<PAGE> 1
As filed with the
Securities and Exchange Commission on February 7, 1997
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. 20 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 21 [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,
1996 was filed on January 23, 1997.
Total number of pages is ____. Exhibit index
appears at page _____.
<PAGE> 2
THE
MERGER
FUND(R)
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, 1997
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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, 1997 is
available upon request without charge and may be obtained by writing to the
Fund's Administrator, Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin
53201-0701. 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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Effective June 1, 1996, the Fund was closed to new investors. Shareholders
in the Fund as of May 31, 1996 may purchase additional shares, subject only to
the terms set forth herein. Investment advisors and financial planners who held
Fund shares in omnibus accounts as of May 31, 1996 may continue to make
purchases in such accounts. The Fund reserves the right to resume sales to new
investors at any time but has no present plans to do so.
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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> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND EXPENSES.............................................................................. 1
CONDENSED FINANCIAL INFORMATION............................................................ 2
INVESTMENTS OBJECTIVES AND POLICIES........................................................ 3
Risk Factors.......................................................................... 3
Leverage Through Borrowing............................................................ 4
Short Sales and Put and Call Options.................................................. 4
Investment Restrictions............................................................... 5
INVESTMENT ADVISER......................................................................... 5
PRINCIPAL UNDERWRITER...................................................................... 6
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR................................................ 6
PLANS OFFERED BY THE FUND.................................................................. 6
The Merger Fund IRA Plan.............................................................. 6
Fund Investors Keogh Plans............................................................ 6
HOW TO PURCHASE SHARES..................................................................... 7
Automatic Investment Plan............................................................. 7
NET ASSET VALUE............................................................................ 7
REDEMPTIONS................................................................................ 7
Systematic Withdrawal Plan............................................................ 8
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS.................................................... 8
ORGANIZATION AND CAPITALIZATION............................................................ 9
SHAREHOLDER COMMUNICATIONS................................................................. 9
</TABLE>
<PAGE> 4
FUND EXPENSES(1)
(FOR THE YEAR ENDED NOVEMBER 30, 1996)
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES................................................ None(2)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees.............................................................. 1.00%
Rule 12b-1 Distribution Fees............................................... 0.14%
Other Expenses............................................................. 0.22%(3)
------
Total Operating Expenses........................................................ 1.36%
</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 $43 $74 $164
</TABLE>
Notes:
(1) The purpose of the 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 at
prevailing rates charged by Firstar Trust Company.
(3) Each IRA and Keogh account will be charged a $12.50 annual maintenance fee
as well as fees for certain transactions.
1
<PAGE> 5
THE MERGER FUND
CONDENSED FINANCIAL INFORMATION
(FOR THE YEARS ENDED NOVEMBER 30, 1987 - 1996) (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,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of
year.............................. $14.87 $13.72 $13.70 $12.34 $12.51 $11.43 $12.03
-------- -------- -------- ------- ------- ------- -------
Income from investment operations:
Net investment income/(loss).... 0.20(5)(6) 0.08(5)(6) -- (5)(6) (0.07 (5)(6) (0.12)(5) 0.02 (0.16)(2)
Net realized and unrealized gain
(loss) on investments....... 1.24 1.78 1.08 2.10 0.65 1.79 0.70
-------- -------- -------- ------- ------- ------- -------
Total from investment
operations.................. 1.44 1.86 1.08 2.03 0.53 1.81 0.54
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) (1.14)
-------- -------- -------- ------- ------- ------- -------
Total distributions............. (0.90) (0.71) (1.06) (0.67) (0.70) (0.73) (1.14)
-------- -------- -------- ------- ------- ------- -------
Net Asset Value, end of year....... $15.41 $14.87 $13.72 $13.70 $12.34 $12.51 $11.43
-------- -------- -------- ------- ------- ------- -------
Total Return....................... 10.26% 14.26% 8.41% 17.24% 4.45% 16.84% 4.57%
Supplemental Data and Ratios:
Net assets, end of year
(000's)..................... $489,084 $243,082 $170,344 $25,173 $11,611 $10,281 $9,599
Ratio of operating expenses to
average net assets.......... 1.36%(4) 1.41%(4) 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....... 0.95% 2.42% 1.72% 1.91% 2.28% 1.01% 1.20%
Ratio of net investment income/
(loss) to average net
assets...................... 1.36% 0.57% (0.03)% (0.57)% (1.42)% 0.21% (1.20)%
Portfolio turnover rate(7)...... 405.99% 418.63% 390.34% 186.00% 231.40% 311.51% 357.39%
Average commission rate
per share................... $0.0434
<CAPTION>
1989 1988 1987
------- ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of
year.............................. $11.50 $10.10 $12.55
------- ------- -------
Income from investment operations:
Net investment income/(loss).... (0.02) 0.04 0.07
Net realized and unrealized gain
(loss) on investments....... 0.66 1.74 (0.82)
------- ------- -------
Total from investment
operations.................. 0.64 1.78 (0.75)
Less Distributions:
Dividends from net investment
income...................... (0.11) (0.07) (0.01)
Distributions from net realized
gains....................... -- (0.31) (1.69)
------- ------- -------
Total distributions............. (0.11) (0.38) (1.70)
------- ------- -------
Net Asset Value, end of year....... $12.03 $11.50 $10.10
------- ------- -------
Total Return....................... 5.66% 18.15% (8.05)%
Supplemental Data and Ratios:
Net assets, end of year
(000's)..................... $11,006 $8,421 $9,909
Ratio of operating expenses to
average net assets.......... 2.80%(1) 2.57% 2.41%
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%
Portfolio turnover rate(7)...... 430.44% 187.16% 323.14%
Average commission rate
per share...................
</TABLE>
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(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, 1996, 1995, 1994, 1993 and 1992 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, 1996, 1995, 1994, 1993 and 1992
were 2.31%, 3.83%, 3.30%, 4.10% and 5.03%, respectively.
(5) Net investment income before interest expense and dividends on short
positions for the years ended November 30, 1996, 1995, 1994, 1993, and 1992
was $0.35, $0.42, $0.21, $0.17 and $0.07, 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 years
ended November 30, 1996 and 1995 was 276.99% and 290.48%, respectively.
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.
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").
2
<PAGE> 6
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. Over the last three-year period, 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.
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%
3
<PAGE> 7
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 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, securities which are sold short, the Fund will maintain a segregated
account consisting of cash, cash equivalents and liquid securities equal in
value on a daily marked-to-market basis to 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. Also, as part of a merger arbitrage strategy
involving a pending corporate reorganization, the Fund may also write (sell)
uncovered put options. As a matter of fundamental policy, which may not be
changed without shareholder approval, the value of all put options purchased or
sold by the Fund, as measured by the premiums paid or received, 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, and, accordingly, call 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. As a matter of fundamental policy, the
value of securities underlying call options written by the Fund may not exceed
50% of the
4
<PAGE> 8
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. Also, options transactions involve special
risks including (i) possible imperfect correlation between the price movements
of the option and the underlying security and (ii) lack of assurance of a liquid
secondary market at any particular time and possible exchange-imposed price
fluctuation limits, either of which may make it difficult or impossible to close
a position when so desired. 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 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.
5
<PAGE> 9
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 record keeping, 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.
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.
6
<PAGE> 10
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, 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 $20.00 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.
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.
7
<PAGE> 11
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 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
8
<PAGE> 12
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 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.
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.
9
<PAGE> 13
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
THE
MERGER
FUND(R)
PROSPECTUS
FEBRUARY 7, 1997
<PAGE> 14
-------------------------
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, 1997
- --------------------------------------------------------------------------------
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,
1997, a copy of which may be obtained without charge by writing to the Fund's
Administrator, Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin
53201-0701.
- --------------------------------------------------------------------------------
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> 15
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . 1
Merger Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . 1
Special Risks of Over-the-Counter Options Transactions . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT ADVISER AND PRINCIPAL UNDERWRITER . . . . . . . . . . . . 6
Investment Adviser and Advisory Contract . . . . . . . . . . . . 6
Principal Underwriter . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . 10
Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SERVICES AND PLANS OFFERED BY THE FUND . . . . . . . . . . . . . . . 11
The Merger Fund IRA Plan . . . . . . . . . . . . . . . . . . . . 11
Fund Investors Keogh Plans . . . . . . . . . . . . . . . . . . . 11
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . . . 12
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ADDITIONAL INFORMATION ABOUT REDEMPTIONS . . . . . . . . . . . . . . 13
TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ORGANIZATION AND CAPITALIZATION . . . . . . . . . . . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Shareholder and Trustee Liability . . . . . . . . . . . . . . . 19
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . 20
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . 21
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 21
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR . . . . . . . . . . . . . 22
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Covered Option Writing . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
-i-
<PAGE> 16
<TABLE>
<S> <C>
Money Market Instruments . . . . . . . . . . . . . . . . . . . . 24
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . 24
Short Selling . . . . . . . . . . . . . . . . . . . . . . . . . 25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
-ii-
<PAGE> 17
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> 18
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.
Special Risks of Over-the-Counter Options Transactions
As part of its merger arbitrage strategy, the Fund may engage in
transactions in options and futures contracts which are traded over-the-counter
("OTC transactions"). OTC transactions differ from exchange-traded
transactions in several respects. OTC transactions are transacted directly
with dealers and not with a clearing corporation. Without the availability of
a clearing corporation, OTC transaction pricing is normally done by reference
to information from market makers, which information is carefully monitored by
the Adviser and verified in appropriate cases.
As the OTC transactions are transacted directly with dealers, there is a
risk of nonperformance by the dealer as a result of the insolvency of such
dealer or otherwise, in which event the Fund may experience a loss. An OTC
transaction may only be terminated voluntarily by entering into a closing
transaction with the dealer
-2-
<PAGE> 19
with whom the Fund originally dealt. Any such cancellation, if agreed to, may
require the Fund to pay a premium to that dealer. In those cases in which the
Fund has entered into a covered transaction and cannot voluntarily terminate
the transaction, the Fund will not be able to sell the underlying security
until the investment instrument expires or is exercised or different cover is
substituted, In such cases, the Fund may not be able to sell an underlying
security even though it might otherwise be advantageous to do so.
It is the Fund's intention to enter into OTC transactions only
with dealers which agree to, and which are expected to be capable of, entering
into closing transactions with the Fund, although there is no assurance that a
dealer will voluntarily agree to terminate the transaction. There is also no
assurance that the Fund will be able to liquidate an OTC transaction at any
time prior to expiration. OTC transactions for which there is no adequate
secondary market will be considered illiquid.
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.
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
-3-
<PAGE> 20
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.
(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.
-4-
<PAGE> 21
(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.
(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.
-5-
<PAGE> 22
(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 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
-6-
<PAGE> 23
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, 1994, 1995, and 1996,
the Fund incurred advisory fees of $923,596, $2,040,921 and $4,114,105,
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.
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.
-7-
<PAGE> 24
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, 1996, the Fund incurred
expenses of $580,487 of which $56,445 was paid or accrued to Mercer and
$524,042 was paid or accrued to others.
-8-
<PAGE> 25
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* 50 President and Trustee President of Westchester Capital
Westchester Capital Management, Inc., the Fund's
Management, Inc. Adviser.
100 Summit Lake Drive
Valhalla, NY 10595
Bonnie L. Smith 49 Vice President, Vice President of Westchester
Westchester Capital Treasurer and Secretary Capital Management, Inc., the
Management, Inc. Fund's Adviser.
100 Summit Lake Drive
Valhalla, NY 10595
William H. Bohnett* 48 Assistant Secretary and Partner in the law firm of
Fulbright & Jaworski L.L.P. Trustee Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
James P. Logan III 60 Trustee President of James P. Logan & Co.,
James P. Logan & Co., Inc. Inc., an executive search firm.
144 East 44th Street
New York, NY 10017
Frank A. McDermott, Jr. 78 Trustee President of JFM Associates, Inc.,
217 Northeast Edgewater Drive a management consulting firm.
Stuart, FL 34996 Also, Director of Orange and
Rockland Utilities, Inc.
Michael J. Downey 53 Trustee Consultant and independent
2 Parsons Lane financial adviser since July 1993.
Rochester, NY 14610 Chairman and Chief Executive
Officer of Prudential Mutual Fund
Management, May 1987 to June 1993.
President and Director of Asia
Pacific Fund, Inc.
</TABLE>
-9-
<PAGE> 26
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age with the Fund During the Past 5 Years
---------------- --- ----------------- -------------------------
<S> <C> <C> <C>
Joseph Neuberger 34 Assistant Secretary Vice President of Firstar Trust
Firstar Trust Company Company, and Manager of Fund
615 East Michigan Street Administration and Compliance since
Milwaukee, WI 53202 August 1994. Previously, manager
with Arthur Andersen LLP.
</TABLE>
As of February 3, 1997, the Trustees and officers of the Fund,
as a group, own 21,810.232 shares of beneficial interest of the Fund, and
50,110.701 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
out-of-pocket expenses in connection with attendance at Trustees meetings, are
paid by the Fund. For the fiscal year ended November 30, 1996, the Fund paid
the following in Trustees' fees:
COMPENSATION TABLE
(for the fiscal year ended November 30, 1996)
<TABLE>
<CAPTION>
======================================================================================================
Aggregate Pension or Estimated
Compensation Retirement Benefits Annual Total
from Accrued as Part of Benefits upon Compensation
Name of Trustee Registrant Fund Expenses Retirement from Registrant
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frederick W. Green 0 0 0 0
- ------------------------------------------------------------------------------------------------------
William H. Bohnett 0 0 0 0
- ------------------------------------------------------------------------------------------------------
Michael J. Downey $8,000 0 0 $8,000
- ------------------------------------------------------------------------------------------------------
James P. Logan 8,000 0 0 8,000
- ------------------------------------------------------------------------------------------------------
Frank McDermott, Jr. 8,000 0 0 8,000
======================================================================================================
</TABLE>
-10-
<PAGE> 27
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
-11-
<PAGE> 28
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
-12-
<PAGE> 29
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.
-13-
<PAGE> 30
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 after
September 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.
-14-
<PAGE> 31
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
-15-
<PAGE> 32
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 for that
year. Also, annual contributions may be made to a spousal IRA. The maximum
contribution to a spousal IRA is the lesser of (a) $2,000, or (b) the combined
compensation of both spouses, minus the dollar amount of the IRA contribution
made by the compensated (or more highly compensated) spouse. 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.
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 upon payment 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
-16-
<PAGE> 33
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
-17-
<PAGE> 34
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.
-18-
<PAGE> 35
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.
-19-
<PAGE> 36
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, 1994, 1995 and 1996,
the Fund paid brokerage commissions of approximately $545,966, $1,162,149 and
$2,467,162, respectively.
-20-
<PAGE> 37
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, 1996, the Fund's portfolio
annual turnover rate was approximately 277%. 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 1996 portfolio
turnover rate of 277% is within the range to be expected for a merger arbitrage
fund, and anticipates that the 1997 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.
-21-
<PAGE> 38
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 .020% of the total value of the Fund's
assets, 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
$14.00 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 the Fund's average daily net assets in excess of $500 million.
The Fund also reimburses the Administrator for all out-of-pocket expenses.
-22-
<PAGE> 39
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 report of
Price Waterhouse LLP, independent accountants given on authority of said firm,
as experts in accounting and auditing.
-23-
<PAGE> 40
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
-24-
<PAGE> 41
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.
-25-
<PAGE> 42
FINANCIAL STATEMENTS
The statement of assets and liabilities, including the
schedules of investments, of securities sold short and of call options written,
as of November 30, 1996, the related statements of operations and of cash flows
for the fiscal year ended November 30, 1996, and statements of changes in net
assets for the years ended November 30, 1996 and 1995, and the independent
accountants' report to the Trustees and shareholders of the Fund dated
January 7, 1997 are attached hereto.
Effective on December 1, 1996, the Fund changed its fiscal
year to end on September 30 in each year, commencing with the short fiscal year
to run from December 1, 1996 through September 30, 1997.
-26-
<PAGE> 43
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C>
COMMON STOCKS - 88.75%*
BANKS - 0.35%*
26,000 Boatmen's Bancshares, Inc.(4)................................... $ 1,732,250
------------
BROADCASTING - 7.01%*
411,225 Infinity Broadcasting Corporation**(2).......................... 13,210,603
365,000 New World Communications Group, Inc.**(4)....................... 8,988,125
340,200 Renaissance Communications Corporation**(4)..................... 12,077,100
------------
34,275,828
------------
CABLE - 2.39%*
610,000 Videotron Holdings plc**(3)(4).................................. 11,666,250
------------
CHILD CARE - 0.41%*
100,000 Kinder-Care Learning Centers, Inc.**(4)......................... 1,987,500
------------
ELECTRIC UTILITIES - 3.68%*
418,600 Portland General Corporation(4)................................. 17,999,800
------------
ELECTRONIC DISTRIBUTORS - 0.05%*
16,500 Milgray Electronics, Inc.**..................................... 241,312
------------
ELECTRONIC SECURITY - 1.74%*
415,020 ADT Ltd.**(2)................................................... 8,507,910
------------
GIFTWARE - 2.02%*
318,800 Syratech Corporation**(4)....................................... 9,882,800
------------
HEALTH CARE INFORMATION SERVICES - 1.41%*
291,100 GMIS, Inc.**(4)................................................. 6,913,625
------------
HEALTH MAINTENANCE ORGANIZATIONS - 3.12%*
363,350 FHP International Corporation**(4).............................. 13,035,181
76,000 Foundation Health Corporation**(2).............................. 2,223,000
------------
15,258,181
------------
HOSPITAL CHAINS - 0.37%*
62,250 OrNda HealthCorp**(4)........................................... 1,813,031
------------
</TABLE>
See notes to the financial statements.
F-1
<PAGE> 44
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C>
HOTELS & GAMING - 1.68%*
215,000 Bally Entertainment Corporation**(4)............................ $ 6,261,875
93,100 Griffin Gaming & Entertainment, Inc.**(4)....................... 1,966,738
------------
8,228,613
------------
INDEPENDENT POWER - 0.46%*
144,100 Destec Energy, Inc.**(4)........................................ 2,233,550
------------
INSURANCE - 8.38%*
33,000 American Travellers Corporation**(4)............................ 1,165,313
242,500 Capitol American Financial Corporation(4)....................... 8,790,625
568,400 First Colony Corporation(4)..................................... 20,462,400
333,800 The Paul Revere Corporation(4).................................. 10,556,425
------------
40,974,763
------------
MEDICAL DEVICES - 1.55%*
262,000 Medex, Inc.(4).................................................. 6,107,875
64,000 Ventritex, Inc.**............................................... 1,488,000
------------
7,595,875
------------
MULTI-INDUSTRY - 6.24%*
856,472 Figgie International, Inc., Class A**(4)........................ 10,866,488
437,600 PHH Corporation(4).............................................. 19,637,300
------------
30,503,788
------------
NATURAL GAS TRANSMISSION & MARKETING - 7.15%*
796,600 ENSERCH Corporation(4).......................................... 18,620,525
1,056,300 NorAm Energy Corporation(4)..................................... 16,372,650
------------
34,993,175
------------
OFFICE SUPPLIES - 3.74%*
40,000 Alco Standard Corporation(2).................................... 2,070,000
832,900 Office Depot, Inc.**(4)......................................... 16,241,550
------------
18,311,550
------------
OIL & GAS EXPLORATION - 0.24%*
51,207 Seagull Energy Corporation**(4)................................. 1,171,360
------------
OILFIELD SERVICES - 0.52%*
141,600 Forasol-Foramer N.V.**(3)(4).................................... 2,548,800
------------
</TABLE>
See notes to the financial statements.
F-2
<PAGE> 45
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C>
PAGING - 0.35%*
317,149 Metrocall, Inc.**(1)............................................ $ 1,724,497
------------
PHARMACEUTICALS - 0.00%*
1,215 Lynx Therapeutics, Inc.(4)...................................... 6,075
------------
PHARMACY MANAGEMENT - 1.02%*
195,000 Owen Healthcare, Inc.**......................................... 4,996,875
------------
PHYSICIANS PRACTICE MANAGEMENT - 0.29%*
73,184 FPA Medical Management, Inc.**.................................. 1,408,792
------------
RAILROADS - 1.87%*
94,000 Conrail, Inc.(2)................................................ 9,141,500
------------
RESTAURANTS - 0.01%*
3,861 Buffets, Inc.**(4).............................................. 35,956
------------
RETAILERS - 5.10%*
533,100 Eckerd Corporation**(4)......................................... 18,391,950
124,200 Vons Companies, Inc.**.......................................... 6,536,025
------------
24,927,975
------------
SAVINGS & LOANS - 7.37%*
548,400 Cal Fed Bancorp Inc.**(4)....................................... 13,298,700
100,000 First Federal Bancshares of Eau Claire, Inc.(4)................. 1,800,000
371,900 Standard Federal Bancorporation(4).............................. 20,965,863
------------
36,064,563
------------
SCIENTIFIC INSTRUMENTS - 0.48%*
74,300 Gelman Sciences, Inc.**(4)...................................... 2,359,025
------------
SPECIALIZED TRAINING SERVICES - 2.48%*
245,500 FlightSafety International, Inc.(2)............................. 12,152,250
------------
SPECIALTY CHEMICALS - 2.65%*
215,800 Loctite Corporation(2).......................................... 12,948,000
------------
</TABLE>
See notes to the financial statements.
F-3
<PAGE> 46
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C>
TELEPHONY - 9.12%*
344,200 C-TEC Corporation**(2).......................................... $ 8,475,925
653,600 MCI Communications Corporation(2)............................... 19,934,800
300,500 MFS Communications Company, Inc.**(4)........................... 14,499,125
189,083 U.S. Long Distance Corporation**(2)............................. 1,689,929
------------
44,599,779
------------
TEMPORARY STAFFING - 0.40%*
96,200 AccuStaff, Inc.**(4)............................................ 1,948,050
------------
TOYS - 2.75%*
1,143,000 Tyco Toys, Inc.**(4)............................................ 13,430,250
------------
WASTE DISPOSAL - 2.35%*
19,200 Addington Resources, Inc.**(4).................................. 576,000
407,600 Continental Waste Industries, Inc.**(4)......................... 10,903,300
------------
11,479,300
------------
TOTAL COMMON STOCKS (Cost $421,343,202)........................ 434,062,848
------------
CONVERTIBLE PREFERRED STOCKS - 0.25%*
50,000 Arcadian Corporation Convertible Preferred A(4) (Cost
$1,208,750)..................................................... 1,218,750
------------
WARRANTS - 0.06%*
172,500 Jacor Communications, Inc., Expire 1/14/00(1)
(Cost $517,500)................................................. 280,313
------------
UNIT TRUSTS - 0.46%*
391,100 EnerMark Income Fund(3)(4)* (Cost $1,941,835)................... 2,249,075
------------
<CAPTION>
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
<S> <C>
PUT OPTIONS PURCHASED - 0.14%*
400 S&P 100 Index
Expiration February 1997, Exercise Price $720.00
TOTAL PUT OPTIONS PURCHASED (Cost $893,930).................... 680,000
------------
<CAPTION>
PAR
VALUE
- -----------
<S> <C>
CORPORATE BONDS - 17.55%*
$ 1,300,000 Baby Superstore Subordinated Notes CLB,
4.875%, 10/01/00(4)........................................... 1,277,250
4,230,000 Continental Cablevision Debentures CLB,
9.50%, 8/01/13(4)............................................. 4,917,375
</TABLE>
See notes to the financial statements.
F-4
<PAGE> 47
THE MERGER FUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PAR
VALUE VALUE
- ----------- ------------
<C> <S> <C>
$15,398,000 Eckerd Corporation Senior Subordinated Notes CLB,
9.25%, 2/15/04(4)............................................. $ 16,822,315
21,487,000 Figgie International, Inc.
9.875%, 10/01/99(4)........................................... 22,400,198
14,350,000 GNF Corporation CLB,
10.625%, 4/01/03(4)........................................... 15,785,000
8,161,000 GranCare, Inc. Subordinated Debentures CLB,
6.50%, 1/15/03(4)............................................. 8,446,635
16,455,000 REPAP Wisconsin, Inc. Senior Notes CLB,
9.25%, 2/01/02(4)............................................. 16,208,175
------------
TOTAL CORPORATE BONDS (Cost $84,618,352)....................... 85,856,948
------------
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
<S> <C>
SHORT-TERM INVESTMENTS - 18.57%*
U.S. TREASURIES - 18.57% *(1)
U.S. Treasury Bills:
$16,740,000 5.06%, 12/12/96................................................. 16,714,659
74,315,000 5.27%, 12/19/96................................................. 74,128,620
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $90,843,279)................ 90,843,279
------------
TOTAL INVESTMENTS (Cost $601,366,848).......................... $615,191,213
=============
</TABLE>
- ------------------------------
* Calculated as a percentage of net assets.
** Non-income producing security.
CLB - Callable
(1) Securities have been committed as collateral for open short positions.
(2) All or a portion of the shares have been committed as collateral for written
call options.
(3) Foreign security.
(4) All or a portion of the shares have been committed as collateral for the
credit facility.
See notes to the financial statements.
F-5
<PAGE> 48
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C>
96,200 AccuStaff, Inc. ................................................ $ 1,948,050
303,300 British Telecommunications plc ADR.............................. 19,297,462
3,861 Buffets, Inc. .................................................. 35,956
40,000 Cal Fed Bancorp SCLP #.......................................... 405,000
50,190 Conseco, Inc. .................................................. 2,804,366
418,600 Enron Corporation............................................... 19,150,950
842,517 Enserch Exploration, Inc. ...................................... 9,583,631
120,333 HBO & Company................................................... 6,843,939
40,000 HFS, Inc. ...................................................... 2,590,000
215,000 Hilton Hotels Corporation....................................... 6,288,750
17,100 Jacor Communications, Inc. ..................................... 410,400
120,000 Mattel, Inc. ................................................... 3,705,000
56,050 Metrocall, Inc. ................................................ 304,772
17,000 NationsBank Corporation......................................... 1,761,625
428,750 News Corporation Ltd ADR........................................ 9,110,938
100,450 News Corporation Ltd Preferred ADR.............................. 1,732,763
72,170 PacifiCare Health Systems, Inc. -- Class B...................... 5,990,110
52,000 Pall Corporation................................................ 1,358,500
164,602 J.C. Penney Company, Inc. ...................................... 8,847,358
93,460 Pride Petroleum Services, Inc. ................................. 1,693,963
255,737 Provident Companies, Inc. ...................................... 10,708,987
343,360 Republic Industries, Inc. ...................................... 11,459,640
181,340 Safeway, Inc. .................................................. 7,366,937
38,400 St. Jude Medical Inc. .......................................... 1,603,200
51,207 Seagull Energy Corporation...................................... 1,171,360
951,300 Staples, Inc. .................................................. 18,788,175
40,069 Sun International Hotels Ltd. .................................. 1,988,424
84,035 Tenet Healthcare Corporation.................................... 1,880,283
41,300 Texas Utilities Company......................................... 1,631,350
618,500 Westinghouse Electric Corporation............................... 11,596,875
630,740 WorldCom, Inc. ................................................. 14,585,862
------------
TOTAL SECURITIES SOLD SHORT (Proceeds $176,358,206)............. $186,644,626
=============
</TABLE>
# When-issued security.
SCLP - Secondary Contingent Litigation Partnership
See notes to the financial statements.
F-6
<PAGE> 49
THE MERGER FUND
SCHEDULE OF CALL OPTIONS WRITTEN
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------------
<C> <S> <C>
4,150 ADT Ltd.
Expiration December 1996, Exercise Price $17.50............... $ 1,296,875
400 Alco Standard Corporation
Expiration December 1996, Exercise Price $45.00............... 270,000
2,350 C-TEC Corporation
Expiration December 1996, Exercise Price $25.00............... 161,562
940 Conrail, Inc.
Expiration December 1996, Exercise Price $90.00............... 740,250
2,455 FlightSafety International, Inc.
Expiration December 1996, Exercise Price $50.00............... 30,688
760 Foundation Health Corporation
Expiration December 1996, Exercise Price $30.00............... 61,750
500 Infinity Broadcasting Corporation
Expiration December 1996, Exercise Price $25.00............... 375,000
Loctite Corporation
1,200 Expiration December 1996, Exercise Price $55.00............... 645,000
100 Expiration December 1996, Exercise Price $60.00............... 5,000
858 Expiration January 1997, Exercise Price $60.00................ 64,350
------------
714,350
------------
920 MCI Communications Corporation
Expiration December 1996, Exercise Price $27.50............... 287,500
1,890 U.S. Long Distance Corporation
Expiration February 1997, Exercise Price $7.50................ 366,187
------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $3,834,076).................................. $ 4,304,162
=============
</TABLE>
See notes to the financial statements.
F-7
<PAGE> 50
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $601,366,848)
See accompanying schedule................................... $ 615,191,213
Cash........................................................... 359,201
Deposit at brokers for short sales............................. 102,066,247
Receivable from brokers for proceeds on securities sold
short....................................................... 168,591,008
Receivable for investments sold................................ 8,225,423
Interest receivable............................................ 1,879,409
Dividends receivable........................................... 13,645
Other receivables.............................................. 278,451
-------------
Total Assets........................................... 896,604,597
LIABILITIES:
Loan payable (Note 10)......................................... $ 197,250,000
Securities sold short, at value (Proceeds of $176,358,206)
See accompanying schedule................................... 186,644,626
Payable for investment securities purchased.................... 17,761,313
Call options written, at value (Premiums received $3,834,076)
See accompanying schedule................................... 4,304,162
Accrued interest payable....................................... 844,757
Investment advisory fee payable................................ 419,849
Distribution fees payable...................................... 64,030
Accrued expenses and other payables............................ 231,914
-------------
Total Liabilities...................................... 407,520,651
-------------
NET ASSETS....................................................... $ 489,083,946
=============
NET ASSETS consist of:
Accumulated undistributed net investment income................ $ 5,323,073
Accumulated undistributed net realized gain on investments
sold, securities sold short and option contracts expired or
closed...................................................... 38,017,893
Net unrealized appreciation (depreciation) on:
Investments................................................. 14,038,295
Short positions............................................. (10,286,420)
Call options................................................ (470,086)
Put options................................................. (213,930)
Paid-in capital................................................ 442,675,121
-------------
Total Net Assets....................................... $ 489,083,946
=============
NET ASSET VALUE, offering price and redemption price per share
($489,083,946 / 31,742,150 shares of beneficial interest
outstanding)................................................... $15.41
======
</TABLE>
See notes to the financial statements.
F-8
<PAGE> 51
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest....................................................... $12,863,883
Dividend income on long positions
(net of foreign withholding taxes of $47,130)............... 2,233,761
-----------
Total investment income..................................... 15,097,644
-----------
EXPENSES:
Investment advisory fee........................................ $ 4,114,105
Distribution fees.............................................. 580,487
Transfer agent and shareholder servicing agent fees............ 191,492
Federal and state registration fees............................ 126,800
Professional fees.............................................. 137,257
Trustees' fees and expenses.................................... 28,778
Custody fees................................................... 141,161
Administration fee............................................. 169,452
Reports to shareholders........................................ 81,522
Other.......................................................... 35,391
------------
Total Operating Expenses Before Interest Expense and
Dividends on Short Positions.............................. 5,606,445
Interest expense............................................... 2,505,198
Dividends on short positions
(net of foreign withholding taxes of $17,108)............... 1,403,369
-----------
Total Expenses.............................................. 9,515,012
-----------
NET INVESTMENT INCOME............................................ 5,582,632
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions........................................... 47,710,273
Short transactions.......................................... (10,324,623)
Options contracts expired or closed......................... 1,734,413
------------
Total Realized Gain......................................... 39,120,063
Change in unrealized (depreciation) appreciation on:
Investments................................................. (4,247,713)
Short positions............................................. (2,141,238)
Call options................................................ (1,074,208)
Put options................................................. 131,592
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.................. 31,788,496
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $37,371,128
===========
</TABLE>
See notes to the financial statements.
F-9
<PAGE> 52
THE MERGER FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C> <C>
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of Capital Shares..................................... $ 412,955,551
Repurchases of Capital Shares............................... (202,305,677)
--------------
Cash Provided by Capital Share Transactions................. 210,649,874
Cash Provided by Borrowings................................. 164,250,000
Distributions Paid in Cash*................................. (2,019,323)
--------------
$ 372,880,551
-------------
CASH (USED) PROVIDED BY OPERATIONS:
Purchases of Portfolio Securities........................... (1,639,715,862)
Net Purchases of Short-Term Investments..................... (69,317,099)
Proceeds from Sales of Portfolio Securities................. 1,382,915,866
--------------
(326,117,095)
--------------
Increase in Deposit at Broker for Short Sales............... (51,066,219)
Net Investment Income....................................... 5,582,632
Net Change in Receivables/Payables Related to Operations.... (1,017,720)
--------------
(46,501,307) (372,618,402)
-------------- ------------
Net Increase in Cash........................................ 262,149
Cash, Beginning of Year..................................... 97,052
------------
Cash, End of Year........................................... $ 359,201
=============
</TABLE>
- ------------------------------
*Non-cash financing activities include reinvestment of dividends of $12,721,008.
See notes to the financial statements.
F-10
<PAGE> 53
THE MERGER FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOV. 30, 1996 NOV. 30, 1995
------------- -------------
<S> <C> <C>
Net investment income.......................................... $ 5,582,632 $ 1,164,566
Net realized gain on investments sold, securities sold short
and option contracts expired or closed....................... 39,120,063 12,544,047
Change in unrealized (depreciation) appreciation of
investments, short positions and call and put options........ (7,331,567) 13,003,454
------------ ------------
Net increase in net assets resulting from operations........... 37,371,128 26,712,067
Distributions to shareholders from:
Net investment income........................................ (1,258,321) --
Net realized gains........................................... (13,482,010) (8,613,574)
------------ ------------
Total dividends and distributions............................ (14,740,331) (8,613,574)
------------ ------------
Net increase in net assets from capital share transactions
(Note 6)..................................................... 223,370,882 54,639,595
------------ ------------
Net increase in net assets..................................... 246,001,679 72,738,088
NET ASSETS:
Beginning of year.............................................. 243,082,267 170,344,179
------------ ------------
End of year (including accumulated undistributed net investment
income of $5,323,073 and $1,031,840, respectively)........... $ 489,083,946 $ 243,082,267
============ ============
</TABLE>
See notes to the financial statements.
F-11
<PAGE> 54
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,
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of year.................. $14.87 $13.72 $13.70 $12.34 $12.51
Income from investment operations:
Net investment income (loss)...................... 0.20(2)(3) 0.08(2)(3) --(2)(3) (0.07)(2)(3) (0.12)(2)
Net realized and unrealized gain on investments... 1.24 1.78 1.08 2.10 0.65
--------- --------- --------- -------- --------
Total from investment operations.................. 1.44 1.86 1.08 2.03 0.53
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)
--------- --------- --------- -------- --------
Total distributions............................... (0.90) (0.71) (1.06) (0.67) (0.70)
--------- --------- --------- -------- --------
Net Asset Value, end of year........................ $15.41 $14.87 $13.72 $13.70 $12.34
========= ========= ========= ======== ========
Total Return........................................ 10.26% 14.26% 8.41% 17.24% 4.45%
Supplemental Data and Ratios:
Net assets, end of year (000's)................... $ 489,084 $ 243,082 $ 170,344 $ 25,173 $ 11,611
Ratio of operating expenses to average net
assets.......................................... 1.36%(1) 1.41%(1) 1.58%(1) 2.19%(1) 2.75%(1)
Ratio of interest expense and dividends on short
positions to average net assets................. 0.95% 2.42% 1.72% 1.91% 2.28%
Ratio of net investment income (loss) to average
net assets...................................... 1.36% 0.57% (0.03)% (0.57)% (1.42)%
Portfolio turnover rate(4)........................ 405.99% 418.63% 390.34% 186.00% 231.40%
Average commission rate per share................. $ 0.0434
</TABLE>
- ------------------------------
(1) For the years ended November 30, 1996, 1995, 1994, 1993 and 1992, 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, 1996, 1995, 1994, 1993 and 1992,
were 2.31%, 3.83%, 3.30%, 4.10% and 5.03%, respectively.
(2) Net investment income before interest expense and dividends on short
positions for the years ended November 30, 1996, 1995, 1994, 1993 and 1992,
was $0.35, $0.42, $0.21, $0.17, and $0.07, respectively.
(3) 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.
(4) 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
years ended November 30, 1996 and 1995 is 276.99% and 290.48%, respectively.
See notes to the financial statements.
F-12
<PAGE> 55
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1996
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 $192,909,526 have been
committed as collateral for open short investment positions and are on deposit
in segregated accounts with the brokers and custodian. The Fund's receivable
from brokers for proceeds on securities sold short and deposit at brokers for
short sales are with four major securities 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 and to distribute investment company net taxable income and net capital
gains to shareholders.
F-13
<PAGE> 56
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
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 average of
the current bid and asked price reported on the day of valuation. When an option
expires on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss if the cost of the
closing purchase transaction differs from the premium received when the option
was sold without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When an option
is exercised, the 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 average of the current bid and asked price reported
on the day of valuation. When option contracts expire or are closed, realized
gains or losses are recognized without regard to any unrealized gains or losses
on the underlying securities.
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. Foreign Securities
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
F-14
<PAGE> 57
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. Foreign Currency Translations
The books and records of the Fund are maintained in U.S. dollars. Foreign
currency transactions are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the daily
rates of exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions. For financial reporting
purposes, the Fund does not isolate changes in the exchange rate of investment
securities from the fluctuations arising from changes in the market prices of
securities. However, for federal income tax purposes the Fund does isolate and
treat as ordinary income the effect of changes in foreign exchange rates on
realized gain or loss from the sale of investment securities and payables and
receivables arising from trade date and settlement date differences.
J. 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 $7,215,531 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. ("Mercer"), 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
F-15
<PAGE> 58
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
NOTE 4 -- SHORT POSITIONS (CONTINUED)
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, cash equivalents or liquid
securities. These segregated assets are required to be adjusted daily to reflect
changes in the value of the securities sold short.
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, 1996, the
Fund paid $92,257 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, 1996 NOVEMBER 30, 1995
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Sold.......................... 28,042,908 $ 412,955,551 12,380,985 $ 172,107,462
Issued as reinvestment of
dividends................... 901,799 12,721,008 617,682 8,066,925
Redeemed...................... (13,551,329) (202,305,677) (9,065,402) (125,534,792)
----------- ------------- ---------- -------------
Net increase.................. 15,393,378 $ 223,370,882 3,933,265 $ 54,639,595
=========== ============= ========== =============
</TABLE>
Effective June 1, 1996, The Merger Fund was closed to new investors.
NOTE 7 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the year ended November 30, 1996
(excluding short-term investments and options) aggregated $1,273,857,238 and
$962,433,811, respectively.
At November 30, 1996, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were:
<TABLE>
<S> <C>
Appreciation............................................................. $23,500,905
(Depreciation)........................................................... (9,692,929)
-----------
Net unrealized appreciation on investments............................... $13,807,976
===========
</TABLE>
At November 30, 1996, the cost of investments for federal income tax
purposes was $601,383,237.
F-16
<PAGE> 59
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
NOTE 8 -- OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
year ended November 30, 1996, were as follows:
<TABLE>
<CAPTION>
PREMIUM NUMBER OF
AMOUNT CONTRACTS
------------ ---------
<S> <C> <C>
Options outstanding at November 30, 1995.................... $ 1,617,928 2,982
Options written............................................. 30,784,448 100,338
Options closed.............................................. (12,325,798) (25,827)
Options exercised........................................... (13,631,056) (48,978)
Options expired............................................. (2,611,446) (11,992)
------------ -------
Options outstanding at November 30, 1996.................... $ 3,834,076 16,523
============ =======
</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, 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, 1996, the Fund incurred $580,487 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 10 -- CREDIT FACILITY
Custodial Trust Company has made available to the Fund a $200 million
credit facility pursuant to a Loan and Security Agreement ("Agreement") dated
March 18, 1992 (subsequently amended) for the purpose of purchasing portfolio
securities. The Agreement can be terminated by either the Fund or Custodial
Trust Company with three months' prior notice. 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 6.75% during the year ended November 30, 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 year ended November 30, 1996, the Fund had an outstanding average
daily balance of $36,982,896. The maximum amount outstanding during the year
ended November 30, 1996, was $197,250,000. Interest expense amounted to
$2,505,198 for the
F-17
<PAGE> 60
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
NOTE 10 -- CREDIT FACILITY (CONTINUED)
year ended November 30, 1996. At November 30, 1996, the Fund had a loan payable
balance of $197,250,000, and the securities collateralizing the Agreement
amounted to $392,024,021.
Pursuant to the 1940 Act, the Fund is required to satisfy asset coverage
requirements on its outstanding borrowings. At November 30, 1996, the Fund
satisfied all asset coverage requirements of the 1940 Act.
NOTE 11 -- DISTRIBUTION
On December 31, 1996, a distribution of $1.426 per share aggregating
$43,838,476 was declared. The distribution was paid on December 31, 1996, to
shareholders of record on December 30, 1996 from net investment income ($0.187)
and net realized gains from investment transactions (including $1.016 taxable to
shareholders as ordinary income dividends and $0.223 applicable to long-term
capital gains).
END TO NOTES TO THE 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 LLP as the Fund's
independent accountants.
- --------------------------------------------------------------------------------
F-18
<PAGE> 61
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 financial highlights present fairly, in all material
respects, the financial position of The Merger Fund (the "Fund") at November 30,
1996, the results of its operations and its cash flows for the year then ended,
and the changes in its net assets and financial highlights for each of the two
years in the period 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at November 30, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The financial statements of The Merger Fund for the years ended November
30, 1992 through November 30, 1994 were audited by other independent accountants
whose report dated December 21, 1994 expressed an unqualified opinion on those
statements.
Price Waterhouse LLP
Milwaukee, Wisconsin
January 7, 1997
F-19
<PAGE> 62
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
A. FINANCIAL STATEMENTS
Included in the Statement of Additional Information:
Report of Independent Accountants, Dated January 7, 1997.
Schedule of Investments, November 30, 1996.
Schedule of Securities Sold Short, November 30, 1996.
Schedule of Call Options Written, November 30, 1996.
Statement of Assets and Liabilities, November 30, 1996.
Statement of Operations for the Year Ended November 30,
1996.
Statement of Cash Flows for the Year Ended November 30,
1996.
Statements of Changes in Net Assets for the Years Ended
November 30, 1996 and November 30, 1995.
Financial Highlights.
Notes to Financial Statements, November 30, 1996.
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.)
C-1
<PAGE> 63
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.)
C-2
<PAGE> 64
Exhibit 10 Opinion of Counsel as to Legality of
Securities Being Registered.
Exhibit 11 Consent of Price Waterhouse 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.
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
5,149 as of January 31, 1997.
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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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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
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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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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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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>
<C> <C>
Net underwriting discounts and commissions: $0.
Compensation for redemption and repurchase: $0.
Brokerage commissions: $0.
Other compensation: $49,542 (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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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 7th
day of February 1997.
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 the paragraph (b) of Rule 485 under
the Act.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Frederick W. Green President February 7, 1997
------------------------------ & Trustee
Frederick W. Green
/s/Bonnie L. Smith Vice-President, February 7, 1997
------------------------------ Treasurer
Bonnie L. Smith & Secretary
/s/William H. Bohnett Trustee February 7, 1997
------------------------------
William H. Bohnett
/s/Frank A. McDermott, Jr. Trustee February 7, 1997
------------------------------
Frank A. McDermott, Jr.
/s/James P. Logan III Trustee February 7, 1997
------------------------------
James P. Logan III
/s/Michael J. Downey Trustee February 7, 1997
------------------------------
Michael J. Downey
</TABLE>
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<PAGE> 71
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- Consent of Price Waterhouse 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> 72
<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.
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, 1997
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
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incoporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 20 to the registration statement on Form N-1A (the "Registration
Statement") of our report appearing in the November 30, 1996 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, 1997
<PAGE> 1
Exhibit 14-4
INDIVIDUAL RETIREMENT ACCOUNT DISCLOSURE STATEMENT
The following information is the disclosure statement required by Federal tax
regulations. You should read this Disclosure Statement, IRS Form 5305-A
Individual Retirement Custodial Account (the "Custodial Account Agreement"),
and the prospectuses for the Funds in which your IRA contributions will be
invested.
REVOCATION OF YOUR IRA
You have the right to revoke your Merger Fund IRA and receive the entire amount
of your contribution by notifying ______________________________, the custodian
of your IRA, in writing within seven days of establishment of your IRA. If you
revoke your IRA within seven days, you are entitled to a return of the entire
amount paid by you, without adjustment for such items as sales commission,
administrative expenses, or fluctuations in market value. If you decide to
revoke your IRA, you should deliver or mail notice to: Firstar Trust Company,
615 East Michigan Avenue, Milwaukee, Wisconsin 53202.
This notice should be signed by you and include the following:
1. the date;
2. a statement that you elect to revoke your IRA;
3. your IRA account number;
4. the date your IRA was established; and
5. your signature and your printed or typed name.
Mailed notice will be deemed given on the date that it is postmarked if it is
deposited in the United States mail, first class postage prepaid and properly
addressed. This means that if you mail your notice, it must be postmarked on
or before the seventh day after your IRA was opened. A revoked IRA will be
reported to the Internal Revenue Service and the Depositor on Forms 1099-R and
5498.
YOUR INDIVIDUAL RETIREMENT ACCOUNT (IRA)
You have opened a Merger Fund Individual Retirement Account which is an account
for the exclusive benefit of you and your beneficiaries, created by a written
instrument (the Custodial Account Agreement). The following requirements apply
to your IRA:
1. Contributions, transfers, and rollovers may be made only in "cash" by
check, draft, wire transfer, or other form acceptable to the
Custodian;
2. The Custodian must be a bank;
3. No part may be invested in life insurance;
4. Your interest must be nonforfeitable (not subject to escheat laws);
5. The assets of the custodial account may not be mixed with other
property except in a common investment fund; and
6. You must begin receiving distributions from your account no later than
April 1 of the year following the year in which you become 70-1/2
years old; and distribution must be completed over a period that is
not longer than the joint life expectancy of you and your beneficiary.
CONTRIBUTIONS
You may not contribute more than 100% of your compensation or earnings from
self-employment, and the maximum contribution is $2,000 per tax year. If your
spouse is not
<PAGE> 2
employed or earns less than you earn, you may also contribute to a Spousal IRA.
The maximum contribution to the Spousal IRA is the lesser of (a) $2,000, or (b)
the combined compensation of both spouses, minus the dollar amount of the IRA
contribution made by the compensated (or more highly compensated) spouse.
EXCESS CONTRIBUTIONS
Amounts contributed to your IRA in excess of the allowable limit will be
subject to a nondeductible excise tax of 6% for each year until the excess is
used up as an allowable contribution (in a subsequent year) or returned to you.
A distribution of excess contributions must be included in your taxable income
when distributed, and may also be subject to the 10% excise tax on early
distributions discussed below. The 6% excise tax will not apply if the excess
contribution and earnings applicable to it are distributed by the due date for
your Federal Income Tax Return, including extensions. If such a distribution
is made by the due date of your tax return, only the earnings are taxable.
INCOME TAX DEDUCTION
Your contribution may be deductible on your Federal Income Tax Return.
However, there is a phase-out of the IRA deduction if either you or your spouse
(if you file a joint return) is an active participant in an employer-sponsored
retirement plan. The IRA deduction is reduced proportionately as adjusted
gross income increases from $25,000 to $35,000 for a single individual, $40,000
to $50,000 for a married couple filing a joint return, or from $0 to $10,000
for a married individual who is an active participant and files a separate
return. The amount of the reduction is equal to 20% of the amount by which
your adjusted gross income exceeds the $25,000, $40,000, and $0 amounts,
respectively. Your contributions in excess of the permitted deduction will be
nondeductible contributions.
TAXATION OF DISTRIBUTIONS
The income of your IRA is not taxed until the money is distributed to you.
Distributions are taxable as ordinary income when received except that the
amount of any distribution representing non-deductible contributions is not
taxed.
In general, you may "rollover" a distribution from another IRA, an eligible
rollover distribution from your employer's qualified plan, or distributions
from certain tax deferred annuities or accounts. If a distribution is rolled
over, i.e. deposited to your IRA within 60 calendar days of receipt, the amount
rolled over is not taxable. The IRS enforces the 60-day time limit strictly.
You may rollover a portion of a distribution in which case the remainder will
be subject to tax. The IRS requires that distributions from your employer's
qualified plan have 20% of the distribution withheld for income tax unless your
money is transferred in a direct asset transfer to an eligible retirement plan
such as another qualified plan or IRA. The rules regarding rollovers are
complex and you should consult your tax adviser prior to rolling over all or
part of a distribution.
Distributions under $10 will not be reported to you on IRS Form 1099-R after
December 31, 1996, as allowed under IRS regulations. However, you must still
report these distributions to the IRS on IRS Form 1040 as well as other forms
which may be required to properly file your tax return.
PENALTY TAX ON CERTAIN TRANSACTIONS
EXCESS CONTRIBUTIONS
<PAGE> 3
If you make an excess contribution to your IRA and it is not corrected on a
timely basis, an excise tax of 6% is imposed on the excess amount. This tax
will apply each year to any part or all of the excess which remains in your
account.
EARLY DISTRIBUTIONS
Your receipt or use of any portion of your account before you attain age 59-1/2
is considered an early distribution unless the distribution is a result of
death or disability or is rolled over, or if it is used specifically for
deductible medical expenses which exceed 7.5% of your adjusted gross income, or
if it is used for health insurance cost due to your unemployment (consult IRS
Publication 590 for specifics on these exceptions). The amount of any early
taxable distribution (excluding any amount representing a return of
nondeductible contributions) is subject to a penalty tax equal to 10% of the
distribution. A pre-age 59-1/2 taxable distribution will be exempt from the
10% penalty tax if it is part of a scheduled series of substantially equal
payments over your life, or over the joint life expectancy of you and a
beneficiary, or if it was made because you became disabled. If you request a
distribution in the form of a series of substantially equal payments, and you
modify the payments before 5 years have elapsed and before attaining age
59-1/2, the 10% additional income tax will apply retroactively to the year
payments began through the year of such modification. This 10% penalty is in
addition to any Federal income tax that is owed at distribution.
REQUIRED DISTRIBUTIONS
You are required to begin receiving minimum distributions from your IRA no
later than April 1 following the calendar year in which you reach the age of
70-1/2. The distribution may be paid either in installments, or in a lump sum.
The installments may be paid over your life, or over the joint and last
survivor life expectancy of you and your designated beneficiary. If the amount
distributed during a taxable year is less than the minimum amount required to
be distributed, the recipient is subject to a penalty tax equal to 50% of the
difference between the amount distributed and the amount required to be
distributed.
EXCESS DISTRIBUTIONS
If you receive more than the greater of $112,500 (subject to annual
cost-of-living adjustments) or $150,000 in a calendar year from certain
retirement plans, a 15% tax is imposed on the amount in excess of that amount.
(Special rules may apply to benefits accumulated prior to August 1, 1986.) All
distributions from IRAs, qualified retirement plans, and tax-sheltered
annuities must be added together for purposes of this excise tax.
There are several possible favorable elections that may reduce or eliminate
this tax. The rules are very complicated. You should consult a competent tax
adviser. The 15% excess distribution tax has been suspended for distributions
received in 1997, 1998, and 1999.
ADDITIONAL INFORMATION ON DISTRIBUTIONS
An IRA distribution request form is available from the Custodian, and should be
obtained and used to request any distribution from your IRA.
PROHIBITED TRANSACTIONS
If you or your beneficiary engage in any prohibited transaction (such as any
sale, exchange, borrowing, or leasing of any property between you and the
account; or any other interference with the independent status of the account),
the account will lose its exemption from tax and be treated as having been
distributed to you. The value of the entire account will be includable in your
gross income. If you are under age 59-1/2, you would also be subject to the
10% penalty tax on early distributions.
<PAGE> 4
If you or your beneficiary use (pledge) all or any part of your IRA as security
for a loan, then the portion so pledged will be treated as if distributed to
you, and will be taxable to you as ordinary income, and subject to a 10%
penalty tax if you have not attained age 59-1/2 during the year which you make
such a pledge.
INCOME TAX WITHHOLDING
The Custodian is required to withhold income tax from any distribution from
your IRA to you at the rate of 10% unless you choose not to have tax withheld.
You may elect out of withholding by advising the Custodian in writing, prior to
the distribution, that you do not want tax withheld from the distribution.
This election may be made on IRS Form W-4P, or any other form acceptable to the
Custodian. If you do not elect out of tax withholding, you may direct the
Custodian to withhold an additional amount of tax in excess of 10%.
ADDITIONAL INFORMATION
For more detailed information, you may obtained Publication 590, Individual
Retirement Arrangements (IRAs) from any district office of the Internal Revenue
Service or by calling 1-800-TAX-FORM.
Any IRA transaction may have tax consequences; consult your tax adviser to
obtain information about the tax consequences in connection with your
particular circumstances.
INFORMATION ABOUT YOUR INVESTMENTS
A mutual fund investment involves investment risks, including possible loss of
principal. In addition, growth in the value of your account is neither
guaranteed nor projected due to the characteristics of a mutual fund
investment. Detailed information about the shares of each mutual fund
available for investment by your IRA must be furnished to you in the form of a
prospectus. The method for computing and allocating annual earnings is set
forth in the prospectus. (See prospectus section entitled "Dividends.") If
you made an initial contribution of $1,000 on the first day of a calendar year
and no further investment during that year, your contribution would also be
subject to certain costs and expenses which would reduce any yield you might
obtain from your investment. (See the prospectus section entitled "Shareholder
and Fund Expenses and Costs" and the sections referred to therein.) For
further information regarding expenses, earnings, and distributions, see the
Fund's financial statements, prospectus and/or statement of additional
information.
FEES AND CHARGES
The charges in connection with your IRA are set forth in the Application. The
Custodian may also charge a service fee in connection with any distribution
from your IRA.
IRS APPROVED FORM
Your IRA is the Internal Revenue Service's model custodial account contained in
IRS Form 5305-A. Certain additions have been added in Article VIII of the
form. By following this form, your IRA meets the requirements of the Internal
Revenue Code. However, the IRS has not endorsed the merits of the investments
allowed under the IRA. Form 5305-A may also be used by qualifying employers in
conjunction with Form 5305-SEP to establish a simplified employee pension plan
(SEP) on behalf of employees. If your IRA is part of a SEP, details regarding
SEPs should also be provided by your employer.
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<NAME> THE MERGER FUND
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<S> <C>
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<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
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<NET-INVESTMENT-INCOME> 5,583
<REALIZED-GAINS-CURRENT> 39,120
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<NET-CHANGE-FROM-OPS> 37,371
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<DISTRIBUTIONS-OF-INCOME> 1,258
<DISTRIBUTIONS-OF-GAINS> 13,482
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<NUMBER-OF-SHARES-REDEEMED> 13,551
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</TABLE>
