THE MERGER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS - 71.65% <F1>
AUTOMOTIVE - 1.44% <F1>
208,000 Hayes Wheels International, Inc. ............... $ 6,500,000
----------
BANKS - 0.83% <F1>
258,800 Civic BanCorp <F2> ............................. 2,199,800
59,000 Pacific Bank, N.A. ............................. 1,548,750
----------
3,748,550
----------
BROADCASTING - 1.59% <F1>
231,000 Citicasters, Inc. .............................. 7,189,875
----------
BUSINESS FORMS - 0.43% <F1>
32,500 Wallace Computer Services, Inc. <F4> ........... 1,950,000
----------
CHEMICALS - 5.11% <F1>
144,000 W. R. Grace & Company <F4> ..................... 10,728,000
1,072,600 Sterling Chemicals, Inc. <F2> .................. 12,334,900
----------
23,062,900
----------
COMPUTER HARDWARE - 3.58% <F1>
87,417 Cray Research, Inc. <F2> ....................... 2,393,040
253,400 Stratacom, Inc. <F2> <F4> ...................... 13,778,625
----------
16,171,665
----------
COMPUTER SOFTWARE & SERVICES - 9.67% <F1>
256,900 AmeriData Technologies, Inc. <F2> .............. 4,046,175
183,600 Cheyenne Software, Inc. <F2> <F4> .............. 3,970,350
120,800 The Continuum Co., Inc. <F2> ................... 7,429,200
186,400 CyCare Systems, Inc. <F2> ...................... 9,250,100
28,116 Davidson & Associates, Inc. <F2> ............... 875,110
205,600 Ideon Group, Inc. .............................. 2,852,700
197,260 Sierra On-Line, Inc. <F2> ...................... 8,876,700
54,858 SoftKey International, Inc. <F2> <F3> .......... 1,364,593
83,550 UUNET Technologies, Inc. <F2> .................. 4,992,112
----------
43,657,040
----------
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
SHARES VALUE
------ -----
ENVIRONMENTAL CONTROL - 0.97% <F1>
146,900 Davis Water & Waste Industries, Inc. ....... $ 4,388,638
----------
HEALTH CARE SERVICES - 5.91% <F1>
46,500 Caremark International, Inc. ............... 1,272,938
393,900 Quantum Health Resources, Inc. <F2> ........ 6,893,250
50,000 Sterling Healthcare Group <F2> ............. 1,018,750
322,200 U.S. Healthcare, Inc. ...................... 17,479,350
----------
26,664,288
----------
HOTELS & GAMING - 0.73% <F1>
137,900 Bally Entertainment Corp. <F2> <F4> ........ 3,309,600
----------
INFORMATION SERVICES - 0.70% <F1>
49,200 Dun & Bradstreet Corporation <F4> .......... 3,142,650
----------
INSURANCE & INVESTMENT MANAGEMENT - 3.27% <F1>
88,181 Liberty Financial Companies, Inc. .......... 2,810,769
566,300 Life Partners Group, Inc. <F4> ............. 11,963,088
----------
14,773,857
----------
METALS & MINING - 3.12% <F1>
37,300 Hemlo Gold, Inc. ........................... 475,575
466,600 Diamond Fields Resources, Inc. <F2> <F5> ... 13,612,954
----------
14,088,529
----------
MULTI-INDUSTRY - 2.19% <F1>
345,100 Figgie International, Inc., Class A <F2> ... 5,047,088
451,200 Scott's Hospitality, Inc. <F5> ............. 4,047,826
20,700 Teledyne, Inc. ............................. 781,425
----------
9,876,339
----------
THE MERGER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
SHARES VALUE
------ -----
OIL & GAS EXPLORATION - 3.27% <F1>
601,404 Ampolex Limited <F2> <F5> .................. $ 2,228,098
391,100 EnerMark Income Fund <F5> .................. 1,982,529
487,000 ENSERCH Corporation, Inc. .................. 10,531,375
----------
14,742,002
----------
OIL REFINING - 2.87% <F1>
261,550 Tosco Corporation <F3> ..................... 12,946,734
----------
OIL FIELD SERVICES - 2.74% <F1>
41,100 Dual Drilling Company <F2> ................. 770,625
101,000 Nowsco Well Service, Ltd. .................. 2,411,375
347,500 Transocean USA <F2> <F5> ................... 9,203,701
----------
12,385,701
----------
PHARMACEUTICALS - 1.40% <F1>
340,712 Athena Neurosciences, Inc. <F2> ............ 6,303,172
1,215 Lynx Therapeutics, Inc. .................... 2,430
----------
6,305,602
----------
RAILROADS - 2.90% <F1>
537,240 Southern Pacific Rail Corporation <F2> ..... 13,095,225
----------
RETAILERS - 5.83% <F1>
282,400 Revco D. S., Inc. <F2> <F4> ................ 6,707,000
589,660 The Stop & Shop Companies, Inc. <F2> ....... 19,606,215
----------
26,313,215
----------
SAVINGS & LOANS - 5.13% <F1>
247,500 Bell Bancorp, Inc. ......................... 9,281,250
266,700 Conestoga Bancorp, Inc. .................... 5,634,038
72,200 First Federal Savings Bank,
Brunswick, Georgia ....................... 3,393,400
100,300 Long Island Bancorp, Inc. <F4> ............. 2,846,013
82,200 MAF Bancorp, Inc. <F3> ..................... 2,003,631
----------
23,158,332
----------
THE MERGER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
SHARES VALUE
------ -----
SECURITIES BROKERAGE - 1.91% <F1>
235,600 Waterhouse Investor Services, Inc. ......... $ 8,628,850
----------
TAX PREPARATION - 0.54% <F1>
69,900 H&R Block, Inc. <F4> ....................... 2,437,763
----------
TELECOMMUNICATIONS - 4.58% <F1>
90,100 A+ Network, Inc. <F2> ...................... 1,835,788
320,800 Cable and Wireless plc - ADR <F4> .......... 6,616,500
227,100 Cellular Communications, Inc. <F2> ......... 12,206,625
----------
20,658,913
----------
WHOLESALERS - 0.94% <F1>
566,400 Alliance Entertainment Corp. <F2> <F4> ..... 3,327,600
14,230 Cardinal Health, Inc. <F3> ................. 908,941
----------
4,236,541
----------
TOTAL COMMON STOCKS
(Cost $312,529,389) ..................... 323,432,809
-----------
PAR VALUE
- ---------
CORPORATE BONDS - 4.73% <F1>
$19,537,000 Figgie International, Inc.
9.875%, 10/01/99 ....................... 19,903,319
1,350,000 Hayes Wheels International, Inc.
9.25%, 11/15/02 ........................ 1,427,372
----------
TOTAL CORPORATE BONDS
(Cost $21,367,452) ..................... 21,330,691
----------
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
PRINCIPAL AMOUNT VALUE
- ---------------- -----
SHORT-TERM INVESTMENTS - 11.69% <F1>
U.S. TREASURIES - 11.07% <F1> <F3>
U.S. Treasury Bills:
$ 8,810,000 4.71%, 6/06/96........................ $ 8,804,170
9,739,000 4.82%, 6/13/96........................ 9,723,359
31,510,000 4.90%, 6/20/96........................ 31,428,512
----------
49,956,041
----------
DEMAND NOTES - 0.62% <F1>
2,800,000 American Express......................... 2,800,000
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $52,756,041).................... 52,756,041
----------
TOTAL INVESTMENTS
(Cost $386,652,882)................... $397,519,541
===========
<F1> Calculated as a percentage of net assets.
<F2> Non-income producing security.
<F3> Securities have been committed as collateral for open short positions.
<F4> Securities have been committed as collateral for written call options.
<F5> Foreign security.
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
MAY 31, 1996 (UNAUDITED)
SHARES VALUE
------ -----
88,141 Aetna Life & Casualty Company .............. $ 6,500,399
39,900 Allegheny Ludlum Corporation ............... 798,000
53,840 Battle Mountain Gold Company ............... 471,100
342,600 CUC International, Inc. .................... 12,676,200
14,183 Cardinal Health, Inc. ...................... 905,939
203,400 Cisco Systems, Inc. ........................ 11,136,150
95,675 Computer Sciences Corp. .................... 7,546,366
49,400 Conseco, Inc. .............................. 1,790,750
25,700 ENSCO International, Inc. .................. 780,637
186,700 Enserch Exploration, Inc. .................. 2,053,700
100,642 Elan Corporation plc ADR ................... 6,315,285
8,000 FPA Medical Management, Inc. ............... 141,000
35,200 HBO & Co. .................................. 4,395,600
228,900 Inco, Ltd. ................................. 7,467,862
40,185 Inco Preferred Series E <F6> ............... 2,084,597
23,100 Jacor Communications, Inc. ................. 678,562
82,200 MAF Bancorp, Inc. .......................... 2,003,625
148,450 MFS Communications Co., Inc. ............... 5,158,637
56,335 MedPartners Mullikin, Inc. ................. 1,316,831
21,100 Metromedia International Group ............. 295,400
228,592 Olsten Corporation ......................... 7,029,204
110,000 Reading and Bates Corporation .............. 2,420,000
47,500 Rite Aid Corporation ....................... 1,395,313
87,417 Silicon Graphics, Inc. ..................... 2,403,968
54,858 SoftKey International, Inc. ................ 1,364,593
98,400 Sonat Offshore Drilling, Inc. .............. 5,215,200
199,785 Tosco Corporation .......................... 9,889,358
174,300 Union Pacific Corporation .................. 12,222,788
62,550 U.S. Filter Corporation .................... 2,181,431
110,400 Voisey Bay Nickel <F6> <F7> ................ 3,090,047
----------
TOTAL SECURITIES SOLD SHORT
(Proceeds $117,204,189) ................. $121,728,542
===========
<F6> When issued security.
<F7> Foreign security.
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF CALL OPTIONS WRITTEN
MAY 31, 1996 (UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
1,379 Bally Entertainment Corp.
Expiration June 1996,
Exercise Price $20.00 .................... $ 560,219
947 Alliance Entertainment Corp.
Expiration June 1996,
Exercise Price $5.00 ..................... 82,862
699 H&R Block, Inc.
Expiration June 1996,
Exercise Price $35.00 .................... 69,900
3,208 Cable & Wireless plc ADR
Expiration June 1996,
Exercise Price $20.00 .................... 320,800
1,836 Cheyenne Software, Inc.
Expiration June 1996,
Exercise Price $17.50 .................... 826,200
492 Dun & Bradstreet Corporation
Expiration June 1996,
Exercise Price $60.00 .................... 199,875
1,440 W.R. Grace & Co.
Expiration June 1996,
Exercise Price $70.00 .................... 729,000
1,611 Life Partners Group, Inc.
Expiration June 1996,
Exercise Price $20.00 .................... 191,306
796 Long Island Bancorp, Inc.
Expiration June 1996,
Exercise Price $25.00 .................... 288,550
1,305 Revco D.S., Inc.
Expiration June 1996,
Exercise Price $22.50 .................... 179,438
500 Stratacom, Inc.
Expiration June 1996,
Exercise Price $45.00 .................... 475,000
325 Wallace Computer Services, Inc.
Expiration June 1996,
Exercise Price $55.00 .................... 168,594
----------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $4,394,341) ........... $4,091,744
----------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996 (UNAUDITED)
ASSETS:
Investments, at value (Cost $386,652,882)
See accompanying schedule ..................... $397,519,541
Cash ............................................. 712,244
Deposit at brokers for short sales ............... 66,274,073
Receivable from brokers for proceeds
on securities sold short ...................... 108,493,369
Receivable for investments sold ................. 14,682,380
Interest receivable .............................. 328,045
Dividends receivable ............................. 91,868
Other receivables ................................ 276,785
-----------
Total Assets ................................... 588,378,305
LIABILITIES:
Securities sold short, at
value (Proceeds of $117,204,189)
See accompanying schedule ..................... $121,728,542
Payable for investment securities purchased ...... 10,460,414
Call options written, at
value (Premiums received $4,394,341)
See accompanying schedule ..................... 4,091,744
Accrued interest payable ......................... 126,158
Investment advisory fee payable .................. 359,823
Distribution fees payable ........................ 46,217
Accrued expenses and other payables .............. 150,441
-----------
Total Liabilities ............................. 136,963,339
-----------
NET ASSETS......................................... $451,414,966
===========
NET ASSETS consist of:
Accumulated undistributed net
investment income ............................. $ 1,987,987
Accumulated undistributed net
realized gain on investments sold,
securities sold short and option
contracts expired or closed ................... 22,806,326
Net unrealized appreciation (depreciation) on:
Investments ................................... 10,866,659
Short positions ............................... (4,524,353)
Call options .................................. 302,597
Paid-in capital .................................. 419,975,750
-----------
Total Net Assets .............................. $451,414,966
===========
NET ASSET VALUE, offering price and
redemption price per share
($451,414,966 / 30,193,792 shares
of beneficial interest outstanding) .............. $14.95
=====
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED)
INVESTMENT INCOME:
Interest ......................................... $4,572,726
Dividend income on long positions
(net of foreign withholding taxes of $1,515) .. 785,980
-----------
Total Investment Income ........................ 5,358,706
-----------
EXPENSES:
Investment advisory fee .......................... $1,657,642
Distribution fees ................................ 220,465
Transfer agent and shareholder
servicing agent fees ........................... 102,732
Federal and state registration fees .............. 52,131
Professional fees ................................ 63,936
Trustees' fees and expenses ...................... 13,890
Custody fees ..................................... 33,781
Administration fee ............................... 72,573
Reports to shareholders .......................... 46,691
Other ............................................ 16,269
-----------
Total Operating Expenses Before Interest
Expense and Dividends on
Short Positions ............................. 2,280,110
Interest expense ................................. 305,439
Dividends on short positions
(net of foreign withholding taxes of $3,225) .. 558,689
-----------
Total Expenses ................................. 3,144,238
-----------
NET INVESTMENT INCOME.............................. 2,214,468
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions .............................. 29,229,286
Short transactions ............................. (5,802,946)
Options contracts expired or closed ............ 486,934
-----------
Total Realized Gain ............................ 23,913,274
Change in unrealized appreciation (depreciation) on:
Investments .................................... (7,073,827)
Short positions ................................ 3,620,829
Call options ................................... (301,525)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.... 20,158,751
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $22,373,219
===========
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of Capital Shares............................ $256,984,233
Repurchases of Capital Shares...................... (69,005,428)
-----------
Cash Provided by Capital Share Transactions........ 187,978,805
Cash Used to Repay Borrowings...................... (33,000,000)
Distributions Paid in Cash<F8>..................... (2,019,325)
-----------
$152,959,480
-----------
CASH (USED) PROVIDED BY OPERATIONS:
Purchases of Portfolio Securities.................. (771,531,529)
Net Purchases of Short-Term Investments............ (32,659,841)
Proceeds from Sales of Portfolio Securities........ 692,920,815
------------
(111,270,555)
------------
Increase in Deposit at Broker for Short Sales...... (42,867,377)
Net Investment Income.............................. 2,214,468
Net Change in Receivables/Payables
related to Operations ............................ (420,824)
-----------
(41,073,733)
-----------
(152,344,288)
------------
Net Increase in Cash............................... 615,192
Cash, Beginning of Period.......................... 97,052
-----------
Cash, End of Period................................ $ 712,244
===========
<F8> Non-cash financing activities include reinvestment of dividends of
$12,721,008.
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1996 NOV. 30, 1995
---------------- -------------
(UNAUDITED)
Net investment income......................... $ 2,214,468 $ 1,164,566
Net realized gain on investments sold,
securities sold short and
option contracts expired or closed .......... 23,913,274 12,544,047
Change in unrealized appreciation
(depreciation) of investments,
short positions and call and put options .... (3,754,523) 13,003,454
----------- -----------
Net increase in net assets resulting
from operations ............................. 22,373,219 26,712,067
Distributions to shareholders from:
Net investment income ....................... (1,258,322) --
Net realized gains .......................... (13,482,011) (8,613,574)
----------- -----------
Total distributions........................... (14,740,333) (8,613,574)
Net increase in net assets from capital
share transactions (Note 7) ................. 200,699,813 54,639,595
----------- -----------
Net increase in net assets.................... 208,332,699 72,738,088
NET ASSETS:
Beginning of period........................... 243,082,267 170,344,179
----------- -----------
End of period (including accumulated
undistributed net investment income of
$1,987,987 and $1,031,840, respectively) .... $451,414,966 $243,082,267
=========== ===========
See notes to the financial statements.
<TABLE>
THE MERGER FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding throughout each period.
<CAPTION>
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED ------------------------------------------------------------------------
MAY 31, 1996 1995 1994 1993 1992 1991
------------- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period................ $14.87 $13.72 $13.70 $12.34 $12.51 $11.43
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) .... 0.10<F11><F12> 0.08<F11><F12> - <F11><F12> (0.07)<F11><F12> (0.12)<F11> 0.02<F11>
Net realized and unrealized gain
on investments................. 0.88 1.78 1.08 2.10 0.65 1.79
------ ------ ------ ------ ------ ------
Total from investment operations 0.98 1.86 1.08 2.03 0.53 1.81
Less distributions:
Dividends from net
investment income (0.08) - - - (0.03) -
Distributions from net
realized gains (0.82) (0.71) (1.06) (0.67) (0.67) (0.73)
------ ------ ------ ------ ------ ------
Total distributions ............. (0.90) (0.71) (1.06) (0.67) (0.70) (0.73)
------ ------ ------ ------ ------ ------
Net Asset Value, end of period..... $14.95 $14.87 $13.72 $13.70 $12.34 $12.51
====== ====== ====== ====== ====== ======
Total Return....................... 6.97%<F14> 14.26% 8.41% 17.24% 4.45% 16.84%
Supplemental Data and Ratios:
Net assets, end of period (000's) $451,415 $243,082 $170,344 $25,173 $11,611 $10,281
Ratio of operating expenses
to average net assets.......... 1.37%<F10><F15> 1.41%<F10> 1.58%<F10> 2.19%<F10> 2.75%<F10> 3.05%<F9><F10>
Ratio of interest expense and
dividends on short positions
to average net assets.......... 0.52%<F15> 2.42% 1.72% 1.91% 2.28% 1.01%
Ratio of net investment
income (loss) to
average net assets............. 1.33%<F15> 0.57% (0.03)% (0.57)% (1.42)% 0.21%
Portfolio turnover rate <F13> ... 260.22% 418.63% 390.34% 186.00% 231.40% 311.51%
Average commission rate per share.. $0.0505
<FN>
<F9> Reflects certain non-recurring expenses associated with the Fund's restructuring as of January 31, 1989.
<F10>For the six months ended May 31, 1996, and 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 six months ended May 31, 1996, and for the years ended November 30, 1995, 1994, 1993, 1992 and 1991,
were 1.89%, 3.83%, 3.30%, 4.10%, 5.03% and 4.06%, respectively.
<F11>Net investment income before interest expense and dividends on short positions for the six months ended May 31, 1996, and for
the years ended November 30, 1995, 1994, 1993, 1992 and 1991, was $0.14, $0.42, $0.21, $0.17, $0.07 and $0.10, respectively.
<F12>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.
<F13>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 six months ended May 31, 1996, and for the year ended November 30, 1995 is 188.37% and
290.48%, respectively.
<F14>Not annualized.
<F15>Annualized.
See notes to the financial statements.
</TABLE>
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION
The Merger Fund (the "Fund") is a no-load, open-end, non-diversified
investment company organized as a trust under the laws of the Commonwealth of
Massachusetts on April 12, 1982, and registered under the Investment Company Act
of 1940 (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. The portion of the foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date of a security is
included in realized gains and losses on investment transactions.
B. Transactions with Brokers for Short Sales
Cash and Treasury securities in the amount of $116,230,114 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
brokers for proceeds on securities sold short and deposit at brokers for short
sales is with three major security dealers. The Fund does not require the
brokers 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.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 (UNAUDITED)
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 mean 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 mean 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. Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
H. When-Issued Securities
The Fund may purchase and sell securities on a when-issued or delayed delivery
basis. Although the payment and interest terms of these securities are
established at the time the purchaser enters into the agreement, these
securities may be delivered and paid for at a future date, generally within 45
days. The Fund records purchases or sales of when-issued securities and reflects
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Fund segregates and maintains at all times
cash, cash equivalents, or other high-quality liquid debt securities in an
amount at least equal to the amount of outstanding commitments for when-issued
securities.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 (UNAUDITED)
I. 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 $2,957,762 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.
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.
NOTE 5 - FOREIGN SECURITIES
Investing in securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include revaluation of currencies and adverse political and economic
developments. Moreover, securities of many foreign companies and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 (UNAUDITED)
NOTE 6 - 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 six months ended May 31, 1996, the
Fund incurred $50,943 for such services.
Certain officers of the Fund are also officers of the Adviser.
NOTE 7 - SHARES OF BENEFICIAL INTEREST
The Trustees have the authority to issue an unlimited amount of shares of
beneficial interest without par value.
Changes in shares of beneficial interest were as follows:
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1996 NOVEMBER 30, 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold .................... 17,676,258 $256,984,233 12,380,985 $172,107,462)
Issued as reinvestment
of dividends .......... 901,799 12,721,008 617,682 8,066,925)
Redeemed ................(4,733,037) (69,005,428) (9,065,402) (125,534,792)
----------- ------------ ----------- -------------
Net increase ............ 13,845,020 $200,699,813 3,933,265 $ 54,639,595)
=========== ============ =========== =============
NOTE 8 - INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended May 31, 1996
(excluding short-term investments and options) aggregated $600,347,618 and
$498,029,440, respectively.
At May 31, 1996, gross unrealized appreciation and depreciation of investments
for federal income tax purposes were:
Appreciation........................................$15,638,307)
(Depreciation)......................................(5,380,463)
-----------
Net unrealized appreciation on investments..........$10,257,844)
===========
At May 31, 1996, the cost of investments for federal income tax purposes was
$387,261,696.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 (UNAUDITED)
NOTE 9 - OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the six
months ended May 31, 1996, were as follows:
PREMIUM NUMBER OF
AMOUNT CONTRACTS
---------- ---------
Options outstanding at November 30, 1995.. $1,617,928 2,982)
Options written........................... 14,180,348 40,759)
Options closed............................ (6,449,165) (12,665)
Options exercised......................... (4,785,497) (14,550)
Options expired........................... (169,273) (1,988)
---------- --------
Options outstanding at May 31, 1996....... $4,394,341 14,538)
========== ========
NOTE 10 - 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 six months ended May 31, 1996, the Fund incurred $220,465
pursuant to the Plan.
The Plan will remain in effect from year to year provided such continuance is
approved at least annually by a vote either of a majority of the Trustees,
including a majority of the non-interested Trustees, or a majority of the Fund's
outstanding shares.
NOTE 11 - 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 6.87% during the six months ended May 31, 1996). 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 six months ended May 31, 1996, the Fund had an outstanding average
daily balance of $9,435,464. The maximum amount outstanding during the six
months ended May 31, 1996, was $95,000,000. Interest expense amounted to
$305,439 for the six months ended May 31, 1996.
Pursuant to the 1940 Act, the Fund is required to satisfy asset coverage
requirements on its outstanding borrowings. At May 31, 1996, the Fund satisfied
all asset coverage requirements of the 1940 Act.
THE MERGER FUND(R)
Semi-Annual Report
May 31, 1996
INVESTMENT ADVISER
Westchester Capital Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600
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
Frederick W. Green, President
Bonnie L. Smith, Vice President, Treasurer
and Secretary
COUNSEL
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
AUDITORS
Price Waterhouse LLP
100 E. Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
[ARTICLE] 6
[CIK] 0000701804
[NAME] THE MERGER FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] NOV-30-1996
[PERIOD-START] DEC-01-1995
[PERIOD-END] MAY-31-1996
[INVESTMENTS-AT-COST] 386,653
[INVESTMENTS-AT-VALUE] 397,520
[RECEIVABLES] 190,146
[ASSETS-OTHER] 712
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 588,378
[PAYABLE-FOR-SECURITIES] 10,460
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 126,503
[TOTAL-LIABILITIES] 136,963
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 419,976
[SHARES-COMMON-STOCK] 30,194
[SHARES-COMMON-PRIOR] 16,349
[ACCUMULATED-NII-CURRENT] 1,988
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 22,806
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 6,645
[NET-ASSETS] 451,415
[DIVIDEND-INCOME] 786
[INTEREST-INCOME] 4,573
[OTHER-INCOME] 0
[EXPENSES-NET] 3,144
[NET-INVESTMENT-INCOME] 2,215
[REALIZED-GAINS-CURRENT] 23,913
[APPREC-INCREASE-CURRENT] (3,755)
[NET-CHANGE-FROM-OPS] 22,373
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1,258
[DISTRIBUTIONS-OF-GAINS] 13,482
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 17,676
[NUMBER-OF-SHARES-REDEEMED] 4,733
[SHARES-REINVESTED] 902
[NET-CHANGE-IN-ASSETS] 208,333
[ACCUMULATED-NII-PRIOR] 1,032
[ACCUMULATED-GAINS-PRIOR] 12,375
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,658
[INTEREST-EXPENSE] 305
[GROSS-EXPENSE] 3,144
[AVERAGE-NET-ASSETS] 331,925
[PER-SHARE-NAV-BEGIN] 14.87
[PER-SHARE-NII] 0.10
[PER-SHARE-GAIN-APPREC] 0.88
[PER-SHARE-DIVIDEND] 0.08
[PER-SHARE-DISTRIBUTIONS] 0.82
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 14.95
[EXPENSE-RATIO] 1.37
[AVG-DEBT-OUTSTANDING] 9,435
[AVG-DEBT-PER-SHARE] 0.41
</TABLE>
