<PAGE> 1
As filed with the
Securities and Exchange Commission on February 7, 1996
File No. 2-76969
File No. 811-3445
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 19 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 20 /x/
THE MERGER FUND
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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)
Registrant's Telephone Number, including Area Code: (914) 741-5600
Frederick W. Green, President
THE MERGER FUND
100 Summit Lake Drive
Valhalla, New York 10595
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(Name and Address of Agent for Service)
Copy to:
William H. Bohnett, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b) of Rule 485.
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. A Rule 24f-2 Notice for the fiscal year
ended November 30, 1995 was filed on January 8, 1996.
Total number of pages is ____. Exhibit index
appears at page [80].
<PAGE> 2
THE MERGER FUND
CROSS-REFERENCE SHEET
Items Required by Form N-1A
Part A
<TABLE>
<CAPTION>
Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------
<S> <C> <C>
1. Cover Page COVER PAGE
2. Synopsis FUND EXPENSES
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description INVESTMENT OBJECTIVES AND POLICIES;
of Registrant ORGANIZATION AND CAPITALIZATION
5. Management of the Fund INVESTMENT ADVISER; PRINCIPAL
UNDERWRITER; ORGANIZATION AND
CAPITALIZATION; CUSTODIAN, TRANSFER
AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND
ADMINISTRATOR
6. Capital Stock and Other TAX STATUS, DIVIDENDS AND
Securities DISTRIBUTIONS; ORGANIZATION AND
CAPITALIZATION; SHAREHOLDER
COMMUNICATIONS
7. Purchase of Securities PRINCIPAL UNDERWRITER; PLANS
Being Offered OFFERED BY THE FUND; HOW TO
PURCHASE SHARES; NET ASSET VALUE
8. Redemption or REDEMPTIONS
Repurchase
9. Legal Proceedings NOT APPLICABLE
</TABLE>
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<PAGE> 3
Part B
<TABLE>
<CAPTION>
Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ ----------------------
<S> <C> <C>
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVES AND POLICIES
and Policies
14. Management of the MANAGEMENT
Registrant
15. Control Persons and MANAGEMENT
Principal Holders of
Securities
16. Investment Advisory and INVESTMENT ADVISER AND PRINCIPAL
Other Services UNDERWRITER; AUDITORS; CUSTODIAN,
TRANSFER AGENT, DIVIDEND PAYING
AGENT, ACCOUNTING SERVICES AGENT
AND ADMINISTRATOR
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE;
PORTFOLIO TURNOVER
18. Capital Stock and Other ORGANIZATION AND CAPITALIZATION
Securities
19. Purchase, Redemption and SERVICES AND PLANS OFFERED BY THE
Pricing of Securities FUND; NET ASSET VALUE; ADDITIONAL
Being Offered INFORMATION ABOUT REDEMPTIONS
20. Tax Status TAX STATUS
21. Underwriters INVESTMENT ADVISER AND PRINCIPAL
UNDERWRITER - Principal Underwriter
22. Calculation of NOT APPLICABLE
Performance Data
23. Financial Statements FINANCIAL STATEMENTS
</TABLE>
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<PAGE> 4
THE MERGER FUND
100 Summit Lake Drive
Valhalla, New York 10595
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A no-load, open-end, nondiversified investment company which seeks capital
growth by engaging in merger arbitrage.
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PROSPECTUS
FEBRUARY 7, 1996
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This prospectus sets forth concisely the information about the Fund
that a prospective investor should know before investing. Please retain it for
future reference. A Statement of Additional Information dated February 7, 1996
is available upon request without charge and may be obtained by writing to The
Merger Fund, 100 Summit Lake Drive, Valhalla, New York 10595. The Statement of
Additional Information, which is incorporated by reference into this
prospectus, has been filed with the Securities and Exchange Commission.
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The Fund pays to its principal underwriter and others an annual fee
of up to 0.25%, as authorized by its Rule 12b-1 plan of distribution. There
can be no assurance that the Fund's investment objective will be achieved, and
its investment policy entails capital risk. Each investor should carefully
consider his ability to assume the risks involved before making an investment
in the Fund.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE> 5
Table of Contents
<TABLE>
<S> <C>
FUND EXPENSES 2
CONDENSED FINANCIAL INFORMATION 3
INVESTMENT OBJECTIVES AND POLICIES 4
Risk Factors 5
Leverage Through Borrowing 5
Short Sales and Put and Call Options 6
Investment Restrictions 7
INVESTMENT ADVISER 7
PRINCIPAL UNDERWRITER 8
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR 8
PLANS OFFERED BY THE FUND 9
The Merger Fund IRA Plan 9
Fund Investors Keogh Plans 9
HOW TO PURCHASE SHARES 9
Automatic Investment Plan 10
NET ASSET VALUE 10
REDEMPTIONS 11
Systematic Withdrawal Plan 12
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 12
ORGANIZATION AND CAPITALIZATION 13
SHAREHOLDER COMMUNICATIONS 14
</TABLE>
<PAGE> 6
FUND EXPENSES
(FOR THE YEAR ENDED NOVEMBER 30, 1995)
<TABLE>
<S> <C>
Shareholder Transaction Expenses None (2)
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Annual Fund Operating Expenses
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(as a percentage of average
net assets)
Advisory Fees 1.00%
Rule 12b-1 Distribution Fees 0.06%
Other Expenses 0.35%(3)
-----
Total Operating Expenses 1.41%
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C>
$14 $45 $77 $169
</TABLE>
Notes:
(1) The purpose of the above table is to assist investors in understanding
the various costs and expenses that investors in the Fund will bear
directly or indirectly. See "INVESTMENT ADVISER", "PRINCIPAL
UNDERWRITER" AND "CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR." THE EXAMPLE PROVIDED ABOVE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN IN THE EXAMPLE.
(2) No sales loads or transaction fees are charged in connection with the
purchase or redemption of Fund shares. Shareholders will be assessed
fees for outgoing wire transfers, returned checks and stop payment
orders.
(3) Each IRA and Keogh account will be charged a $12.50 annual maintenance
fee as well as fees for certain transactions.
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<PAGE> 7
THE MERGER FUND
CONDENSED FINANCIAL INFORMATION
(FOR THE YEARS ENDED NOVEMBER 30, 1986 - 1995) (Audited)
The table below sets forth certain information covering the Fund's investment
results for the periods indicated.
Further financial data and related notes are contained in the Statement of
Additional Information, which is available upon request.
<TABLE>
<CAPTION>
Year ended November 30,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of
year . . . . . . . . . . . . . . 13.72 13.70 $12.34 $12.51 $11.43 $12.03
----- ------ ------ ------ ------
Income from investment
operations:
Net investment income/(loss) . 0.08(3)(6) (5)(6) (0.07)(5)(6) (0.12)(5) 0.02(5) (0.16)(2)(5)
Net realized and unrealized
gain (loss) on investments . . 1.78 1.08 2.10 0.65 1.79 0.70
---- ---- ------ ------ ------ ------
Total from investment
operations . . . . . . . . . . 1.86 1.08 2.03 0.53 1.81 0.54
Less Distributions:
Dividends from net investment
income . . . . . . . . . . . . -- -- -- (0.03) -- --
Distributions from net
realized gains . . . . . . . . (0.71) (1.06) (0.67) (0.67) (0.73) (1.14)
------ ------ ------ ------ ------ ------
Total distributions . . . . . (0.71) (1.06) (0.67) (0.70) (0.73) (1.14)
------ ------ ------ ------ ------ ------
Net Asset Value, end of year . . $14.87 $13.72 $13.70 $12.34 $12.51 $11.43
====== ====== ====== ====== ====== ======
Total Return . . . . . . . . . . 14.26% 8.41% 17.24% 4.45% 16.84% 4.57%
Supplemental Data and Ratios:
Net assets, end of year
(000's) 243,082 $170,344 $25,173 $11,611 $10,281 $9,599
Ratio of operating expenses
to average net assets . . . 1.41%(2) 1.58%(4) 2.19%(4) 2.75%(4) 3.05%(1)(4) 3.26%(1)(3)(4)
Ratio of interest expense and
dividends on short positions
to average net assets . . . 2.42% 1.72% 1.91% 2.28% 1.01% 1.20%
Ratio of net investment
income/(loss)
to average net assets . . . 0.57% (0.03)% (0.57)% (1.42)% 0.21% (1.20)%
Portfolio turnover rate(7) . . . 418.63% 390.34% 186.00% 231.40% 311.51% 357.39%
<CAPTION>
Year ended November 30,
------------------------------------------
1989 1988 1987 1986
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, beginning of
year . . . . . . . . . . . . . . $11.50 $10.10 $12.55 $12.13
------ ------ ------ ------
Income from investment
operations:
Net investment income/(loss) . (0.02) 0.04 0.07 0.04
Net realized and unrealized
gain (loss) on investments . . 0.66 1.74 (0.82) 1.34
------ ------ ------ ------
Total from investment
operations . . . . . . . . . . 0.64 1.78 (0.75) 1.38
Less Distributions:
Dividends from net investment
income . . . . . . . . . . . . (0.11) (0.07) (0.01) (0.03)
Distributions from net
realized gains . . . . . . . . - (0.31) (1.69) (0.93)
------ ------ ------ ------
Total distributions . . . . . (0.11) (0.38) (1.70) (0.96)
------ ------ ------ ------
Net Asset Value, end of year . . $12.03 $11.50 $10.10 $12.55
====== ====== ====== ======
Total Return . . . . . . . . . . 5.66% 18.15% (8.05)% 12.27%
Supplemental Data and Ratios:
Net assets, end of year
(000's) $11,006 $8,421 $9,909 $10,319
Ratio of operating expenses
to average net assets . . . 2.80%(1) 2.57% 2.41% 2.49%
Ratio of interest expense and
dividends on short positions
to average net assets . . .
Ratio of net investment
income/(loss)
to average net assets . . . (0.17)% 0.39% 0.47% 0.08%
Portfolio turnover rate(7) . . . 430.44% 187.16% 323.14% 264.61%
</TABLE>
(1) Reflects certain non-recurring expenses associated with the Fund's
restructuring as of January 31, 1989.
(2) Net investment income before reimbursement of expenses by the investment
adviser for the year ended November 30, 1990 would have been $(0.17).
(3) Operating expense ratio before reimbursement by investment adviser was
3.31%.
(4) For the years ended November 30, 1995, 1994, 1993, 1992 and 1991 the
operating expense ratio excludes interest expense and dividends on short
positions. The ratios including interest expense and dividends on short
positions for the years ended November 30, 1995, 1994, 1993, 1992 and 1991
were 3.83%, 3.30%, 4.10%, 5.03% and 4.06%, respectively.
(5) Net investment income before interest expense and dividends on short
positions for the years ended November 30, 1995, 1994, 1993, 1992, and
1991 was $0.42, $0.21, $0.17, $0.07 and $0.10, respectively.
(6) Net investment income (loss) per share represents net investment income
for the respective year divided by the monthly average shares of
beneficial interest outstanding throughout each year.
(7) The numerator for the portfolio turnover rate includes the lesser of
purchases or sales (including both long and short positions). The
denominator includes the average long position throughout the year. The
portfolio turnover rate excluding short positions from the numerator for
the year ended November 30, 1995 is 290.48%.
NOTE: FROM THE FUND'S INCEPTION THROUGH JANUARY 31, 1989, THE AYCO CORPORATION
SERVED AS INVESTMENT ADVISER TO THE FUND. DURING THIS PERIOD, WESTCHESTER
CAPITAL MANAGEMENT, INC., THE FUND'S CURRENT INVESTMENT ADVISER, AND TWO OTHER
NON-ARBITRAGE INVESTMENT ADVISERS WERE RETAINED BY THE AYCO CORPORATION TO
MANAGE VARYING PORTIONS OF THE FUND'S ASSETS. THE ABOVE INVESTMENT RESULTS,
THEREFORE, ARE NOT NECESSARILY REPRESENTATIVE OF THE RESULTS THAT WOULD HAVE
BEEN REALIZED HAD WESTCHESTER CAPITAL MANAGEMENT, INC. BEEN THE SOLE INVESTMENT
ADVISER TO THE FUND.
Further information regarding the Fund's performance is contained in the Fund's
Annual Report, a copy of which may be obtained without charge.
-3-
<PAGE> 8
INVESTMENT OBJECTIVES AND POLICIES
The Fund seeks to achieve capital growth by engaging in merger arbitrage.
The Fund's investment adviser is Westchester Capital Management, Inc. (the
"Adviser").
Under normal market conditions, the Fund will invest at least 65% of its
assets in the equity securities of companies which are involved in publicly
announced mergers, takeovers and other corporate reorganizations ("merger
arbitrage investments"). Depending upon the level of merger activity and other
economic and market conditions, the Fund may temporarily invest a substantial
portion of its assets in cash or cash equivalents, including money market
instruments such as Treasury bills and other short-term obligations of the
United States Government, its agencies or instrumentalities; negotiable bank
certificates of deposit; prime commercial paper; and repurchase agreements with
respect to the above securities.
Merger arbitrage is a highly specialized investment approach generally
designed to profit from the successful completion of proposed mergers,
takeovers, tender offers, leveraged buyouts, spin-offs, liquidations and other
types of corporate reorganizations. Although a variety of strategies may be
employed depending upon the nature of the reorganizations selected for
investment, the most common merger arbitrage activity involves purchasing the
shares of an announced acquisition target at a discount to their expected value
upon completion of the acquisition. As compared to conventional investing,
merger arbitrage results are considered by the Adviser to be less sensitive to
the overall trend of stock prices. In the seven-year period since Westchester
Capital Management, Inc. became Adviser to the Fund, the Fund's "beta" (a
statistical measure of market-related risk, whereby a fund's sensitivity to
movements in the Standard & Poor's 500 Stock Index is expressed relative to the
Index's beta of 1.0) has averaged less than 0.2. The Adviser believes that
this number is significantly lower than comparable figures for other equity
mutual funds seeking capital growth. While some periods will be more conducive
to a merger arbitrage strategy than others, a systematic, disciplined arbitrage
program may produce attractive rates of return, even in flat or down markets.
The principal risk associated with the Fund's merger arbitrage investments is
that certain of the proposed reorganizations may be renegotiated or terminated,
in which case losses may be realized.
The Fund's investment objective of achieving capital growth by engaging in
merger arbitrage is a fundamental policy which may not be changed without
shareholder approval. Except as otherwise stated, the Fund's other investment
objectives and policies are not fundamental and may be changed without
obtaining approval by the Fund's shareholders.
-4-
<PAGE> 9
Risk Factors
The Fund's investment program will involve investment techniques and
securities holdings which entail risks, in some cases different from the risks
ordinarily associated with investments in equity securities. To the extent
that the Fund's assets are invested in a smaller number of issues, there is a
somewhat greater risk associated with investment in the Fund than in a
diversified investment company, as defined in the Investment Company Act of
1940.
The Fund intends to invest a portion of its assets to seek short-term
capital appreciation, which can be expected to increase the portfolio turnover
rate and as a result cause increased brokerage commission costs. It is
currently anticipated that the Fund's annual portfolio turnover rate may exceed
300%. In addition, a high turnover rate may expose shareholders to a higher
current realization of capital gains, and thus a higher current tax liability,
than may be associated with investments in other investment companies which
emphasize long-term investment strategies and thus have a lower turnover rate.
The Fund is not intended to provide a balanced investment program. The
Fund is intended to be an investment vehicle only for that portion of an
investor's capital which can appropriately be exposed to risk. Each investor
should evaluate an investment in the Fund in terms of the investor's own
investment goals.
Leverage Through Borrowing
The Fund may borrow from banks or by entering into reverse repurchase
agreements to increase its portfolio holdings of securities. Such borrowings
may be on a secured or unsecured basis at fixed or variable rates of interest.
A reverse repurchase agreement is functionally identical to a repurchase
agreement except that the roles of the parties are reversed so that the Fund
will sell the underlying security with the promise to repurchase. The
Investment Company Act of 1940 requires the Fund to maintain continuous asset
coverage of not less than 300% with respect to all borrowings. This allows the
Fund to borrow for such purposes an amount (when taken together with any
borrowings for temporary or emergency purposes as described below) equal to as
much as 50% of the value of its net assets (not including such borrowings). If
such asset coverage should decline to less than 300% due to market fluctuations
or other reasons, the Fund may be required to dispose of some of its portfolio
holdings within three days in order to reduce the Fund's debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to dispose of assets at that time. Leveraging will exaggerate any
increase or decrease in the net asset value of the Fund's portfolio, and in
that respect may be considered a speculative practice. The interest which the
Fund must pay on borrowed money, together with any additional fees to maintain
a line of credit or any minimum average balances required to be maintained, are
additional costs which will reduce or eliminate any net investment income and
may also offset any potential capital gains. Unless the appreciation and
income, if any, on assets acquired with borrowed funds exceed the
-5-
<PAGE> 10
costs of borrowing, the use of leverage will diminish the investment
performance of the Fund compared with what it would have been without leverage.
The Fund, like many other investment companies, may also borrow money for
temporary or emergency purposes, but such borrowings, together with all other
borrowings, may not exceed 33% of the value of the Fund's gross assets when the
loan is made.
Short Sales and Put and Call Options
The Fund may employ various hedging techniques, such as short selling and
the selective use of put and call options, in an effort to reduce the risks
associated with certain of its investments. For example, when the terms of a
proposed acquisition call for the exchange of common stock and/or other
securities, the common stock of the company to be acquired may be purchased
and, at approximately the same time, an equivalent amount of the acquiring
company's common stock and/or other securities may be sold short. Any such
short sale will be made with the intention of later closing out ("covering")
the short position with the securities of the acquiring company received upon
consummation of the acquisition. The purpose of the short sale is to protect
against a decline in the market value of the acquiring company's securities
prior to the acquisition's completion. However, should the acquisition be
called off or otherwise not completed, the Fund may realize losses on both its
long position in the target company's shares and its short position in the
acquirer's securities.
At all times when the Fund does not own, or have an unconditional right to
receive, the securities sold short, it will maintain a segregated account
consisting of cash or cash equivalents. This account will be adjusted ("marked
to market") daily to reflect changes in the value of the securities sold short.
The purchase of put options may be similarly used for hedging purposes. A
put option is a short-term contract which gives the purchaser of the option, in
return for a premium paid, the right to sell the underlying security at a
specified price upon exercise of the option at any time prior to the expiration
of the option. The market price of a put option will normally vary inversely
with the market price of the underlying security. Consequently, by purchasing
put options on merger arbitrage stocks, it may be possible for the Fund to
partially offset any decline in the market value of certain of the equity
positions held by the Fund. As a matter of fundamental policy, which may not
be changed without shareholder approval, the value of such put options
purchased by the Fund, as measured by the premiums paid, may not exceed 25% of
the Fund's net assets.
The sale of covered call options may also be used by the Fund to reduce
the risks associated with individual investments and to increase total
investment return. In return for the premium income, the Fund will give up the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the contract
continue, except insofar as the premium represents a profit. The sale of call
options will not be used for speculative purposes,
-6-
<PAGE> 11
and, accordingly, options will be written solely as covered call options; that
is, options on securities which the Fund owns at the time the call is sold. In
addition, the security underlying the call will be listed on a national
securities exchange and the option will be issued by The Options Clearing
Corporation. As a matter of fundamental policy, the value of securities
underlying call options written by the Fund may not exceed 50% of the Fund's
net assets. In addition, the Fund may purchase call options only for the
purpose of closing out previously written covered call options.
The Adviser believes that, when used for hedging purposes, short sales and
options transactions should be viewed less as speculative strategies than as
techniques to help protect the assets of the Fund against unfavorable market
conditions that might otherwise adversely affect certain of its investments.
Nonetheless, a substantial percentage of the investments made by the Fund will
not lend themselves to hedging strategies and, even when available, such
strategies may not be successful. In addition, the frequent use of short sales
and options transactions increases the risk that the Fund will fail to qualify
as a regulated investment company under the Internal Revenue Code.
Accordingly, the Fund will limit such transactions to the extent necessary, in
the opinion of the Adviser, to avoid such disqualification.
Investment Restrictions
The investment restrictions set forth below have been adopted by the Fund
as fundamental policies which may be changed only by a vote of the Fund's
shareholders. The Fund may not invest more than 5% of its total assets in
enterprises with less than three years of continuous operation; may not invest
more than 10% of its assets in the securities of any one issuer; may not
purchase more than 10% of an issuer's voting securities; may not invest more
than 10% of its assets in restricted securities or securities without readily
available market quotations, including repurchase agreements having a maturity
of more than seven days; may not borrow money in an amount exceeding 33% of its
total assets; and may not invest more than 25% of its total assets in
securities of companies in the same industry. The Fund may not invest more
than 5% of its net assets in warrants or more than 2% of its net assets in
warrants not listed on specified national stock exchanges. The Fund may make
short sales but only under certain conditions to the extent of 50% of its net
assets. The value of securities of any one company in which the Fund is short
may not exceed the lesser of 10% of its net assets or 10% of any class of such
company's securities.
INVESTMENT ADVISER
Westchester Capital Management, Inc., 100 Summit Lake Drive, Valhalla, New
York 10595, a registered investment adviser since 1980, is the Fund's
investment adviser. Westchester Capital Management, Inc. and affiliates also
manage merger arbitrage programs for high-net-worth individuals and other
institutional investors, including offshore funds and private limited
partnerships. Subject to the authority of the Fund's Board of Trustees, the
Adviser is responsible for the overall management of the Fund's business
affairs. The Adviser charges an annual advisory fee of 1.0% of the average
daily net assets of the Fund. The fee charged the Fund is
-7-
<PAGE> 12
higher than those typically paid by other mutual funds. This higher fee is
attributable in part to the higher expense incurred by the Adviser and the
specialized skills required to manage a portfolio of merger arbitrage
investments.
Mr. Frederick W. Green acts as the President of the Adviser and also
serves as the President and a Trustee of the Fund. Ms. Bonnie L. Smith is the
Vice President of the Adviser as well as the Vice President, Treasurer and
Secretary of the Fund. Mr. Green and Ms. Smith have been primarily responsible
for the day-to-day management of the Fund's portfolio since January 1989.
PRINCIPAL UNDERWRITER
The Fund's principal underwriter is Mercer Allied Company, L.P.
("Mercer"), One Wall Street, Albany, New York 12205, a majority-owned
subsidiary of The Ayco Company, L.P. ("Ayco"), a registered investment adviser
principally engaged in personal financial counseling.
The Fund has adopted a plan of distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may
pay to Mercer, any broker-dealer with whom Mercer or the Fund has entered into
a contract to distribute the Fund's shares, or any other qualified financial
services firm, compensation for services with respect to shares held or
purchased by their respective customers or in connection with the purchase of
shares attributable to their efforts. 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, payable as a service fee for providing recordkeeping, subaccounting,
subtransfer agency and/or shareholder liaison services. In addition, the
Adviser may pay amounts from its own resources for the provision of such
services.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 is
the Fund's custodian, transfer agent and dividend paying agent.
Firstar Trust Company also serves as the Fund's accounting services agent
and Fund Administrator. As such, Firstar Trust Company provides a variety of
administrative and accounting services to the Fund, such as accounting relating
to the Fund's portfolio and portfolio transactions, the determination of net
asset value and pricing of the Fund's shares of beneficial interest, and
maintaining the books of account of the Fund.
-8-
<PAGE> 13
PLANS OFFERED BY THE FUND
Additional information about any of the plans described below may be
obtained by contacting the Adviser at 100 Summit Lake Drive, Valhalla, New York
10595 (telephone (914) 741-5600).
The Merger Fund IRA Plan
The Fund makes available The Merger Fund IRA Plan for individuals to
establish an Individual Retirement Account ("IRA") under which shares of the
Fund may be purchased. The Merger Fund IRA Plan can be used to make regular
IRA contributions, and can also be used for a rollover or transfer from an
existing IRA, or for a rollover from a qualified retirement plan from which the
individual receives a lump-sum distribution.
An annual maintenance fee of $12.50 will be charged for each IRA account.
In addition, a $15.00 fee will be assessed to any IRA account which is
transferred to a successor trustee, distributed to a participant or for which a
refund of excess contribution is paid. These fees are subject to change upon
notification by Firstar Trust Company to the Fund.
Fund Investors Keogh Plans
The Fund makes available the Fund Investors Defined Contribution Prototype
Plan and the Fund Investors Defined Benefit Prototype Plan (referred to
collectively in this prospectus as the "Fund Investors Keogh Plans"), for
corporations, self-employed individuals or partnerships, to establish a
qualified retirement plan under which shares of the Fund may be purchased. The
Fund Investors Keogh Plans can accept a transfer or qualified rollover from an
existing qualified retirement plan from which an individual receives a lump-sum
distribution, as well as regular annual contributions.
An annual maintenance fee of $12.50 will be charged for each Keogh account.
In addition, a $15.00 fee will be assessed to any Keogh account which is
transferred to a successor trustee or distributed to a participant, or for
which a refund of excess contribution is paid. These fees are subject to
change upon notification by Firstar Trust Company to the Fund.
HOW TO PURCHASE SHARES
Shares of the Fund may be purchased at net asset value without any sales
or other charge by sending a completed application form to The Merger Fund, c/o
Firstar Trust Company, P. O. Box 701, Milwaukee, Wisconsin 53201-0701.
However, applicants should not send any correspondence by overnight courier to
this post office box address. Correspondence sent by overnight courier should
be addressed to the Fund at Firstar Trust Company, Mutual Fund Services, Third
Floor, 615 East Michigan Street,
-9-
<PAGE> 14
Milwaukee, Wisconsin 53202. The minimum initial investment for individuals,
IRAs, corporations, partnerships or trusts is $2,000. There is no minimum for
subsequent investments. There is no minimum investment requirement for Keogh
Plans. Shares of the Fund are offered on a continuous basis. The Fund,
however, reserves the right, in its sole discretion, to reject any application
to purchase shares. Applications will not be accepted unless they are
accompanied by a check drawn on a U.S. bank, savings and loan, or credit union
in U.S. funds for the full amount of the shares to be purchased.
After an account is opened, additional shares may be purchased by sending
a check payable to "The Merger Fund," together with a note stating the name(s)
on the account and the account number, to Firstar Trust Company, P. O. Box 701,
Milwaukee, Wisconsin 53201-0701. All shares will be purchased at the net asset
value per share next determined after receipt of the shareholder's application
in proper order and acceptance of such application by the Fund. No share
certificates will be issued unless requested in writing. Shares of the Fund
may also be purchased through authorized broker-dealers who may charge for
their services.
The custodian will charge a $15.00 fee against a shareholder's account, in
addition to any loss sustained by the Fund, for any payment check returned to
the custodian for insufficient funds.
Shareholders should contact the Administrator at (800) 343-8959 to obtain
the latest wire instructions for wiring funds to Firstar Trust Company for the
purchase of Fund shares and to notify Firstar Trust Company that a wire
transfer is coming.
Automatic Investment Plan
A shareholder may also participate in the Fund's Automatic Investment
Plan, an investment plan that automatically debits money from the shareholder's
bank account and invests it in the Fund through the use of electronic funds
transfers or automatic bank drafts. After making an initial investment of at
least $2,000, shareholders may elect to make subsequent investments by
transfers of a minimum of $100 on specified days of each month into their
established Fund account. Shareholders should contact the Administrator at
(800) 343-8959 for more information about the Fund's Automatic Investment Plan.
NET ASSET VALUE
The net asset value per share of the Fund will be determined on each day
when the New York Stock Exchange (the "Exchange") is open for business at the
close of the Exchange and will be computed by determining the aggregate market
value of all assets of the Fund less its liabilities, and then dividing by the
total number of shares outstanding. The determination of net asset value for a
particular day is applicable to all applications for the purchase of shares as
well as all requests for the redemption of shares received at or before the
close of trading on the Exchange on that day.
-10-
<PAGE> 15
REDEMPTIONS
Fund shareholders will be entitled to redeem all or any portion of the
shares credited to their accounts by submitting a written request for
redemption to: The Merger Fund, c/o Firstar Trust Company, P. O. Box 701,
Milwaukee, Wisconsin 53201-0701. Upon the receipt of such a request in "proper
order," as described below, the shareholder will receive a check based on the
net asset value next determined after the redemption request has been received,
which may be more or less than the amount originally invested. If the shares
to be redeemed represent an investment made by check, the Fund reserves the
right to withhold the proceeds until the check clears. It will normally take
up to three days to clear local checks and up to seven days to clear other
checks.
A redemption request will be considered to have been received in "proper
order" if the following conditions are satisfied:
(i) the request is in writing, indicates the number of shares to be
redeemed and identifies the shareholder's account number;
(ii) the request is signed by the shareholder(s) exactly as the
shares are registered;
(iii) the request is accompanied by certificates, if any, issued
representing the shares, which have been endorsed for transfer (or are
themselves accompanied by an endorsed stock power) exactly as the shares are
registered; and
(iv) if the redemption proceeds are requested to be sent other than
to the address of record or if the proceeds of a requested redemption exceed
$25,000, the signature(s) on the request is/are guaranteed by an eligible
signature guarantor.
Questions concerning a redemption request may be addressed to the Fund at
its principal office. No redemption request will become effective until all
documents have been received in "proper order" by Firstar Trust Company.
Shareholders who have an IRA or other retirement plan must indicate on
their redemption request whether or not to withhold federal income tax.
Redemption requests failing to indicate an election not to have federal tax
withheld will be subject to withholding.
Shareholders may also redeem Fund shares through broker-dealers holding
such shares who have made arrangements with the Fund permitting redemptions by
telephone or facsimile transmission. These broker-dealers may charge a fee for
this service.
If a shareholder's transactions at any time reduce the shareholder's
account in the Fund to below $1,000 in value, the Fund may notify the
shareholder that, unless the account is brought up to at least such minimum
amount, the Fund may, within a
-11-
<PAGE> 16
reasonable time, redeem all shares in the account and close it by making
payment to the shareholder.
Systematic Withdrawal Plan
Individuals in whose accounts shares of the Fund are held or accounts in
which shares are allocated to The Merger Fund IRA Plan, the Fund Investors
Keogh Plans or other qualified retirement plan, which accounts in each case
have a current account value of at least $10,000, may adopt a Systematic
Withdrawal Plan to provide for periodic distributions for an annual fee of
$15.00 per plan, which fee is subject to change upon notification by Firstar
Trust Company to the Fund. By using the Systematic Withdrawal Plan, a
shareholder can request monthly, quarterly or other periodic checks for any
designated amount of $500 or more. A Systematic Withdrawal Plan may be opened
by making an application to Firstar Trust Company.
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
The Fund has qualified and elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code") and
intends to continue to so qualify. In any taxable year in which it qualifies
as such and distributes all of its net investment income and net capital gain
in accordance with the timing requirements of the Code, it will be exempt from
federal income and excise taxes.
The Fund intends to distribute substantially all of its net investment
income and net capital gain shortly after the end of each fiscal year. Both
distributions will be in shares of the Fund unless a shareholder elects to
receive cash. Dividends from net investment income (including any excess of
net short-term capital gain over net long-term capital loss) are taxable to
investors as ordinary income, while distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss) are
taxable as long-term capital gain regardless of the shareholder's holding
period for the shares. A portion of the Fund's income distributions may be
eligible for the 70% dividends-received deduction for domestic corporate
shareholders. Certain dividends or distributions declared in October, November
or December will be taxed to shareholders as if received in December if they
are paid during the following January.
Each year the Fund informs its shareholders of the amount and type of its
distributions. The Fund is required by federal tax law to withhold 31% of
dividends (including capital gain dividends) and redemption proceeds for
accounts (other than those of corporations and certain other exempt entities)
without a certified taxpayer identification number ("TIN") and certain other
certified information or with respect to which the IRS or a broker has notified
the Fund that withholding is required due to an incorrect TIN or a failure to
report taxable interest or dividends. The shareholder also must certify that
the number is correct and that he/she is not subject to backup withholding.
The certification is included as part of the share purchase
-12-
<PAGE> 17
application form. If the shareholder does not have a social security number,
he/she should indicate on the purchase form that an application to obtain a
number is pending. The Fund is required to withhold taxes if a number is not
delivered to the Fund within seven days.
IRA's, Keogh plans and other qualified retirement plans are exempt from
federal income taxation under the Code.
This summary is not intended to be, nor should it be, construed as legal
or tax advice to any current holder of the Fund's shares. The Fund's
shareholders are urged to consult their own tax advisors to determine the U.S.
federal income tax consequences to them of their ownership of the Fund's
shares.
ORGANIZATION AND CAPITALIZATION
The Fund is an open-end management investment company established under
the laws of the Commonwealth of Massachusetts by Declaration of Trust dated
April 12, 1982, as amended and restated on August 22, 1989. The Fund's
activities are supervised by its Trustees, who are elected by the Fund's
shareholders. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares. The Trustees are also
empowered by the Declaration of Trust and the By-Laws to create additional
series of shares, or portfolios. Each share represents an equal proportionate
interest in the Fund.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders. In such an event, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Except for the foregoing
and unless removed by action of the shareholders in accordance with the Fund's
By-Laws, the Trustees shall continue to hold office and may appoint successor
Trustees. The Trustees shall only be liable in cases of their willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Shares entitle their holders to one vote per share. Shares have
noncumulative voting rights, do not have preemptive or subscription rights and
are transferable.
-13-
<PAGE> 18
SHAREHOLDER COMMUNICATIONS
Shareholders of the Fund will receive quarterly schedules of investments,
unaudited semi-annual financial statements and audited year-end financial
statements certified by the Fund's independent certified public accountants.
Each report will show the investments owned by the Fund and the market values
thereof as determined in accordance with the policies of the Fund and will
provide other information about the Fund and its operations.
Shareholder inquiries should be directed to Firstar Trust Company, Mutual
Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 (telephone (800)
343-8959). Any correspondence sent by overnight courier service should be
addressed to the Fund at Firstar Trust Company, Third Floor, 615 East
Michigan Street, Milwaukee, Wisconsin 53202.
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<PAGE> 19
<TABLE>
<S> <C>
INVESTMENT ADVISER
Westchester Capital Management,
Inc.
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND THE
PAYING AGENT, SHAREHOLDER MERGER
SERVICING AGENT & CUSTODIAN FUND
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
TRUSTEES
Frederick W. Green
William H. Bohnett
Michael J. Downey
James P. Logan III
Frank A. McDermott, Jr.
EXECUTIVE OFFICERS
Frederick W. Green, President
Bonnie L. Smith, Vice President,
Treasurer and Secretary
COUNSEL PROSPECTUS
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
INDEPENDENT ACCOUNTANTS February 7, 1996
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
<PAGE> 20
--------------------------
THE MERGER FUND
100 Summit Lake Drive
Valhalla, New York 10595
--------------------------
A no-load, open-end, nondiversified investment company which seeks capital
growth by engaging in merger arbitrage.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 7, 1996
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of The Merger Fund dated February 7,
1996, a copy of which may be obtained without charge by writing to The Merger
Fund, 100 Summit Lake Drive, Valhalla, New York 10595.
- --------------------------------------------------------------------------------
The Fund pays to its principal underwriter and others an annual fee of up
to 0.25%, as authorized by its Rule 12b-1 plan of distribution. There can be
no assurance that the Fund's investment objective will be achieved, and its
investment policy entails capital risk. Each investor should carefully
consider his ability to assume the risks involved before making an investment
in the Fund.
- --------------------------------------------------------------------------------
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT ADVISER AND PRINCIPAL UNDERWRITER . . . . . . . . . . . . . . . . . . 5
Investment Adviser and Advisory Contract . . . . . . . . . . . . . . . . . . 5
Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SERVICES AND PLANS OFFERED BY THE FUND . . . . . . . . . . . . . . . . . . . . . 10
The Merger Fund IRA Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fund Investors Keogh Plans . . . . . . . . . . . . . . . . . . . . . . . . . 10
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . . . . . . . . . 11
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ADDITIONAL INFORMATION ABOUT REDEMPTIONS . . . . . . . . . . . . . . . . . . . . 12
TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ORGANIZATION AND CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . 18
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Shareholder and Trustee Liability . . . . . . . . . . . . . . . . . . . . . 18
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR . . . . . . . . . . . . . . . . . . . 21
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Covered Option Writing . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Money Market Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Short Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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<PAGE> 22
INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT OBJECTIVES AND
POLICIES" in the Fund's prospectus.)
The Merger Fund (the "Fund") is a no-load, open-end, nondiversified,
registered management investment company which seeks to achieve capital growth
by engaging in merger arbitrage. The Fund's adviser is Westchester Capital
Management, Inc., 100 Summit Lake Drive, Valhalla, New York 10595 (the
"Adviser").
Trading to seek short-term capital appreciation can be expected to
cause the Fund's portfolio turnover rate to be substantially higher than that
of the average equity-oriented investment company and, as a result, may involve
increased brokerage commission costs which will be borne directly by the Fund
and ultimately by its investors. See "Allocation of Portfolio Brokerage" and
"Portfolio Turnover." Certain investments of the Fund may, under certain
circumstances, be subject to rapid and sizable losses, and there are additional
risks associated with the Fund's overall investment strategy, which may be
considered speculative.
Merger Arbitrage.
Although a variety of strategies may be employed depending upon the
nature of the reorganizations selected for investment, the most common merger
arbitrage activity involves purchasing the shares of an announced acquisition
target at a discount from the expected value of such shares upon completion of
the acquisition. The size of the discount, or spread, and whether the
potential reward justifies the potential risk, are functions of numerous
factors affecting the riskiness and timing of the acquisition. Such factors
include the status of the negotiations between the two companies (for example,
spreads typically narrow as the parties advance from an agreement in principle
to a definitive agreement), the complexity of the transaction, the number of
regulatory approvals required, the likelihood of government intervention on
antitrust or other grounds, the type of consideration to be received and the
possibility of competing offers for the target company.
Because the expected gain on an individual arbitrage investment is
normally considerably smaller than the possible loss should the transaction be
unexpectedly terminated, Fund assets will not be committed unless the proposed
acquisition or other reorganization plan appears to the Adviser to have a
substantial probability of success. The expected timing of each transaction is
also extremely important since the length of time that the Fund's capital must
be committed to any given reorganization will affect the rate of return
realized by the Fund, and delays can substantially reduce such returns. See
"Portfolio Turnover."
<PAGE> 23
The Adviser will be guided by the following general principles in
making investments for the Fund:
1. Securities will be purchased only after a reorganization is
announced or when one or more publicly disclosed events point toward
the likelihood of some type of reorganization within a reasonable
period of time.
2. Before an initial position will be established in a newly
announced reorganization, a preliminary analysis will be made of the
proposed transaction to determine the probability and timing of a
successful completion. A more detailed review will take place before
the position is enlarged.
3. In deciding whether or to what extent to invest in any given
reorganization, the Adviser will place particular emphasis on the
credibility, strategic motivation and financial resources of the
participants, and the liquidity of the securities involved in the
transaction.
4. The risk-reward characteristics of each arbitrage position will
be assessed on an ongoing basis, and the Fund's holdings will be
adjusted accordingly, subject to certain limitations contained in
Subchapter M of the Internal Revenue Code on the portion of the
Fund's gross income that may be derived from the sale of stock or
securities held for less than three months.
5. The Adviser will attempt to invest in as many attractive
reorganizations as can be effectively monitored in order to minimize
the impact on the Fund of losses resulting from the termination of
any given proposed transaction.
6. The Adviser will invest the Fund's assets in both negotiated, or
"friendly," reorganizations and non-negotiated, or "hostile,"
takeover attempts, but in either case the Adviser's primary
consideration will be the likelihood that the transaction will be
successfully completed.
Investment Restrictions.
The following investment restrictions have been adopted by the Fund
as fundamental policies and may be changed only by the affirmative vote of a
majority of the outstanding shares of the Fund. As used in this Statement of
Additional Information and in the Fund's prospectus, the term "majority of the
outstanding shares of the Fund" means the vote of (i) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50%
of the Fund's outstanding shares, whichever is less.
-2-
<PAGE> 24
These investment restrictions provide that:
1. The Fund may not issue senior securities other than to evidence
borrowings as permitted in paragraph (5) below.
2. The Fund may not make short sales of securities (unless by virtue of
its ownership of other securities at the time of such sale, it owns or has a
prospective right to receive, without the payment of additional compensation,
securities equivalent in kind and amount to the securities sold). The total
market value of all securities sold short may not exceed 50% of the value of
the net assets of the Fund, and the value of securities of any one issuer in
which the Fund is short may not exceed the lesser of 10% of the value of the
Fund's net assets or 10% of the securities of any class of any issuer.
3. The Fund may not purchase securities on margin, except that the Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities.
4. The Fund may not (a) purchase call options except to terminate,
through a closing purchase transaction, its obligation with respect to a
previously written covered call option; (b) sell uncovered (naked) call
options; (c) sell covered call options the underlying securities of which have
an aggregate value (determined as of the date the calls are sold) exceeding 50%
of the value of the net assets of the Fund; or (d) invest in put options to the
extent that the premiums on protective put options exceed 25% of the value of
its net assets; provided that the provisions of this paragraph (4) shall not
prevent the purchase, ownership, holding or sale of forward contracts with
respect to foreign securities or currencies.
5. The Fund may not borrow money except that it may borrow (i) from
banks to purchase or carry securities or other investments, (ii) from banks for
temporary or emergency purposes, or (iii) by entering into reverse repurchase
agreements, if, immediately after any such borrowing, the value of the Fund's
assets, including all borrowings then outstanding less its liabilities, is
equal to at least 300% of the aggregate amount of borrowings then outstanding
(for the purpose of determining the 300% asset coverage, the Fund's liabilities
will not include amounts borrowed). Any such borrowings may be secured or
unsecured. The Fund may issue securities (including senior securities)
appropriate to evidence the indebtedness, including reverse repurchase
agreements, which the Fund is permitted to incur.
6. The Fund may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings as permitted in paragraph (5) above, the Fund may
pledge securities having a market value at the time of pledge not exceeding 33%
of the value of its total assets. The Fund may, in addition, pledge securities
having a market value at the time of pledge not exceeding 50% of the value of
its net assets to secure short sales as permitted in paragraph (2) above or
covered option writing as permitted in paragraph (4) above.
-3-
<PAGE> 25
7. The Fund may not underwrite or participate in the marketing of
securities issued by other persons except to the extent that the Fund may be
deemed to be an underwriter under federal securities laws in connection with
the disposition of portfolio securities.
8. The Fund may not knowingly purchase or otherwise acquire securities
which are subject to legal or contractual restrictions on resale or invest more
than 10% of its total assets in securities without readily available market
quotations, including repurchase agreements having a maturity of more than
seven days.
9. The Fund may not concentrate its investments in any industry. No
more than 25% of the value of the total assets of the Fund may be invested in
the securities of issuers having their principal business activities in the
same industry.
10. The Fund may not purchase or sell real estate or real estate mortgage
loans as such, but this restriction shall not prevent the Fund from investing
in readily marketable interests in real estate investment trusts, readily
marketable securities of companies which invest in real estate, or obligations
secured by real estate or interests therein.
11. The Fund may not purchase or sell commodities or commodity contracts.
12. The Fund may not make loans, except that subject to paragraph (8),
the Fund may enter into repurchase agreements maturing in seven days or less.
13. The Fund may not purchase warrants, valued at the lower of cost or
market, in excess of 5% of the net assets of the Fund (taken at current value);
provided that this shall not prevent the purchase, ownership, holding or sale
of warrants of which the grantor is the issuer of the underlying securities.
Included within that amount, but not to exceed 2% of the value of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund at any time in units or attached
to securities are not subject to this restriction.
14. The Fund may not invest in interests (other than equity stock
interests or debentures) in oil, gas or other mineral exploration or
development programs.
15. The Fund may not invest in companies for the purpose of exercising
control or management.
16. The Fund may not purchase or retain the securities of any issuer,
other than its own securities, if, to the knowledge of the Fund's management,
the Trustees and officers, or the directors and employees of the Fund's
investment adviser, who individually own beneficially more than 1/2% of the
outstanding securities of such issuer, together own beneficially more than 5%
of such outstanding securities.
-4-
<PAGE> 26
17. The Fund may not invest more than 5% of the value of its total assets
in the securities of issuers which, together with any predecessors, have been
in continuous operation for less than three years.
18. The Fund may not participate on a joint or a joint and several basis
in any trading account in securities.
19. The Fund may not purchase securities of other investment companies,
except by purchases in the open market where no underwriter or dealer's
commission or profit is involved, other than customary brokers' commissions,
and except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
20. The Fund may not invest more than 10% of its total assets (taken at
market value) in the securities of any one issuer, except those issued or
guaranteed by the United States Government, its agencies or instrumentalities.
21. The Fund may not purchase securities of any one issuer if as a result
more than 10% of the voting securities of such issuer would be held by the
Fund.
If a particular percentage restriction as set forth above is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from a change in values or assets will not constitute a violation of
that restriction.
INVESTMENT ADVISER AND PRINCIPAL UNDERWRITER
(See "INVESTMENT ADVISER" and "PRINCIPAL
UNDERWRITER" in the Fund's prospectus.)
Investment Adviser and Advisory Contract.
The Fund's investment advisory contract with the Adviser (the
"Advisory Contract") provides that the Fund pay all of the Adviser's expenses,
including, without limitation, (i) the costs incurred in connection with
registration and maintenance of its registration under the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and state
securities laws and regulations, (ii) preparation of and printing and mailing
reports, notices and prospectuses to current shareholders, (iii) transfer taxes
on the sales of the Fund's shares and on the sales of portfolio securities,
(iv) brokerage commissions, (v) custodial and shareholder transfer charges,
(vi) legal, auditing and accounting expenses, (vii) expenses of servicing
shareholder accounts, (viii) insurance expenses for fidelity and other
coverage, (ix) fees and expenses of Trustees who are not "interested persons"
within the meaning of the Investment Company Act of 1940, (x) expenses of
Trustee and shareholder meetings and (xi) any expenses of distributing the
Fund's shares which may be payable pursuant to a Plan of Distribution adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund is
also liable for such nonrecurring expenses as may arise, including
-5-
<PAGE> 27
litigation to which the Fund may be a party. The Fund has an obligation to
indemnify each of its officers and Trustees with respect to such litigation but
not against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
The Adviser receives an advisory fee, payable monthly, for the
performance of its services at an annual rate of 1.0% (1/12 of 1% monthly) of
the average daily net assets of the Fund. The fee will be accrued daily for
the purpose of determining the offering and redemption price of the Fund's
shares.
The Advisory Contract will continue in effect from year to year
provided such continuance is approved at least annually by (i) a vote of the
majority of the Fund's Trustees who are not parties thereto or "interested
persons" (as defined in the Investment Company Act of 1940) of the Fund or the
Adviser, cast in person at a meeting specifically called for the purpose of
voting on such approval and by (ii) the majority vote of either all of the
Fund's Trustees or the vote of a majority of the outstanding shares of the
Fund. The Advisory Contract may be terminated without penalty on 60 days'
written notice by a vote of a majority of the Fund's Trustees or by the
Adviser, or by holders of a majority of the Fund's outstanding shares. The
Advisory Contract shall terminate automatically in the event of its assignment.
For the fiscal years ended November 30, 1993, 1994, and 1995, the
Fund incurred advisory fees of $151,870, $923,596 and $2,040,921, respectively,
to the Adviser.
Principal Underwriter.
The Fund's principal underwriter is Mercer Allied Company, L.P.
("Mercer"), One Wall Street, Albany, New York 12205. Mercer is a Delaware
limited partnership organized in 1994, and is currently majority-owned by The
Ayco Company, L.P. Mercer is a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc.
The Fund has adopted a plan of distribution dated January 31, 1989,
as amended and restated on July 1, 1993 (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. Under the Plan, the Fund may pay to
Mercer, to any broker-dealer with whom Mercer or the Fund has entered into a
contract to distribute Fund shares, or to any other qualified financial
services firm, compensation for services with respect to shares held or
purchased by their respective customers or in connection with the purchase of
shares attributable to their efforts. 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. As of July 1, 1993, the Fund reduced the maximum allowable
compensation under the Plan to 0.25% from its previous 0.45% limit, payable as
a service fee.
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<PAGE> 28
The Plan provides that Mercer will furnish to the Trustees and the
Trustees will review, at least quarterly, a report of distribution expenses
incurred under the Plan and the purposes for which such expenses were incurred.
The Plan will remain in effect from year to year provided such continuance is
approved at least annually by the vote of a majority of the Fund's Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of the Fund, the Adviser or Mercer and who have no direct or indirect interest
in the operation of the Plan or any related agreement (the "Rule 12b-1
Trustees"), cast in person at a meeting called for the purpose of voting on
such approval, and additionally by a vote of either a majority of the Fund's
Trustees or a majority of the outstanding shares of the Fund.
The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees or by vote of a majority of the Fund's outstanding shares.
The Plan may not be amended to increase materially the amount of distribution
expenses payable under the Plan without approval of the Fund's shareholders.
In addition, all material amendments to the Plan must be approved by the
Trustees in the manner described above.
The Fund has distribution and/or service contracts with authorized
dealers and distributors of the Fund's shares and others, all of which
contracts incorporate the terms of the Plan and have been approved by the
Trustees, including the Rule 12b-1 Trustees. Pursuant to their respective
contracts, for the fiscal year ended November 30, 1995, the Fund incurred
expenses of $122,593 of which $35,363 was paid or accrued to Mercer and $87,230
was paid to others.
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<PAGE> 29
MANAGEMENT
Trustees and Officers.
The Fund's Trustees and officers are listed below. Except as
indicated, each Trustee has held the office shown or other offices in the same
company for the last five years.
The "interested" Trustees as defined in the Investment Company Act of
1940 are indicated by an asterisk(*).
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age with the Fund During the Past 5 Years
---------------- --- ----------------- -------------------------
<S> <C> <C> <C>
Frederick W. Green* 49 President and President of Westchester
Westchester Capital Trustee Capital Management, Inc.,
Management, Inc. the Fund's Adviser.
100 Summit Lake Drive
Valhalla, NY 10595
Bonnie L. Smith 48 Vice President, Vice President of
Westchester Capital Treasurer and Westchester Capital
Management, Inc. Secretary Management, Inc., the
100 Summit Lake Drive Fund's Adviser.
Valhalla, NY 10595
William H. Bohnett* 47 Assistant Partner in the law firm
Fulbright & Jaworski L.L.P. Secretary and of Fulbright & Jaworski
666 Fifth Avenue Trustee L.L.P.
New York, NY 10103
James P. Logan III 59 Trustee President of James P.
James P. Logan & Co., Inc. Logan & Co., Inc., an
144 East 44th Street executive search firm.
New York, NY 10017
Frank A. McDermott, Jr. 77 Trustee President of JFM
217 Northeast Edgewater Drive Associates, Inc., a
Stuart, FL 34996 management consulting
firm. Also, Director of
Orange and Rockland
Utilities, Inc.
</TABLE>
-8-
<PAGE> 30
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age with the Fund During the Past 5 Years
---------------- --- ----------------- -------------------------
<S> <C> <C> <C>
Michael J. Downey 52 Trustee Consultant and
2 Parsons Lane independent financial
Rochester, NY 14610 adviser since July 1993.
Chairman and Chief
Executive Officer of
Prudential Mutual Fund
Management, May 1987 to
June 1993. President and
Director of Asia Pacific
Fund, Inc.
Joseph Neuberger 33 Assistant Vice President of Firstar
Firstar Trust Co. Secretary Trust Company, and
615 East Michigan Street Manager of Fund
Milwaukee, WI 53202 Administration and
Compliance since August
1994. Previously,
manager with Arthur
Andersen LLP.
</TABLE>
The Trustees and officers of the Fund, as a group, own 18,520.728
shares of beneficial interest of the Fund, and 30,958.156 shares are owned by
the Adviser's retirement funds.
Remuneration.
Management considers that Messrs. Logan, McDermott and Downey are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Fund or the Adviser. The fees of the non-interested Trustees (currently $4,000
per year and $1,000 per meeting attended), in addition to their expenses, are
paid by the Fund.
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<PAGE> 31
SERVICES AND PLANS OFFERED BY THE FUND
(See "PLANS OFFERED BY THE FUND" in the Fund's prospectus.)
The costs of services rendered to the Fund's investors by its
transfer agent, Firstar Trust Company ("Firstar") are paid for by the Fund;
however, in order to cover abnormal administrative costs, investors requesting
an historical transcript of their account will be charged a fee based upon the
number of years researched. The Fund reserves the right, on 60 days' written
notice, to charge investors to cover other administrative costs of services
provided to shareholders.
The Merger Fund IRA Plan.
The Fund makes available an Individual Retirement Account ("IRA"),
known as "The Merger Fund IRA Plan." The Merger Fund IRA Plan provides
individuals with the opportunity to establish an IRA in order to purchase
shares of the Fund. The Merger Fund IRA Plan can also be used for a transfer
from an existing IRA, or for a rollover from a qualified retirement plan from
which the individual receives a lump-sum distribution. The form of The Merger
Fund IRA Plan meets the requirements of Section 408 of the Internal Revenue
Code. Firstar acts as custodian for The Merger Fund IRA Plan, and the adoption
of The Merger Fund IRA Plan by each individual is subject to acceptance or
rejection by Firstar in its capacity as custodian.
Fund Investors Keogh Plans.
The Fund makes available the Fund Investors Defined Contribution
Prototype Plan (the "Fund Investors Defined Contribution Keogh Plan") and the
Fund Investors Defined Benefit Prototype Plan (the "Fund Investors Defined
Benefit Keogh Plan"). The Fund Investors Defined Contribution Keogh Plan and
the Fund Investors Defined Benefit Keogh Plan (collectively hereinafter
referred to as the "Fund Investors Keogh Plans") provide opportunities to
corporations, self-employed individuals and partnerships to establish qualified
retirement plans under which shares of the Fund may be purchased. The Fund
Investors Keogh Plans can, in most cases, also accept a transfer or a rollover
from an existing qualified retirement plan from which an individual receives a
lump-sum distribution of the individual's entire account balance in such plan.
A defined benefit qualified retirement plan specifies what a participant's
pension benefit will be, and the employer (including a self-employed
individual) adopting the plan must then fund the plan on an actuarial basis so
it can pay the promised benefit. A defined contribution qualified retirement
plan does not promise any definite benefit but instead provides for certain
contributions to be made to the plan, and a participant's ultimate benefit
depends on the amount that has accumulated in his account. The Fund Investors
Keogh Plans have received an opinion from the Internal Revenue Service
approving the plans as prototype plans which meet the requirements of Sections
401 and 501 of the Internal Revenue Code of 1986, as amended. The Fund
Investors Keogh Plans are in the process of being submitted to the
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<PAGE> 32
Internal Revenue Service for additional approval of certain amendments required
by recent changes in tax law. Firstar acts as custodian of the Fund Investors
Keogh Plans. The Fund Investors Keogh Plans as adopted by each employer
(including a self-employed individual) or partnership are subject to acceptance
or rejection by Firstar in its capacity as trustee of the Fund Investors Keogh
Plans.
Systematic Withdrawal Plan.
Shareholders participating in the Fund's Systematic Withdrawal Plan
should note that disbursements may be based on the redemption of a fixed dollar
amount, fixed number of shares, percent of account or declining balance. Any
income, dividends and capital gain distributions on shares held in Systematic
Withdrawal Plan accounts will be reinvested in additional Fund shares.
Systematic Withdrawal Plan payments will be made out of the proceeds realized
from the redemption of Fund shares held in the account. These redemptions made
to effect withdrawal payments may reduce or exhaust entirely the original
investment held under the Plan. A Systematic Withdrawal Plan may be terminated
at any time by the shareholder or the Fund upon written notice and will be
automatically terminated when all Fund shares in the shareholder's account
under the Plan have been liquidated.
NET ASSET VALUE
(See "NET ASSET VALUE" in the Fund's prospectus.)
The net asset value per share of the Fund will be determined on each
day when the New York Stock Exchange is open for business and will be computed
by taking the aggregate market value of all assets of the Fund less its
liabilities, and dividing by the total number of shares outstanding. Each
determination will be made (i) by valuing portfolio securities, including open
short positions, which are traded on the New York Stock Exchange, American
Stock Exchange and on the Nasdaq National Market System at the last reported
sales price on that exchange; (ii) by valuing put and call options which are
traded on the Chicago Board Options Exchange or any other domestic exchange at
the last sale price on such exchange; (iii) by valuing listed securities and
put and call options for which no sale was reported on a particular day and
securities traded on the over-the-counter market at the mean between the last
bid and asked prices; and (iv) by valuing any securities or other assets for
which market quotations are not readily available at fair value in good faith
and under the supervision of the Trustees, although the actual calculation may
be done by others. The Adviser reserves the right to value securities,
including options, at prices other than last-sale prices when such last-sale
prices are believed unrepresentative of fair market value as determined in good
faith by the Adviser.
The assets of the Fund received for the issue or sale of its shares,
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, shall constitute the underlying assets of the Fund. In
the event of the dissolution or
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<PAGE> 33
liquidation of the Fund, the holders of shares of the Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
(See "REDEMPTIONS" in the Fund's prospectus.)
Supporting documents in addition to those listed under "Redemptions"
in the Fund's prospectus will be required from executors, administrators,
trustees, or if redemption is requested by one other than the shareholder of
record. Such documents include, but are not restricted to, stock powers, trust
instruments, certificates of death, appointments as executor, certificates of
corporate authority and waiver of tax required in some states when settling
estates.
Under the Investment Company Act of 1940, a shareholder's right to
redeem shares and to receive payment therefor may be suspended at times: (a)
when the New York Stock Exchange is closed, other than customary weekend and
holiday closings; (b) when trading on that exchange is restricted for any
reason; (c) when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets,
provided that applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) will govern as to whether
the conditions prescribed in (b) or (c) exist; or (d) when the Securities and
Exchange Commission by order permits a suspension of the right to redemption or
a postponement of the date of payment on redemption. In case of suspension of
the right of redemption, payment of a redemption request will be made based on
the net asset value next determined after the termination of the suspension.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
The Fund has qualified and elected to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to continue to so qualify, which requires compliance with
certain requirements concerning the sources of its income, diversification of
its assets, and the amount and timing of its distributions to shareholders.
Such qualification does not involve supervision of management or investment
practices or policies by any government agency or bureau. By so qualifying,
the Fund will not be subject to federal income or excise tax on its net
investment income or net capital gain which are distributed to shareholders in
accordance with the applicable timing requirements. Net investment income and
net capital gain of the Fund will be computed in accordance with Section 852 of
the Code.
-12-
<PAGE> 34
The Fund intends to distribute all of its net investment income, any
excess of net short-term capital gains over net long-term capital losses, and
any excess of net long-term capital gains over net short-term capital losses in
accordance with the timing requirements imposed by the Code and therefore will
not be required to pay any federal income or excise taxes. Distributions of
net investment income and net capital gain will be made shortly after November
30, the end of each fiscal year, and no later than December 31 of each year.
Both types of distributions will be in shares of the Fund unless a shareholder
elects to receive cash.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula contained in
Section 4982 of the Code. The formula requires payment to shareholders during
a calendar year of distributions representing at least 98% of the Fund's
ordinary income for the calendar year and at least 98% of its capital gain net
income (i.e., the excess of its capital gains over capital losses) realized
during the one-year period ending October 31 during such year (although
investment companies with taxable years ending on November 30 or December 31
may make an irrevocable election to measure the required capital gain
distribution using their actual taxable year) plus 100% of any income that was
neither distributed nor taxed to the Fund during the preceding calendar year.
Under ordinary circumstances, the Fund expects to time its distributions so as
to avoid liability for this tax.
Net investment income is made up of dividends and interest less
expenses. Net capital gain for a fiscal year is computed by taking into
account any capital loss carryforward of the Fund. Presently, the Fund has no
capital loss carryforwards.
The following discussion of tax consequences is for the general
information of shareholders who are subject to tax. Shareholders that are
IRAs, Keogh plans or other qualified retirement plans are exempt from income
taxation under the Code.
To the extent that the Fund retains any of its net long-term capital
gain for the year for reinvestment, requiring federal corporate income taxes to
be paid thereon by the Fund, the Fund will elect to treat the undistributed net
long-term capital gain as having been distributed to shareholders. As a
result, each shareholder will report for federal income tax purposes its
proportionate share of the undistributed net long-term capital gain, will be
able to claim his proportionate share of federal income taxes paid by the Fund
on that amount as a credit against his own federal income tax liability and
will be able to claim a refund to the extent that the credit exceeds such tax
liability. In addition, each shareholder of the Fund will be entitled to
increase the adjusted tax basis of his Fund shares by the difference between
his pro rata share of such undistributed gain and his tax credit.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
-13-
<PAGE> 35
Dividends from domestic corporations may comprise some portion of the
Fund's gross income. To the extent that such dividends constitute a portion of
the Fund's gross income, a portion of the income distributions of the Fund may
be eligible for the 70% deduction for dividends received by corporations.
Taxable corporate shareholders will be informed of the portion of dividends
which so qualify. Receipt of qualifying dividends may result in the reduction
of a corporate shareholder's tax basis in its shares by the untaxed portion of
such dividends if they are treated as "extraordinary dividends" under the Code.
The dividends-received deduction is reduced to the extent the shares of the
Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if the shares are
deemed to have been held for less than 46 days. The same restrictions apply to
the Fund with respect to its ownership of the dividend-paying stock. In
addition, the deducted amount is included in the calculation of the federal
alternative minimum tax, if any, applicable to such corporate shareholders.
Distributions of net capital gain ("capital gain dividends") are
taxable to shareholders as long-term capital gain, regardless of the length of
time the shares of the Fund have been held by such shareholders. Capital gain
dividends are not eligible for the dividends-received deduction. Any loss
realized upon the redemption of shares within six months from the date of their
purchase will be treated as a long-term capital loss to the extent of any
amounts treated as capital gain dividends during such six-month period. All or
a portion of any loss realized upon the redemption of shares may be disallowed
to the extent shares are purchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
All distributions will be included in the individual shareholder's
alternative minimum taxable income and in the income which may be subject to
tax under the alternative minimum tax for corporations.
Distributions of taxable net investment income and net capital gain
will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so
received equal to the net asset value of a share on the reinvestment date.
All distributions of taxable net investment income and net capital
gain, whether received in shares or in cash, must be reported by each taxable
shareholder on his or her federal income tax return. Dividends or
distributions declared in October, November or December as of a record date in
such a month, if any, will be deemed to have been received by shareholders on
December 31, if paid during January of the following year. Redemptions of
shares may result in tax consequences (gain or loss) to the shareholder and are
also subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for
any taxable year only if (i) neither the individual nor his or her spouse
(unless filing separate returns) is an active participant in an employer's
retirement plan, or (ii) the
-14-
<PAGE> 36
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,000 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,000 and
$50,000; $25,000 for a single individual, with a phase-out for adjusted gross
income between $25,000 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed
if an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse
elects to be treated as having no earnings (for IRA contribution purposes) for
the year.
Distributions by the Fund result in a reduction in the net asset
value of the Fund's shares. Should a distribution reduce the net asset value
below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax
implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
a partial return of capital upon the distribution, which will nevertheless be
taxable to them.
Subchapter M of the Code requires that the Fund realize less than 30%
of its annual gross income from the sale of securities held for less than three
months. Options activities of the Fund may increase the amount of gains from
the sale of securities held for less than three months, because all or a
portion of any gains from the expiration of, or from closing transactions with
respect to, call options written by the Fund will be treated as short-term
gains and because the exercise of call options written by the Fund would cause
it to sell the underlying securities before it otherwise might. Holding period
reductions resulting from short sales entered into by the Fund would have a
similar effect.
Equity options (including call and put options on stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund uponpayment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of the option, on the Fund's holding period for the underlying
security. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio. If the
-15-
<PAGE> 37
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as
short-term capital gain or loss. If a call option is exercised, the character
of the gain or loss depends on the holding period of the underlying security.
The exercise of a put option written by the Fund is not a taxable transaction
for the Fund.
Any listed nonequity options written or purchased by the Fund
(including options on debt securities) will be governed by Section 1256 of the
Code. Absent a tax election to the contrary, gain or loss attributable to the
lapse, exercise or closing out of any such position will be treated as 60%
long-term and 40% short-term capital gain or loss, and on the last trading day
of the Fund's fiscal year, all outstanding Section 1256 positions will be
marked to market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term capital gain or loss.
Ordinarily, gains and losses realized from portfolio transactions
will be treated as capital gain or loss. However, all or a portion of the gain
or loss from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial forward, futures and option
contracts, and certain preferred stock) may be treated as ordinary income or
loss under Section 988 of the Internal Revenue Code. In addition, all or a
portion of the gain realized from the disposition of market discount bonds will
be treated as ordinary income under Section 1276 of the Internal Revenue Code.
Generally, a market discount bond is defined as any bond bought by the Fund
after April 30, 1993, and after its original issuance, at a price below its
face or accreted value. Finally, all or a portion of the gain realized from
engaging in "conversion transactions" may be treated as ordinary income under
Section 1258 of the Internal Revenue Code. "Conversion transactions" are
defined to include certain forward, futures, option and straddle transactions,
transactions marketed or sold to produce capital gains, or transactions
described in Treasury regulations to be issued in the future.
Offsetting positions held by the Fund involving certain financial
forward, futures or options contracts (including certain foreign currency
forward contracts or options) may constitute "straddles." "Straddles" are
defined to include "offsetting positions" in actively traded personal property.
The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the
Internal Revenue Code, which, in certain circumstances, override or modify the
provisions of Sections 1256 and 988. If the Fund were treated as entering into
"straddles" by reason of its engaging in certain forward contracts or options
transactions, such "straddles" would be characterized as "mixed straddles" if
the forward contracts or options transactions comprising a part of such
"straddles" were governed by Section 1256. The Fund may make one or more
elections with respect to "mixed straddles." Depending on which election is
made, if any, the results to the Fund may differ. If no election is made to
the extent the "straddle" rules apply to positions established by the Fund,
losses realized by the Fund will be deferred to the extent of unrealized gain
in the offsetting position. Moreover, as a result of the "straddle" rules,
short-term capital loss on "straddle" positions may be recharacterized
-16-
<PAGE> 38
as long-term capital loss, and long-term capital gains may be treated as
short-term capital gains.
Under the Code, the Fund will be required to report to the Internal
Revenue Service all distributions of taxable income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions
of Section 3406 of the Code, distributions of taxable net investment income and
net capital gain and proceeds from the redemption or exchange of the shares of
a regulated investment company may be subject to withholding of federal income
tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the investment company with their taxpayer identification numbers and
with required certifications regarding their status under the federal income
tax law, or if the Fund is notified by the IRS or a broker that withholding is
required due to an incorrect TIN or a previous failure to report taxable
interest or dividends. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form
and character of the distribution. In January of each year the Fund issues to
each shareholder a statement of the federal income tax status of all
distributions.
The Fund is organized as a Massachusetts business trust and is not
liable for any income or franchise tax in the Commonwealth of Massachusetts;
provided that it qualifies as a regulated investment company for federal income
tax purposes. If it so qualifies and pays no federal income tax, it will also
not be liable for New York State income taxes, other than a nominal corporation
franchise tax (as adjusted by the applicable New York State surtaxes).
The foregoing discussion of U.S. federal income tax law relates
solely to the application of that law to U.S. persons; i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates.
Each shareholder who is not a U.S. person should consider the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the possibility
that such a shareholder may be subject to a U.S. withholding tax at a rate of
30% (or at a lower rate under an applicable income tax treaty) on amounts
constituting ordinary income received by him or her.
Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this statement of additional
information in light of their particular tax situations.
-17-
<PAGE> 39
ORGANIZATION AND CAPITALIZATION
(See "ORGANIZATION AND CAPITALIZATION" in the Fund's prospectus.)
General.
The Fund is an open-end investment company established under the laws
of the Commonwealth of Massachusetts by Declaration of Trust dated April 12,
1982, as amended and restated on August 22, 1989 (the "Declaration of Trust").
Previously known as the Risk Portfolio of The Ayco Fund, the Fund commenced
doing business as The Merger Fund on January 31, 1989. The Fund's name was
formally changed to The Merger Fund on August 22, 1989.
Shares entitle their holders to one vote per share. Shares have
noncumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of Trustees can elect all Trustees and, in such
event, the holders of the remaining shares voting for the election of Trustees
will not be able to elect any person or persons as Trustees. Shares have no
preemptive or subscription rights, and are transferable.
Shareholder and Trustee Liability.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification out of Fund property of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Management believes that, in view of the above, the risk of
personal liability of shareholders is remote. The Declaration of Trust does
not require the Fund to hold annual meetings of shareholders. However, the
Fund will hold special meetings when required by federal or state securities
laws. The holders of at least 10% of the Fund's outstanding shares have the
right to call a meeting of shareholders for the purpose of voting upon the
removal of one or more Trustees, and in connection with any such meeting, the
Fund will comply with the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
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<PAGE> 40
ALLOCATION OF PORTFOLIO BROKERAGE
Subject to the supervision of the Trustees, decisions to buy and sell
securities for the Fund are made by the Adviser. The Adviser is authorized by
the Trustees to allocate the orders placed by it on behalf of the Fund to
brokers or dealers who may, but need not, provide research or statistical
material or other services to the Fund or the Adviser for the Fund's use. Such
allocation is to be in such amounts and proportions as the Adviser may
determine.
In selecting a broker or dealer to execute each particular
transaction, the Adviser will take the following into consideration: the best
net price available; the reliability, integrity and financial condition of the
broker or dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker or dealer to the investment
performance of the Fund on a continuing basis. Brokers or dealers executing a
portfolio transaction on behalf of the Fund may receive a commission in excess
of the amount of commission another broker or dealer would have charged for
executing the transaction if the Adviser determines in good faith that such
commission is reasonable in relation to the value of brokerage, research and
other services provided to the Fund.
In allocating portfolio brokerage, the Adviser may select brokers or
dealers who also provide brokerage, research and other services to other
accounts over which the Adviser exercises investment discretion. Some of the
services received as the result of Fund transactions may primarily benefit
accounts other than the Fund, while services received as the result of
portfolio transactions effected on behalf of those other accounts may primarily
benefit the Fund. The Adviser is unable to quantify the amount of commissions
set forth below which were paid as a result of such services because a
substantial number of transactions were effected through brokers which provide
such services but which were selected principally because of their execution
capabilities.
For the fiscal years ended November 30, 1993, 1994 and 1995, the Fund
paid brokerage commissions of approximately $130,446, $545,966 and $1,162,149,
respectively.
-19-
<PAGE> 41
PORTFOLIO TURNOVER
The portfolio turnover rate may be defined as the ratio of the lesser
of annual sales or purchases to the monthly average value of the portfolio,
excluding from both the numerator and the denominator (1) securities with
maturities at the time of acquisition of one year or less and (2) short
positions. For the fiscal year ended November 30, 1995, the Fund's portfolio
annual turnover rate was approximately 290%. The Fund will invest portions of
its assets to seek short-term capital appreciation. The Fund's investment
objective and corresponding investment policies can be expected to cause the
portfolio turnover rate to be substantially higher than that of the average
equity-oriented investment company.
Merger arbitrage investments are characterized by a high turnover
rate because, in general, a relatively short period of time elapses between the
announcement of a reorganization and its completion or termination. The
majority of mergers and acquisitions are consummated in less than six months,
while tender offers are normally completed in less than two months.
Liquidations and certain other types of corporate reorganizations usually
require more than six months to complete. The Fund will generally benefit from
the timely completion of the proposed reorganizations in which it has invested,
and a correspondingly high portfolio turnover rate would be consistent with,
although it would not necessarily ensure, the achievement of the Fund's
investment objective. Short-term trading involves increased brokerage
commissions, which expense is ultimately borne by the shareholders. Moreover,
federal tax requirements for qualification as a regulated investment company
limit the gross amount of gains the Fund may realize from the sale of stock or
securities held for less than three months to 30% of its gross income.
Fund management believes that the fiscal 1995 portfolio turnover rate
of 290% is within the range to be expected for a merger arbitrage fund, and
anticipates that the 1996 rate will be within the same range.
INDEPENDENT ACCOUNTANTS
The Fund has selected Price Waterhouse LLP, 100 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, as its independent accountants.
-20-
<PAGE> 42
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR
(See "CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT, ACCOUNTING SERVICES
AGENT AND ADMINISTRATOR" in the Fund's prospectus.)
Firstar, a Wisconsin trust company with its principal offices in
Milwaukee, Wisconsin, is custodian of the assets of the Fund. The custody
services performed by Firstar include maintaining custody of the Fund's assets,
record keeping, processing of portfolio securities transactions, collection of
income, special services relating to put and call options and making cash
disbursements. Firstar is also custodian for The Merger Fund IRA Plan and
trustee for the Fund Investors Keogh Plans. Firstar takes no part in
determining the investment policies of the Fund or in deciding which securities
are purchased or sold by the Fund. The Fund pays to Firstar a custodian fee,
payable monthly, at the annual rate of .035% of the total value of the Fund's
assets up to $50 million, plus .020% of the total value of the Fund's assets
above $50 million, plus a fee for each transaction with respect to the Fund's
portfolio securities, which varies depending on the nature of the transaction.
Firstar is also the Fund's transfer agent and dividend paying agent.
Its principal address is 615 East Michigan Street, Milwaukee, Wisconsin 53202.
The transfer agent services provided by Firstar include: performing customary
transfer agent functions; making dividend and distribution payments;
administering shareholder accounts in connection with the issuance, transfer
and redemption of the Fund's shares; performing related record keeping
services; answering shareholders correspondence; mailing reports, proxy
statements, confirmations and other communications to shareholders; and filing
tax information returns. Firstar's transfer agent fee is equal to a maximum of
$13.00 per shareholder account.
Accounting services for the Fund are provided pursuant to a separate
agreement with Firstar. The Fund pays Firstar a minimum annual fee of $22,000
plus an additional .010% of the value of the Fund's net assets in excess of $40
million up to $200 million and .005% of the value of the Fund's net assets in
excess of $200 million.
Under the Fund Administration Servicing Agreement, Firstar maintains
the books, accounts and other documents required by the Act; prepares the
Fund's financial statements and tax returns; prepares certain reports and
filings with the Securities and Exchange Commission; furnishes statistical and
research data, clerical, accounting and bookkeeping services and office
supplies; and generally assists in all aspects of the Fund's operations.
Firstar, as Administrator, furnishes office space and all necessary office
facilities, equipment and executive personnel for performing the services
required pursuant to the agreement. For the foregoing, the Fund pays Firstar a
fee, payable monthly, at the annual rate of .050% of the Fund's first $100
million of average aggregate daily net assets, .040% of the next $400 million
and .030% of
-21-
<PAGE> 43
the Fund's average daily net assets in excess of $500 million. The Fund also
reimburses the Administrator for all out-of-pocket expenses.
The fees charged to the Fund by Firstar for custody, transfer agent,
fund accounting and administration services are competitive with fees charged
by other providers of such services within the investment company industry.
COUNSEL
The firm of Fulbright & Jaworski L.L.P. is counsel to the Fund.
EXPERTS
The financial statements incorporated in this Statement of Additional
Information have been so incorporated in reliance upon the reports of Price
Waterhouse LLP and Grant Thornton LLP, independent accountants given on
authority of said firms, as experts in accounting and auditing.
-22-
<PAGE> 44
APPENDIX
Some of the terms used in this Statement of Additional Information
and the Fund's prospectus are described below.
Covered Option Writing.
A call option is a short-term contract which gives the purchaser of
the option, in return for a premium paid, the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any time
upon the assignment of an exercise notice prior to the expiration of the
option, regardless of the market price of the security during the option
period. A covered call option is an option written on a security which is
owned by the writer throughout the option period.
The Fund will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return. In return for the premium income, the Fund will give up the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the contract
continue, except insofar as the premium represents a profit. Moreover, in
writing the option, the Fund will retain the risk of loss should the price of
the security decline, which loss the premium is intended to offset. Unlike the
situation in which the Fund owns securities not subject to a call option, the
Fund, in writing call options, must assume that the call may be exercised at
any time prior to the expiration of its obligations as a writer, and that in
such circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing
market price. The Adviser may deem it desirable to close out a particular
position prior to the expiration of the option through the purchase of an
equivalent option, in which case the underlying security may either be sold or
retained in the Fund's portfolio.
Money Market Instruments.
Money market instruments are liquid, short-term, high-grade debt
instruments, including United States Government obligations, commercial paper,
certificates of deposit and bankers' acceptances.
Repurchase Agreements.
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller (a
member bank of the Federal Reserve System or recognized securities dealer) at
an agreed upon price on an agreed upon date within a number of days (usually
not more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or maturity of the
-23-
<PAGE> 45
purchased security. A repurchase agreement involves the obligation of the
seller to repurchase the securities at the agreed upon price, which obligation
is in effect secured by the value of the underlying security. The Fund may
enter into repurchase agreements with respect to obligations in which the Fund
is authorized to invest.
Short Selling.
A short sale is a transaction involving the sale of a security that
is not owned by the seller, the security having been borrowed from a third
party by the seller in order to make delivery to the buyer. In a transaction
of this type, the seller has a continuing obligation to replace the borrowed
security; and until such replacement, the broker retains the proceeds from the
sale and the seller is required to pay to the lender any dividends or interest
due to holders of the security. Although the seller's obligation to the lender
can be met by purchasing the security in the open market and delivering it
against the short position, the Fund will effect short sales only in
anticipation of replacing the borrowed security with an identical security
received upon the successful completion of a merger, acquisition or exchange
offer. (This strategy is illustrated by the following example: Company A
proposes to acquire Company B through a merger in which each outstanding common
share of Company B is exchanged for two shares of Company A. Assume that
following the announcement of the merger terms, Company A's stock is trading at
$20 while Company B's shares are trading at $35, or $5 below the market value
of Company A's offer (2 x $20 per A Share). Believing that the proposed merger
represents an attractive arbitrage opportunity, but wanting to protect against
a decline in the market price of Company A's stock prior to the completion of
the acquisition, the Fund purchases 1,000 shares of Company B at a total cost
of $35,000 plus commissions, and, at approximately the same time, borrows and
sells short 2,000 shares of Company A, yielding proceeds of $40,000 less
commissions. The Fund is now hedged; that is, a decline in the market price of
Company A's stock will not reduce the Fund's potential profit should the deal
go through. Upon completion of the merger, the 1,000 shares of Company B held
by the Fund are exchanged for 2,000 shares of Company A. These shares are then
delivered to the lender, thereby satisfying the Fund's obligation to replace
the borrowed shares, and the proceeds from the short sale become available to
the Fund. In this example a profit of $5,000 less commissions and any other
expenses is realized.) However, should the merger, acquisition or exchange
offer be terminated or otherwise not completed, the Fund will be required to
satisfy its obligation to the lender by making an open-market purchase, and to
the extent the price paid exceeds the proceeds from the short sale, the Fund
will incur a loss on the transaction. The amount of any such loss will be
increased by the amount of any dividends or interest the Fund may be required
to pay in connection with the short sale.
-24-
<PAGE> 46
FINANCIAL STATEMENTS
The statement of assets and liabilities, including the schedules of
investments, of call options written and of securities sold short, as of
November 30, 1995, the related statements of operations and of cash flows for
the fiscal year ended November 30, 1995, and statements of changes in net
assets for the years ended November 30, 1995 and 1994, the independent
accountants' reports to the Trustees and shareholders of the Fund dated
December 21, 1994 and January 11, 1996 (all of which are attached hereto), are
hereby incorporated by reference into this Statement of Additional Information.
-25-
<PAGE> 47
January 22, 1996
Dear Fellow Shareholder:
The Merger Fund had a good year. As previously reported, the Fund's NAV rose
14.3% in the fiscal year ended November 30. For calendar 1995, we were up
14.2%. In contrast to virtually all other equity mutual funds, our results
last year owed little to the bull market. Because we routinely hedge against
market risk in stock-for-stock acquisitions, our approach to merger arbitrage
offers few opportunities for "windfalls." It is this same discipline, however,
that has served the Fund well - and will do so again - in less favorable market
environments.
M&A activity ran at record levels in 1995, and the Fund invested in 114 new
mergers, takeovers and other corporate reorganizations. By year-end, 100 of
these positions had been closed out at a profit or showed unrealized gains,
while only seven had resulted in realized losses. There were many other failed
deals last year, but our selectivity kept us out of them.
Continuing a trend seen in recent years, almost all of last year's acquisitions
were strategic in nature. Highly leveraged, financially driven transactions
involving public companies remained few and far between. The paucity of LBOs
and the surge in stock prices are closely linked; the gap between private
market values and public market values has been closed, if not reversed. For
the same reason, stock is still the currency of choice for the majority of
corporate acquirers.
As shown in the accompanying financial statements, The Merger Fund's holdings
at the end of fiscal 1995 were well diversified by industry, although
investments in the financial services sector continue to represent a sizable
percentage of our portfolio. Our year-end financials also reflect a further
decline in the Fund's expense ratio to 1.41%, down from 1.58% in fiscal 1994.
Our expense ratio is now in line with the industry average for growth funds.
While this key ratio will move somewhat lower as our assets grow, we also
recognize that too- rapid growth could jeopardize the Fund's returns. Before
that happens, however, we would close the Fund to new investors.
Underscoring the perceived importance of strategic acquisitions, a number of
blue-chip companies, including IBM, Wells Fargo, Moore Corp., Johnson & Johnson
and Glaxo, launched hostile takeover attempts last year. In an increasingly
competitive marketplace, corporate culture has undergone a dramatic
transformation; hostile takeovers are now viewed as just one more arrow in the
corporate quiver. Of course, not all of these deals, whether hostile or
friendly, will stand the test of time, but as long as buyers remain highly
motivated, The Merger Fund should benefit from a continuing stream of
attractive investment opportunities. The consolidation of Corporate America
appears to have a long way to go.
Sincerely,
/s/ Frederick W. Green
Frederick W. Green
President
<PAGE> 48
[FIGURE 1]
Comparison of Change in Value of $10,000 Investment
in the Merger Fund and the S&P 500.
<TABLE>
<CAPTION>
One Year S&P 500 The Merger Fund
- -------- -------- ---------------
<S> <C> <C>
11/94 10,000 10,000
10,148 10,120
10,411 10,311
2/95 10,817 10,434
11,140 10,503
11,468 10,433
5/95 11,927 10,502
12,201 10,681
12,603 10,884
8/95 12,641 11,025
13,175 11,202
13,127 11,232
11/95 13,704 11,426
</TABLE>
<TABLE>
<CAPTION>
Average Annual Return
<S> <C>
One year 14.3%
Five years 12.1%
From Inception 9.8%
</TABLE>
<TABLE>
<CAPTION>
Five Years S&P 500 The Merger Fund
- ----------- -------- ---------------
<S> <C> <C>
11/90 10,000 10,000
10,279 10,115
10,726 10,161
2/91 11,493 10,190
11,771 10,489
11,799 10,778
5/91 12,308 10,843
11,744 11,012
12,292 11,217
8/91 12,583 11,282
12,373 11,301
12,539 11,394
11/91 12,034 11,684
13,410 11,818
13,160 12,016
2/92 13,330 12,016
13,071 12,085
13,455 12,075
5/92 13,521 12,006
13,320 11,936
13,864 12,302
8/92 13,580 12,441
13,740 12,540
13,787 12,639
11/92 14,256 12,203
14,431 12,449
14,552 12,709
2/93 14,750 12,793
15,062 12,730
14,698 12,897
5/93 15,091 13,063
15,135 13,428
15,074 13,691
8/93 15,648 13,847
15,526 13,941
15,847 14,150
11/93 15,696 14,307
15,886 14,656
16,426 14,825
2/94 15,979 14,769
15,282 14,803
15,478 14,961
5/94 15,732 15,063
15,346 15,199
15,850 15,346
8/94 16,500 15,606
16,095 15,696
15,458 15,628
11/94 15,858 15,515
16,093 15,702
16,510 15,998
2/95 17,154 16,189
17,660 16,296
18,179 16,188
5/95 18,906 16,295
19,341 16,572
19,979 16,887
8/95 20,039 17,106
20,885 17,380
20,810 17,427
11/95 21,723 17,721
</TABLE>
<TABLE>
<CAPTION>
10 YEAR S&P 500 The Merger Fund
- -------- -------- ---------------
<S> <C> <C>
1/89 10,000 10,000
9,751 10,099
9,978 10,396
10,496 10,472
5/89 10,921 10,540
10,859 10,676
11,840 10,913
8/89 12,071 11,168
12,022 10,625
11,743 10,184
11/89 11,982 10,209
12,270 10,680
11,446 10,057
2/90 11,594 10,226
11,901 10,571
11,604 10,637
5/90 12,735 10,917
12,649 10,973
12,609 10,739
8/90 11,469 10,683
10,911 9,871
10,865 10,179
11/90 11,568 10,674
11,890 10,796
12,407 10,846
2/91 13,295 10,876
13,617 11,195
13,649 11,504
5/91 14,238 11,574
13,585 11,754
14,219 11,973
8/91 14,556 12,043
14,312 12,063
14,504 12,162
11/91 13,920 12,471
15,512 12,614
15,223 12,825
2/92 15,420 12,825
15,120 12,899
15,564 12,889
5/92 15,640 12,815
15,407 12,741
16,037 13,131
8/92 15,709 13,279
15,893 13,385
15,948 13,490
11/92 16,491 13,028
16,693 13,288
16,833 13,566
2/93 17,062 13,655
17,423 13,588
17,001 13,766
5/93 17,456 13,944
17,507 14,333
17,437 14,613
8/93 18,099 14,781
17,960 14,881
18,331 15,104
11/93 18,156 15,271
16,376 16,644
19,001 15,825
2/94 18,484 15,764
17,678 15,801
17,904 15,970
5/94 18,198 16,078
17,752 16,223
18,334 16,380
8/94 19,086 16,658
18,618 16,754
19,037 16,682
11/94 18,344 16,561
18,616 16,760
19,098 17,077
2/95 19,843 17,280
20,428 17,394
21,029 17,279
5/95 21,870 17,393
22,373 17,689
23,111 18,025
8/95 23,181 18,259
24,159 18,551
24,072 18,601
11/95 25,129 18,920
</TABLE>
Note: Westchester Capital Management, Inc. became sole advisor to the Fund in
January of 1989. Results for earlier periods are not shown. All figures
represent past performance and may not be indicative of future results. The
Fund's share price and return will vary, and investors may have a gain or loss
when they redeem their shares.
<PAGE> 49
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Shares Value
------- ------
<S> <C>
COMMON STOCKS - 90.7% <F1>
BANKS - 19.1% <F1>
208,800 Civic BanCorp <F2><F4> $ 1,592,104
76,300 First Interstate Bancorp <F5> 10,224,200
283,231 Fleet Financial Group, Inc. 11,824,881
219,500 Midlantic Corporation Inc. 13,197,438
46,500 Pacific Bank N.A. 778,875
371,730 Premier Bancorp, Inc. 8,782,121
-----------
46,399,619
-----------
BROADCASTING - 6.9% <F1>
33,375 CAI Wireless Systems, Inc. <F2> 287,859
113,700 Capital Cities/ABC, Inc. <F4> 14,056,163
54,900 Outlet Communications, Inc. <F2> <F4> 2,566,575
-----------
16,910,597
-----------
BUSINESS FORMS - 3.1% <F1>
130,000 Wallace Computer Services, Inc. 7,507,500
-----------
COMPUTER HARDWARE - 5.6% <F1>
302,300 Conner Peripherals, Inc. <F2> 6,839,538
101,600 NetWorth, Inc. <F2> 4,241,800
35,000 Xylogics, Inc. <F2> 2,485,000
-----------
13,566,338
-----------
COMPUTER SOFTWARE - 3.2% <F1>
164,000 Minnesota Educational Computing
Corporation <F2> 5,412,000
92,110 Symantec Corporation <F2> 2,440,915
-----------
7,852,915
-----------
FOREST PRODUCTS & PAPER - 5.6% <F1>
127,000 Federal Paper Board Company <F4> 6,604,000
122,644 Scott Paper Company 7,006,039
-----------
13,610,039
-----------
</TABLE>
See notes to the financial statements.
3
<PAGE> 50
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Shares Value
------- ------
<S> <C> <C>
HEALTH SERVICES - 3.4% <F1>
254,400 Surgical Care Affiliates, Inc. $8,268,000
-----------
INDUSTRIAL GASES - 1.2% <F1>
83,700 CBI Industries, Inc.<F5> 2,814,413
-----------
INSURANCE & INVESTMENT MANAGEMENT - 12.1% <F1>
222,000 Capital Guaranty Corporation 4,911,750
29,700 GEICO Corporation 2,060,438
174,200 Independent Insurance Group, Inc. 4,676,181
218,100 Kemper Corporation 10,741,425
243,381 Liberty Financial Companies, Inc. 7,118,894
-----------
29,508,688
-----------
PHARMACEUTICALS - 0.0% <F1>
12,150 Lynx Therapeutics, Inc. <F2> 2,430
-----------
PUBLISHING - 2.3% <F1>
45,400 CCH Inc. - Class A 2,474,300
57,900 CCH Inc. - Class B 3,155,550
-----------
5,629,850
-----------
RAILROADS - 3.3% <F1>
331,740 Southern Pacific Rail Corporation <F2> <F4> 7,920,293
-----------
RETAIL - 2.1% <F1>
206,883 Younkers, Inc. <F2> 5,197,935
-----------
SAVINGS & LOANS - 13.1% <F1>
370,800 Bay Ridge Bancorp, Inc. <F2> 8,111,250
154,500 Brooklyn Bancorp, Inc. <F2> <F4> 6,218,625
159,700 Conestoga Bancorp, Inc. 3,213,963
96,000 First Federal Savings Bank of Brunswick, Georgia 2,976,000
66,000 Long Island Bancorp, Inc. <F5> 1,699,500
79,000 RS Financial Corporation 3,090,875
187,000 SFFed Corporation <F4> 5,820,375
21,700 Sunrise Bancorp, Inc. 683,550
-----------
31,814,138
-----------
</TABLE>
See notes to the financial statements.
4
<PAGE> 51
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Shares Value
------- ------
<S> <C> <C>
SURGICAL DEVICES - 5.9% <F1>
135,500 Cordis Corporation <F2> <F5> $14,363,000
------------
TELECOMMUNICATIONS - 1.2% <F1>
87,250 Associated Group, Inc. - Class A 1,570,500
72,750 Associated Group, Inc. - Class B 1,309,500
------------
2,880,000
------------
TRANSACTION PROCESSING SERVICES - 1.6% <F1>
161,800 Comdata Holdings Corporation <F2> 3,883,200
------------
WRITING INSTRUMENTS - 1.0% <F1>
60,900 BIC Corporation <F4> 2,458,838
------------
TOTAL COMMON STOCKS (Cost $202,301,785) 220,587,793
------------
</TABLE>
Contracts (100 shares per contract)
<TABLE>
<S> <C>
PUT OPTIONS PURCHASED - 0.3% <F1>
2,832 Fleet Financial Group, Inc.
Expiration December 1995, Exercise Price $40.00 833,175
------------
TOTAL PUT OPTIONS PURCHASED (Cost $1,178,697) 833,175
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
- -----------------
<S> <C>
SHORT-TERM INVESTMENTS - 8.0% <F1><F3>
U.S. TREASURIES -8.0% <F1>
U.S. Treasury Bills:
$15,200,000 4.29%, 12/07/95 15,187,325
4,200,000 5.00%, 12/14/95 4,192,038
------------
TOTAL SHORT-TERM INVESTMENTS (COST $19,379,363) 19,379,363
------------
TOTAL INVESTMENTS (COST $222,859,845) $240,800,331
------------
</TABLE>
- ------------------------
<F1> Calculated as a percentage of net assets.
<F2> Non-income producing.
<F3> Securities have been committed as collateral for open short positions.
<F4> All or a portion of the shares have been committed as collateral for the
credit facility.
<F5> Securities have been committed as collateral for written call options.
See notes to the financial statements.
5
<PAGE> 52
THE MERGER FUND
SCHEDULE OF CALL OPTIONS WRITTEN
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Contracts (100 shares per contract) Value
- ----------------------------------- -------
<S> <C> <C>
600 CBI Industries
Expiration January 1995, Exercise Price $35.00 $ 27,188
--------
Cordis Corporation:
706 Expiration December 1995, Exercise Price $105.00 92,663
313 Expiration December 1995, Exercise Price $110.00 1,956
--------
94,619
--------
First Interstate Bancorp:
242 Expiration December 1995, Exercise Price $120.00 347,875
150 Expiration December 1995, Exercise Price $125.00 142,500
50 Expiration December 1995, Exercise Price $130.00 26,250
150 Expiration January 1996, Exercise Price $125.00 160,312
171 Expiration January 1996, Exercise Price $130.00 117,562
--------
794,499
--------
Long Island Bancorp
600 Expiration January 1996, Exercise Price $25.00 97,500
--------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $1,617,928) $1,013,806
==========
</TABLE>
See notes to the financial statements.
6
<PAGE> 53
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Shares Value
------ -------
<S> <C> <C>
229,640 Banc One Corporation $ 8,755,025
55,125 Bay Networks, Inc. 2,480,625
92,226 Ceridian Corporation 3,873,492
113,700 The Walt Disney Company 6,836,212
62,800 Financial Security Assurance Holdings Ltd. 1,640,650
226,000 HEALTHSOUTH Rehabilitation Corporation 6,836,500
25,400 International Paper Company 968,375
93,704 Kimberly-Clark Corporation 7,203,495
39,750 Liberty Media Class A 1,113,000
449,805 PNC Bank Corporation 13,156,796
202,680 Proffitts, Inc. 5,472,360
133,622 Seagate Technology, Inc. 7,048,561
62,200 Softkey International, Inc. 2,099,250
92,030 Symantec Corporation 2,438,795
156,500 Tele-Communications, Inc. 2,895,250
107,450 Union Pacific Corporation 7,279,738
-----------
TOTAL SECURITIES SOLD SHORT
(Proceeds $71,952,942) $80,098,124
===========
</TABLE>
See notes to the financial statements.
7
<PAGE> 54
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS:
Investments, at value (Cost $222,859,845)
<S> <C> <C>
See accompanying schedule $240,800,331
Cash 97,052
Deposit at broker for short sales 51,000,028
Receivable from broker for proceeds on securities
sold short 80,900,037
Receivable for investments sold 217,340
Interest receivable 134,669
Dividends receivable 194,844
Other receivables 106,124
-----------
Total Assets 373,450,425
LIABILITIES:
Loan payable (Note 10) $27,900,000
Securities sold short, at value (Proceeds of
$71,952,942) See accompanying schedule 80,098,124
Payable for investment securities purchased 15,413,826
Short-term borrowings 5,100,000
Call options written, at value (Premiums
received $1,617,928) See accompanying schedule 1,013,806
Accrued interest payable 451,173
Investment advisory fee payable 202,320
Distribution fees payable 18,505
Accrued expenses and other payables 170,404
-----------
Total Liabilities 130,368,158
-----------
NET ASSETS $243,082,267
===========
NET ASSETS consist of:
Accumulated undistributed net investment income $ 1,031,840
Accumulated undistributed net realized gain on
investments sold, securities sold short and
option contracts expired or closed 12,375,064
Net unrealized appreciation (depreciation) on:
Investments 17,940,486
Short positions (8,145,182)
Call options 604,122
Paid-in capital 219,275,937
------------
Total Net Assets $243,082,267
------------
NET ASSET VALUE, offering price and redemption price
per share ($243,082,267/16,348,772 shares of
beneficial interest outstanding) $14.87
======
</TABLE>
See notes to the financial statements.
8
<PAGE> 55
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Interest $ 6,657,217
Dividend income on long positions
(net of foreign withholding taxes of $29,408) 2,323,672
-----------
Total Investment Income 8,980,889
-----------
EXPENSES:
Investment advisory fee $2,040,921
Distribution fees 122,593
Transfer agent and shareholder servicing agent fees 247,023
Federal and state registration fees 56,035
Professional fees 133,028
Trustees+ fees and expenses 20,192
Custody fees 53,079
Administration fee 94,423
Reports to shareholders 64,179
Other 40,004
---------
Total Operating Expenses Before Interest
Expense and Dividends on Short Positions 2,871,477
Interest expense 3,897,408
Dividends on short positions
(net of foreign withholding taxes of $9,972) 1,047,438
-----------
Total Expenses 7,816,323
-----------
NET INVESTMENT INCOME 1,164,566
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 24,665,194
Short transactions (10,675,531)
Options contracts expired or closed (1,445,616)
------------
Total Realized Gain 12,544,047
Change in unrealized appreciation (depreciation) on:
Investments 23,590,640
Short positions (11,142,607)
Call options 555,421
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 25,547,501
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 26,712,067
============
</TABLE>
See notes to the financial statements.
9
<PAGE> 56
THE MERGER FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
<S> <C> <C>
Sales of Capital Shares $ 172,107,462
Repurchases of Capital Shares (125,534,792)
-------------
Cash Provided by Capital Share Transactions 46,572,670
Cash Used to Repay Borrowings (23,090,000)
Distributions Paid in Cash <F6> (546,649)
-------------
$22,936,021
-----------
CASH (USED) PROVIDED BY OPERATIONS:
Purchases of Portfolio Securities (804,433,234)
Net Purchases of Short-Term Investments (19,379,363)
Proceeds from Sales of Portfolio Securities 792,595,423
-------------
(31,217,174)
-------------
Decrease in Deposit at Broker for Short Sales 4,928,059
Net Investment Income 1,164,566
Net Change in Receivables/Payables related
to Operations (154,782)
-------------
5,937,843
-------------
(25,279,331)
-----------
Net Decrease in Cash (2,343,310)
Cash, Beginning of Year 2,440,362
-----------
Cash, End of Year $ 97,052
==========
</TABLE>
- -----------
<F6> Non-cash financing activities include reinvestment of dividends of
$8,066,925.
See notes to the financial statements.
10
<PAGE> 57
THE MERGER FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
Nov. 30, 1995 Nov. 30, 1994
------------- -------------
<S> <C> <C>
Net investment income (loss) $ 1,164,566 $ (27,595)
Net realized gain on investments sold,
securities sold short and
option contracts expired or closed 12,544,047 8,312,449
Change in unrealized appreciation
(depreciation) of investments,
short positions and call and put options 13,003,454 (3,238,901)
------------ ------------
Net increase in net assets resulting from
operations 26,712,067 5,045,953
Distributions to shareholders from:
Net realized gains (8,613,574) (2,034,795)
Net increase in net assets from capital
share transactions (Note 6) 54,639,595 142,159,845
------------ ------------
Net increase in net assets 72,738,088 145,171,003
NET ASSETS:
Beginning of period 170,344,179 25,173,176
------------ -----------
End of period (including accumulated
undistributed net investment income
(loss) of $1,031,840 and $(27,595),
respectively) $243,082,267 $170,344,179
============= ============
</TABLE>
See notes to the financial statements.
11
<PAGE> 58
THE MERGER FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each year.
<TABLE>
<CAPTION>
Year Ended November 30,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value,
beginning of year $13.72 $13.70 $12.34 $12.51 $11.43
------- ------- ------- ------- ------
Income from investment operations:
Net investment income (loss) 0.08 <F9><F10> - <F9><F10> (0.07)<F9><F10> (0.12) <F9> 0.02 <F9>
Net realized and unrealized gain
on investments 1.78 1.08 2.10 0.65 1.79
------ ------- ------- ------- ------
Total from investment operations 1.86 1.08 2.03 0.53 1.81
Less distributions:
Dividends from net investment income - - - (0.03) -
Distributions from net realized gains (0.71) (1.06) (0.67) (0.67) (0.73)
------- ------- ------- ------- -------
Total distributions (0.71) (1.06) (0.67) (0.70) (0.73)
------- ------- ------- ------- -------
Net Asset Value, end of year $14.87 $13.72 $13.70 $12.34 $12.51
------ ------ ------ ------ ------
Total Return 14.26% 8.41% 17.24% 4.45% 16.84%
Supplemental Data and Ratios:
Net assets, end of period (000+s) $243,082 $170,344 $25,173 $11,611 $10,281
Ratio of operating expenses
to average net assets 1.41% <F8> 1.58% <F8> 2.19% <F8> 2.75% <F8> 3.05% <F7><F8>
Ratio of interest expense and dividends on
short positions to average net assets 2.42% 1.72% 1.91% 2.28% 1.01%
Ratio of net investment income (loss) to
average net assets 0.57% (0.03)% (0.57)% (1.42)% 0.21%
Portfolio turnover rate <F11> 418.63% 390.34% 186.00% 231.40% 311.51%
</TABLE>
- -----------------
<F7> Reflects certain non-recurring expenses associated with the Fund's
restructuring as of January 31, 1989.
<F8> For the years ended November 30, 1995, 1994, 1993, 1992 and 1991, the
operating expense ratio excludes interest expense and dividends on short
positions. The ratios including interest expense and dividends on short
positions for the years ended November 30, 1995, 1994, 1993, 1992 and
1991, were 3.83%, 3.30%, 4.10%, 5.03% and 4.06%, respectively.
<F9> Net investment income before interest expense and dividends on short
positions for the years ended November 30, 1995, 1994, 1993, 1992 and
1991, was $0.42, $0.21, $0.17, $0.07 and $0.10, respectively.
<F10>Net investment income (loss) per share represents net investment income
for the respective year divided by the monthly average shares of
beneficial interest outstanding throughout each year.
<F11>The numerator for the portfolio turnover rate includes the lesser of
purchases or sales (including both long and short positions). The
denominator includes the average long position throughout the year. The
portfolio turnover rate excluding short positions from the numerator for
the year ended November 30, 1995 is 290.48%.
See notes to the financial statements.
12
<PAGE> 59
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1995
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 (the "1940 Act"), as amended. 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
Investments in securities and commodities (including options) are valued at the
last sales price on the securities or commodities exchange on which such
financial instruments are primarily traded. Securities not listed on an
exchange or securities for which there were no transactions are valued at the
average of the current bid and asked prices. 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 investment
adviser reserves the right to value securities, including options, at prices
other than last-sale prices or the average of current bid and asked prices when
such prices are believed unrepresentative of fair market value as determined in
good faith by the adviser. 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. Transactions with Brokers for Short Sales
Cash and Treasury securities in the amount of $70,379,391 have been committed
as collateral for open short investment positions and are on deposit in
segregated accounts with the broker and custodian. The Fund's receivable from
broker for proceeds on securities sold short and deposit at broker for short
sales is with one major security dealer. The Fund does not require the broker
to maintain collateral in support of the receivable from broker for proceeds on
securities sold short.
C. 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 available to regulated
investment companies and intends to continue to so comply in future years.
13
<PAGE> 60
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. Written Option Accounting
The Fund writes covered call options to hedge portfolio investments. When the
Fund 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. Option
contracts are valued at the last sales price reported on the date of valuation.
If no sale is reported the option contract written is valued at the last asked
price. 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 Fund realizes a gain or loss from the sale of
the underlying security, and the proceeds from such sale are increased by the
premium originally received.
E. Purchased Option Accounting
The Fund purchases put 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, the option contract
purchased is valued at the last bid price. 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.
F. Distributions to Shareholders
Dividends from net investment income and net realized capital gains, if any,
are declared and paid annually.
G. Other
Investment and shareholder transactions are recorded no later than the first
business day after 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 $4,821,286 of
interest earned on receivables from brokers for proceeds on securities sold
short and deposits. Generally accepted accounting principles require that
permanent financial reporting and tax differences be reclassified to capital
stock.
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.
14
<PAGE> 61
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 3 AGREEMENTS (CONTINUED)
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held
bank holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
Distribution services are performed pursuant to distribution contracts with
Mercer Allied Company, L.P., the Fund's principal underwriter, and other
broker-dealers.
NOTE 4 - SHORT POSITIONS
The Fund may sell securities 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 sold, but not yet purchased, may require purchasing the
securities 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 segregated assets consisting of cash or liquid high-grade debt
obligations. These segregated assets are required to be adjusted daily to
reflect changes in the value of the securities sold short. At various times
throughout the year ended November 30, 1995, the Fund failed to adjust these
segregated assets to reflect fluctuations in the market value of its short
positions. As a result, the Fund did not always maintain sufficient segregated
assets as collateral for its short positions. At November 30, 1995, the short
positions of the Fund were undercollateralized by $7.3 million. As of January
11, 1996, this undercollateralization was rectified, and new procedures were
implemented to ensure that securities sold short are properly valued for
collateralization purposes.
NOTE 5 - RELATED PARTY TRANSACTIONS
William H. Bohnett, Esq., a partner of Fulbright & Jaworski L.L.P., serves as a
Trustee and Assistant Secretary of the Fund. Fulbright & Jaworski L.L.P.
furnishes legal services to the Fund. For the year ended November 30, 1995, the
Fund incurred $81,684 for such services.
Certain officers of the Fund are also officers of the Adviser.
NOTE 6 - 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:
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1995 November 31, 1994
----------------------- ------------------------
Shares Amount Shares Amount
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Sold 12,380,985 $172,107,462 12,018,681 $161,946,089)
Issued as reinvestment
of dividends 617,682 8,066,925 150,407 1,941,752)
Redeemed (9,065,402) (125,534,792) (1,590,598) (21,727,996)
------------ -------------- ------------ -------------
Net increase 3,933,265 $54,639,595 10,578,490 $142,159,845)
============ ============ =========== =============
</TABLE>
15
<PAGE> 62
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 7 - INVESTMENT TRANSACTIONS
Purchases and sales of securities for the year ended November 30, 1995
(excluding short-term investments and options) aggregated $809,230,749 and
$804,028,763, respectively.
At November 30, 1995, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were:
<TABLE>
<S> <C>
Appreciation $19,347,762)
(Depreciation) (2,462,005)
-------------
Net unrealized appreciation on investments $16,885,757)
=============
</TABLE>
At November 30, 1995, the cost of investments for federal income tax
purposes was $223,914,574.
NOTE 8 - OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the year
ended November 30, 1995, were as follows:
<TABLE>
<CAPTION>
Premium Number of
Amount Contracts
--------- -----------
<S> <C> <C>
Options outstanding at November 30, 1994 $ 113,951 540
Options written 7,275,690 19,036
Options closed (2,183,813) (5,649)
Options exercised (3,203,572) (8,714)
Options expired (384,328) (2,231)
------------ --------
Options outstanding at November 30, 1995 $1,617,928 2,982
============ ========
</TABLE>
NOTE 9 - DISTRIBUTION PLAN
The Fund has adopted a Plan of Distribution (the "Plan") dated July 1, 1993, as
amended, pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Plan, the Fund will compensate its principal underwriter, Mercer
Allied Company, L.P. ("Mercer"), and any other broker-dealers with whom Mercer
or the Fund has entered into a contract to distribute Fund shares ("Dealers").
Under the Plan, the amount of compensation paid in any one year shall not
exceed 0.25% of the average daily net assets of the Fund, payable as a service
fee to Mercer and Dealers for providing personal service and maintenance of
shareholder accounts. For the year ended November 30, 1995, the Fund incurred
$122,593 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.
16
<PAGE> 63
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 10 - CREDIT FACILITY
Custodial Trust Company has made available to the Fund a $125 million credit
facility pursuant to a Loan and Security Agreement ("Agreement") dated March
18, 1992, and amended January 1, 1995, 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. Outstanding principal amounts
under the credit facility bear interest at a rate per annum of 0.50% plus the
Broker Call Rate quoted by Bear Stearns Securities Corp. at its office in New
York on credit extended up to $25 million on any given day and the Broker Call
Rate plus 0.25% for the amount of the loan which exceeds $25 million (weighted
average rate of 7.18% during the year ended November 30, 1995). 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 November 30, 1995, the Fund had an outstanding average
daily balance of $52,480,055. The maximum amount outstanding during the year
ended November 30, 1995, was $104,900,000. Interest expense amounted to
$3,897,408 for the year ended November 30, 1995. At November 30, 1995, the Fund
had a loan payable balance of $27,900,000, and the securities collateralizing
the Agreement amounted to $43,849,643.
The Fund had short-term borrowings at November 30, 1995, in the amount of
$5,100,000 from Firstar Corporation. The short-term borrowings were repaid
within seven days.
Pursuant to the 1940 Act, the Fund is required to satisfy asset coverage
requirements on its outstanding borrowings. At November 30, 1995, the Fund
satisfied all asset coverage requirements of the 1940 Act.
NOTE 11 - DISTRIBUTION
On December 28, 1995, an ordinary income distribution of $.902 per share
aggregating $14,741,869 was declared. The distribution was paid on December 28,
1995, to shareholders of record on December 27, 1995. Fifteen percent of the
dividends paid qualifies for the dividend received deduction available to
corporate shareholders.
END OF NOTES TO FINANCIAL STATEMENTS
Effective October 31, 1995, Grant Thornton L.L.P. was terminated as the Fund's
independent accountants. For the years ended November 30, 1991 through November
30, 1994, Grant Thornton L.L.P. expressed an unqualified opinion on the Fund's
financial statements. There were no disagreements between Fund management and
Grant Thornton L.L.P. prior to their termination. The Board of Trustees
approved the termination of Grant Thornton L.L.P. and the appointment of Price
Waterhouse L.L.P. as the Fund's independent accountants.
17
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
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 call options written and of securities sold
short, 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 November
30, 1995, the results of its operations, its cash flows, and the changes in its
net assets and the financial highlights for the year then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities at November 30, 1995 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above. The financial statements of The Merger Fund for
the years ended November 30, 1991 through November 30, 1994 were audited by
other independent accountants whose report dated December 21, 1994 expressed an
unqualified opinion on those statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Milwaukee, Wisconsin
January 11, 1996
18
<PAGE> 65
[GRANT THORNTON LOGO]
GRANT THORNTON LLP
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
The Merger Fund
We have audited the accompanying statement of changes in net assets of The
Merger Fund for the year ended November 30, 1994 and the financial highlights
for the years ended November 30, 1991 to 1994. This financial statement and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement and financial
highlights are free of material misstatement. An audit includes examining on
a test basis, evidence supporting the amounts and disclosures in the financial
statement. Our procedures included confirmation of securities owned as of
November 30, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statement and financial highlights referred
to above present fairly, in all material respects, the changes in net assets
for year ended November 30, 1994 of The Merger Fund, and financial highlights
for each of the four years in the period then ended, in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
-----------------------
Grant Thornton LLP
New York, New York
December 21, 1994
<PAGE> 66
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT ADVISER
Westchester Capital Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600 THE MERGER FUND
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND PAYING AGENT,
SHAREHOLDER SERVICING AGENT & CUSTODIAN Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
TRUSTEES
Frederick W. Green
William H. Bohnett
Michael J. Downey
James P. Logan III
Frank A. McDermott, Jr.
EXECUTIVE OFFICERS ANNUAL REPORT
Frederick W. Green, President
Bonnie L. Smith, Vice President, Treasurer and Secretary
NOVEMBER 30, 1995
COUNSEL
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
AUDITORS
Price Waterhouse LLP
100 E. Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
</TABLE>
<PAGE> 67
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
A. FINANCIAL STATEMENTS
Included in and incorporated by reference into the Statement of Additional
Information:
Report of Independent Accountants, Dated January 11, 1996.
Report of Independent Accountants, Dated December 21, 1994.
Schedule of Investments, November 30, 1995.
Schedule of Call Options Written, November 30, 1995.
Schedule of Securities Sold Short, November 30, 1995.
Statement of Assets and Liabilities, November 30, 1995.
Statement of Operations for the Year Ended November 30, 1995.
Statement of Cash Flows for the Year Ended November 30, 1995.
Statements of Changes in Net Assets for the Years Ended November 30,
1995 and November 30, 1994.
Financial Highlights.
Notes to Financial Statements, November 30, 1995.
B. EXHIBITS
Exhibits Required
By Form N-1A
-----------------
Exhibit 1 Amended and Restated Declaration of Trust (Previously filed
as Exhibit 1 to Post-Effective Amendment No. 11 to the
Registration Statement.)
Exhibit 2 By-laws, as amended to date. (Previously filed as Exhibit 2
to Post-Effective Amendment No. 11 to the Registration
Statement.)
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<PAGE> 68
Exhibit 3 Inapplicable
Exhibit 4 Specimen certificate of shares of beneficial interest of the
Fund. (Previously filed as Exhibit 4 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
Exhibit 5 Investment Advisory Contract between the Fund and
Westchester Capital Management, Inc., dated January 31,
1989. (Previously filed as Exhibit 5 to Post-Effective
Amendment No. 11 to the Registration Statement.)
Exhibit 6 Second Amended and Restated Distribution Contract between
the Fund and Mercer Allied Corporation, dated as of July 1,
1993. (Previously filed as Exhibit 6 to Post-Effective
Amendment No. 16 to the Registration Statement.)
Exhibit 7 Inapplicable
Exhibit 8 Custodian Agreement between the Fund and Firstar Trust
Company, dated April 1, 1994. (Previously filed as Exhibit
8 to Post- Effective Amendment No. 17 to the Registration
Statement.)
Exhibit 9-1 Transfer Agent Agreement between the Fund and Firstar Trust
Company, dated April 1, 1994. (Previously filed as Exhibit
9-1 to Post-Effective Amendment No. 17 to the Registration
Statement.)
Exhibit 9-2 Fund Accounting Servicing Agreement between the Fund and
Firstar Trust Company, dated April 1, 1994. (Previously
filed as Exhibit 9-2 to Post-Effective Amendment No. 17 to
the Registration Statement.)
Exhibit 9-3 Fund Administration Servicing Agreement between the Fund and
Firstar Trust Company, dated September 30, 1994.
(Previously filed as Exhibit 9-3 to Post-Effective Amendment
No. 18 to the Registration Statement.)
Exhibit 9-4 Services Agreement between the Fund and Charles Schwab &
Co., Inc. dated December 8, 1994. (Previously filed as
Exhibit 9-4 to Post-Effective Amendment No. 18 to the
Registration Statement.)
Exhibit 9-5 Operating Agreement between the Fund and Charles Schwab &
Co., Inc. dated December 8, 1994. (Previously filed as
Exhibit 9-5 to Post-Effective Amendment No. 18 to the
Registration Statement.)
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Exhibit 10 Opinion of Counsel as to Legality of Securities Being
Registered.
Exhibit 11-1 Consent of Price Waterhouse LLP.
Exhibit 11-2 Consent of Grant Thornton LLP.
Exhibit 12 Inapplicable
Exhibit 13 Inapplicable
Exhibit 14-1 Model Merger Fund IRA Plan and supporting documents.
(Previously filed as Exhibit 14-1 to Post-Effective
Amendment No. 11 to the Registration Statement.)
Exhibit 14-2 Model Fund Investors Defined Benefit Keogh Plan.
(Previously filed as Exhibit 14-2 to Post-Effective
Amendment No. 7 to the Registration Statement.)
Exhibit 14-3 Model Fund Investors Defined Contribution Keogh Plan
(Previously filed as Exhibit 14-3 to Post-Effective
Amendment No. 7 to the Registration Statement.)
Exhibit 14-4 The Merger Fund IRA Plan Disclosure Statement. (Previously
filed as Exhibit 14-4 to Post-Effective Amendment No. 17 to
the Registration Statement.)
Exhibit 15 The Merger Fund Amended and Restated Plan of Distribution
Pursuant to Rule 12b-1. (Previously filed as Exhibit 15 to
Post- Effective Amendment No. 16 to the Registration
Statement.)
Exhibit 16 Inapplicable
Exhibit 17 Financial Data Schedule
Exhibit 18 Inapplicable
Item 25. Persons Controlled by or Under Common Control with Registrant.
Inapplicable.
Item 26. Number of Holders of Securities.
(1) Title of Class
Shares of Beneficial Interest
(2) Number of Record Holders
4,985 as of January 31, 1996.
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Item 27. Indemnification.
The Trustees and officers of the Registrant are insured under a
directors' and officers' liability insurance policy against loss
incurred solely because of their positions as Trustees and
officers of the Registrant. The policy coverage is, however,
subject to a number of exclusions.
The Trustees and officers of the Registrant will be indemnified
by Mercer Allied Company, L.P. under its Distribution Contract
with the Registrant for expenses reasonably incurred in
connection with any claim, action, suit or proceeding which
actually or allegedly arises out of any actual or alleged
misrepresentation or omission to state a material fact on the
distributor's part unless such misrepresentation or omission was
made in reliance upon written information furnished by the
Registrant.
ARTICLE IV of the Registrant's Amended and Restated Declaration of
Trust provides as follows:
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
------------------------------------------------
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc.
No Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs of
the Trust. No Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever to any Person, other than to the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising from bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties with respect to such Person; and
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If
any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust,
is made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability.
The Trust shall indemnify and hold each Shareholder harmless from and against
all claims and liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only out of the
assets of the one or more Series of which the Shareholder who is entitled to
indemnification or reimbursement was a Shareholder at the time the act or event
occurred which gave rise to the claim against or liability of said Shareholder.
The rights accruing to a Shareholder under this Section 4.1 shall not impair
any other right to which such Shareholder may be lawfully entitled, nor shall
anything herein
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<PAGE> 71
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph(b) below:
(i) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been
a Trustee or officer and against amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof, or the
Shareholders by reason of a final adjudication by a court or other body before
which a proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not involving
a final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office:
(A) by the court or other body approving the settlement or
other disposition; or
(B) based upon a review of readily available facts (as opposed
to a full trial-type inquiry) by (x) vote of a majority of the Disinterested
Trustees acting
C-5
<PAGE> 72
on the matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or (y) written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a Person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a Person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph (a)
of this Section 4.3 may be advanced by the Trust prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the recipient to
repay such amount if it is ultimately determined that he is not entitled to
indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust shall be insured
against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on the matter) or
an independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is
not (i) an Interested Person of the Trust (including anyone who has been
exempted from being an Interested Person by any rule, regulation, or order of
the Commission), or (ii) involved in the claim, action, suit or proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc.
No purchaser, lender, transfer agent or other Person dealing with the Trustees
or any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or
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<PAGE> 73
issued by the Trustees may recite that the same is executed or made by them not
individually, but as Trustees under the Declaration, and that the obligations
of the Trust under any such instrument are not binding upon any of the Trustees
or Shareholders, individually, but bind only the Trust Property, and may
contain any further recital which they or he may deem appropriate, but the
omission of such recital shall not operate to bind the Trustees individually.
The Trustees shall at all times maintain insurance for the protection of the
Trust Property, its Shareholders, Trustees, officers, employees and agents in
such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment
shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to the
Trust by any of its officers or employees or by the Investment Adviser, the
Distributor, Custodian, Transfer Agent, selected dealers, accountants,
appraisers or other experts or consultants selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of whether such
counsel or expert may also be a Trustee.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Westchester Capital Management, Inc., the Registrant's investment
adviser, also manages merger arbitrage accounts for high-net-worth
individuals and other institutional investors. The information
required by this Item 28 with respect to each director, officer or
partner of Westchester Capital Management, Inc. is incorporated by
reference to Schedules A and D of Form ADV filed by Westchester
Capital Management, Inc. pursuant to the Investment Advisers Act of
1940 (SEC File No. 801-15556).
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<PAGE> 74
Item 29. Principal Underwriters.
(a) Inapplicable
(b) Mercer Allied Company, L.P.
The information required by this Item 29 with respect to each
officer or partner of Mercer Allied Company, L.P. is
incorporated by reference to Schedule A of Form BD filed by
Mercer Allied pursuant to the Securities Exchange Act of 1934
(SEC File No. 8-20745).
(c) Principal Underwriter: Mercer Allied Company, L.P.
<TABLE>
<S> <C>
Net underwriting discounts and commissions: $0.
Compensation for redemption and repurchase: $0.
Brokerage commissions: $0.
Other compensation: $35,363 (Rule 12b-1 fees).
</TABLE>
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder are maintained at the offices of the Registrant at 100
Summit Lake Drive, Valhalla, New York 10595 and at the offices of the
Registrant's transfer agent and custodian, Firstar Trust Company, 615
East Michigan Street, Milwaukee, Wisconsin 53202.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
(a) The Registrant hereby undertakes to provide each person to whom
a copy of the prospectus is given with a copy of the Fund's
Annual Report, which contains the information required by Item
5A of Form N-1A, upon request by such person and free of charge.
(b) The Registrant undertakes to call a meeting of the Fund's
shareholders upon request to do so by holders of at least 10% of
the Fund's outstanding voting securities.
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<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Act")
and the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Westchester and State of New York, on the 6th
day of February 1996.
THE MERGER FUND
By /s/Frederick W. Green
-------------------------
Frederick W. Green,
President
Pursuant to the requirements of the Act, this Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated. This amendment to the Fund's Registration Statement meets all the
requirements for effectiveness under paragraph (b) of Rule 485 under the Act.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Frederick W. Green President February 6, 1996
----------------------------- & Trustee
Frederick W. Green
/s/Bonnie L. Smith Vice-President, February 6, 1996
----------------------------- Treasurer &
Bonnie L. Smith Secretary
/s/William H. Bohnett Trustee February 6, 1996
-----------------------------
William H. Bohnett
/s/Frank A. McDermott, Jr. Trustee February 6, 1996
---------------------------
Frank A. McDermott, Jr.
/s/James P. Logan III Trustee February 6, 1996
-----------------------------
James P. Logan III
Trustee
-----------------------------
Michael J. Downey
</TABLE>
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<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C>
Exhibit 1- Amended and Restated Declaration of Trust (Previously filed as Exhibit 1 to
Post-Effective Amendment No. 11 to the Registration Statement.)
Exhibit 2- By-laws, as amended to date. (Previously filed as Exhibit 2 to Post-Effective
Amendment No. 11 to the Registration Statement.)
Exhibit 3- Inapplicable
Exhibit 4- Specimen certificate of shares of beneficial interest of the Fund. (Previously
filed as Exhibit 4 to Pre-Effective Amendment No. 1 to the Registration
Statement.)
Exhibit 5- Investment Advisory Contract between the Fund and Westchester Capital
Management, Inc., dated January 31, 1989. (Previously filed as Exhibit 5 to
Post-Effective Amendment No. 11 to the Registration Statement.)
Exhibit 6- Second Amended and Restated Distribution Contract between the Fund and Mercer
Allied Corporation, dated as of July 1, 1993. (Previously filed as Exhibit 6
to Post-Effective Amendment No. 16 to the Registration Statement.)
Exhibit 7- Inapplicable
Exhibit 8- Custodian Agreement between the Fund and Firstar Trust Company, dated April 1,
1994. (Previously filed as Exhibit 8 to Post-Effective Amendment No. 17 to the
Registration Statement.)
Exhibit 9-1- Transfer Agent Agreement between the Fund and Firstar Trust Company, dated
April 1, 1994. (Previously filed as Exhibit 9-1 to Post-Effective Amendment
No. 17 to the Registration Statement.)
Exhibit 9-2- Fund Accounting Servicing Agreement between the Fund and Firstar Trust Company,
dated April 1, 1994. (Previously filed as Exhibit 9-2 to Post-Effective
Amendment No. 17 to the Registration Statement.)
Exhibit 9-3- Fund Administration Servicing Agreement between the Fund and Firstar Trust
Company, dated September 30, 1994. (Previously filed as Exhibit 9-3 to Post-
Effective Amendment No. 18 to the Registration Statement.)
Exhibit 9-4- Services Agreement between the Fund and Charles Schwab & Co., Inc. dated
December 8, 1994. (Previously filed as Exhibit 9-4 to Post-Effective Amendment
No. 18 to the Registration Statement.)
Exhibit 9-5- Operating Agreement between the Fund and Charles Schwab & Co., Inc. dated
December 8, 1994. (Previously filed as Exhibit 9-5 to Post-Effective Amendment
No. 18 to the Registration Statement.)
Exhibit 10- Opinion of Counsel as to Legality of Securities Being Registered.
Exhibit 11-1- Consent of Price Waterhouse LLP.
Exhibit 11-2- Consent of Grant Thornton LLP.
Exhibit 12- Inapplicable
Exhibit 13- Inapplicable
Exhibit 14-1- Model Merger Fund IRA Plan and supporting documents. (Previously filed as
Exhibit 14-1 to Post-Effective Amendment No. 11 to the Registration Statement.)
</TABLE>
<PAGE> 77
<TABLE>
<S> <C>
Exhibit 14-2- Model Fund Investors Defined Benefit Keogh Plan. (Previously filed as Exhibit
14-2 to Post-Effective Amendment No. 7 to the Registration Statement.)
Exhibit 14-3- Model Fund Investors Defined Contribution Keogh Plan. (Previously filed as
Exhibit 14-3 to Post-Effective Amendment No. 7 to the Registration Statement.)
Exhibit 14-4- The Merger Fund IRA Plan Disclosure Statement. (Previously filed as Exhibit
14-4 to Post-Effective Amendment No. 17 to the Registration Statement.)
Exhibit 15- The Merger Fund Amended and Restated Plan of Distribution Pursuant to Rule 12b-
1 dated as of July 1, 1993. (Previously filed as Exhibit 15 to Post-Effective
Amendment No. 16 to the Registration Statement.)
Exhibit 16- Inapplicable
Exhibit 17- Financial Data Schedule
Exhibit 18- Inapplicable
</TABLE>
<PAGE> 1
EXHIBIT 10
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
February 7, 1996
The Merger Fund
100 Summit Lake Drive
Valhalla, New York 10595
Re: Registration Statement on Form N-1A
Securities Act File No. 2-76969/
Investment Company Act File No. 811-3445
Gentlemen:
This will refer to the Registration Statement under the Securities Act of
1933 (File No. 2-76969) and Investment Company Act of 1940 (File No. 811-3445),
filed by The Merger Fund (the "Fund"), a Massachusetts business trust, with the
Securities and Exchange Commission and the further amendments thereto (the
"Registration Statement"), covering the registration under the Securities Act
of 1933 of an indefinite number of shares of beneficial interest of the Fund
(the "Shares").
As counsel to the Fund, we have examined such documents and reviewed such
questions of law as we deem appropriate. On the basis of such examination and
review, it is our opinion that the Shares have been duly authorized and, when
issued, sold and paid for in the manner contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the heading "Counsel" in the
Statement of Additional Information filed as part of the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act of 1933.
Very truly yours,
/s/ FULBRIGHT & JAWORSKI L.L.P.
<PAGE> 1
EXHIBIT 11-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 19 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated January 11, 1996, relating to the financial
statements and financial highlights appearing in the November 30, 1995 Annual
Report of The Merger Fund, portions of which are incorporated by reference into
the Registration Statement. We also consent to the reference to us under the
headings "Independent Accountants" and "Experts" in the Statement of Additional
Information.
/s/ PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
February 5, 1996
<PAGE> 1
EXHIBIT 11-2
[GRANT THORNTON LLP LOGO]
GRANT THORNTON LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation in the statement of additional
information constituting part of this Amendment No. 19 and Amendment No. 20 to
the Registration Statement on Form N-1A of our report dated December 21, 1994.
We also consent to the reference to us under the heading "Auditors" and
"Experts" in such Statement of Additional Information.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
New York, New York
January 30, 1996
<PAGE> 2
EXHIBIT 11-2
[GRANT THORNTON LLP LOGO]
GRANT THORNTON LLP
November 1, 1995
Securities and Exchange Commission
Attn: SECPS/Mail Stop 9-5
Washington, D.C. 20549
Re: 2-776969
811-3445
We have read The Merger Fund statement regarding our termination as their
independent auditors included at the end of the "Notes To the Financial
Statements" on Page 17 and agree with the information contained therein.
Very truly yours,
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701804
<NAME> THE MERGER FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 222,860
<INVESTMENTS-AT-VALUE> 240,800
<RECEIVABLES> 132,553
<ASSETS-OTHER> 97
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 373,450
<PAYABLE-FOR-SECURITIES> 15,414
<SENIOR-LONG-TERM-DEBT> 27,900
<OTHER-ITEMS-LIABILITIES> 87,054
<TOTAL-LIABILITIES> 130,368
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 219,276
<SHARES-COMMON-STOCK> 16,349
<SHARES-COMMON-PRIOR> 12,416
<ACCUMULATED-NII-CURRENT> 1,032
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,375
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,399
<NET-ASSETS> 243,082
<DIVIDEND-INCOME> 2,324
<INTEREST-INCOME> 6,657
<OTHER-INCOME> 0
<EXPENSES-NET> 7,816
<NET-INVESTMENT-INCOME> 1,165
<REALIZED-GAINS-CURRENT> 12,544
<APPREC-INCREASE-CURRENT> 13,003
<NET-CHANGE-FROM-OPS> 26,712
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 8,614
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,381
<NUMBER-OF-SHARES-REDEEMED> 9,065
<SHARES-REINVESTED> 617
<NET-CHANGE-IN-ASSETS> 72,738
<ACCUMULATED-NII-PRIOR> (28)
<ACCUMULATED-GAINS-PRIOR> 8,139
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,041
<INTEREST-EXPENSE> 3,897
<GROSS-EXPENSE> 7,816
<AVERAGE-NET-ASSETS> 204,273
<PER-SHARE-NAV-BEGIN> 13.72
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 1.78
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.71
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.87
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 52,480
<AVG-DEBT-PER-SHARE> 3.58
</TABLE>
