)<F12> 86,614,719
385,900 Vincor International Inc.(a)<F8>(f)<F13> 12,206,058
--------------
98,820,777
--------------
FOOD RETAILING -- 2.75%
1,592,700 Albertson's, Inc. 40,852,755
--------------
HEALTHCARE FACILITIES -- 1.15%
1,392,900 Beverly Enterprises, Inc.(a)<F8>(g)<F14> 17,063,025
--------------
HOME HEALTHCARE -- 0.42%
196,500 Apria Healthcare Group, Inc.(a)<F8>(g)<F14> 6,270,315
--------------
INSURANCE -- 1.57%
4,479,500 Skandia Forsakrings AB(e)<F12> 23,343,067
--------------
LOTTERY SERVICES -- 2.94%
1,361,400 GTECH Holdings Corporation(g)<F14> 43,646,484
--------------
MANAGED CARE -- 2.53%
470,750 PacifiCare Health Systems, Inc.(a)<F8>(i)<F16> 37,556,435
--------------
MEDICAL DEVICES -- 8.13%
1,048,400 Guidant Corporation(g)<F14> 72,224,276
640,573 INAMED Corporation(a)<F8>(i)<F16> 48,478,565
--------------
120,702,841
--------------
MEDICAL INFORMATION SYSTEMS -- 1.78%
1,400,300 NDCHealth Corporation(i)<F16> 26,493,676
--------------
OFFICE PRODUCTS -- 0.35%
430,226 Dictaphone Corporation(a)<F8>(d)<F11> 5,162,712
--------------
OIL & GAS DISTRIBUTION -- 1.28%
619,300 Terasen Inc.(e)<F12> 18,981,212
--------------
OIL & GAS EXPLORATION & PRODUCTION -- 6.20%
688,900 PetroKazakhstan Inc. -- Class A(g)<F14> 37,496,827
843,300 Spinnaker Exploration Company(a)<F8>(i)<F16> 54,553,077
--------------
92,049,904
--------------
OILFIELD EQUIPMENT & SERVICES -- 0.66%
200,000 Precision Drilling Corporation(a)<F8>(i)<F16> 9,858,000
--------------
PHARMACEUTICALS -- 3.85%
888,000 Chiron Corporation(a)<F8>(g)<F14> 38,734,560
16,000 ID Biomedical Corporation(a)<F8>(h)<F15> 480,800
678,000 IVAX Corporation(a)<F8>(f)<F13> 17,872,080
--------------
57,087,440
--------------
PHARMACY SERVICES -- 0.62%
332,900 Priority Healthcare Corporation(a)<F8>(f)<F13> 9,274,594
--------------
PUBLISHING & MARKET RESEARCH -- 2.55%
1,196,150 IMS Health Incorporated(f)<F13> 30,107,096
250,000 VNU NV(d)<F11>(e)<F12> 7,800,204
--------------
37,907,300
--------------
REAL ESTATE INVESTMENT TRUSTS -- 3.58%
303,833 Capital Automotive REIT 11,761,375
947,800 Gables Residential Trust(e)<F12> 41,371,470
--------------
53,132,845
--------------
RESTAURANTS -- 2.64%
869,200 Wendy's International, Inc.(i)<F16> 39,244,380
--------------
SATELLITE COMMUNICATIONS -- 2.16%
1,325,300 PanAmSat Holding Corp.(i)<F16> 32,072,260
--------------
SPECIALTY RETAILING -- 4.63%
1,157,704 Brookstone, Inc.(a)<F8>(e)<F12> 23,084,618
680,294 Electronics Boutique Holdings Corp.(a)<F8>(e)<F12> 42,749,675
173,200 Party City Corporation(a)<F8> 2,930,544
--------------
68,764,837
--------------
TELEPHONY -- 4.24%
3,615,898 Price Communications Corporation(a)<F8>(i)<F16> 59,481,522
1,331,800 Versatel Telecom International NV(a)<F8> 3,520,106
--------------
63,001,628
--------------
TOTAL COMMON STOCKS
(Cost $1,716,604,303) 1,732,360,315
--------------
WARRANTS -- 0.00%
Dictaphone Corporation
241,889 Expiration: March, 2006,
Exercise Price: $20.000(d)<F11> 15,239
--------------
TOTAL WARRANTS
(Cost $26,608) 15,239
--------------
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
PUT OPTIONS PURCHASED -- 0.08%
Standard and Poor's 500 Index
1,500 Expiration: December, 2005,
Exercise Price: $1,150.00 1,095,000
--------------
TOTAL PURCHASED OPTIONS
(Cost $2,795,100) 1,095,000
--------------
PRINCIPAL AMOUNT
- ----------------
TAX ESCROW NOTES -- 0.08%
$2,244,534 NextWave Wireless LLC Secured Note 1,234,494
--------------
TOTAL TAX ESCROW NOTES
(Cost $1,234,494) 1,234,494
--------------
CONVERTIBLE BONDS -- 0.15%
Adelphia Communications Corporation
27,725,000 6.000%, 02/15/2006(b)<F9> 1,109,000
26,583,000 3.250%, 05/01/2021(b)<F9> 1,063,320
--------------
2,172,320
--------------
TOTAL CONVERTIBLE BONDS
(Cost $19,481,852) 2,172,320
--------------
CORPORATE BONDS -- 3.99%
Adelphia Communications Corporation
11,818,000 9.375%, 11/15/2009(b)<F9> 9,218,040
23,905,000 10.250%, 06/15/2011(b)<F9> 18,526,375
11,695,000 9.250%, 10/01/2022(b)<F9> 8,712,775
10,000,000 Brookstone Company Inc.
12.000%, 10/15/2012
(Acquired 09/23/2005,
Cost $9,883,300)(c)<F10>(e)<F12> 9,900,000
14,500,000 Toys "R" Us, Inc.
7.875%, 04/15/2013(f)<F13> 12,905,000
--------------
TOTAL CORPORATE BONDS
(Cost $65,766,031) 59,262,190
--------------
SHORT TERM INVESTMENTS -- 0.00%
VARIABLE RATE DEMAND NOTES -- 0.00%
882 U.S. Bank, 3.590% 882
--------------
TOTAL SHORT TERM INVESTMENTS (Cost $882) 882
--------------
TOTAL INVESTMENTS (Cost $1,805,909,270) $1,796,140,440
--------------
--------------
Percentages are stated as a percent of net assets.
(a)<F8> Non-income producing security.
(b)<F9> Security in default.
(c)<F10> Restricted under Rule 144A of the Securities Act of 1933.
(d)<F11> Fair-valued security.
(e)<F12> All or a portion of the shares have been committed as collateral for
open short options.
(f)<F13> All or a portion of the shares have been committed as collateral for
foreign currency contracts.
(g)<F14> All or a portion of the shares have been committed as collateral for
written option contracts.
(h)<F15> All or a portion of the shares have been committed as collateral for
equity swap contracts.
(i)<F16> All or a portion of the shares have been committed as collateral for
the credit facility.
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 2005
SHARES VALUE
------ -----
1,048,000 Adelphia Communications Corporation -- Class A $ 94,320
244,097 Adobe Systems Incorporated 7,286,295
1,338,950 Bank of America Corporation 56,369,795
373,600 Capital One Financial Corporation 29,708,672
35,325 DRS Technologies, Inc. 1,743,642
536,253 GameStop Corporation -- Class A 16,875,882
72,125 Kinder Morgan, Inc. 6,935,540
908,775 Medicis Pharmaceutical Corporation -- Class A 29,589,714
1,584,975 The Procter & Gamble Company 94,242,614
287,194 Teva Pharmaceutical Industries, Ltd. -- ADR 9,598,023
517,785 UnitedHealth Group, Incorporated 29,099,517
423,284 Verizon Communications Inc. 13,837,154
626,212 VNU NV 19,538,326
1,006,285 Wachovia Corporation 47,889,103
159,285 Washington Mutual, Inc. 6,247,158
141,000 Zions Bancorporation 10,040,610
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $371,212,096) $379,096,365
------------
------------
ADR - American Depository Receipt
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF OPTIONS WRITTEN
SEPTEMBER 30, 2005
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
CALL OPTIONS
Albertson's, Inc.
14,149 Expiration: October, 2005, Exercise Price: $22.50 $ 4,527,680
1,778 Expiration: October, 2005, Exercise Price: $25.00 186,690
1,965 Apria Healthcare Group, Inc. 44,213
Expiration: October, 2005, Exercise Price: $35.00
1,000 Beverly Enterprises, Inc. 5,000
Expiration: October, 2005, Exercise Price: $12.50
Cablevision Systems Corporation
5,975 Expiration: October, 2005, Exercise Price: $30.00 717,000
2,500 Expiration: October, 2005, Exercise Price: $32.50 37,500
8,880 Chiron Corporation 1,620,600
Expiration: October, 2005, Exercise Price: $42.50
13,614 GTECH Holdings Corporation 1,497,540
Expiration: October, 2005, Exercise Price: $32.50
Guidant Corporation
750 Expiration: October, 2005, Exercise Price: $65.00 412,500
9,734 Expiration: October, 2005, Exercise Price: $70.00 1,898,130
3,713 Hibernia Corporation -- Class A 167,085
Expiration: October, 2005, Exercise Price: $30.00
1,757 Lin TV Corp -- Class A 17,570
Expiration: October, 2005, Exercise Price: $15.00
PetroKazakhstan Inc. -- Class A
6,457 Expiration: October, 2005, Exercise Price: $50.00 3,228,500
432 Expiration: November, 2005, Exercise Price: $50.00 233,280
2,000 Precision Drilling Corporation 361,290
Expiration: October, 2005, Exercise Price: $56.00
19,378 Time Warner Inc. 678,230
Expiration: October, 2005, Exercise Price: $18.00
Transkaryotic Therapies, Inc.
1,993 Expiration: October, 2005, Exercise Price: $35.00 398,600
835 Expiration: October, 2005, Exercise Price: $40.00 --
8,692 Wendy's International, Inc. 1,216,880
Expiration: October, 2005, Exercise Price: $45.00
2,500 York International Corporation 300,000
Expiration: October, 2005, Exercise Price: $55.00
-----------
17,548,288
-----------
PUT OPTIONS
1,500 Standard and Poor's 500 Index
Expiration: December, 2005, Exercise Price: $1,075.00 330,000
-----------
TOTAL OPTIONS WRITTEN
(Premiums received $23,611,205) $17,878,288
-----------
-----------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2005
ASSETS:
Investments, at value (Cost $1,805,909,270) $1,796,140,440
Deposit at brokers for short sales 68,833,500
Receivable from brokers for proceeds on securities sold short 375,415,717
Receivable for investments sold 20,580,629
Receivable for fund shares issued 2,124,613
Receivable for forward currency exchange contracts 445,120
Dividends and interest receivable 8,084,182
Prepaid expenses 78,269
--------------
Total Assets 2,271,702,470
--------------
LIABILITIES:
Securities sold short, at value (Proceeds of $371,212,096) $379,096,365
Options written, at value (Premiums received $23,611,205) 17,878,288
See accompanying schedule
Loan payable 334,095,000
Payable to custodian 2,262,169
Payable for short dividends 83,008
Payable for investment securities purchased 45,921,659
Payable for fund shares redeemed 1,799,549
Payable for equity swap contracts 3,064,963
Investment advisory fee payable 1,232,392
Distribution fees payable 655,892
Accrued expenses and other liabilities 938,569
------------
Total Liabilities 787,027,854
--------------
NET ASSETS $1,484,674,616
--------------
--------------
NET ASSETS Consist Of:
Accumulated undistributed net investment loss $ (442,029)
Accumulated undistributed net realized gain on investments sold, foreign
currency translations, forward currency exchange contracts, securities
sold short, equity swap contracts, and written option contracts expired
or closed 11,054,079
Net unrealized appreciation (depreciation) on:
Investments $ (9,768,830)
Securities sold short (7,884,269)
Written option contracts 5,732,917
Equity swap contracts (580,856)
Foreign currency translation (603)
Forward currency exchange contracts 445,120
------------
Net unrealized depreciation (12,056,521)
Paid-in capital 1,486,119,087
--------------
Total Net Assets $1,484,674,616
--------------
--------------
NET ASSET VALUE, offering price and redemption price per share
($1,484,674,616 / 94,109,909 shares of beneficial interest outstanding) $15.78
------
------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2005
INVESTMENT INCOME:
Interest $12,019,769
Dividend income on long positions
(net of foreign withholding taxes of $195,139) 10,421,552
-----------
Total investment income 22,441,321
-----------
EXPENSES:
Investment advisory fee $15,838,350
Distribution fees 3,425,548
Transfer agent and shareholder servicing agent fees 231,463
Federal and state registration fees 84,458
Professional fees 250,289
Trustees' fees and expenses 42,895
Custody fees 361,215
Administration fee 663,650
Fund accounting expense 206,344
Reports to shareholders 304,819
Dividends on short positions 5,796,734
Interest 659,372
Other 184,626
-----------
Total expenses before expense reimbursement by adviser 28,049,763
-----------
Expense reimbursement by adviser (84,115)
-----------
Net Expenses 27,965,648
NET INVESTMENT LOSS (5,524,327)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Investments 86,423,302
Securities sold short (25,515,779)
Written option contracts expired or closed 20,679,280
Equity swap contracts 1,901,206
Foreign currency translation 613,758
Forward currency exchange contracts 294,987
-----------
Net realized gain 84,396,754
Change in unrealized appreciation / depreciation on:
Investments (25,558,778)
Securities sold short 37,224,918
Written option contracts 226,458
Equity swap contracts (1,542,122)
Foreign currency translation (24,576)
Forward currency exchange contracts 712,249
-----------
Net unrealized gain 11,038,149
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 95,434,903
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $89,910,576
-----------
-----------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF CASH FLOWS
SEPTEMBER 30, 2005
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of capital shares $ 312,111,072
Repurchases of capital shares (597,964,690)
Net change in receivables / payables related to capital
share transactions (511,381)
---------------
Cash provided by capital share transactions (286,364,999)
Cash provided by borrowings 553,814,169
Cash repayment of borrowings (217,457,000)
Distributions paid in cash*<F17> (663,510)
---------------
$49,328,660
-----------
CASH PROVIDED (USED) BY OPERATIONS:
Purchases of investments (7,702,629,797)
Proceeds from sales of investments 7,656,801,002
---------------
(45,828,795)
---------------
Increase in deposit at brokers for short sales 3,911,722
Net investment income (5,524,327)
Net change in receivables / payables related to operations (5,268,999)
---------------
(6,881,604)
(52,710,399)
-----------
Net increase in cash (3,381,739)
Cash, beginning of year 1,119,570
-----------
Cash, end of year $(2,262,169)
-----------
-----------
*<F17> Non-cash financing activities include reinvestment of dividends of $ 20,840,244
Supplemental Information:
Cash paid for interest $ 192,347
See notes to the financial statements.
THE MERGER FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------
Net investment loss $ (5,524,327) $ (10,907,842)
Net realized gain on investments sold, foreign
currency translations, forward currency exchange
contracts, securities sold short, equity swap contracts,
and written option contracts expired or closed 84,396,754 67,478,565
Change in unrealized appreciation / depreciation on
investments, foreign currencies, forward currency
exchange contracts, securities sold short, equity swap
contracts and written option contracts 11,038,149 (41,966,413)
-------------- --------------
Net increase in net assets resulting from operations 89,910,576 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) (265,013,374) 519,817,382
-------------- --------------
Net increase (decrease) in net assets (196,606,552) 531,290,936
NET ASSETS:
Beginning of year 1,681,281,168 1,149,990,232
-------------- --------------
End of year (including accumulated undistributed net
investment income (loss) of ($5,495,315) and $250,581
respectively) $1,484,674,616 $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 year.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Net Asset Value, beginning of year $15.10 $14.84 $13.46 $15.74 $16.90
Income from investment operations:
Net investment income (loss)(1)<F18> (0.06)(2)<F19> (0.08)(3)<F20> 0.05(2)<F19> 0.22(3)<F20> 0.31(3)<F20>
Net realized and unrealized
gain (loss) on investments 0.94 0.38 1.53 (1.44) 0.32
------ ------ ------ ------ ------
Total from investment operations 0.88 0.30 1.58 (1.22) 0.63
------ ------ ------ ------ ------
Redemption fees 0.00(5)<F22> 0.00(5)<F22> -- -- --
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income 0.00(5)<F22> (0.04) (0.20) (0.21) (0.14)
Distributions from net realized gains (0.20) -- -- (0.85) (1.65)
------ ------ ------ ------ ------
Total distributions (0.20) (0.04) (0.20) (1.06) (1.79)
------ ------ ------ ------ ------
Net Asset Value, end of year $15.78 $15.10 $14.84 $13.46 $15.74
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 5.88% 1.99% 11.88% (8.39)% 3.86%
Supplemental Data and Ratios:
Net assets, end of year (000's) $1,484,675 $1,681,281 $1,149,990 $853,957 $982,893
Ratio of operating expenses
to average net assets 1.77% 1.87% 1.86% 1.60% 1.99%
Ratio of interest expense and dividends
on short positions to average net assets 0.41% 0.50% 0.49% 0.22% 0.65%
Ratio of operating expense to average
net assets excluding interest expense
and dividends on short positions
Before expense waiver 1.36% 1.37% 1.37% 1.38% 1.34%
After expense waiver 1.36% 1.37% 1.37% 1.38% 1.34%
Ratio of net investment income
to average net assets
Before expense waiver (0.35)% (0.68)% 0.22% 1.31% 1.91%
After expense waiver (0.35)% (0.68)% 0.22% 1.31% 1.91%
Portfolio turnover rate(4)<F21> 312.04% 256.88% 309.18% 258.37% 383.74%
FOOTNOTES TO FINANCIAL HIGHLIGHTS ON FOLLOWING PAGE
(1)<F18> Net investment income before interest expense and dividends on short
positions for the years ended September 30, 2005, 2004, 2003, 2002 and
2001, was $0.01, $0.00, $0.01, $0.16 and $0.27, respectively.
(2)<F19> Net investment income per share is calculated using ending balances
prior to consideration of adjustments for permanent book and tax
differences.
(3)<F20> 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)<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.
(5)<F22> Amount less than $0.005 per share.
See notes to the financial statements.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 1 -- ORGANIZATION
The Merger Fund (the "Fund") is a no-load, open-end, non-diversified
investment company organized as a trust under the laws of the Commonwealth of
Massachusetts on April 12, 1982, and registered under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund was formerly known as the Risk
Portfolio of The Ayco Fund. In January of 1989, the Fund's fundamental policies
were amended to permit the Fund to engage exclusively in merger arbitrage. At
the same time, Westchester Capital Management, Inc. became the Fund's investment
adviser, and the Fund began to do business as The Merger Fund. Merger arbitrage
is a highly specialized investment approach generally designed to profit from
the successful completion of proposed mergers, takeovers, tender offers,
leveraged buyouts, liquidations and other types of corporate reorganizations.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. Investment Valuation
Securities listed on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"). Other listed securities are valued at the last
sales price on the exchange on which such securities are primarily traded or, in
the case of options, at the higher of the intrinsic value of the option or the
last reported composite sales price. Securities not listed on an exchange and
securities for which there are no transactions are valued at the average of the
closing bid and asked prices. When pricing options, if no sales are reported or
if the last sale is outside the bid and asked parameters, the higher of the
intrinsic value of the option or the mean between the last reported bid and
asked prices will be used. Securities for which there are no such valuations
are valued at fair value as determined in good faith by management under the
supervision of the Board of Trustees. The Adviser (as defined herein) reserves
the right to value securities, including options, at prices other than last-sale
prices, intrinsic value prices, or the average of closing bid and asked prices
when such prices are believed unrepresentative of fair market value as
determined in good faith by the Adviser. When fair-valued pricing is employed,
the prices of securities used by the Fund to calculate its NAV may differ from
quoted or published prices for the same securities. In addition, due to the
subjective and variable nature of fair value pricing, it is possible that the
value determined for a particular asset may be materially different from the
value realized upon such asset's sale. At September 30, 2005 fair-valued long
securities represented 5.95% of investments, at value. 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 swap contracts, and unrealized gains or losses on Section 1256 contracts,
which were realized, for tax purposes, at September 30, 2005. 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 decreased accumulated net investment loss by $5,053,286, reduced realized
accumulated gains by $7,405,945, and increased paid-in capital by $2,352,659.
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. 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. Investment income includes $5,795,579 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 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 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.
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
The Trustees have the authority to issue an unlimited amount of shares of
beneficial interest without par value.
Changes in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold 20,234,535 $312,111,072 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 -- 44,851 -- 62,200
Redeemed (38,803,235) (598,009,541) (37,447,925) (569,430,191)
----------- ------------- ----------- --------------
Net increase (decrease) (17,213,678) $(265,013,374) 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 year ended September 30, 2005
(excluding short-term investments, options and short positions) aggregated
$4,897,602,603 and $4,452,269,483, respectively. There were no purchases or
sales of U.S. Government Securities.
At September 30, 2005, the components of accumulated losses on a tax basis
were as follows:
Cost of Investments $1,834,916,025
--------------
--------------
Gross unrealized appreciation 54,363,392
Gross unrealized depreciation (93,138,977)
--------------
Net unrealized depreciation $ (38,775,585)
--------------
--------------
Undistributed ordinary income $ 61,551,603
Undistributed long-term capital gain --
--------------
Total distributable earnings $ 61,551,603
--------------
--------------
Other accumulated losses (24,220,489)
--------------
Total accumulated losses $ (1,444,471)
--------------
--------------
The tax components of dividends paid during the years ended September 30,
2005 and September 30, 2004 were as follows:
2005 2004
---- ----
Ordinary Income $21,503,754 $3,130,756
Long-Term Capital Gains $ -- $ --
The Fund incurred a post-October capital loss of $17,809,171, which is
deferred for tax purposes until the next fiscal year.
For the fiscal year ended September 30, 2005 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
24% for the 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, 2005 was 23% for the Fund (unaudited).
NOTE 6 -- OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
year ended September 30, 2005, were as follows:
PREMIUM AMOUNT NUMBER OF CONTRACTS
-------------- -------------------
Options outstanding at
September 30, 2004 $ 12,088,977 52,051
Options written 170,543,307 892,983
Options closed (44,792,582) (280,110)
Options exercised (91,217,279) (440,858)
Options expired (23,011,218) (114,464)
------------ --------
Options outstanding at
September 30, 2005 $ 23,611,205 109,602
------------ --------
------------ --------
NOTE 7 -- DISTRIBUTION PLAN
The Fund has adopted an Amended and Restated Plan of Distribution (the
"Plan") dated July 19, 2005, pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, the Fund will compensate broker-dealers or qualified institutions with
whom the Fund has entered into a contract to distribute Fund shares ("Dealers").
Under the Plan, the amount of such compensation paid in any one year shall not
exceed 0.25% annually of the average daily net assets of the Fund, which may be
payable as a service fee for providing recordkeeping, subaccounting, subtransfer
agency and/or shareholder liaison services. For the year ended September 30,
2005, the Fund incurred $3,425,548 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 $400 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. For the period October 1, 2004 to September 30, 2005, the
interest rate on the outstanding principal amount was the Federal Funds Rate
plus 0.75% (weighted average rate of 4.32% during the year ended September 30,
2005). Advances are collateralized by securities owned by the Fund and held
separately in a special custody account pursuant to a Special Custody Agreement
dated March 31, 1994. During the year ended September 30, 2005, the Fund had an
outstanding average daily balance of $15,868,499. The maximum amount
outstanding during the year ended September 30, 2005 was $341,080,000. At
September 30, 2005, the Fund had a loan-payable balance of $334,095,000. 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.
NOTE 9 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At September 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
$445,120 is included in the net unrealized appreciation (depreciation) section
of the Statement of Assets and Liabilities. The terms of the open contracts are
as follows:
SETTLEMENT CURRENCY TO U.S. $ VALUE AT CURRENCY TO U.S. $ VALUE AT
DATE BE DELIVERED SEPTEMBER 30, 2005 BE RECEIVED SEPTEMBER 30, 2005
---------- ------------ ------------------ ----------- ------------------
10/7/05 4,376,592 British Pounds $ 7,715,334 7,877,866 U.S. Dollars $ 7,877,866
10/11/05 4,310,453 British Pounds 7,598,644 7,862,294 U.S. Dollars 7,862,294
11/14/05 16,040,160 British Pounds 28,269,581 28,262,762 U.S. Dollars 28,262,762
10/24/05 11,200,000 Canadian Dollars 9,644,189 9,576,742 U.S. Dollars 9,576,742
11/3/05 14,548,800 Canadian Dollars 12,532,707 12,279,071 U.S. Dollars 12,279,071
11/25/05 13,506,500 Canadian Dollars 11,642,197 11,527,268 U.S. Dollars 11,527,268
12/16/05 10,911,225 Canadian Dollars 9,411,288 9,226,865 U.S. Dollars 9,226,865
12/23/05 4,819,248 Canadian Dollars 4,157,679 4,124,656 U.S. Dollars 4,124,656
12/30/05 560,000 Canadian Dollars 483,230 480,274 U.S. Dollars 480,274
10/25/05 6,000,000 Euros 7,218,839 7,355,400 U.S. Dollars 7,355,400
10/28/05 25,647,060 Euros 30,862,762 31,382,177 U.S. Dollars 31,382,177
10/28/05 5,200,800 Swiss Francs 4,028,619 4,044,483 U.S. Dollars 4,044,483
11/25/05 125,419,650 Swedish Krona 16,244,450 16,254,781 U.S. Dollars 16,254,781
------------ ------------
$149,809,519 $150,254,639
------------ ------------
------------ ------------
NOTE 10 -- EQUITY SWAP CONTRACTS
The Fund has entered into both long and short equity swap contracts with
multiple broker-dealers. A long equity swap contract entitles the Fund to
receive from the counterparty any appreciation and dividends paid on an
individual security, while obligating the Fund to pay the counterparty any
depreciation on the security as well as interest on the notional amount of the
contract at a rate equal to LIBOR plus 25 to 100 basis points. A short equity
swap contract obligates the Fund to pay the counterparty any appreciation and
dividends paid on an individual security, while entitling the Fund to receive
from the counterparty any depreciation on the security as well as interest on
the notional value of the contract at a rate equal to LIBOR less 25 to 100 basis
points.
The Fund may also enter into equity swap contracts whose value is
determined by the spread between a long equity position and a short equity
position. This type of swap contract obligates the Fund to pay the counterparty
an amount tied to any increase in the spread between the two securities over the
term of the contract. The Fund is also obligated to pay the counterparty any
dividends paid on the short equity holding as well as any net financing costs.
This type of swap contract entitles the Fund to receive from the counterparty
any gains based on a decrease in the spread as well as any dividends paid on the
long equity holding and any net interest income.
Fluctuations in the value of an open contract are recorded daily as a net
unrealized gain or loss. The Fund will realize a gain or loss upon termination
or reset of the contract. Either party, under certain conditions, may terminate
the contract prior to the contract's expiration date.
Credit risk may arise as a result of the failure of the counterparty to
comply with the terms of the contract. The Fund considers the creditworthiness
of each counterparty to a contract in evaluating potential credit risk. The
counterparty risk to the Fund is limited to the net unrealized gain, if any, on
the contract, along with dividends receivable on long equity contracts and
interest receivable on short equity contracts. Additionally, risk may arise from
unanticipated movements in interest rates or in the value of the underlying
securities. At September 30, 2005, the Fund had the following open equity swap
contracts:
UNREALIZED APPRECIATION
TERMINATION DATE SECURITY SHARES (DEPRECIATION)
---------------- -------- ------ --------------
11/30/05 BPB PLC 300,000 $ 203,192
12/1/05 BPB PLC 2,227,800 (249,967)
10/31/05 Hexagon AB (59,310) (71,345)
10/31/05 Leica Geosystems AG 11,820 49,538
12/31/05 London Stock Exchange plc 472,520 (311,097)
12/31/05 London Stock Exchange plc 323,224 (52,337)
12/16/05 London Stock Exchange plc December Call (179,500) (10,128)
10/6/05 Mersey Docks & Harbour Company 439,427 (242,150)
1/31/06 Old Mutual plc (2,836,103) 327,334
6/30/06 Telesystem International Wireless Inc. 904,334 (221,894)
6/30/06 Telesystem International Wireless Inc. 310,000 12,400
6/30/06 Telesystem International Wireless Inc. 2,940,190 1,676
11/30/05 Unicredito Italiano SPA (2,838,160) 240,777
10/21/05 VNU NV October Call (250,000) (256,855)
---------
$(580,856)
---------
---------
For the year ended September 30, 2005, the Fund realized losses of
$1,901,206 upon the termination of equity swap contracts. Such losses may have
been offset by gains on related long or short equity positions or forward
currency exchange contracts.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
The Merger Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedules of investments, of securities sold short, and of options written,
and the related statements of operations, of cash flows and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of The Merger Fund (the "Fund") at September 30, 2005,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
/s/PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 18, 2005
INFORMATION ABOUT TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. Information pertaining to the Officers and Trustees of
the Fund is set forth below. The Statement of Additional Information includes
additional information about the Fund's Officers and Trustees and is available,
without charge, upon request by calling 1-800-343-8959.
TERM OF # OF PORTFOLIOS OTHER
POSITIONS (S) OFFICE AND IN FUND COMPLEX DIRECTORSHIPS
HELD WITH LENGTH OF PRINCIPAL OCCUPATION OVERSEEN BY HELD BY OFFICER
NAME, ADDRESS AND AGE THE FUND TIME SERVED DURING PAST FIVE YEARS TRUSTEE**<F24> OR TRUSTEE
- --------------------- ------------- ----------- ---------------------- --------------- ---------------
Frederick W. Green*<F23> President Indefinite; President of 2 None
Westchester Capital and since 1989 Westchester Capital
Management, Inc. Trustee Management, Inc.,
100 Summit Lake Drive the Fund's Adviser.
Valhalla, NY 10595
Age: 58
Bonnie L. Smith Vice One-year Vice President of N/A None
Westchester Capital President, term; Westchester Capital
Management, Inc. Secretary since 1989 Management, Inc.,
100 Summit Lake Drive and the Fund's Adviser.
Valhalla, NY 10595 Treasurer
Age: 57
James P. Logan, III Independent Indefinite; President of Logan, 2 None
Logan, Chace LLC Trustee since 1989 Chace LLC, an
420 Lexington Avenue executive search firm.
New York, NY 10170 Chairman of J.P.
Age: 69 Logan & Company.
Michael J. Downey Independent Indefinite; Managing Partner of 2 President and
c/o Westchester Trustee since 1995 Lexington Capital Director of The
Capital Management, Inc. Investments. Asia Pacific
100 Summit Lake Drive Consultant and Fund, Inc;
Valhalla, NY 10595 independent financial Director of the
Age: 61 adviser since July AllianceBernstein
1993. core mutual fund
group.
Roy D. Behren Chief One-year Analyst and Trader N/A Director of
100 Summit Lake Drive Compliance term; for Westchester Redback
Valhalla, NY 10595 Officer since 2004 Capital Management, Networks Inc.
Age: 45 Inc., the Fund's Adviser.
*<F23> Denotes a trustee who is an "interested person" (as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended) of the Fund or of the Fund's Adviser.
**<F24> The Fund Complex consists of the Fund and The Merger Fund VL.
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, 2005 is
available 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.
- -----------------------
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the period covered by this
report. The registrant has not granted any waivers from any provisions of the
code of ethics during the period covered by this report. A copy of the
registrant's Code of Ethics is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ----------------------------------------
The registrant's board of trustees has determined that the registrant has at
least one audit committee financial expert serving on its audit committee.
Michael J. Downey and James P. Logan, III are audit committee financial experts
and are considered to be independent as each term is defined in Item 3 of
Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -----------------------------------------------
The registrant has engaged its principal accountant to perform audit services
and tax services during the past two fiscal years. "Audit services" refer to
performing an audit of the registrant's annual financial statements or services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years. "Tax services" refer
to professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning. The following table details the
aggregate fees billed or expected to be billed for each of the last two fiscal
years for audit fees and tax fees by the principal accountant.
FYE 09/30/2005 FYE 09/30/2004
-------------- --------------
Audit Fees $56,000 $52,500
Audit-Related Fees
Tax Fees $8,600 $8,100
All Other Fees
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services of
the registrant, including services provided to any entity affiliated with the
registrant. The audit committee approved 100% of the tax services provided by
the registrant's principal accountant. All of the principal accountant's hours
spent on auditing the registrant's financial statements were attributed to work
performed by full-time permanent employees of the principal accountant.
There were no non-audit fees billed by the registrant's accountant for services
to the registrant and to the registrant's investment adviser, and any entity
controlling, controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant for each of the last two fiscal
years of the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
- ----------------------------------------------
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
- --------------------------------
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
- -------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES.
- --------------------------------
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
- -------------------------------------------------------------------------
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
- ---------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
- ----------------------------------
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of trustees.
ITEM 11. CONTROLS AND PROCEDURES.
- ---------------------------------
(a) The Registrant's President/Principal Executive Officer and
Treasurer/Principal Financial Officer have reviewed the Registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (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 changes in the Registrant's internal controls over financial
reporting that occurred during the second fiscal quarter of the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS.
- -----------------
(a) (1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit. Filed
herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 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 11/30/05
---------------------------------------
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 11/30/05
---------------------------------------
By (Signature and Title) /s/ Bonnie L. Smith
--------------------------
Bonnie L. Smith, Treasurer
Date 11/30/05
---------------------------------------