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As filed with the
Securities and Exchange Commission on November 25, 1998
File No. 2-76969
File No. 811-3445
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. 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 23 [X]
THE MERGER FUND
(Exact name of Registrant as Specified in Charter)
100 Summit Lake Drive
Valhalla, New York 10595
(Address of Principal Executive Offices) (Zip Code)
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
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
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THE
MERGER
FUND(R)
100 Summit Lake Drive
Valhalla, New York 10595
PROSPECTUS
JANUARY __, 1999
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
Table of Contents
<TABLE>
Page No.
--------
<S> <C>
RISK/RETURN SUMMARY................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.................................... 4
Risk Factors.......................................................... 5
Leverage Through Borrowing............................................ 5
Short Sales and Put and Call Options.................................. 6
Investment Restrictions............................................... 7
INVESTMENT ADVISER.................................................... 8
DISTRIBUTION ARRANGEMENTS............................................. 8
PLANS OFFERED BY THE FUND............................................. 8
The Merger Fund IRA Plan.............................................. 8
Fund Investors Keogh Plans............................................ 9
HOW TO PURCHASE SHARES................................................ 9
Automatic Investment Plan............................................. 10
NET ASSET VALUE....................................................... 10
REDEMPTIONS........................................................... 11
Systematic Withdrawal Plan............................................ 12
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS............................... 12
FINANCIAL HIGHLIGHTS.................................................. 14
</TABLE>
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RISK/RETURN SUMMARY
Investment Goal: The Fund seeks to achieve capital growth by engaging in
merger arbitrage.
Principal Investment Under normal market conditions, the Fund invests at
Strategies: least 65% of its assets in the equity securities of
companies which are involved in publicly announced
mergers, takeovers, tender offers, leveraged buyouts,
spin-offs, liquidations and other corporate
reorganizations. Merger arbitrage is a highly
specialized investment approach generally designed to
profit from the successful completion of such
transactions. As compared with conventional investing,
the Adviser considers the Fund's merger arbitrage
investment results to be less volatile than overall
stock prices.
Principal Investment The principal risk associated with the Fund's merger
Risks: arbitrage investment strategy is that certain of the
proposed reorganizations in which the Fund invests
may be renegotiated or terminated, in which case losses
may be realized. The Fund invests a portion of
its assets to seek short-term capital appreciation. This
can be expected to increase the portfolio turnover rate
and cause increased brokerage commission costs. More
rapid portfolio turnover also exposes taxable
shareholders to a higher current realization of capital
gains and a potentially larger current tax liability.
The Fund is not a "diversified" fund within the meaning
of the Investment Company Act of 1940. Accordingly, the
Fund may invest its assets in a relatively small number
of issuers, thus making an investment in the Fund
potentially more risky than an investment in a
diversified fund which is otherwise similar to the Fund.
Who Should Invest in The Fund is not intended to provide a balanced
the Fund: 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.
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BAR CHART AND PERFORMANCE TABLE
The bar chart and table shown below indicate the risks of investing in
the Fund. The bar chart shows changes in the performance of the Fund's shares
from year to year over a nine-year period. The Adviser began managing the Fund
on January 31, 1989. Prior to that time, the Fund was managed in part by other
advisers with different investment objectives. The table following the bar chart
shows how the Fund's average annual returns for the listed periods compare to
those of the S&P 500, a widely used composite index of 500 publicly traded
stocks.
The Fund's past performance does not necessarily indicate how the Fund
will perform in the future.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998
----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Merger Fund 1.10% 16.84% 5.34% 17.69% 7.13% 14.15% 9.95% 11.65%
</TABLE>
During the nine-year period shown in the above chart, the highest
quarterly return was 9.38% (for the quarter ended December 31, 1990) and the
lowest quarterly return was (10.04)% (for the quarter ended September 30, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Past 1 Year Past 5 Years Since January 31, 1989
----------- ------------ ----------------------
<S> <C> <C> <C>
The Merger Fund
S&P 500
</TABLE>
2
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FEES AND EXPENSES OF THE FUND
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY
AND HOLD SHARES OF THE FUND.
<TABLE>
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your account)
Maximum Sales Charge (Load) Imposed on Purchases (as None
a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage None
of offering price)
Maximum Sale Charge (Load) Imposed on Reinvested None
Dividends and Other Distributions
Redemption Fee (as a percentage of amount redeemed) None(1)
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees 1.00%
Distribution and/or Service (12b-1) Fees 0.15%
Other Expenses 0.18%(2)
Total Annual Fund Operating Expenses 1.33%
</TABLE>
- ----------
(1) Shareholders will be assessed fees for outgoing wire transfers,
returned checks and stop payment orders at prevailing rates charged by
Firstar Mutual Fund Services, LLC, the Fund's transfer agent.
(2) Each IRA and Keogh account will be charged a $12.50 annual maintenance
fee as well as fees for certain transactions.
EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN
THE FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your
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costs would be:
<TABLE>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$135 $421 $729 $1601
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund seeks to achieve capital growth by engaging in merger
arbitrage. The Fund's investment adviser is Westchester Capital Management, Inc.
(the "Adviser").
Under normal market conditions, the Fund invests 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, the Adviser considers the Fund's
merger arbitrage investment results to be less volatile than overall 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 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.
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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. The principal risk
associated with the Fund's merger arbitrage investments is that certain of the
proposed reorganizations in which the Fund invests may be renegotiated or
terminated, in which case losses may be realized, since the Fund's investment
strategy generally depends upon the successful completion of these transactions.
Also, because 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 invests a portion of its assets to seek short-term capital
appreciation, which increases the portfolio turnover rate and causes increased
brokerage commission costs. A high turnover rate exposes taxable 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.
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and the Fund's service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Y2K Problem." The Adviser is
taking steps to address the Y2K Problem with respect to the computer systems
that it uses and understands that comparable steps are being taken by the Fund's
other major service providers.
Leverage Through Borrowing
The Fund may borrow from banks to increase its portfolio holdings of
securities. Such borrowings may be on a secured or unsecured basis at fixed or
variable rates of interest. The Investment Company Act of 1940 requires the Fund
to maintain continuous asset coverage of not less than 300% with respect to all
borrowings. This allows the Fund to borrow for such purposes an amount (when
taken together with any borrowings for temporary or emergency purposes as
described below) equal to as much as 50% of the value of its net assets (not
including such
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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
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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. 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 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 price fluctuation limits,
either of which may make it difficult or impossible to close a position when so
desired.
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
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<PAGE> 12
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 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 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. The Fund paid the Adviser an advisory fee of 1.0% of the Fund's
average daily net assets for the most recent fiscal year.
Mr. Frederick W. Green has served as President of the Adviser since
1980 and also serves as the President and a Trustee of the Fund. Ms. Bonnie L.
Smith has served as Vice President of the Adviser since 1986 and also serves as
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.
DISTRIBUTION ARRANGEMENTS
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 any broker-dealer with whom the Fund has entered into a contract to
distribute the Fund's shares, or any other qualified financial services firm,
compensation for distribution and/or shareholder-related 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, which may be 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 and the Fund may itself be
reimbursed under the Plan for its expenses of distribution.
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
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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 Mutual Fund Services, LLC to the Fund.
The Fund also makes available to qualifying shareholders a "Roth IRA,"
which is a form of IRA created in 1997. Shareholders should consult with their
own financial advisers to determine eligibility.
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 Mutual Fund Services, LLC to the Fund.
HOW TO PURCHASE SHARES
Shares of the Fund may be purchased at net asset value without any
sales or other charge by sending a completed application form to:
The Merger Fund
c/o Firstar Mutual Fund Services, LLC
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:
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Firstar Mutual Fund Services, LLC
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 Fund Investors 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 Mutual Fund Services,
LLC, 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, Firstar Bank Milwaukee, N.A., 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 Mutual Fund
Services, LLC for the purchase of Fund shares and to notify Firstar Mutual Fund
Services, LLC 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 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,
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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 Mutual Fund Services, LLC
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 seven days to clear checks.
A redemption request will be considered to have been received in
"proper order" if the following conditions are satisfied:
(i) the request is in writing, indicates the number of shares
to be redeemed and identifies the shareholder's account number;
(ii) the request is signed by the shareholder(s) exactly as
the shares are registered;
(iii) the request is accompanied by certificates, if any,
issued representing the shares, which have been endorsed for transfer (or
are themselves accompanied by an endorsed stock power) exactly as the
shares are registered; and
(iv) if the redemption proceeds are requested to be sent other
than to the address of record or if the proceeds of a requested redemption
exceed $25,000, the signature(s) on the request is/are guaranteed by an
eligible signature guarantor.
Questions concerning a redemption request may be addressed to the Fund
at its principal office. No redemption request will become effective until all
documents have been received in "proper order" by Firstar Mutual Fund Services,
LLC. The Fund does not accept telephone redemptions.
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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.
Shareholders who effect redemptions by wire transfer will pay a $12.00
wire transfer fee to the Transfer Agent to cover costs associated with the
transfer. In addition, a shareholder's bank may impose a charge for receiving
wires.
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 Mutual Fund
Services, LLC 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 Mutual Fund Services, LLC.
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment
income and net capital gain in December. 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. The Fund expects that, as a
result of its investment objectives and strategies, its distributions will
consist primarily of short-term capital gains, which are taxable as ordinary
income. Certain dividends or distributions declared in October, November or
December will be taxed to shareholders as if received in December if they are
paid during the following January.
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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 tax
consequences to them of their ownership of the Fund's shares.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). Information for
1995 through 1998 has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the Fund's Annual
Report, which is available upon request. Information for 1994 was audited by the
Fund's prior independent accountants whose report dated December 21, 1994
expressed an unqualified opinion on those statements. Effective December 1,
1996, the Fund changed its fiscal year to end on September 30 in each year,
commencing with the fiscal year which ran from December 1, 1996 through
September 30, 1997.
THE MERGER FUND CONDENSED FINANCIAL INFORMATION
(FOR THE FISCAL YEARS 1994 - 1998 (Audited)
<TABLE>
<CAPTION>
Ten Months
Year ended ended
September 30, September 30, Year ended November 30,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 15.35 $ 15.41 $ 14.87 $ 13.72 $ 13.70
--------- --------- --------- --------- ---------
Income from investment operations:
Net Investment Income/(Loss) 0.20(2)(3) 0.02(2)(3) 0.20(2)(3) 0.08(2)(3) --(2)(3)
Net Gain/(Loss) on securities (realized
and unrealized) (0.05) 1.35 1.24 1.78 1.08
--------- --------- --------- --------- ---------
Total from Investment Operations 0.15 1.37 1.44 1.86 1.08
Less Distributions:
Dividends from net investment income (0.03) (0.19) (0.08) -- --
Distributions (from net capital gains) (1.57) (1.24) (0.82) (0.71) (1.06)
--------- --------- --------- --------- ---------
Total Distributions (1.60) (1.43) (0.90) (0.71) (1.06)
--------- --------- --------- --------- ---------
Net Asset Value, end of period $ 13.90 $ 15.35 $ 15.41 $ 14.87 $ 13.72
========= ========= ========= ========= =========
Total Return 0.82% 9.68%(5) 10.26% 14.26% 8.41%
Supplemental Data and Ratios:
Net Assets, end of year (000's) $ 426,392 $ 445,987 $ 489,084 $ 243,082 $ 170,344
Ratio of Expenses to Average Net Assets 1.33%(1) 1.36%(1)(6) 1.36%(1) 1.41%(1) 1.58%(1)
Ratio of interest expense and dividends
on short positions to average net assets 1.93% 2.93%(6) 0.95% 2.42% 1.72%
Ratio of Net Income/(Loss) to Average
Net Assets 1.36% 0.13%(6) 1.36% 0.57% (0.03)%
Portfolio Turnover Rate 355.38% 271.24% 276.99% 290.48% 390.34%(4)
</TABLE>
- ----------
(1) For the fiscal years ended September 30, 1998 and 1997 and for the
fiscal years ended November 30, 1996, 1995 and 1994, the operating
expense ratio excludes interest expense and dividends on short
positions. The ratios including interest expense and dividends on short
positions for the fiscal years ended September 30, 1998 and 1997 and
for the fiscal years ended November 30, 1996, 1995 and 1994, were
3.26%, 4.29%, 2.31%, 3.83% and 3.30%, respectively.
(2) Net investment income before interest expense and dividends on short
positions for the fiscal years ended September 30, 1998 and 1997 and
for the years ended November 30, 1996, 1995 and 1994 was $0.49,
$0.38, $0.35, $0.42 and $0.21, respectively.
(3) Net investment income (loss) per share represents net investment income
for the respective fiscal 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.
(5) Not annualized.
(6) Annualized.
Further information regarding the Fund's performance is contained in the Fund's
Annual Report, a copy of which may be obtained without charge.
14
<PAGE> 19
For investors who want more information about the Fund, the following documents
are available upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION: The Fund's SAI provides more detailed
information about the Fund and is incorporated into this Prospectus by
reference.
The Fund's Annual Report, Semi-Annual Report and SAI are available, without
charge, upon request by contacting the Fund's Transfer Agent, Firstar Mutual
Fund Services, LLC, at 800-343-8959. Shareholder inquiries should be directed to
Firstar Mutual Fund Services, LLC, Mutual Fund Services, P.O. Box 701,
Milwaukee, WI 53201-0701. Correspondence sent by overnight courier should be
sent to Firstar Mutual Fund Services, LLC, Third Floor, 615 East Michigan
Street, Milwaukee, WI 53202.
You also can review the Fund's reports and SAI at the Securities and Exchange
Commission's Public Reference Room. Text-only copies can be obtained from the
SEC for a fee by writing to or calling the Public Reference Room of the SEC,
Washington, D.C. 20549-6009. 800-SEC-0330. Copies also can be obtained free
from the SEC's website at www.sec.gov.
THE
MERGER
FUND(R)
Investment Company Act
File No. 811-3445
<PAGE> 20
-----------------------------------------------------
THE MERGER FUND(R)
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
January ___, 1999
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of The Merger Fund dated January ___,
1999, a copy of which may be obtained without charge by contacting the Fund's
Transfer Agent, Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701 or (800) 343-8959.
The Fund's financial statements are incorporated by reference in this
Statement of Additional Information from the Fund's Annual Report.
<PAGE> 21
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......................................................... 6
Investment Adviser and Advisory Contract................................. 6
Other Service Providers.................................................. 7
MANAGEMENT................................................................. 9
Trustees and Officers.................................................... 9
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
PERFORMANCE INFORMATION.................................................... 14
Total Return............................................................. 14
Other Information........................................................ 14
Comparison of Fund Performance........................................... 15
TAX STATUS................................................................. 16
ORGANIZATION AND CAPITALIZATION............................................ 22
General ................................................................. 22
Shareholder and Trustee Liability........................................ 22
ALLOCATION OF PORTFOLIO BROKERAGE.......................................... 23
PORTFOLIO TURNOVER......................................................... 24
INDEPENDENT ACCOUNTANTS.................................................... 24
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR.............................. 24
COUNSEL.................................................................... 26
</TABLE>
i
<PAGE> 22
<TABLE>
<S> <C>
EXPERTS.................................................................... 26
FINANCIAL STATEMENTS....................................................... 26
APPENDIX................................................................... A-1
Covered Option Writing................................................... A-1
Money Market Instruments................................................. A-1
Repurchase Agreements.................................................... A-1
Short Selling............................................................ A-2
</TABLE>
ii
<PAGE> 23
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> 24
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.
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 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
2
<PAGE> 25
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 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
3
<PAGE> 26
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.
(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),
4
<PAGE> 27
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.
(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
5
<PAGE> 28
not constitute a violation of that restriction.
INVESTMENT ADVISER
(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 Fund'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 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.
6
<PAGE> 29
For the fiscal years ended November 30, 1996, September 30, 1997 and
September 30, 1998, the Fund incurred advisory fees of $4,114,105, $3,864,592
and $4,722,291, respectively, to the Adviser.
Other Service Providers.
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., a registered investment adviser principally engaged in
personal financial counseling. 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 July 14, 1998 (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 distribution and/or
shareholder-related 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 the Trustees will review, at least quarterly, a
report of distribution expenses incurred under the Plan and the purposes for
which such expenses were incurred. The Plan will remain in effect from year to
year provided such continuance is approved at least annually by the vote of a
majority of the Fund's Trustees who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund, the Adviser or Mercer and who
have no direct or indirect interest in the operation of the Plan or any related
agreement (the "Rule 12b-1 Trustees"), cast in person at a meeting called for
the purpose of voting on such approval, and additionally by a vote of either a
majority of the Fund's Trustees or a majority of the outstanding shares of the
Fund.
The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees or by vote of a majority of the Fund's outstanding shares.
The Plan may not be amended to increase materially the amount of distribution
expenses payable under the Plan without approval of the Fund's shareholders. In
addition, all material amendments to the Plan must be approved by the Trustees
in the manner described above.
The Fund has entered into service agreements with, among others,
Charles Schwab & Company, Inc. ("Schwab") and National Financial Services
Corporation ("NFSC"). Though the terms of the Fund's agreements vary, service
providers generally are required to provide various shareholder services to the
Fund, including records maintenance, shareholder communications, transactional
services, tax information and reports, and facilitation of purchase and
redemption orders. Payments generally are made under the Plan at the annual rate
of 0.25% of the value of the Fund's
7
<PAGE> 30
shares held in accounts maintained by each such service provider. In the case of
the Fund's agreements with Schwab and NFSC, the Adviser is required to pay an
additional 0.10% of the value of all Fund shares held in their respective
accounts. The Fund is required to make these payments to its service providers
regardless of any actual expenses incurred by them.
The Fund incurred total expenses of $__________, $___________ and
$_______ during fiscal years 1998, 1997 and 1996, respectively, under its
agreements with its principal underwriter and other service providers. During
fiscal 1998, the Fund paid or accrued $______ to Mercer, $_________ to Schwab
and $_________ to NFSC. During 1997, the Fund paid or accrued $______ to Mercer,
$_________ to Schwab and $_________ to NFSC. During 1996, the Fund paid or
accrued $______ to Mercer, $_________ to Schwab and $_________ to NFSC.
During the last fiscal year, the Fund paid or incurred the following
amounts for the following services under the Plan:
Advertising................................................... $
Printing and mailing prospectuses to
other than current shareholders...............................
Compensation to broker-dealers................................
Compensation to sales personnel...............................
Interest, carrying or other
financing charges.............................................
Other.........................................................
8
<PAGE> 31
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* 52 President and Trustee President of Westchester Capital
Westchester Capital Management, Management, Inc., the Fund's
Inc. Adviser.
100 Summit Lake Drive
Valhalla, NY 10595
Bonnie L. Smith 50 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* 50 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 62 Trustee President of Logan, Chace &
Logan, Chace & Company, Inc. Company, Inc., an executive
420 Lexington Avenue search firm.
New York, NY 10170
Michael J. Downey 55 Trustee Consultant and independent
2 Parsons Lane financial adviser since July
Rochester, NY 14610 1993. President and Director of
Asia Pacific Fund, Inc.
</TABLE>
9
<PAGE> 32
<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 36 Assistant Secretary Vice President of Firstar Mutual
Firstar Mutual Fund Services, LLC Fund Services, LLC, and
615 East Michigan Street Manager of Fund
Milwaukee, WI 53202 Administration and Compliance
since August 1994. Previously,
manager with Arthur Andersen
LLP.
Michael Peck 31 Assistant Secretary Compliance Administrator and
Firstar Mutual Fund Services, LLC other positions, Firstar Mutual
615 East Michigan Street Fund Services, LLC.
Milwaukee, WI 53202
</TABLE>
As of November 17, 1998, the Trustees and officers of the Fund and the
Adviser's retirement funds, as a group, owned less than 1% of the Fund's
outstanding shares.
Remuneration.
Management considers that Messrs. Logan 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 (which are $6,000 per year and
$1,000 per meeting attended effective January 1, 1999), 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 September 30, 1998, the Fund paid
the following in Trustees' fees:
COMPENSATION TABLE
(for the fiscal year ended September 30, 1998)
<TABLE>
<CAPTION>
Aggregate Pension or Estimated
Compensation Retirement Benefits Annual Total
from Registrant Accrued as Part of Benefits upon Compensation
Name of Trustee 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
(resigned October 13,
1998) 8,000 0 0 8,000
========================== ======================= ======================== ======================= ========================
</TABLE>
10
<PAGE> 33
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 Mutual Fund Services, LLC ("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
Bank Milwaukee, N.A. 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 Bank Milwaukee, N.A. in its capacity as custodian.
The Fund also makes available to qualifying shareholders a "Roth IRA,"
which is a form of IRA created in 1997. Shareholders should consult with their
own financial advisers to determine eligibility.
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
11
<PAGE> 34
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 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.
12
<PAGE> 35
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 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.
13
<PAGE> 36
PERFORMANCE INFORMATION
Total Return.
Average annual total return quotations which may used in the Fund's
advertising and promotional materials are calculated according to the following
formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
Under the foregoing formula, the time periods used in any advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
The calculation assumes an initial $1,000 payment and assumes all
dividends and distributions by the Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.
A Fund may also calculate total return on a cumulative basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating cumulative total return can be expressed as follows:
Cumulative Total Return = [(ERV) - 1]
P
Other Information.
The Fund's performance data quoted in any advertising and
other promotional materials represents past performance and is not intended to
predict or indicate future results. The return and principal value of an
investment in the Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount.
14
<PAGE> 37
Comparison of Fund Performance.
The performance of the Fund may be compared to data prepared
by Lipper Analytical Services, Inc., Morningstar, Inc. or other independent
services which monitor the performance of investment companies, and may be
quoted in advertising in terms of its ranking in each applicable universe. In
addition, the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal
and USA Today.
The Fund may from time to time use the following unmanaged index for
performance comparison purposes:
S&P 500 Index -- the S&P 500 is an index of 500 stocks designed to
mirror the overall equity market's industry weighting. Most, but not all, large
capitalization stocks are in the Index. There are also some small capitalization
names in the Index. The Index is maintained by Standard & Poor's Corporation. It
is market capitalization weighted. There are always 500 issuers in the S&P 500.
Changes are made by Standard & Poor's as needed.
15
<PAGE> 38
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.
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 certain
undistributed amounts of ordinary income and capital gain 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
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.
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
16
<PAGE> 39
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 deemed 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.
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 received by
corporations from the Fund may be eligible for the 70% deduction for dividends
received. 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
Section 1059 of 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 (91 days for
preferred stock) during the 90-day (180 days for preferred stock) period
beginning on the date which is 45 days (90 days for preferred stock) before the
ex-dividend date (for this purpose, holding periods are reduced for periods
where the risk of loss with respect to shares is diminished). 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. A noncorporate
shareholder's net capital gains will be taxed at a maximum rate of 20% for
property held more than 12 months.
A redemption of Fund shares by a shareholder will result in the
recognition of taxable gain or loss depending upon the difference between the
amount realized and his tax basis in his Fund shares. Such gain or loss is
treated as a capital gain or loss if the shares are held as capital assets. In
the case of a noncorporate shareholder, if such shares were held for more than
12 months at the time of disposition such gain will be long-term capital gain
and will be taxed at a maximum effective rate of 20%; and if such shares were
held for one year or less at the time of disposition, such gain will be
short-term capital gain and will be taxed at a maximum effective rate of 39.6%.
Capital gains of corporate shareholders will be long-term or short-term
depending upon whether the shareholder's holding period exceeds one year, and
are not subject to varying effective tax rates. However, any loss realized upon
the redemption of shares within six months from the date of their purchase will
be
17
<PAGE> 40
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.
Assuming sufficient earned income, an individual may generally
contribute up to $2,000 per year to a regular IRA. A regular IRA contribution
may be deductible if (i) neither the individual nor his or her spouse is an
active participant in an employer's retirement plan ("Plan Participant"), or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income ("AGI") below a certain level ("Threshold Level"). For 1999, the
Threshold Level is $51,000 for married individuals filing a joint return (with a
phase-out of the deduction for AGI between $51,000 and $61,000) and $31,000 for
a single individual (with a phase-out of the deduction for AGI between $31,000
and $41,000). The Threshold Levels are scheduled to continue to gradually
increase through the year 2007. There is a separate Threshold Level and
phase-out limit that applies to certain individuals who are not Plan
Participants but whose spouses are Plan Participants. These "non-working
spouses" can make deductible IRA contributions for a taxable year if their AGI
does not exceed $150,000 (with a phase-out of the deduction for AGI between
$150,000 and $160,000).
There are a number of additional forms of IRA that may be available,
including a Roth IRA and an Educational IRA. Shareholders should
18
<PAGE> 41
contact their tax advisers for more information regarding their eligibility to
make IRA contributions and the advisability of same.
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.
If the Fund makes a "constructive sale" of an "appreciated financial
position," the Fund will recognize gain as if the position were sold at fair
market value on the date of such constructive sale. Constructive sales include
short sales of substantially identical property, offsetting notional principal
contracts with respect to substantially identical property and futures and
forward contracts to deliver substantially identical property. However,
transactions that otherwise would be treated as constructive sales are
disregarded if closed within 30 days after the close of the taxable year and the
Fund holds the position and does not hedge such position for 60 days thereafter.
In addition, to the extent provided in regulations (which have not yet been
promulgated), a constructive sale also occurs if a taxpayer enters into one or
more other transactions (or acquires one or more positions) that have
"substantially the same effect" as the transactions described above. Appreciated
financial positions include positions with respect to stock, debt, instruments
or partnership interests if gain would be recognized on a disposition at fair
market value. If the constructive sale rules apply, adjustments are made to the
basis and holding period of the affected financial position.
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. The character of any gain
or loss recognized (i.e., long-term or short-term) generally will 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 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
19
<PAGE> 42
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 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 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
20
<PAGE> 43
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 generally
will not be liable for any income or franchise tax in the Commonwealth of
Massachusetts. If the Fund qualifies as a regulated investment company for
federal income tax purposes and pays no federal income tax, it generally 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 is a general summary of certain of the
material U.S. federal income tax consequences to U.S. persons (as defined below)
of owning and disposing of shares in the Fund. This summary is based on the
provisions of the Code, final, temporary and proposed U.S. Treasury Regulations
promulgated thereunder, and administrative and judicial interpretations thereof,
all as in effect on the date hereof, and all of which are subject to change,
possibly with retroactive effect.
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, estates the income of
which is includible in its gross income for U.S. federal income tax purposes
without regard to its source, or trusts if either: (i) a U.S. court is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all the substantial decisions of
the trust or (ii) the trust was in existence on August 20, 1996 and, in general,
would have been treated as a U.S. person under rules applicable prior to such
time, provided the trust elects to continue such treatment thereafter. 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.
This summary does not deal with all aspects of U.S. federal income
taxation that may be relevant to particular shareholders in light of their
particular circumstances. Accordingly, 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.
21
<PAGE> 44
ORGANIZATION AND CAPITALIZATION
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.
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.
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 Trustee 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 of the Fund's common stock 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. Each share represents an equal proportionate interest in the Fund.
The following broker-dealers each hold of record 5% or more of the
Fund's outstanding common stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT HELD
<S> <C>
Charles Schwab & Co. Inc.
101 Montgomery Street
San Francisco, CA 94104-4122 33.55%
Millenco Limited Partnership
111 Broadway
New York, NY 10006-1901 14.92%
National Financial Services Corp.
Church Street Station
P.O. Box 3908
New York, NY 10008-3908 12.67%
</TABLE>
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
22
<PAGE> 45
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.
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, 1996, September 30, 1997 and
September 30 1998, the Fund paid brokerage commissions of approximately
$2,467,162, $2,298,674 and
23
<PAGE> 46
$3,159,845, respectively.
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 September 30, 1998, the Fund's portfolio
annual turnover rate was 355%. 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.
Fund management believes that the fiscal 1998 portfolio turnover rate
of 355% is within the range to be expected for a merger arbitrage fund, and
anticipates that the 1999 rate will be within the same range or somewhat lower.
INDEPENDENT ACCOUNTANTS
The Fund has selected PricewaterhouseCoopers LLP, 100 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, as its independent accountants.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR
Firstar Mutual Fund Services, LLC ("Firstar"), P.O. Box 701, Milwaukee,
Wisconsin 53201-0701 is the Fund's transfer agent and dividend paying agent.
Firstar Bank Milwaukee, N.A. ("Firstar Bank") acts as the Fund's custodian.
24
<PAGE> 47
The custody services performed by Firstar Bank 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 Bank is also custodian for The
Merger Fund IRA Plan and trustee for the Fund Investors Keogh Plans. Firstar
Bank 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 Bank 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 the Fund's transfer agent and dividend paying agent. 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.
Firstar also serves as the Fund's accounting services agent and Fund
Administrator. As such, Firstar 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. 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 Investment Company Act
of 1940; 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.
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.
25
<PAGE> 48
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
PricewaterhouseCoopers LLP, independent accountants given on authority of said
firm, as experts in accounting and auditing.
FINANCIAL STATEMENTS
The statement of assets and liabilities, including the schedules of
investments, of options written and of securities sold short, as of September
30, 1998, the related statements of operations and of cash flows for the fiscal
year ended September 30, 1998, statements of changes in net assets for the
fiscal years ended September 30, 1998 and September 30, 1997, financial
highlights, and notes to the financial statements and the independent
accountants' report to the Trustees and shareholders of the Fund dated
November 13, 1998 are incorporated herein by reference to the Fund's Annual
Report. A copy of the Fund's Annual Report may be obtained without charge from
Firstar by calling (800) 343-8959.
Effective December 1, 1996, the Fund changed its fiscal year to end on
September 30 in each year, commencing with the fiscal year which ran from
December 1, 1996 through September 30, 1997.
26
<PAGE> 49
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 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
A-1
<PAGE> 50
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.
A-2
<PAGE> 51
PART C
OTHER INFORMATION
Item 23. 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.)
Exhibit 3 Inapplicable
Exhibit 4 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 5 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 6 Inapplicable
Exhibit 7 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 8-1 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 8-2 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 8-3 Fund Administration Servicing Agreement between the Fund and
Firstar
<PAGE> 52
Trust Company, dated September 30, 1994. (Previously filed as
Exhibit 9-3 to Post-Effective Amendment No. 18 to the
Registration Statement.)
Exhibit 8-4 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 8-5 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 9 Opinion of Counsel as to Legality of Securities Being
Registered.
Exhibit 10 Consent of PricewaterhouseCoopers LLP.
Exhibit 11 Inapplicable
Exhibit 12 Inapplicable
Exhibit 13 The Merger Fund Plan of Distribution Pursuant to Rule 12b-1
dated July 14, 1998.
Exhibit 14 Financial Data Schedule
Exhibit 15 Inapplicable
Item 24. Persons Controlled by or Under Common Control with Registrant.
Inapplicable.
Item 25. 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.
<PAGE> 53
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
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
<PAGE> 54
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 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:
<PAGE> 55
(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 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
<PAGE> 56
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 26. 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 26 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).
Item 27. Principal Underwriters.
(a) Inapplicable
(b) Mercer Allied Company, L.P.
The information required by this Item 27 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.
Net underwriting discounts and commissions: $0.
Compensation for redemption and repurchase: $0.
Brokerage commissions: $0.
Other compensation: $_______ (Rule 12b-1 fees).
<PAGE> 57
Item 28. 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 29. Management Services.
Inapplicable.
Item 30. Undertaking.
Inapplicable.
<PAGE> 58
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 25th
day of November, 1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Frederick W. Green President November 25, 1998
- -----------------------------
Frederick W. Green & Trustee
/s/Bonnie L. Smith Vice-President, November 25, 1998
- ------------------------------
Bonnie L. Smith Treasurer & Secretary
/s/William H. Bohnett Trustee November 25, 1998
- ------------------------------
William H. Bohnett
/s/James P. Logan III Trustee November 25, 1998
- ------------------------------
James P. Logan III
/s/Michael J. Downey Trustee November 25, 1998
- ------------------------------
Michael J. Downey
</TABLE>
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
<S> <C> <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- 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 5- 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 6- Inapplicable
Exhibit 7- 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 8-1- 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 8-2- 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 8-3- 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 8-4- 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 8-5- 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 9- Opinion of Counsel as to Legality of Securities Being
Registered.
Exhibit 10- Consent of PricewaterhouseCoopers LLP
Exhibit 11- Inapplicable
Exhibit 12- Inapplicable
Exhibit 13- The Merger Fund Plan of Distribution Pursuant to Rule 12b-1
dated as of July 14 1998
Exhibit 14- Financial Data Schedule
Exhibit 15- Inapplicable
</TABLE>
<PAGE> 1
EXHIBIT 9
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
November 25, 1998
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 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and the
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 22 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated November 13, 1998, relating to the financial
statements and financial highlights appearing in the September 30, 1998 Annual
Report to Shareholders of The Merger Fund, which is also incorporated by
reference in the Registration Statement. We also consent to the reference to
us under the headings "Financial Highlights" in such Prospectus and
"Independent Accountants" and "Experts" in such Statement of Additional
Information.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
November 25, 1998
<PAGE> 1
EXHIBIT 13
THE MERGER FUND
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
July 14, 1998
WHEREAS, The Merger Fund (the "Fund") engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund adopted a Plan of Distribution pursuant to Rule 12b-1
under the Act dated January 13, 1989 (the "Plan") and an Amended and Restated
Plan of Distribution Pursuant to Rule 12b-1 dated July 1, 1993 (the "Amended
Plan"), the Trustees of the Fund having determined that there was a reasonable
likelihood that the Plan and the Amended Plan would benefit the Fund and its
shareholders; and
WHEREAS, the Fund (i) employs Mercer Allied Company, L.P. (the
"Distributor") as its principal underwriter and a distributor of its shares of
beneficial interest; (ii) may itself act as a distributor of its shares; and
(iii) may enter into contracts for distribution and/or shareholder-related
services with brokers or dealers who are members of the National Association of
Securities Dealers, Inc. ("Dealers") and with other qualified financial
institutions (the "Service Providers"); it being understood that to the extent
any activity financed hereunder is one in which the Fund may finance without a
Rule 12b-1 plan, the Fund may also make payments to finance such activity
outside such a plan and not subject to its limitations; and
WHEREAS, the Fund desires to adopt certain amendments to the Amended
Plan pursuant to Rule 12b-1 under the Act, and the Trustees of the Fund have
determined that there is reasonable likelihood that the adoption of this Plan of
Distribution (the "1998 Plan") will benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby
agrees to the terms of, this 1998 Plan in accordance with Rule 12b-1 under the
Act on the following terms and conditions:
1. The Fund may pay to the Distributor, any Dealer or any Service Provider
compensation for various distribution and/or shareholder-related services in
connection with Fund 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 shall not exceed 0.25% annually of the average daily
net assets of the Fund and shall be paid at such intervals as the Trustees may
determine.
<PAGE> 2
2. The amount set forth in Section 1 may be paid as a service fee to
any Distributor, Dealer or Service Provider so long as the Fund's records
adequately detail that such amount was paid for personal service and/or the
maintenance of shareholder accounts. Payments under the 1998 Plan may include,
but are not necessarily limited to, amounts payable for: sales and marketing
expenses related to distribution of Fund shares; servicing shareholder accounts
by processing new account applications and performing other shareholder liaison
functions; preparing and transmitting records of transactions by customers to
the Fund's transfer agent; serving as a source of information to the Fund's
shareholders; and preparing, printing and distributing prospectuses, statements
of additional information and account applications to those persons not already
shareholders of the Fund. The Fund may be paid hereunder for its expenses of
distribution of its shares, including, but not necessarily limited to, the cost
of preparing, printing and distributing prospectuses, statements of additional
information and account applications to prospective investors.
3. The Plan was approved by a vote of at least a majority (as defined
in the Act) of the outstanding voting securities of the Fund and the Amended
Plan was approved in the manner provided in Section 4 below.
4. The 1998 Plan shall not take effect until the 1998 Plan, together
with any related agreement, has been approved by votes of a majority of both (a)
the Trustees of the Fund and (b) those Trustees of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of the 1998 Plan or any agreements
related to it (the "Rule 12b-1 Trustees") cast in person at a meeting (or
meetings) called for the purpose of voting on the 1998 Plan and any such related
agreements.
5. The 1998 Plan shall remain in effect until July 14, 1999 and shall
continue in effect thereafter so long as such continuance is specifically
approved at least annually in the manner provided for approval of the 1998 Plan
in Section 4 above.
6. The Fund shall provide to the Trustees and the Trustees shall
review, at least quarterly, a written report of expenses hereunder and the
purposes for which such expenses were incurred.
7. The 1998 Plan may be terminated as to the Fund at any time by vote
of a majority of the Rule 12b-1 Trustees, or by vote of a majority of the
outstanding voting securities of the Fund.
8. The 1998 Plan may not be amended to increase materially the amount
of expenses payable pursuant to Section 1 hereof unless such amendment is
approved by shareholder vote in the manner provided in Section 3 hereof, and no
material amendment to the 1998 Plan shall be made unless approved in the manner
provided in Section 4 hereof.
-2-
<PAGE> 3
9. While the 1998 Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the Trustees who are not such interested
persons.
10. The Fund shall preserve copies of the 1998 Plan and any related
agreements and all reports made pursuant to Section 6 hereof, for a period of
not less than six years from the date of the 1998 Plan, any such agreement or
any such report, as the case may be, the first two years in an easily accessible
place.
IN WITNESS WHEREOF, the Fund and the Distributor have executed this
1998 Plan as of the day and year first above written.
THE MERGER FUND
By: /s/ Fred Green
MERCER ALLIED COMPANY, L.P.
By: /s/ Peter Martin
-3-
<TABLE> <S> <C>
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<CIK> 0000701804
<NAME> THE MERGER FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
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<NET-CHANGE-FROM-OPS> 3,197,270
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<DISTRIBUTIONS-OF-INCOME> (813,613)
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