<PAGE> 1
THE MERGER FUND
SCHEDULE OF INVESTMENTS (UNAUDITED)
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<C> <S> <C>
COMMON STOCKS -- 83.81%*
AUTOS -- 0.52%*
46,700 General Motors Corporation(2)............................... $ 3,867,344
------------
BANKS -- 1.68%*
164,000 First Security Corporation(4)............................... 1,968,000
55,400 U.S. Trust Corporation...................................... 10,470,600
------------
12,438,600
------------
BROADCASTING -- 4.70%*
183,200 CBS Corporation**(1)........................................ 10,373,700
481,800 CTV Inc.**(1)(5)............................................ 12,743,573
93,287 General Motors Corporation -- Class H**..................... 11,614,231
------------
34,731,504
------------
CABLE TV -- 4.94%*
450,600 MediaOne Group, Inc.**(1)................................... 36,498,600
------------
CHEMICALS -- 3.58%*
6,551 The Dow Chemical Company.................................... 746,814
441,000 Union Carbide Corporation(1)................................ 25,715,813
------------
26,462,627
------------
COMPUTER HARDWARE -- 0.80%*
98,500 Seagate Technology, Inc.**(4)............................... 5,934,625
------------
COMPUTER SOFTWARE -- 1.34%*
153,400 Aspect Development, Inc.**(1)............................... 9,875,125
------------
FIBER OPTICS -- 3.05%*
119,900 Ortel Corporation**(4)...................................... 22,503,731
------------
FOOD RETAILERS -- 4.61%*
461,700 Hannaford Bros. Co.(1)...................................... 34,050,375
------------
FOOD WHOLESALERS -- 3.67%*
1,052,000 U.S. Foodservice**(1)....................................... 27,089,000
------------
GAS UTILITIES -- 3.39%*
1,001,000 MCN Energy Group Inc.(1).................................... 25,025,000
------------
GIFTWARE -- 0.05%*
73,554 Syratech Corporation**(3)(6)................................ 367,770
------------
HOTELS & GAMING -- 1.28%*
487,000 Mirage Resorts, Incorporated**.............................. 9,435,625
------------
HOUSEHOLD PRODUCTS -- 0.56%*
219,300 WestPoint Stevens Inc.(4)................................... 4,166,700
------------
</TABLE>
See notes to the financial statements.
1
<PAGE> 2
THE MERGER FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<C> <S> <C>
INSURANCE -- 4.80%*
233,900 Financial Security Assurance Holdings Ltd................... $ 17,177,031
442,300 Travelers Property Casualty Corp. -- Class A................ 18,244,875
------------
35,421,906
------------
INTEGRATED OIL COMPANIES -- 2.58%*
223,900 Atlantic Richfield Company.................................. 19,031,500
------------
INTERNET SERVICES -- 1.35%*
16,518 Akamai Technologies, Inc.**(2).............................. 2,656,301
81,416 InterVU Inc.**(3)........................................... 7,327,440
------------
9,983,741
------------
INVESTMENT MANAGEMENT -- 3.29%*
635,100 PIMCO Advisors Holdings L.P................................. 24,332,269
------------
NATURAL GAS TRANSMISSION & MARKETING -- 4.84%*
291,800 Columbia Energy Group(4).................................... 17,289,150
419,500 The Williams Companies, Inc.(1)............................. 18,431,781
------------
35,720,931
------------
NETWORKING PRODUCTS -- 3.18%*
723,600 Newbridge Networks Corporation**(1)......................... 23,471,775
------------
NETWORKING SERVICES -- 3.38%*
454,100 Concentric Network Corporation**(1)......................... 24,975,500
------------
PAPER & FOREST PRODUCTS -- 2.19%*
821,400 St. Laurent Paperboard Inc.**............................... 16,171,313
------------
PHARMACEUTICALS -- 1.73%*
131,200 Warner-Lambert Company...................................... 12,792,000
------------
PUBLISHING & TRADE SHOWS -- 1.95%*
921,446 Ziff-Davis Inc. -- ZD**(1).................................. 14,397,594
------------
RECOGNITION PRODUCTS -- 1.91%*
577,300 Jostens, Inc.(1)............................................ 14,071,688
------------
SAVINGS & LOANS -- 0.07%*
402,700 Coast Federal Litigation Contingent Payment Rights
Trust**(7)................................................ 553,712
------------
SEMICONDUCTORS & ELECTRONIC EQUIPMENT -- 6.06%*
160,000 C-Cube Microsystems Inc.**.................................. 11,650,000
293,200 The DII Group, Inc.**(3).................................... 33,149,925
------------
44,799,925
------------
TELECOMMUNICATIONS -- 4.04%*
410,800 US WEST, Inc.(1)............................................ 29,834,350
------------
</TABLE>
See notes to the financial statements.
2
<PAGE> 3
THE MERGER FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<C> <S> <C>
TELEPHONY -- 8.27%*
136,000 BCE Inc.(1)................................................. $ 17,059,500
325,900 IXnet, Inc.**............................................... 14,950,663
160,805 Qwest Communications International Inc.**................... 7,799,043
35,664 McLeodUSA Incorporated -- Class A**......................... 3,024,753
430,200 Telefonica de Argentina S.A. -- ADR(3)...................... 16,885,350
26,100 Williams Communications Group, Inc.**....................... 1,352,306
------------
61,071,615
------------
TOTAL COMMON STOCKS (Cost $608,368,909)..................... 619,076,445
------------
CONTRACTS (100 SHARES PER CONTRACT)
- ----------------------------------
PUT OPTIONS PURCHASED -- 5.86%*
AT&T Corp.:
4,280 Expiration April 2000, Exercise Price $50.00.............. 187,250
2,000 Expiration May 1, 2000, Exercise Price $80.00............. 4,750,000
------------
4,937,250
Alcatel S.A. -- ADR
750 Expiration May 1, 2000, Exercise Price $60.00(6).......... 1,214,062
The Charles Schwab Corporation
1,200 Expiration April 26, 2000, Exercise Price $90.00(6)....... 3,982,500
The Dow Chemical Company
2,145 Expiration April 26, 2000, Exercise Price $150.00(6)...... 7,722,000
General Motors Corporation -- Class H
1,166 Expiration June 23, 2000, Exercise Price $200.00(6)....... 8,992,775
Lucent Technologies Inc.
3,755 Expiration April 26, 2000, Exercise Price $90.00(6)....... 10,983,375
NEXTLINK Communications, Inc. -- Class A
2,953 Expiration April 22, 2000, Exercise Price $70.00.......... 55,516
Viacom Inc. -- Class B
1,986 Expiration April 12, 2000, Exercise Price $80.00(6)....... 5,387,025
------------
TOTAL PUT OPTIONS PURCHASED
(Cost $43,421,028)........................................ 43,274,503
------------
</TABLE>
See notes to the financial statements.
3
<PAGE> 4
THE MERGER FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ---------------- ------------
<C> <S> <C>
CONVERTIBLE BONDS -- 2.77%*
20,489,000 MindSpring Enterprises, 5.000%, 4/15/2006(2)(6)
(Cost $19,844,962)........................................ $ 20,489,000
------------
SHORT-TERM INVESTMENTS -- 3.91%*
U.S. TREASURIES -- 3.87%*
U.S. Treasury Bills:
11,500,000 5.77%, 4/20/2000(2)......................................... 11,464,979
17,200,000 5.60%, 4/27/2000(2)......................................... 17,130,436
------------
28,595,415
------------
VARIABLE RATE DEMAND NOTES# -- 0.04%*
303,326 Warner-Lambert Co., 5.7710%................................. 303,326
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $28,898,741)........................................ 28,898,741
------------
TOTAL INVESTMENTS
(Cost $700,533,640)....................................... $711,738,689
============
</TABLE>
- ------------------------------
* Calculated as a percentage of net assets.
** Non-income producing security.
# Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed above are as of March 31, 2000.
(1) All or a portion of the shares have been committed as collateral for open
short positions.
(2) All or a portion of the shares have been committed as collateral for equity
swap contracts.
(3) All or a portion of the shares have been committed as collateral for short
foreign currency contracts.
(4) All or a portion of the shares have been committed as collateral for
written option contracts.
(5) Foreign security.
(6) Fair-valued security.
(7) Litigation settlement rights.
See notes to the financial statements.
4
<PAGE> 5
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT (UNAUDITED)
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
- ------ ------------
<C> <S> <C>
65,000 Akamai Technologies, Inc.................................... $ 10,452,813
511,055 Alcatel S.A. -- ADR......................................... 22,390,597
228,122 AT&T Corp. ................................................. 12,831,862
367,180 BP Amoco Plc -- ADR......................................... 19,483,489
160,000 C-Cube Semiconductor........................................ 4,560,000
69,873 The Charles Schwab Corporation.............................. 3,969,660
146,500 Delhaize America, Inc. ..................................... 2,527,125
29,000 The Dow Chemical Company.................................... 3,306,000
349,225 DTE Energy Company.......................................... 10,127,525
471,850 Flextronics International Ltd. ............................. 33,235,934
37 General Motors Corporation -- Class H....................... 4,606
385,928 Global Crossing Ltd. ....................................... 15,798,928
86,715 Harmonic Inc. .............................................. 7,219,024
84,370 i2 Technologies, Inc........................................ 10,303,686
62 Lucent Technologies Inc..................................... 3,766
35,700 McLeodUSA Incorporated -- Class A........................... 3,027,806
224,800 NEXTLINK Communications, Inc. -- Class A.................... 27,804,950
109,542 Nortel Networks Corporation................................. 13,802,292
360,850 Pfizer Inc.................................................. 13,193,578
867,900 Qwest Communications International Inc...................... 42,093,150
410,700 Smurfit-Stone Container Corporation......................... 6,956,231
238,763 Telefonica S.A. -- ADR...................................... 17,817,689
42,497 VERITAS Software Corporation................................ 5,567,107
410,300 Williams Communications Group, Inc.......................... 21,258,669
516,818 Ziff-Davis Inc. -- ZDNet.................................... 10,982,383
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $303,103,611)................................... $318,718,870
============
</TABLE>
See notes to the financial statements.
5
<PAGE> 6
THE MERGER FUND
SCHEDULE OF OPTIONS WRITTEN (UNAUDITED)
MARCH 31, 2000
<TABLE>
<CAPTION>
CONTRACTS (100 SHARES PER CONTRACT) VALUE
----------------------------------- ----------
<C> <S> <C>
CALL OPTIONS
Columbia Energy Group
770 Expiration April 2000, Exercise Price $60.00.............. $ 52,938
First Security Corporation:
1,240 Expiration April 2000, Exercise Price $10.00.............. 294,500
400 Expiration April 2000, Exercise Price $12.50.............. 37,500
----------
332,000
Seagate Technology, Inc.:
37 Expiration May 2000, Exercise Price $45.00................ 63,825
38 Expiration May 2000, Exercise Price $50.00................ 60,325
----------
124,150
PUT OPTIONS
AT&T Corp.
4,280 Expiration April 2000, Exercise Price $55.00.............. 682,146
NEXTLINK Communications, Inc. -- Class A
2,248 Expiration April 2000, Exercise Price $90.00.............. 98,350
----------
TOTAL OPTIONS WRITTEN
(Premiums received $5,518,501)............................ $1,289,584
==========
</TABLE>
See notes to the financial statements.
6
<PAGE> 7
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $700,533,640)................. $ 711,738,689
Cash...................................................... 6,933,068
Deposit at brokers for short sales........................ 66,503,634
Receivable from brokers for proceeds on securities sold
short.................................................. 265,889,228
Receivable for investments sold........................... 61,941,348
Receivable for fund shares issued......................... 3,160,154
Receivable for forward currency exchange contracts........ 192,175
Dividends and interest receivable......................... 905,800
Other receivables......................................... 965,030
--------------
Total Assets...................................... 1,118,229,126
--------------
LIABILITIES:
Securities sold short, at value (Proceeds of
$303,103,611).......................................... $318,718,870
Payable for investment securities purchased............... 56,201,319
Options written, at value (Premiums received
$5,518,501)............................................ 1,289,584
See accompanying schedule
Payable on equity swap contracts.......................... 1,667,523
Payable for fund shares redeemed.......................... 399,129
Accrued interest payable.................................. 162,700
Investment advisory fee payable........................... 590,165
Distribution fees payable................................. 86,258
Dividends payable on short positions...................... 230,038
Accrued expenses and other payables....................... 198,539
------------
Total Liabilities................................. 379,544,125
--------------
NET ASSETS.................................................. $ 738,685,001
==============
NET ASSETS Consist Of:
Accumulated undistributed net investment income........... $ 3,010,007
Accumulated undistributed net realized gain on investments
sold, forward currency exchange contracts, securities
sold short, equity swaps, and option contracts expired
or closed.............................................. 31,688,253
Net unrealized appreciation (depreciation) on:
Investments and foreign currency related items......... 11,205,049
Short positions........................................ (15,615,259)
Written options........................................ 4,228,917
Equity swap contracts.................................. (1,667,523)
Forward currency exchange contracts.................... 192,175
------------
Net unrealized depreciation............................ (1,656,641)
Paid-in capital........................................... 705,643,382
--------------
Total Net Assets.................................. $ 738,685,001
==============
NET ASSET VALUE, offering price and redemption price per
share ($738,685,001/47,790,687 shares of beneficial
interest outstanding)..................................... $15.46
======
</TABLE>
See notes to financial statements.
7
<PAGE> 8
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................. $ 8,571,443
Dividend income on long positions
(net of foreign withholding taxes of $18,317).......... 2,727,893
-----------
Total investment income................................ 11,299,336
-----------
EXPENSES:
Investment advisory fee................................... $ 3,262,522
Distribution fees......................................... 533,350
Transfer agent and shareholder servicing agent fees....... 96,990
Federal and state registration fees....................... 64,490
Professional fees......................................... 63,895
Trustees' fees and expenses............................... 12,420
Custody fees.............................................. 72,670
Administration fee........................................ 141,674
Reports to shareholders................................... 42,725
Other..................................................... 13,774
------------
Total operating expenses before interest expense and
dividends on short positions......................... 4,304,510
Interest expense.......................................... 782,437
Dividends on short positions.............................. 848,911
-----------
Total expenses......................................... 5,935,858
-----------
NET INVESTMENT INCOME....................................... 5,363,478
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions and foreign currency related items... 54,479,513
Short transactions..................................... (24,270,334)
Option contracts expired or closed..................... 4,722,524
Equity swap contracts.................................. 8,977,913
Forward currency exchange contracts.................... 20,442
------------
Net realized gain...................................... 43,930,058
Change in unrealized appreciation (depreciation) on:
Investments and foreign currency related items......... 18,267,714
Short positions........................................ (12,885,592)
Written options........................................ 2,250,922
Equity swap contracts.................................. (1,667,523)
Forward currency exchange contracts.................... 382,854
------------
Net unrealized gain.................................... 6,348,375
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 50,278,433
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $55,641,911
===========
</TABLE>
See notes to financial statements.
8
<PAGE> 9
THE MERGER FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of Capital Shares..................................... $ 517,829,073
Repurchases of Capital Shares............................... (408,493,757)
Net Change in Receivables/Payables Related to Capital Share
Transactions.............................................. (6,726,384)
---------------
Cash Provided by Capital Share Transactions................. 102,608,932
Cash Used by Borrowings..................................... (162,600,000)
Distributions Paid in Cash*................................. (1,741,613)
---------------
$(61,732,681)
-------------
CASH (USED) PROVIDED BY OPERATIONS:
Purchases of Investments.................................... (2,232,071,449)
Proceeds from Sales of Investments.......................... 2,315,682,529
---------------
83,611,080
---------------
Increase in Deposit at Brokers for Short Sales.............. (37,080,980)
Net Investment Income....................................... 5,363,478
Net Change in Receivables/Payables Related to Operations.... (1,048,292)
---------------
(32,765,794)
---------------
50,845,286
-------------
Net Decrease in Cash........................................ (10,887,395)
Cash, Beginning of Year..................................... 17,820,463
-------------
Cash, End of Year........................................... $ 6,933,068
=============
</TABLE>
- ------------------------------
*Non-cash financing activities include reinvestment of dividends of $46,260,669.
See notes to financial statements.
9
<PAGE> 10
THE MERGER FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
MARCH 31, 2000 SEPTEMBER 30, 1999
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
Net investment income..................................... $ 5,363,478 $ 2,473,322
Net realized gain on investments sold, forward currency
exchange contracts, securities sold short, equity swap
contracts, and option contracts expired or closed....... 43,930,058 54,231,596
Change in unrealized appreciation (depreciation) of
investments, forward currency exchange contracts, short
positions, equity swap contracts and written options.... 6,348,375 24,245,755
------------ ------------
Net increase in net assets resulting from operations...... 55,641,911 80,950,673
------------ ------------
Distributions to shareholders from:
Net investment income................................... (2,863,460) (5,109,498)
Net realized gains...................................... (45,138,822) (25,528,920)
------------ ------------
Total dividends and distributions....................... (48,002,282) (30,638,418)
------------ ------------
Net increase in net assets from capital share transactions
(Note 5)................................................ 155,595,985 98,744,768
------------ ------------
Net increase in net assets................................ 163,235,614 149,057,023
NET ASSETS:
Beginning of period....................................... 575,449,387 426,392,364
------------ ------------
End of period (including accumulated undistributed net
investment income of $3,010,007 and $510,322,
respectively)........................................... $738,685,001 $575,449,387
============ ============
</TABLE>
See notes to financial statements.
10
<PAGE> 11
THE MERGER FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each period.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR TEN MONTHS YEAR ENDED
ENDED ENDED ENDED ENDED NOVEMBER 30,
MARCH 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------------
2000 1999 1998 1997(7) 1996 1995
----------- ------------- ------------- ------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period................. $15.37 $13.90 $15.35 $15.41 $14.87 $13.72
Income from investment
operations:
Net investment income..... 0.12(2) 0.08(2)(3) 0.20(2)(3) 0.02(2)(3) 0.20(2)(3) 0.08(2)(3)
Net realized and
unrealized gain (loss)
on investments.......... 1.19 2.71 (0.05) 1.35 1.24 1.78
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. 1.31 2.79 0.15 1.37 1.44 1.86
Less distributions:
Dividends from net
investment income....... (0.07) (0.22) (0.03) (0.19) (0.08) --
Distributions from net
realized gains.......... (1.15) (1.10) (1.57) (1.24) (0.82) (0.71)
-------- -------- -------- -------- -------- --------
Total distributions....... (1.22) (1.32) (1.60) (1.43) (0.90) (0.71)
-------- -------- -------- -------- -------- --------
Net Asset Value, end of
period.................... $15.46 $15.37 $13.90 $15.35 $15.41 $14.87
======== ======== ======== ======== ======== ========
Total Return............... 8.93%(5) 21.39% 0.82% 9.68%(5) 10.26% 14.26%
Supplemental Data and
Ratios:
Net assets, end of period
(000's)................. $738,685 $575,449 $426,392 $445,987 $489,084 $243,082
Ratio of operating
expenses to average net
assets.................. 1.32%(1) 1.38%(1) 1.33%(1) 1.36%(1)(6) 1.36%(1) 1.41%(1)
Ratio of interest expense
and dividends on short
positions to average net
assets.................. 0.50% 1.07% 1.93% 2.93%(6) 0.95% 2.42%
Ratio of net investment
income to average net
assets.................. 1.64% 0.54% 1.36% 0.13%(6) 1.36% 0.57%
Portfolio turnover
rate(4)................. 204.99% 386.52% 355.38% 271.24% 276.99% 290.48%
</TABLE>
- ------------------------------
(1) For the six months ended March 31, 2000, the years ended September 30, 1999
and 1998, the ten months ended September 30, 1997, and for the years ended
November 30, 1996 and 1995, the operating expense ratio excludes interest
expense and dividends on short positions. The ratios including interest
expense and dividends on short positions for the six months ended March 31,
2000, the years ended September 30, 1999 and 1998, the ten months ended
September 30, 1997, and for the years ended November 30, 1996 and 1995, were
1.82%, 2.45%, 3.26 %, 4.29%, 2.31% and 3.83%, respectively.
(2) Net investment income before interest expense and dividends on short
positions for the six months ended March 31, 2000, the years ended September
30, 1999 and 1998, the ten months ended September 30, 1997, and for the
years ended November 30, 1996 and 1995, was $0.16, $0.23, $0.49, $0.38,
$0.35 and $0.42, respectively.
(3) Net investment income per share represents net investment income for the
respective period divided by the monthly average shares of beneficial
interest outstanding throughout each period.
(4) The numerator for the portfolio turnover rate includes the lesser of
purchases or sales (excluding short positions). The denominator includes the
average long position throughout the period.
(5) Not annualized.
(6) Annualized.
(7) Effective December 1, 1996 the Fund's fiscal year end was changed to
September 30 from November 30.
See notes to financial statements.
11
<PAGE> 12
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
NOTE 1 -- ORGANIZATION
The Merger Fund (the "Fund") is a no-load, open-end, non-diversified
investment company organized as a trust under the laws of the Commonwealth of
Massachusetts on April 12, 1982, and registered under the Investment Company Act
of 1940 (the "1940 Act"), as amended. The Fund was formerly known as the Risk
Portfolio of The Ayco Fund. In January of 1989, the Fund's fundamental policies
were amended to permit the Fund to engage exclusively in merger arbitrage. At
the same time, Westchester Capital Management, Inc. became the Fund's investment
adviser, and the Fund began to do business as The Merger Fund. Merger arbitrage
is a highly specialized investment approach generally designed to profit from
the successful completion of proposed mergers, takeovers, tender offers,
leveraged buyouts, liquidations and other types of corporate reorganizations.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. Investment Valuation
Investments in securities and commodities (including options) are valued at
the last sales price on the securities or commodities exchange on which such
financial instruments are primarily traded. Securities not listed on an exchange
or securities for which there were no transactions are valued at the average of
the current bid and asked prices. Securities for which there are no such
valuations are valued at fair value as determined in good faith by management
under the supervision of the Board of Trustees. At March 31, 2000 fair valued
long securities represent 8.3% of investments, at value. The investment adviser
reserves the right to value securities, including options, at prices other than
last-sale prices or the average of current bid and asked prices when such prices
are believed unrepresentative of fair market value as determined in good faith
by the adviser. Investments in United States government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments are carried at
amortized cost, which approximates market value.
B. Transactions with Brokers for Short Sales
Cash and liquid securities in the amount of $318,722,112 have been
committed as collateral for open short investment positions and specifically
identified in the Fund's records. The Fund's receivable from brokers for
proceeds on securities sold short and deposit at brokers for short sales are
with three major securities dealers. The Fund does not require the brokers to
maintain collateral in support of the receivable from the broker for proceeds on
securities sold short.
C. Federal Income Taxes
No provision for federal income taxes has been made since the Fund has
complied to date with the provisions of the Internal Revenue Code applicable to
regulated investment companies and intends to continue to so comply in future
years and to distribute investment company net taxable income and net
12
<PAGE> 13
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capital gains to shareholders. Additionally, the Fund intends to make all
required distributions to avoid federal excise tax.
D. Written Option Accounting
The Fund writes (sells) covered call options to hedge portfolio
investments. Uncovered put options can also be written by the Fund as part of a
merger arbitrage strategy involving a pending corporate reorganization. When the
Fund writes (sells) an option, an amount equal to the premium received by the
Fund is included in the Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the option written. By writing
an option, the Fund may become obligated during the term of the option to
deliver or purchase the securities underlying the option at the exercise price
if the option is exercised. Option contracts are valued at the last sales price
reported on the date of valuation. If no sale is reported, the option contract
written is valued at the average of the current bid and asked price reported on
the day of valuation. When an option expires on its stipulated expiration date
or the Fund enters into a closing purchase transaction, the Fund realizes a gain
or loss if the cost of the closing purchase transaction differs from the premium
received when the option was sold without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option is
eliminated. When an option is exercised, the premium originally received
decreases the cost basis of the security (or increases the proceeds on a sale of
the security), and the Fund realizes a gain or loss from the sale of the
underlying security.
E. Purchased Option Accounting
The Fund purchases put options to hedge portfolio investments. Call options
may be purchased only for the purpose of closing out previously written covered
call options. Premiums paid for option contracts purchased are included in the
Statement of Assets and Liabilities as an asset. Option contracts are valued at
the last sales price reported on the date of valuation. If no sale is reported,
the option contract purchased is valued at the average of the current bid and
asked price reported on the day of valuation. When option contracts expire or
are closed, realized gains or losses are recognized without regard to any
unrealized gains or losses on the underlying securities.
F. Forward Currency Exchange Contracts
The Fund may enter into forward currency exchange contracts obligating the
Fund to deliver and receive a currency at a specified future date. Forward
contracts are valued daily and unrealized appreciation or depreciation is
recorded daily as the difference between the contract exchange rate and the
closing forward rate applied to the face amount of the contract. A realized gain
or loss is recorded at the time the forward contract is closed.
G. Distributions to Shareholders
Dividends from net investment income and net realized capital gains, if
any, are declared and paid annually. Income and capital gain distributions are
determined in accordance with income tax
13
<PAGE> 14
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
regulations which may differ from generally accepted accounting principles.
These differences are due primarily to wash loss and straddle loss deferrals and
unrealized gains or losses on Section 1256 contracts, which are realized, for
tax purposes, at September 30, 1999. The Fund also utilized earnings and profits
distributed to shareholders on redemption of shares as part of the dividends
paid deduction. Accordingly, reclassifications are made within the net asset
accounts for such amounts, as well as amounts related to permanent differences
in the character of certain income and expense items for income tax and
financial reporting purposes.
H. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
I. Foreign Securities
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
J. Foreign Currency Translations
The books and records of the Fund are maintained in U.S. dollars. Foreign
currency transactions are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the daily
rates of exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions. For financial reporting
purposes, the Fund does not isolate changes in the exchange rate of investment
securities from the fluctuations arising from changes in the market prices of
securities. However, for federal income tax purposes the Fund does isolate and
treat as ordinary income the effect of changes in foreign exchange rates on
realized gain or loss from the sale of investment securities and payables and
receivables arising from trade date and settlement date differences.
K. When-Issued Securities
The Fund may sell securities on a when-issued or delayed delivery basis.
Although the payment and interest terms of these securities are established at
the time the Fund enters into the agreement, these securities may be delivered
for cash proceeds at a future date. The Fund records sales of when-issued
securities and reflects the values of such securities in determining net asset
value in the same
14
<PAGE> 15
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
manner as other open short sale positions. The Fund segregates and maintains at
all times cash, cash equivalents, or other liquid securities in an amount at
least equal to the market value for when-issued securities.
L. Other
Investment and shareholder transactions are recorded on the trade date.
Realized gains and losses from security transactions are recorded on the
identified cost basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest is accounted for on the accrual
basis. Investment income includes $7,600,589 of interest earned on receivables
from brokers for proceeds on securities sold short and deposits. The Fund may
utilize derivative instruments including options, forward currency exchange
contracts and other instruments with similar characteristics to the extent that
they are consistent with the Fund's investment objectives and limitations. The
use of these instruments may involve additional investment risks including the
possibility of illiquid markets or imperfect correlation between the value of
the instruments and the underlying securities.
NOTE 3 -- AGREEMENTS
The Fund's investment adviser is Westchester Capital Management, Inc. (the
"Adviser") pursuant to an investment advisory agreement dated January 31, 1989.
Under the terms of this agreement, the Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 1.00% of the Fund's
average daily net assets.
Firstar Mutual Fund Services, LLC, a subsidiary of Firstar Corporation, a
publicly held bank holding company, serves as transfer agent, administrator and
accounting services agent for the Fund. Firstar Bank, N.A. serves as custodian
for the Fund.
Distribution services are performed pursuant to distribution contracts with
Mercer Allied Company, L.P. ("Mercer"), the Fund's principal underwriter, and
other broker-dealers.
NOTE 4 -- SHORT POSITIONS
The Fund may sell securities short for hedging purposes. For financial
statement purposes, an amount equal to the settlement amount is included in the
Statement of Assets and Liabilities as an asset and an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
value of the short position. Subsequent fluctuations in the market prices of
securities sold, but not yet purchased, may require purchasing the securities at
prices which may differ from the market value reflected on the Statement of
Assets and Liabilities. The Fund is liable for any dividends payable on
securities while those securities are in a short position. As collateral for its
short positions, the Fund is required under the 1940 Act to maintain assets
consisting of cash, cash equivalents or liquid securities. These assets are
required to be adjusted daily to reflect changes in the value of the securities
sold short.
15
<PAGE> 16
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 5 -- SHARES OF BENEFICIAL INTEREST
The Trustees have the authority to issue an unlimited amount of shares of
beneficial interest without par value.
Changes in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2000 SEPTEMBER 30, 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Sold........................ 33,815,525 $ 517,829,073 34,234,589 $ 500,045,668
Issued as reinvestment of
dividends................. 3,145,089 46,260,669 2,104,113 28,405,531
Redeemed.................... (26,621,533) (408,493,757) (29,554,687) (429,706,431)
----------- ------------- ----------- -------------
Net increase................ 10,339,081 $ 155,595,985 6,784,015 $ 98,744,768
=========== ============= =========== =============
</TABLE>
Effective August 9, 1999 through the six months ended March 31, 2000, The
Merger Fund was closed to new investors.
NOTE 6 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended March 31, 2000
(excluding short-term investments, options and short positions) aggregated
$1,243,749,963 and $1,332,472,466, respectively.
At March 31, 2000, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were:
<TABLE>
<S> <C>
Appreciation................................................ $ 45,607,929
(Depreciation).............................................. (36,057,977)
------------
Net unrealized appreciation on investments.................. $ 9,549,952
============
</TABLE>
At March 31, 2000, the cost of investments for federal income tax purposes
was $702,188,737. The primary difference between the cost amount for book
purposes and tax purposes is due to deferred wash sale losses. The Fund
realized, on a tax basis, post-October losses through September 30, 1999 of
$6,585,077 which are not recognized for tax purposes until the first day of the
following fiscal year.
16
<PAGE> 17
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 7 -- OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
six months ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
PREMIUM NUMBER OF
AMOUNT CONTRACTS
------------ ---------
<S> <C> <C>
Options outstanding at September 30, 1999.................. $ 5,717,202 7,063
Options written............................................ 17,750,861 28,721
Options closed............................................. (2,383,592) (6,059)
Options exercised.......................................... (10,347,723) (14,536)
Options expired............................................ (5,218,247) (6,176)
------------ -------
Options outstanding at March 31, 2000...................... $ 5,518,501 9,013
============ =======
</TABLE>
NOTE 8 -- DISTRIBUTION PLAN
The Fund has adopted a Plan of Distribution (the "Plan") dated July 1,
1993, as amended, pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund will compensate its principal underwriter, Mercer, and any other
broker-dealers with whom Mercer or the Fund has entered into a contract to
distribute Fund shares ("Dealers"). Under the Plan, the amount of 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. For the six months ended March 31, 2000, the Fund incurred
$533,350 pursuant to the Plan.
The Plan will remain in effect from year to year provided such continuance
is approved at least annually by a vote either of a majority of the Trustees,
including a majority of the non-interested Trustees, or a majority of the Fund's
outstanding shares.
NOTE 9 -- CREDIT FACILITY
Custodial Trust Company has made available to the Fund a $230 million
credit facility pursuant to a Loan and Security Agreement ("Agreement") dated
March 18, 1992 (subsequently amended) for the purpose of purchasing portfolio
securities. The Agreement can be terminated by either the Fund or Custodial
Trust Company with three months' prior notice. For the period October 1, 1999 to
January 31, 2000, the interest rate on the outstanding principal amount was the
Federal Funds Rate plus 0.875%. The interest rate changed on February 1, 2000 to
the Federal Funds Rate plus 0.75% (weighted average rate of 6.26% during the six
months ended March 31, 2000). Advances are collateralized by securities owned by
the Fund and held separately in a special custody account pursuant to a Special
Custody Agreement dated March 31, 1994. During the six months ended March 31,
2000, the Fund had an outstanding average daily balance of $24,137,044. The
maximum amount outstanding during the six months ended March 31, 2000, was
$160,700,000. Cash paid for interest amounted to $1,430,795 for the six months
ended March 31, 2000. At March 31, 2000, the Fund did not have a loan payable
balance.
17
<PAGE> 18
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000 (UNAUDITED)
NOTE 10 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At March 31, 2000, the Fund had entered into "position hedge" forward
currency exchange contracts that obligated the Fund to deliver and receive
currencies at a specified future date. The net unrealized appreciation of
$192,175 is included in the net unrealized appreciation (depreciation) section
of the accompanying financial statements. The terms of the open contracts are as
follows:
<TABLE>
<CAPTION>
CURRENCY TO U.S. $ VALUE AT CURRENCY TO U.S. $ VALUE AT
SETTLEMENT DATE BE DELIVERED MARCH 31, 2000 BE RECEIVED MARCH 31, 2000
- --------------- --------------------------- --------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
4/10/00 24,077,210 British Pounds $38,412,905 38,692,940 U.S. Dollars $38,692,940
4/14/00 18,549,300 Canadian Dollars $12,782,801 12,694,941 U.S. Dollars $12,694,941
</TABLE>
NOTE 11 -- EQUITY SWAP CONTRACTS
The Fund has entered into both long and short equity swap contracts with
three major broker/dealers: Bear Stearns, & Co., Deutsche Bank and J.P. Morgan
Securities. A long equity swap contract allows the Fund to receive from the
counterparty any appreciation and dividends paid on an individual security and
pay the counterparty LIBOR rate plus between 50 and 100 basis points based on
the notional amount of the contract as well as any depreciation on an individual
security. A short equity swap contract obligates the Fund to pay the
counterparty any appreciation and dividends paid on an individual security and
receive from the counterparty LIBOR rate less between 50 and 100 basis points
based on the notional amount of the contract as well as any depreciation on an
individual security.
Fluctuations in the value of an open contract are recorded daily as a net
unrealized gain or loss. The Fund will realize a gain or loss upon termination
or reset of the contract. Either party, under certain conditions, may terminate
the contract prior to the contract's expiration date.
Credit risk may arise as a result of the failure of the counterparty to
comply with the terms of the contract. The Fund considers the creditworthiness
of each counterparty to a contract in evaluating potential credit risk. The
credit risk to the Fund is limited to the net unrealized gain by counterparty,
if any, on the contract, along with dividends and interest receivable on short
equity contracts. Additionally, risk may arise from unanticipated movements in
interest rates or in the value of the underlying securities. At March 31, 2000,
the Fund had the following open contracts:
<TABLE>
<CAPTION>
UNREALIZED
TERMINATION DATE SECURITY SHARES APPRECIATION (DEPRECIATION)
- ---------------- ------------------ ---------- ---------------------------
<S> <C> <C> <C>
5/19/00 BOC Group plc 1,631,800 $(1,976,884)
7/31/00 Burmah Castrol plc 880,700 309,361
-----------
$(1,667,523)
===========
</TABLE>
For the period ended March 31, 2000, the Fund realized gains of $8,977,913
upon the termination of equity swap contracts.
18
<PAGE> 19
INVESTMENT ADVISER
Westchester Capital Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT, AND SHAREHOLDER
SERVICING AGENT
Firstar Mutual Fund Services, LLC
615 East Michigan Street
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
CUSTODIAN
Firstar Bank, N.A.
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
TRUSTEES
Frederick W. Green
Michael J. Downey
James P. Logan III
EXECUTIVE OFFICERS
Frederick W. Green, President
Bonnie L. Smith, Vice President, Treasurer
and Secretary
COUNSEL
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
[THE MERGER FUND(R) LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 2000
