UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-3445
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)
Roy Behren and Michael T. Shannon
100 Summit Lake Drive
Valhalla, New York 10595
(Name and address of agent for service)
1-800-343-8959
Registrant's telephone number, including area code
Date of fiscal year end: September 30
Date of reporting period: March 31, 2011
Item 1. Reports to Stockholders.
THE
MERGER
FUND®
SEMI-ANNUAL REPORT
MARCH 31, 2011
Chart 1 | Chart 2 |
PORTFOLIO COMPOSITION | PORTFOLIO COMPOSITION |
By Type of Deal* | By Type of Buyer* |
Chart 3
PORTFOLIO COMPOSITION
By Deal Terms*
* Data expressed as a percentage of long equity positions as of March 31, 2011
1
Chart 4
PORTFOLIO COMPOSITION
By Sector*
Chart 5
PORTFOLIO COMPOSITION
By Region*
* Data expressed as a percentage of long equity positions as of March 31, 2011
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
2
Chart 6
MERGER ACTIVITY
2001 – 2011
Source: Securities Data Corp.
3
The Merger Fund
EXPENSE EXAMPLE
March 31, 2011
(Unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) redemption fees and (2) ongoing costs, including management fees; distribution and/or service fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 for the period 10/01/10 – 3/31/11.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges no sales load or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop-payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, a $15.00 fee will be charged by the Fund’s transfer agent. You will be charged a redemption fee equal to 2.00% of the net amount of the redemption if you redeem your shares less than 30 calendar days after you purchase them. IRAs will be charged a $12.00 annual maintenance fee. To the extent the Fund invests in shares of other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by the underlying funds in which the Fund invests in addition to the expenses of the Fund. Actual expenses of the underlying funds are expected to vary among the various underlying funds. These expenses are not included in the example below. The example below includes, but is not limited to, management fees, shareholder servicing fees, fund accounting, custody and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses, and other extraordinary expenses as determined under generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account | Ending Account | Expenses Paid During | |
Value 10/01/10 | Value 3/31/11 | Period 10/01/10-3/31/11* | |
Actual + (1) | $1,000.00 | $1,033.10 | $9.38 |
Hypothetical ++ (2) | $1,000.00 | $1,015.71 | $9.30 |
+ | Excluding interest expense, borrowing expense on securities sold short and dividends on securities sold short, your actual cost of investment in the Fund would be $6.89. |
++ | Excluding interest expense, borrowing expense on securities sold short and dividends on securities sold short, your hypothetical cost of investment in the Fund would be $6.84. |
(1) | Ending account values and expenses paid during period based on a 3.31% return. This actual return is net of expenses. |
(2) | Ending account values and expenses paid during period based on a 5.00% annual return before expenses. |
* | Expenses are equal to the Fund’s annualized expense ratio of 1.85%, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). |
4
The Merger Fund
SCHEDULE OF INVESTMENTS
March 31, 2011
(Unaudited)
Shares | Value | ||||||
COMMON STOCKS — 86.12% | |||||||
AEROSPACE & DEFENSE — 2.13% | |||||||
1,561,800 | ITT Corporation (f) | $ | 93,786,090 | ||||
AIRLINES — 1.22% | |||||||
7,241,200 | AirTran Holdings, Inc. (a)(h)(i) | 53,946,940 | |||||
BIOTECHNOLOGY — 5.65% | |||||||
271,800 | Cephalon, Inc. (a)(h) | 20,597,004 | |||||
2,850,213 | Genzyme Corporation (a)(f) | 217,043,720 | |||||
674,800 | Savient Pharmaceuticals Inc. (a) | 7,152,880 | |||||
149,695 | Talecris Biotherapeutics Holdings Corp. (a) | 4,011,826 | |||||
248,805,430 | |||||||
BROADCASTING — 0.27% | |||||||
342,600 | Discovery Communications, Inc. Series K (a)(h) | 12,062,946 | |||||
CABLE & SATELLITE — 1.59% | |||||||
3,013,300 | Comcast Corporation Special Class A (g) | 69,968,826 | |||||
COAL & CONSUMABLE FUELS — 5.01% | |||||||
3,226,700 | Massey Energy Company (f) | 220,577,212 | |||||
COMPUTER STORAGE & PERIPHERALS — 1.43% | |||||||
223,900 | EMC Corp. (a) | 5,944,545 | |||||
3,952,055 | Seagate Technology LLC (a)(b)(f) | 56,909,592 | |||||
62,854,137 | |||||||
CONSTRUCTION & FARM | |||||||
MACHINERY & HEAVY TRUCKS — 6.17% | |||||||
2,971,847 | Bucyrus International Inc. (e) | 271,775,408 | |||||
DEPARTMENT STORES — 0.85% | |||||||
933,900 | Dillard’s, Inc. (h) | 37,468,068 | |||||
DIVERSIFIED CHEMICALS — 1.20% | |||||||
3,043,300 | Huntsman Corporation (f) | 52,892,554 | |||||
DIVERSIFIED METALS & MINING — 5.32% | |||||||
3,801,800 | Fronteer Gold, Inc. (a)(b)(g) | 57,487,765 | |||||
1,000,000 | Hillgrove Resources Ltd. (a)(b) | 294,790 | |||||
326,471 | Rio Tinto plc — ADR (h) | 23,218,617 | |||||
11,733,600 | Western Coal Corp. (a)(b)(g) | 153,213,343 | |||||
234,214,515 | |||||||
ELECTRIC UTILITIES — 0.75% | |||||||
712,300 | Progress Energy Inc. (g) | 32,865,522 |
The accompanying notes are an integral part of these financial statements.
5
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
March 31, 2011
(Unaudited)
Shares | Value | ||||||
GAS UTILITIES — 0.08% | |||||||
61,400 | Nicor Inc. | $ | 3,297,180 | ||||
GENERAL MERCHANDISE STORES — 2.38% | |||||||
373,200 | 99 Cents Only Stores (a) | 7,314,720 | |||||
1,176,600 | Big Lots, Inc. (a)(f) | 51,099,738 | |||||
908,100 | Family Dollar Stores, Inc. (h) | 46,603,692 | |||||
105,018,150 | |||||||
HEALTH CARE EQUIPMENT — 2.79% | |||||||
1,479,796 | Beckman Coulter, Inc. (e) | 122,926,654 | |||||
HEALTH CARE SERVICES — 2.26% | |||||||
911,271 | Emergency Medical Services Corporation (a)(g) | 57,947,723 | |||||
1,131,500 | RehabCare Group, Inc. (a)(h) | 41,718,405 | |||||
99,666,128 | |||||||
HOTELS, RESORTS & CRUISE LINES — 0.46% | |||||||
575,100 | Marriott International Inc. (h) | 20,462,058 | |||||
HOUSEWARES & SPECIALTIES — 1.04% | |||||||
742,500 | Fortune Brands, Inc. (h) | 45,953,325 | |||||
HYPERMARKETS & SUPER CENTERS — 1.37% | |||||||
1,234,500 | BJ’s Wholesale Club, Inc. (a)(f) | 60,268,290 | |||||
INDUSTRIAL REITS — 0.99% | |||||||
2,730,300 | ProLogis (h) | 43,630,194 | |||||
INTEGRATED TELECOMMUNICATION SERVICES — 7.53% | |||||||
2,403,600 | AT&T Inc. (f) | 73,550,160 | |||||
37,712,828 | Qwest Communications International Inc. (e) | 258,332,872 | |||||
331,883,032 | |||||||
INTERNET SOFTWARE & SERVICES — 0.32% | |||||||
745,930 | Terremark Worldwide, Inc. (a)(h) | 14,172,670 | |||||
LIFE SCIENCES TOOLS & SERVICES — 0.51% | |||||||
190,900 | Dionex Corporation (a)(g) | 22,535,745 | |||||
MOVIES & ENTERTAINMENT — 0.22% | |||||||
547,580 | News Corporation Class A (h) | 9,615,504 | |||||
OIL & GAS DRILLING — 2.16% | |||||||
2,212,900 | Pride International, Inc. (a)(g) | 95,044,055 | |||||
OIL & GAS EXPLORATION & PRODUCTION — 2.86% | |||||||
3,789,379 | EXCO Resources Inc. (f) | 78,288,570 | |||||
3,347,300 | Quicksilver Resources Inc. (a)(h) | 47,899,863 | |||||
126,188,433 |
The accompanying notes are an integral part of these financial statements.
6
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
March 31, 2011
(Unaudited)
Shares | Value | ||||||
PACKAGED FOODS & MEATS — 0.98% | |||||||
2,449,200 | Sara Lee Corp. (h) | $ | 43,277,364 | ||||
PAPER PACKAGING — 2.31% | |||||||
2,629,400 | Smurfit-Stone Container Corporation (a)(g) | 101,626,310 | |||||
PERSONAL PRODUCTS — 4.03% | |||||||
4,759,912 | Alberto-Culver Company (e) | 177,401,920 | |||||
REGIONAL BANKS — 4.48% | |||||||
750,000 | Danvers Bancorp, Inc. (h) | 16,065,000 | |||||
20,960,000 | Marshall & Ilsley Corporation (e) | 167,470,400 | |||||
1,593,700 | Sterling Bancshares, Inc. (h) | 13,721,757 | |||||
197,257,157 | |||||||
RESTAURANTS — 0.15% | |||||||
85,000 | McDonald’s Corporation (f) | 6,467,650 | |||||
SEMICONDUCTOR EQUIPMENT — 0.68% | |||||||
2,120,670 | Verigy Ltd. (a)(b)(h) | 29,880,240 | |||||
SEMICONDUCTORS — 1.09% | |||||||
888,640 | Atheros Communications, Inc. (a)(h) | 39,677,776 | |||||
512,097 | SunPower Corp. Class B (a) | 8,536,657 | |||||
48,214,433 | |||||||
SPECIALIZED FINANCE — 2.54% | |||||||
3,176,300 | NYSE Euronext (f) | 111,710,471 | |||||
SPECIALIZED REITS — 0.84% | |||||||
870,400 | Nationwide Health Properties, Inc. (h) | 37,018,112 | |||||
SPECIALTY CHEMICALS — 4.44% | |||||||
1,460,410 | The Lubrizol Corporation (f) | 195,636,524 | |||||
STEEL — 3.01% | |||||||
7,502,100 | Consolidated Thompson Iron Mines Limited (a)(b)(g) | 132,631,247 | |||||
SYSTEMS SOFTWARE — 1.49% | |||||||
11,030,900 | Novell, Inc. (a)(g) | 65,413,237 | |||||
THRIFTS & MORTGAGE FINANCE — 0.22% | |||||||
660,751 | NewAlliance Bancshares Inc. (h) | 9,805,545 | |||||
TRUCKING — 3.30% | |||||||
2,176,101 | Dollar Thrifty Automotive Group, Inc. (a)(f)(i) | 145,211,220 | |||||
TOTAL COMMON STOCKS | |||||||
(Cost $3,586,480,160) | 3,793,430,496 |
The accompanying notes are an integral part of these financial statements.
7
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
March 31, 2011
(Unaudited)
Shares | Value | ||||||
WARRANTS — 0.01% | |||||||
142,642 | Kinross Gold Corporation (a)(b) | $ | 397,249 | ||||
TOTAL WARRANTS | |||||||
(Cost $540,028) | 397,249 | ||||||
Principal Amount | |||||||
CORPORATE BONDS — 1.83% | |||||||
Washington Mutual, Inc. | |||||||
$ | 636,000 | 4.000%, 1/15/2009 (d) | 692,445 | ||||
5,747,000 | 4.200%, 1/15/2010 (d) | 6,278,598 | |||||
9,377,000 | 5.500%, 8/24/2011 (d) | 10,607,731 | |||||
20,154,000 | 5.000%, 3/22/2012 (d) | 22,446,518 | |||||
36,099,000 | 5.250%, 9/15/2017 (d) | 40,521,127 | |||||
TOTAL CORPORATE BONDS | |||||||
(Cost $80,840,448) | 80,546,419 | ||||||
Contracts (100 shares per contract) | |||||||
PURCHASED PUT OPTIONS — 0.13% | |||||||
99 Cents Only Stores | |||||||
3,732 | Expiration: April, 2011, Exercise Price: $17.50 | 18,660 | |||||
AT&T Inc. | |||||||
24,036 | Expiration: May, 2011, Exercise Price: $25.00 | 192,288 | |||||
Big Lots, Inc. | |||||||
6,493 | Expiration: April, 2011, Exercise Price: $32.50 | 16,233 | |||||
5,273 | Expiration: May, 2011, Exercise Price: $35.00 | 279,469 | |||||
BJ’s Wholesale Club, Inc. | |||||||
12,345 | Expiration: April, 2011, Exercise Price: $45.00 | 246,900 | |||||
Cephalon, Inc. | |||||||
1,848 | Expiration: April, 2011, Exercise Price: $65.00 | 27,720 | |||||
870 | Expiration: May, 2011, Exercise Price: $65.00 | 56,550 | |||||
Dillard’s, Inc. | |||||||
9,339 | Expiration: May, 2011, Exercise Price: $35.00 | 793,815 | |||||
Energy Select Sector SPDR Fund | |||||||
846 | Expiration: June, 2011, Exercise Price: $80.00 | 296,100 | |||||
Family Dollar Stores, Inc. | |||||||
4,198 | Expiration: April, 2011, Exercise Price: $42.00 | 10,495 | |||||
4,883 | Expiration: April, 2011, Exercise Price: $43.00 | 24,415 |
The accompanying notes are an integral part of these financial statements.
8
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
March 31, 2011
(Unaudited)
Contracts (100 shares per contract) | Value | ||||||
PURCHASED PUT OPTIONS — 0.13% (continued) | |||||||
Fortune Brands, Inc. | |||||||
7,425 | Expiration: April, 2011, Exercise Price: $55.00 | $ | 37,125 | ||||
Huntsman Corporation | |||||||
12,152 | Expiration: April, 2011, Exercise Price: $13.00 | 30,380 | |||||
10,226 | Expiration: May, 2011, Exercise Price: $13.00 | 102,260 | |||||
iShares Nasdaq Biotechnology Index Fund | |||||||
643 | Expiration: June, 2011, Exercise Price: $100.00 | 192,900 | |||||
Marriott International Inc. | |||||||
5,751 | Expiration: April, 2011, Exercise Price: $35.00 | 373,815 | |||||
Massey Energy Company | |||||||
8,776 | Expiration: April, 2011, Exercise Price: $50.00 | 39,492 | |||||
Materials Select Sectors SPDR | |||||||
636 | Expiration: June, 2011, Exercise Price: $40.00 | 108,756 | |||||
McDonald’s Corporation | |||||||
850 | Expiration: June, 2011, Exercise Price: $70.00 | 54,400 | |||||
Nationwide Health Properties, Inc. | |||||||
8,704 | Expiration: June, 2011, Exercise Price: $35.00 | 239,360 | |||||
NYSE Euronext | |||||||
977 | Expiration: April, 2011, Exercise Price: $31.00 | 3,908 | |||||
7,197 | Expiration: April, 2011, Exercise Price: $32.00 | 57,576 | |||||
5,273 | Expiration: April, 2011, Exercise Price: $33.00 | 79,095 | |||||
Progress Energy Inc. | |||||||
3,816 | Expiration: April, 2011, Exercise Price: $41.00 | 28,620 | |||||
ProLogis | |||||||
27,303 | Expiration: July, 2011, Exercise Price: $12.00 | 341,287 | |||||
Quicksilver Resources Inc. | |||||||
33,473 | Expiration: April, 2011, Exercise Price: $12.00 | 83,683 | |||||
Sara Lee Corp. | |||||||
14,500 | Expiration: April, 2011, Exercise Price: $15.00 | 36,250 | |||||
6,140 | Expiration: May, 2011, Exercise Price: $15.00 | 30,700 | |||||
Seagate Technology LLC | |||||||
12,218 | Expiration: April, 2011, Exercise Price: $11.00 | 24,436 | |||||
8,178 | Expiration: May, 2011, Exercise Price: $11.00 | 81,780 | |||||
Smith & Nephew PLC | |||||||
8,297 | Expiration: June, 2011, Exercise Price: GBP 6.00 | 46,546 | |||||
SPDR S&P 500 ETF Trust | |||||||
6,860 | Expiration: May, 2011, Exercise Price: $130.00 | 1,522,920 |
The accompanying notes are an integral part of these financial statements.
9
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
March 31, 2011
(Unaudited)
Contracts (100 shares per contract) | Value | ||||||
PURCHASED PUT OPTIONS — 0.13% (continued) | |||||||
Technology Select Sector SPDR Fund | |||||||
2,240 | Expiration: June, 2011, Exercise Price: $27.00 | $ | 321,440 | ||||
TOTAL PURCHASED PUT OPTIONS | |||||||
(Cost $12,748,689) | 5,799,374 | ||||||
Shares | |||||||
SHORT-TERM INVESTMENTS — 12.87% | |||||||
276,000,000 | Fidelity Institutional Money Market Portfolio 0.21% (c) | 276,000,000 | |||||
14,870,191 | Fidelity Institutional Prime Money Market Portfolio 0.16% (c) | 14,870,191 | |||||
276,000,000 | Goldman Sachs Money Market 0.17% (c) | 276,000,000 | |||||
TOTAL SHORT-TERM INVESTMENTS | |||||||
(Cost $566,870,191) | 566,870,191 | ||||||
TOTAL INVESTMENTS | |||||||
(Cost $4,247,479,516) — 100.96% | $ | 4,447,043,729 |
ADR — American Depository Receipt
GBP — British Pounds
(a) | Non-income producing security. |
(b) | Foreign security. |
(c) | The rate quoted is the annualized seven-day yield as of March 31, 2011. |
(d) | Default or other conditions exist and security is not presently accruing income. |
(e) | All or a portion of the shares have been committed as collateral for open securities sold short. |
(f) | All or a portion of the shares have been committed as collateral for written option contracts. |
(g) | All or a portion of the shares have been committed as collateral for swap contracts. |
(h) | All or a portion of the shares have been committed as collateral for forward currency exchange contracts. |
(i) | Affiliated company. |
The Global Industry Classifications Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
10
The Merger Fund
SCHEDULE OF SECURITIES SOLD SHORT
March 31, 2011
(Unaudited)
Shares | Value | ||||||
51,449 | AGL Resources Inc. | $ | 2,049,728 | ||||
2,408,271 | Alpha Natural Resources Inc. | 142,979,049 | |||||
32,193 | Avis Budget Group, Inc. | 576,577 | |||||
2,632,318 | Bank of Montreal (a) | 171,048,024 | |||||
6,247,953 | CenturyLink, Inc. | 259,602,447 | |||||
3,013,800 | Comcast Corporation Class A | 74,501,136 | |||||
376,902 | Comerica Incorporated | 13,839,841 | |||||
342,600 | Discovery Communications, Inc. | 13,669,740 | |||||
1,057,648 | Ensco plc — ADR | 61,174,360 | |||||
625,069 | First Niagara Financial Group | 8,488,437 | |||||
12,500 | Genzyme Corporation | 951,875 | |||||
95,345 | Grifols SA (a) | 1,662,004 | |||||
533,157 | Kindred Healthcare, Inc. | 12,731,789 | |||||
7,429 | Kinross Gold Corporation (a) | 117,086 | |||||
547,580 | News Corporation Class B | 10,195,940 | |||||
205,100 | Nissan Motor Co., Ltd. (a) | 1,819,714 | |||||
848,195 | Novartis AG — ADR | 46,099,398 | |||||
669,700 | People’s United Financial Inc. | 8,424,826 | |||||
470,200 | Pilot Gold | 339,495 | |||||
327,293 | Rio Tinto Ltd. (a) | 28,805,399 | |||||
804,576 | RockTenn Company | 55,797,346 | |||||
1,107,626 | Southwest Airlines Co. | 13,989,317 | |||||
512,097 | SunPower Corp. Class A | 8,777,343 | |||||
17,915 | VMware Inc. | 1,460,789 | |||||
417,046 | Walter Energy Inc. | 56,480,540 | |||||
TOTAL SECURITIES SOLD SHORT | |||||||
(Proceeds $887,513,811) | $ | 995,582,200 |
ADR — American Depository Receipt
(a)Foreign security.
The accompanying notes are an integral part of these financial statements.
11
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN
March 31, 2011
(Unaudited)
Contracts (100 shares per contract) | Value | ||||||
CALL OPTIONS WRITTEN | |||||||
99 Cents Only Stores | |||||||
3,732 | Expiration April 2011, Exercise Price $20.00 | $ | 37,320 | ||||
ASX Ltd. | |||||||
1,422 | Expiration April 2011, Exercise Price AUD 34.00 | 143,409 | |||||
5,864 | Expiration April 2011, Exercise Price AUD 34.50 | 397,281 | |||||
4,900 | Expiration April 2011, Exercise Price AUD 37.50 | 15,190 | |||||
AT&T Inc. | |||||||
24,036 | Expiration May 2011, Exercise Price $28.00 | 6,309,450 | |||||
Big Lots, Inc. | |||||||
6,493 | Expiration April 2011, Exercise Price $37.50 | 3,895,800 | |||||
5,273 | Expiration May 2011, Exercise Price $40.00 | 2,552,132 | |||||
BJ’s Wholesale Club, Inc. | |||||||
12,345 | Expiration April 2011, Exercise Price $47.50 | 2,345,550 | |||||
British Sky Broadcasting Group | |||||||
31,552 | Expiration June 2011, Exercise Price GBP 8.20 | 1,379,138 | |||||
Cephalon, Inc. | |||||||
1,848 | Expiration April 2011, Exercise Price $75.00 | 351,120 | |||||
870 | Expiration May 2011, Exercise Price $75.00 | 252,300 | |||||
Dillard’s, Inc. | |||||||
9,339 | Expiration May 2011, Exercise Price $38.00 | 3,595,515 | |||||
Dollar Thrifty Automotive Group, Inc. | |||||||
4,339 | Expiration April 2011, Exercise Price $48.00 | 8,135,625 | |||||
8,521 | Expiration April 2011, Exercise Price $50.00 | 14,255,633 | |||||
5,125 | Expiration May 2011, Exercise Price $55.00 | 6,201,250 | |||||
1,707 | Expiration May 2011, Exercise Price $60.00 | 1,314,390 | |||||
EXCO Resources, Inc. | |||||||
8,605 | Expiration April 2011, Exercise Price $20.00 | 666,888 | |||||
9,186 | Expiration June 2011, Exercise Price $21.00 | 643,020 | |||||
Family Dollar Stores, Inc. | |||||||
9,081 | Expiration April 2011, Exercise Price $47.00 | 4,222,665 | |||||
Fortune Brands, Inc. | |||||||
7,425 | Expiration April 2011, Exercise Price $60.00 | 1,633,500 | |||||
Genzyme Corporation | |||||||
12,896 | Expiration July 2011, Exercise Price $75.00 | 1,740,960 | |||||
Huntsman Corporation | |||||||
12,152 | Expiration April 2011, Exercise Price $16.00 | 1,822,800 | |||||
16,326 | Expiration May 2011, Exercise Price $17.00 | 2,122,380 |
The accompanying notes are an integral part of these financial statements.
12
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
March 31, 2011
(Unaudited)
Contracts (100 shares per contract) | Value | ||||||
ITT Corporation | |||||||
7,703 | Expiration April 2011, Exercise Price $55.00 | $ | 4,005,560 | ||||
1,895 | Expiration April 2011, Exercise Price $60.00 | 161,075 | |||||
2,992 | Expiration May 2011, Exercise Price $60.00 | 553,520 | |||||
2,228 | Expiration July 2011, Exercise Price $55.00 | 1,303,380 | |||||
The Lubrizol Corporation | |||||||
839 | Expiration June 2011, Exercise Price $135.00 | 29,365 | |||||
8,977 | Expiration September 2011, Exercise Price $135.00 | 359,080 | |||||
Marriott International Inc. | |||||||
1,917 | Expiration April 2011, Exercise Price $40.00 | 9,585 | |||||
3,834 | Expiration May 2011, Exercise Price $35.00 | 766,800 | |||||
Massey Energy Company | |||||||
8,776 | Expiration April 2011, Exercise Price $57.50 | 9,675,540 | |||||
McDonald’s Corporation | |||||||
850 | Expiration June 2011, Exercise Price $75.00 | 221,850 | |||||
Nationwide Health Properties | |||||||
8,704 | Expiration June 2011, Exercise Price $40.00 | 2,611,200 | |||||
NYSE Euronext | |||||||
5,531 | Expiration April 2011, Exercise Price $33.00 | 1,285,958 | |||||
11,170 | Expiration April 2011, Exercise Price $34.00 | 1,641,990 | |||||
8,417 | Expiration April 2011, Exercise Price $35.00 | 707,028 | |||||
5,273 | Expiration April 2011, Exercise Price $36.00 | 263,650 | |||||
1,372 | Expiration May 2011, Exercise Price $34.00 | 300,468 | |||||
Progress Energy Inc. | |||||||
7,123 | Expiration April 2011, Exercise Price $45.00 | 925,990 | |||||
ProLogis | |||||||
27,303 | Expiration July 2011, Exercise Price $15.00 | 4,027,192 | |||||
Quicksilver Resources Inc. | |||||||
33,473 | Expiration April 2011, Exercise Price $14.00 | 1,673,650 | |||||
Sara Lee Corp. | |||||||
14,500 | Expiration April 2011, Exercise Price $17.00 | 1,160,000 | |||||
6,140 | Expiration May 2011, Exercise Price $17.00 | 601,720 | |||||
2,094 | Expiration May 2011, Exercise Price $18.00 | 73,290 | |||||
Seagate Technology LLC | |||||||
14,173 | Expiration April 2011, Exercise Price $13.00 | 2,090,517 | |||||
3,910 | Expiration April 2011, Exercise Price $14.00 | 261,970 | |||||
15,795 | Expiration May 2011, Exercise Price $14.00 | 1,737,450 |
The accompanying notes are an integral part of these financial statements.
13
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
March 31, 2011
(Unaudited)
Contracts (100 shares per contract) | Value | ||||||
Smith & Nephew PLC | |||||||
4,188 | Expiration June 2011, Exercise Price GBP 6.60 | $ | 376,250 | ||||
4,109 | Expiration June 2011, Exercise Price GBP 6.80 | 290,054 | |||||
Walter Energy Inc. | |||||||
288 | Expiration April 2011, Exercise Price $110.00 | 736,128 | |||||
PUT OPTIONS WRITTEN | |||||||
SPDR S&P 500 ETF Trust | |||||||
1,715 | Expiration May 2011, Exercise Price $120.00 | 108,045 | |||||
TOTAL OPTIONS WRITTEN | |||||||
(Premiums received $71,723,044) | $ | 101,991,621 |
AUD — Australian Dollars
GBP — British Pounds
The accompanying notes are an integral part of these financial statements.
14
The Merger Fund
SCHEDULE OF FORWARD CONTRACTS
March 31, 2011
(Unaudited)
Settlement | Currency to | U.S. $ Value at | Currency to | U.S. $ Value at | ||||||||||||||||||
Date | be Delivered | March 31, 2011 | be Received | March 31, 2011 | Unrealized | |||||||||||||||||
4/1/11 | 87,203,760 | Australian Dollars | $ | 90,188,150 | 85,982,907 | U.S. Dollars | $ | 85,982,907 | $ | (4,205,243 | ) | |||||||||||
4/1/11 | 87,847,037 | U.S. Dollars | 87,847,037 | 87,203,760 | Australian Dollars | 90,188,150 | 2,341,113 | |||||||||||||||
4/29/11 | 20,809,899 | Australian Dollars | 21,447,856 | 20,784,376 | U.S. Dollars | 20,784,376 | (663,480 | ) | ||||||||||||||
5/2/11 | 1,682,751 | Australian Dollars | 1,733,652 | 1,693,521 | U.S. Dollars | 1,693,521 | (40,131 | ) | ||||||||||||||
5/6/11 | 43,440,325 | Australian Dollars | 44,729,980 | 43,343,402 | U.S. Dollars | 43,343,402 | (1,386,578 | ) | ||||||||||||||
5/11/11 | 2,502,725 | Australian Dollars | 2,575,273 | 2,510,984 | U.S. Dollars | 2,510,984 | (64,289 | ) | ||||||||||||||
5/11/11 | 1,255,096 | U.S. Dollars | 1,255,096 | 1,277,954 | Australian Dollars | 1,314,999 | 59,903 | |||||||||||||||
5/17/11 | 4,100,564 | Australian Dollars | 4,215,990 | 3,997,407 | U.S. Dollars | 3,997,407 | (218,583 | ) | ||||||||||||||
6/29/11 | 6,197,369 | Australian Dollars | 6,337,523 | 6,184,974 | U.S. Dollars | 6,184,974 | (152,549 | ) | ||||||||||||||
6/29/11 | 97,990 | U.S. Dollars | 97,990 | 99,080 | Australian Dollars | 101,321 | 3,331 | |||||||||||||||
6/30/11 | 7,943,658 | Australian Dollars | 8,122,288 | 7,938,097 | U.S. Dollars | 7,938,097 | (184,191 | ) | ||||||||||||||
4/8/11 | 94,454,694 | Canadian Dollars | 97,409,462 | 95,799,756 | U.S. Dollars | 95,799,756 | (1,609,706 | ) | ||||||||||||||
4/8/11 | 4,601,413 | U.S. Dollars | 4,601,413 | 4,457,982 | Canadian Dollars | 4,597,438 | (3,975 | ) | ||||||||||||||
4/15/11 | 129,411,225 | Canadian Dollars | 133,438,785 | 130,825,727 | U.S. Dollars | 130,825,727 | (2,613,058 | ) | ||||||||||||||
5/4/11 | 5,478,030 | Canadian Dollars | 5,646,134 | 5,604,651 | U.S. Dollars | 5,604,651 | (41,483 | ) | ||||||||||||||
5/4/11 | 5,313,769 | U.S. Dollars | 5,313,769 | 5,194,935 | Canadian Dollars | 5,354,352 | 40,583 | |||||||||||||||
5/6/11 | 54,883,944 | Canadian Dollars | 56,565,640 | 55,565,268 | U.S. Dollars | 55,565,267 | (1,000,373 | ) | ||||||||||||||
5/3/11 | 302,184,645 | Danish Krone | 57,406,236 | 55,653,668 | U.S. Dollars | 55,653,668 | (1,752,568 | ) | ||||||||||||||
7/14/11 | 11,519,775 | Euros | 16,289,275 | 16,091,272 | U.S. Dollars | 16,091,272 | (198,003 | ) | ||||||||||||||
7/29/11 | 6,817,257 | Euros | 9,635,971 | 9,468,858 | U.S. Dollars | 9,468,858 | (167,113 | ) | ||||||||||||||
6/23/11 | 5,558,200 | British Pounds | 8,905,902 | 8,963,532 | U.S. Dollars | 8,963,532 | 57,630 | |||||||||||||||
8/25/11 | 103,919,656 | British Pounds | 166,315,490 | 167,997,717 | U.S. Dollars | 167,997,717 | 1,682,227 | |||||||||||||||
8/25/11 | 34,172,626 | U.S. Dollars | 34,172,626 | 21,100,344 | British Pounds | 33,769,493 | (403,133 | ) | ||||||||||||||
5/9/11 | 453,030,617 | Japanese Yen | 5,447,638 | 5,669,970 | U.S. Dollars | 5,669,970 | 222,332 | |||||||||||||||
5/9/11 | 5,471,384 | U.S. Dollars | 5,471,384 | 453,030,617 | Japanese Yen | 5,447,638 | (23,746 | ) | ||||||||||||||
$ | 875,170,560 | $ | 864,849,477 | $ | (10,321,083 | ) |
The accompanying notes are an integral part of these financial statements.
15
The Merger Fund
SCHEDULE OF SWAP CONTRACTS
March 31, 2011
(Unaudited)
Unrealized | |||||||||||||||
Termination | Appreciation | ||||||||||||||
Date | Security | Shares | Notional | (Depreciation) | Counterparty | ||||||||||
4/12/11 | Alcon, Inc. | 1,889,339 | 313,044,579 | $ | 810,100 | JPMorgan Chase & Co. Inc. | |||||||||
9/29/11 | ASX Ltd. | 1,218,592 | 43,415,996 | (1,886,566 | ) | JPMorgan Chase & Co. Inc. | |||||||||
12/31/11 | British Sky Broadcasting Group | 3,217,800 | 42,997,580 | 8,950,795 | Merrill Lynch & Co. Inc. | ||||||||||
12/31/11 | British Sky Broadcasting Group | 7,377,319 | 98,532,948 | 10,482,210 | JPMorgan Chase & Co. Inc. | ||||||||||
6/30/11 | Bulgari SpA | 552,900 | 9,559,143 | 270,820 | JPMorgan Chase & Co. Inc. | ||||||||||
5/20/11 | Danisco A/S | 454,413 | 57,106,082 | 2,171,818 | Merrill Lynch & Co. Inc. | ||||||||||
12/31/11 | Hillgrove Resources Ltd. | 14,245,760 | 4,119,874 | (1,058,196 | ) | JPMorgan Chase & Co. Inc. | |||||||||
12/31/11 | Indophil Resources NL | 11,348,083 | 7,617,968 | (4,494,280 | ) | JPMorgan Chase & Co. Inc. | |||||||||
12/31/11 | Infigen Energy | 3,061,928 | 1,154,041 | (2,191,610 | ) | JPMorgan Chase & Co. Inc. | |||||||||
12/31/11 | Renault SA | 63,300 | 3,462,921 | (432,459 | ) | JPMorgan Chase & Co. Inc. | |||||||||
4/8/11 | Riversdale Mining Ltd. | 1,261,206 | 21,412,125 | 1,897,149 | JPMorgan Chase & Co. Inc. | ||||||||||
6/30/11 | Smith & Nephew PLC | 829,700 | 9,407,056 | 323,836 | Merrill Lynch & Co. Inc. | ||||||||||
8/30/11 | Tognum AG | 460,791 | 16,434,526 | 458,860 | JPMorgan Chase & Co. Inc. | ||||||||||
5/17/11 | Tower Australia Group Limited | 1,025,141 | 4,171,094 | 343,941 | JPMorgan Chase & Co. Inc. | ||||||||||
4/13/11 | Whitehaven Coal Limited | 240,393 | 1,658,327 | 169,712 | JPMorgan Chase & Co. Inc. | ||||||||||
12/31/11 | Daimler AG | (7,029 | ) | (494,788 | ) | 17,959 | JPMorgan Chase & Co. Inc. | ||||||||
4/13/11 | Novartis AG | (27,313,069 | ) | (150,187,244 | ) | 1,015,358 | JPMorgan Chase & Co. Inc. | ||||||||
4/14/11 | Novartis AG - Reg. | (77,203 | ) | (4,204,475 | ) | 80,570 | JPMorgan Chase & Co. Inc. | ||||||||
12/31/11 | Volvo AB | (29,677 | ) | (525,829 | ) | (11,803 | ) | JPMorgan Chase & Co. Inc. | |||||||
$ | 16,918,214 |
The accompanying notes are an integral part of these financial statements.
16
The Merger Fund
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2011
(Unaudited)
ASSETS: | ||||||||
Investments, at value | ||||||||
Investments in non affiliates (Cost $4,083,433,367) | $ | 4,247,885,569 | ||||||
Investments in affiliates (Cost $164,046,149) | 199,158,160 | |||||||
Total Investments | $ | 4,447,043,729 | ||||||
Cash | 1,922,323 | |||||||
Deposits at brokers | 204,827,358 | |||||||
Receivable from brokers | 887,494,812 | |||||||
Receivable for investments sold | 26,719,345 | |||||||
Receivable for swap contracts | 16,918,214 | |||||||
Receivable for fund shares issued | 27,400,774 | |||||||
Dividends and interest receivable | 2,540,518 | |||||||
Prepaid expenses and other receivables | 437,146 | |||||||
Total Assets | 5,615,304,219 | |||||||
LIABILITIES: | ||||||||
Securities sold short, at value (proceeds of $887,513,811) | $ | 995,582,200 | ||||||
Written option contracts, at value (premiums received $71,723,044) | 101,991,621 | |||||||
Payable for forward currency exchange contracts | 10,321,083 | |||||||
Payable for closed swap contracts | 530,325 | |||||||
Payable for swap interest | 237,633 | |||||||
Payable for investments purchased | 81,121,816 | |||||||
Payable for fund shares redeemed | 4,783,305 | |||||||
Investment advisory fee payable | 3,217,239 | |||||||
Distribution fees payable | 2,621,376 | |||||||
Dividends payable | 6,684,099 | |||||||
Accrued expenses and other liabilities | 3,263,073 | |||||||
Total Liabilities | 1,210,353,770 | |||||||
NET ASSETS | $ | 4,404,950,449 | ||||||
NET ASSETS CONSIST OF: | ||||||||
Accumulated undistributed net investment loss | $ | (10,099,689 | ) | |||||
Accumulated undistributed net realized gain on investments, securities | ||||||||
sold short, written option contracts expired or closed, swap contracts, | ||||||||
foreign currency translation and forward currency exchange contracts | 64,214,163 | |||||||
Net unrealized appreciation (depreciation) on: | ||||||||
Investments | $ | 199,564,213 | ||||||
Securities sold short | (108,068,389 | ) | ||||||
Written option contracts | (30,268,577 | ) | ||||||
Swap contracts | 16,918,214 | |||||||
Foreign currency translation | 2,403 | |||||||
Forward currency exchange contracts | (10,321,083 | ) | ||||||
Net unrealized appreciation | 67,826,781 | |||||||
Paid-in capital | 4,283,009,194 | |||||||
Total Net Assets | $ | 4,404,950,449 | ||||||
NET ASSET VALUE and offering price per share*, ($4,404,950,449 / 272,630,536 | ||||||||
shares of beneficial interest outstanding) | $ | 16.16 |
*The redemption price per share may vary based on the length of time a shareholder holds Fund shares.
The accompanying notes are an integral part of these financial statements.
17
The Merger Fund
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2011
(Unaudited)
INVESTMENT INCOME: | ||||||||
Interest | $ | 4,833,506 | ||||||
Dividend income on long positions | ||||||||
Non Affiliates | 14,298,144 | |||||||
Affiliates | 132,179 | |||||||
Total investment income | 19,263,829 | |||||||
EXPENSES: | ||||||||
Investment advisory fees | $ | 19,701,554 | ||||||
Distribution fees | 4,925,389 | |||||||
Transfer agent and shareholder servicing agent fees | 2,460,809 | |||||||
Administration fees | 684,478 | |||||||
Federal and state registration fees | 290,097 | |||||||
Reports to shareholders | 309,416 | |||||||
Professional fees | 190,038 | |||||||
Fund accounting expense | 181,856 | |||||||
Miscellaneous expenses | 90,428 | |||||||
Custody fees | 150,257 | |||||||
Trustees’ fees and expenses | 52,290 | |||||||
Borrowing expense on securities sold short | 1,858,228 | |||||||
Dividends on securities sold short | 7,701,218 | |||||||
Total expenses before expense waiver by adviser | 38,596,058 | |||||||
Less: Expense reimbursed by Adviser | (2,195,105 | ) | ||||||
Net expenses | 36,400,953 | |||||||
NET INVESTMENT LOSS | (17,137,124 | ) | ||||||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | ||||||||
Realized gain (loss) on: | ||||||||
Investments | ||||||||
Non Affiliates | 59,428,299 | |||||||
Affiliates | 19,733,002 | |||||||
Securities sold short | 2,344,010 | |||||||
Written option contracts expired or closed | 43,520,909 | |||||||
Swap contracts | 58,198,326 | |||||||
Foreign currency translation | 17,280 | |||||||
Forward currency exchange contracts | (72,053,306 | ) | ||||||
Net realized gain | 111,188,520 | |||||||
Change in unrealized appreciation / (depreciation) on: | ||||||||
Investments | 105,811,257 | |||||||
Securities sold short | (74,934,935 | ) | ||||||
Written option contracts | (37,568,074 | ) | ||||||
Swap contracts | 9,947,103 | |||||||
Foreign currency translation | (4,680 | ) | ||||||
Forward currency exchange contracts | 34,016,363 | |||||||
Net unrealized appreciation | 37,267,034 | |||||||
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 148,455,554 | |||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 131,318,430 |
The accompanying notes are an integral part of these financial statements.
18
The Merger Fund
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended | Year Ended | |||||||
March 31, 2011 | September 30, 2010 | |||||||
(Unaudited) | ||||||||
Net investment loss | $ | (17,137,124 | ) | $ | (35,261,194 | ) | ||
Net realized gain on investments, securities sold short, | ||||||||
written option contracts expired or closed, | ||||||||
swap contracts, foreign currency translation | ||||||||
and forward currency exchange contracts | 111,188,520 | 153,002,878 | ||||||
Change in unrealized appreciation (depreciation) | ||||||||
on investments, securities sold short, written option | ||||||||
contracts, swap contracts, foreign currency translation | ||||||||
and forward currency exchange contracts | 37,267,034 | (10,669,250 | ) | |||||
Net increase in net assets resulting from operations | 131,318,430 | 107,072,434 | ||||||
Distributions to shareholders from: (Note 5) | ||||||||
Net investment income | — | (42,329 | ) | |||||
Net realized gains | (70,276,450 | ) | — | |||||
Return of capital | — | — | ||||||
Total dividends and distributions | (70,276,450 | ) | (42,329 | ) | ||||
Net increase in net assets from | ||||||||
capital share transactions (Note 4) | 770,326,177 | 1,655,172,030 | ||||||
Net increase in net assets | 831,368,157 | 1,762,202,135 | ||||||
NET ASSETS: | ||||||||
Beginning of period | 3,573,582,292 | 1,811,380,157 | ||||||
End of period (including accumulated undistributed | ||||||||
net investment income (loss) of $(10,099,689) | ||||||||
and $7,037,435, respectively) | $ | 4,404,950,449 | $ | 3,573,582,292 |
The accompanying notes are an integral part of these financial statements.
19
The Merger Fund
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding throughout each year.
Six Months | Year | Year | Year | Year | Year | |||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
March 31, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Net Asset Value, beginning of year | $ | 15.93 | $ | 15.26 | $ | 14.79 | $ | 16.55 | $ | 15.95 | $ | 15.78 | ||||||||||||
Income from investment operations: | ||||||||||||||||||||||||
Net investment income (loss)(1) | (0.07 | )(3) | (0.02 | )(2) | 0.24 | (2) | 0.00 | (3)(4) | 0.13 | (3) | 0.06 | (3) | ||||||||||||
Net realized and unrealized | ||||||||||||||||||||||||
gain (loss) on investments | 0.59 | 0.69 | 0.58 | (0.70 | ) | 1.13 | 0.99 | |||||||||||||||||
Total from investment operations | 0.52 | 0.67 | 0.82 | (0.70 | ) | 1.26 | 1.05 | |||||||||||||||||
Redemption fees | 0.00 | (4) | 0.00 | (4) | 0.00 | (4) | 0.00 | (4) | 0.00 | (4) | 0.00 | (4) | ||||||||||||
Less distributions: | ||||||||||||||||||||||||
Distributions from | ||||||||||||||||||||||||
net investment income | — | — | (4) | (0.06 | ) | (0.37 | ) | (0.11 | ) | (0.01 | ) | |||||||||||||
Distributions from net realized gains | (0.29 | ) | — | (0.05 | ) | (0.69 | ) | (0.55 | ) | (0.87 | ) | |||||||||||||
Distributions from return to capital | — | — | (0.24 | ) | — | — | — | |||||||||||||||||
Total distributions | (0.29 | ) | — | (0.35 | ) | (1.06 | ) | (0.66 | ) | (0.88 | ) | |||||||||||||
Net Asset Value, end of period | $ | 16.16 | $ | 15.93 | $ | 15.26 | $ | 14.79 | $ | 16.55 | $ | 15.95 | ||||||||||||
Total Return | 3.31 | % | 4.39 | % | 5.78 | % | (4.32 | )% | 8.15 | % | 7.10 | % | ||||||||||||
Supplemental data and ratios: | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 4,404,950 | $ | 3,573,582 | $ | 1,811,380 | $ | 1,414,165 | $ | 1,821,714 | $ | 1,563,045 | ||||||||||||
Ratio of operating expenses | ||||||||||||||||||||||||
to average net assets | 1.85 | %(7) | 2.57 | % | 4.22 | % | 1.66 | % | 2.16 | % | 2.08 | % | ||||||||||||
Ratio of dividends on short positions | ||||||||||||||||||||||||
and borrowing expense on securities | ||||||||||||||||||||||||
sold short to average net assets | 0.49 | %(7) | 1.16 | % | 2.68 | % | 0.19 | % | 0.76 | % | 0.71 | % | ||||||||||||
Ratio of operating expense to average | ||||||||||||||||||||||||
net assets excluding dividends on | ||||||||||||||||||||||||
short positions and borrowing | ||||||||||||||||||||||||
expense on securities sold short | ||||||||||||||||||||||||
Before expense waiver | 1.47 | %(7) | 1.48 | % | 1.54 | % | 1.48 | % | 1.41 | % | 1.37 | % | ||||||||||||
After expense waiver | 1.36 | %(7) | 1.41 | % | 1.54 | % | 1.47 | % | 1.40 | %(5) | 1.37 | % | ||||||||||||
Ratio of net investment income (loss) | ||||||||||||||||||||||||
to average net assets | ||||||||||||||||||||||||
Before expense waiver | (0.98 | )%(7) | (1.35 | )% | (2.49 | )% | (0.10 | )% | 0.82 | % | 0.43 | % | ||||||||||||
After expense waiver | (0.87 | )%(7) | (1.28 | )% | (2.49 | )% | (0.09 | )% | 0.83 | % | 0.43 | % | ||||||||||||
Portfolio turnover rate(6) | 139.04 | % | 192.21 | % | 318.45 | % | 300.24 | % | 334.87 | % | 369.47 | % |
Footnotes To Financial Highlights On Following Page
The accompanying notes are an integral part of these financial statements.
20
The Merger Fund
FINANCIAL HIGHLIGHTS (continued)
(1) | Net investment income (loss) before interest expense, borrowing expense on securities sold short and dividends on securities sold short for the six months ended March 31, 2011 and the years ended September 30, 2010, 2009, 2008, 2007 and 2006 was $(0.03), $0.12, $0.55, $0.02, $0.26 and $0.18, respectively. |
(2) | Net investment income per share is calculated using ending balance after consideration of adjustments for permanent book and tax differences. |
(3) | Net investment income (loss) per share is calculated using ending balances prior to consideration of adjustments for permanent book and tax differences. |
(4) | Amount less than $0.005 per share. |
(5) | The Fund incurred proxy expenses of approximately $525,000 in 2007 related to shareholder approval of changes in the Fund’s fundamental investment policies and the election of trustees. |
(6) | The numerator for the portfolio turnover rate includes the lesser of purchases or sales (excluding short positions). The denominator includes the average long positions throughout the year. |
(7) | Annualized. |
The accompanying notes are an integral part of these financial statements.
21
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2011 (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, as amended (the “1940 Act”). The Fund was formerly known as the Risk Portfolio of The Ayco Fund. In January of 1989, the Fund’s fundamental investment policies were amended to permit the Fund to engage 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. See Note 3 for a discussion of a transaction under which Westchester Capital Management, LLC (the “Adviser”) became the Fund’s investment adviser. 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 followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles.
A.Investment Valuation
Securities listed on the NASDAQ Global Market and the NASDAQ Global Select Market are valued at the NASDAQ Official Closing Price (“NOCP”). Investments in registered investment companies that are money market funds are valued at the end of day net asset value. Other listed securities are valued at the last sale price on the exchange on which such securities are primarily traded or, in the case of options, at the last sale price. Securities not listed on an exchange and securities for which there are no transactions are valued at the average of the closing bid and asked prices. When pricing options, if no sales are reported or if the last sale is outside the bid and asked parameters, the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices will be used. Securities for which there are no such valuations are valued at fair value as determined in good faith by the Adviser under the supervision of the Board of Trustees. The Adviser reserves the right to value securities, including options, at prices other than last-sale prices, intrinsic value prices, or the average of closing bid and asked prices, when such prices are believed unrepresentative of fair market value as determined in good faith by the Adviser. When fair-value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities. In addition, due to the subjective and variable nature of fair-value pricing, it is possible that the value determined for a particular asset may be materially different from the value realized upon such asset’s sale. At March 31, 2011, the Fund did not have any fair valued securities. Investments in United States government securities (other than short-term securities) are valued at the average of the quoted bid and asked prices in the over-the-counter market. Short-term investments are carried at amortized cost, which approximates market value.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determination. Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
22
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
Level 1 — | Quoted prices in active markets for identical securities. | |
Level 2 — | Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). | |
Level 3 — | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following tables provide the fair value measurements of applicable Fund assets and liabilities by level within the fair value hierarchy for the Fund as of March 31, 2011. These assets and liabilities are measured on a recurring basis.
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Assets | |||||||||||||||||
Common Stocks* | $ | 3,381,884,281 | $ | 411,546,215 | $ | — | $ | 3,793,430,496 | |||||||||
Warrants | 397,249 | — | — | 397,249 | |||||||||||||
Corporate Bonds | — | 80,546,419 | — | 80,546,419 | |||||||||||||
Purchased Put Options | 5,752,828 | 46,546 | — | 5,799,374 | |||||||||||||
Short-Term Investments | 566,870,191 | — | — | 566,870,191 | |||||||||||||
Swap Contracts** | — | 16,918,214 | — | 16,918,214 | |||||||||||||
Liabilities | |||||||||||||||||
Securities Sold Short | $ | 966,320,220 | $ | 29,261,980 | $ | — | $ | 995,582,200 | |||||||||
Options Written | 99,390,299 | 2,601,322 | — | 101,991,621 | |||||||||||||
Forward Currency | |||||||||||||||||
Exchange Contracts** | — | 10,321,083 | — | 10,321,083 |
* | Please refer to the Schedule of Investments to view common stocks segregated by industry type. |
** | Swap contracts and forward currency exchange contracts are valued at the unrealized appreciation (depreciation) on the instrument. |
The Fund did not invest in Level 3 Securities at March 31, 2011. There were no transfers into or out of Level 1 or 2 during the period.
B.Securities Sold Short
The Fund may sell securities or currencies short for economic hedging purposes. For financial statement purposes, an amount equal to the settlement amount is initially 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 or currencies sold, but not yet purchased, may require purchasing the
23
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
securities or currencies at prices which may differ from the market value reflected on the Statement of Assets and Liabilities. Short sale transactions result in off balance sheet risk because the ultimate obligation may exceed the related amounts shown in the Statement of Assets and Liabilities. The Fund will incur a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund’s loss on a short sale is potentially unlimited because there is no upward limit on the price a borrowed security could attain.
The Fund is liable for any dividends payable on securities while those securities are sold short. Until the security is replaced, the Fund is required to pay to the lender any income earned which is recorded as an expense by the Fund. As collateral for its securities sold short, 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 or currencies sold short.
C.Transactions with Brokers for Securities Sold Short
The Fund’s receivable from brokers for proceeds on securities sold short and deposit at brokers for securities sold short are with two securities dealers. The Fund does not require the brokers to maintain collateral in support of the receivable from brokers for proceeds on securities sold short. The Fund maintains cash deposits at brokers beyond the receivable for short sales. These cash deposits are presented as deposits at brokers on the Statement of Assets and Liabilities.
D.Federal Income Taxes
No provision for federal income taxes has been made since the Fund has complied to date with the provisions of Subchapter M 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 capital gains to shareholders. Additionally, the Fund intends to make all required distributions to avoid federal excise tax.
The Fund has reviewed all open tax years and major jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to income tax positions taken or expected to be taken on a tax return. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next six months. As of March 31, 2011, open Federal and New York tax years include the tax years ended September 30, 2007 through 2010. The Fund has no examination in progress.
E.Written Option Contracts
The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. 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 daily to reflect the current value of the
24
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Written option contracts are valued at the higher of the intrinsic value of the option or the last sales price reported on the date of valuation. If no sale is reported or if the last sale is outside the parameters of the closing bid and asked prices, the written option contract is valued at the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices 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. With written option contracts, there is minimal counterparty credit risk to the Fund since written option contracts are exchange traded.
F.Purchased Options
The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund purchases put or call options to hedge portfolio investments. Premiums paid for option contracts purchased are included in the Statement of Assets and Liabilities as an asset. Option contracts are valued daily at the higher of the intrinsic value of the option or the last sales price reported on the date of valuation. If no sale is reported or if the last sale is outside the parameters of the closing bid and asked prices, the option contract purchased is valued at the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices 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. With purchased options, there is minimal counterparty credit risk to the Fund since purchased options are exchange traded.
G.Forward Currency Exchange Contracts
The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward currency exchange contracts to hedge against changes in the value of foreign currencies. 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 expires. With forward contracts, there is minimal counterparty credit risk to the Fund since forward contracts are exchange traded.
25
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
The use of forward currency exchange contracts does not eliminate fluctuations in the underlying prices of the Fund’s investment securities; however, it does establish a rate of exchange that can be achieved in the future. The use of forward currency exchange contracts involves the risk that anticipated currency movements will not be accurately predicted. A forward currency exchange contract would limit the risk of loss due to a decline in the value of a particular currency; however it would also limit any potential gain that might result should the value of the currency increase instead of decrease. These contracts may involve market risk in excess of the amount of receivable or payable reflected on the Statement of Assets and Liabilities.
H.Equity Swap Contracts
The Fund is subject to equity price risk and interest rate risk in the normal course of pursuing its investment objectives. The Fund has entered into both long and short equity swap contracts with multiple broker-dealers. A long equity swap contract entitles the Fund to receive from the counterparty any appreciation and dividends paid on an individual security, while obligating the Fund to pay the counterparty any depreciation on the security as well as interest on the notional amount of the contract at a rate equal to LIBOR plus 25 to 100 basis points. A short equity swap contract obligates the Fund to pay the counterparty any appreciation and dividends paid on an individual security, while entitling the Fund to receive from the counterparty any depreciation on the security as well as interest on the notional value of the contract at a rate equal to LIBOR less 25 to 100 basis points.
The Fund may also enter into equity swap contracts whose value is determined by the spread between a long equity position and a short equity position. This type of swap contract obligates the Fund to pay the counterparty an amount tied to any increase in the spread between the two securities over the term of the contract. The Fund is also obligated to pay the counterparty any dividends paid on the short equity holding as well as any net financing costs. This type of swap contract entitles the Fund to receive from the counterparty any gains based on a decrease in the spread as well as any dividends paid on the long equity holding and any net interest income.
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 quarterly. The counterparty risk to the Fund is limited to the net unrealized gain, if any, on the contract, along with dividends receivable on long equity contracts 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.
I.Distributions to Shareholders
Dividends from net investment income and net realized capital gains, if any, are declared and paid at least annually. Income and capital gain distributions are determined in accordance with income tax
26
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
regulations which may differ from generally accepted accounting principles. These differences are due primarily to wash sale-loss deferrals, constructive sales, straddle-loss deferrals, adjustments on swap contracts, and unrealized gains or losses on Section 1256 contracts, which were realized, for tax purposes, at September 30, 2010.
J.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 adverse political and economic developments. Moreover, securities of many foreign companies and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government.
K.Foreign Currency Translation
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.
L.When-Issued Securities
The Fund may engage in securities transactions 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. During this period, the securities are subject to market fluctuations. The Fund records sales of when-issued securities and reflects the values of such securities in determining net asset value in the same manner as other open short-sale positions. When delayed-delivery purchases are outstanding, 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.
M. Cash Equivalents
The Fund considers highly liquid temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. Cash equivalents are included in short-term investments on the Schedule of Investments as well as in investments on the Statement of Assets and Liabilities.
27
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
N.Guarantees and Indemnifications
In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
O.Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Adviser 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.
P.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 and includes amortization of premiums and discounts on the interest method. Expenses include $1,858,228 of borrowing expense on securities sold short. The Fund may utilize derivative instruments such as 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.
Q.Counterparty Risk
The Fund helps manage counterparty credit risk by entering into agreements only with counterparties the Adviser believes have the financial resources to honor their obligations and by having the Adviser monitor the financial stability of the counterparties. Collateral pledges are monitored and subsequently adjusted if and when the valuations fluctuate, either up or down, by at least the predetermined threshold amount.
R.The Right to Offset
Financial assets and liabilities as well as cash collateral received and posted are offset by counterparty, and the net amount is reported in the Statement of Assets and Liabilities when the Fund believes there exists a legally enforceable right to set off the recognized amounts.
S.Derivatives
The Fund has adopted authoritative standards regarding disclosure about derivatives and hedging activities and how they affect the Fund’s Statement of Assets and Liabilities and Statement of Operations. For the six months ended March 31, 2011: long option contracts (2,333,118 contracts) were
28
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
purchased and $40,793,871 in premiums were paid, written option contracts (7,788,208 contracts) were opened and $310,532,062 in premiums were received, equity swap contracts were opened for a notional value of $957,501,720 and closed for a notional value of $1,131,950,901 and an average of 21 forward currency exchange contract positions were open during the year.
Statement of Assets and Liabilities
Fair values of derivative instruments as of March 31, 2011:
Asset Derivatives | Liability Derivatives | ||||||||||||||||
Statement of Assets | Statement of Assets | ||||||||||||||||
and Liabilities | and Liabilities | ||||||||||||||||
Derivatives | Location | Fair Value | Location | Fair Value | |||||||||||||
Equity Contracts: | |||||||||||||||||
Purchased Options | Investments | $ | 5,799,374 | N/A | $ | — | |||||||||||
Written Option Contracts | N/A | — | Written Options | 101,991,621 | |||||||||||||
Swap Contracts | Receivables | 26,993,128 | Payables | 10,074,914 | |||||||||||||
Foreign exchange contracts: | |||||||||||||||||
Forward Foreign Currency | |||||||||||||||||
Exchange Contracts | Receivables | 4,407,119 | Payables | 14,728,202 | |||||||||||||
Total | $ | 37,199,621 | $ | 126,794,737 |
Statement of Operations
The effect of derivative instruments on the Statement of Operations for the six month period ended March 31, 2011:
Amount of Realized Gain (Loss) on Derivatives
Forward | |||||||||||||||||||||
Written | Currency | ||||||||||||||||||||
Purchased | Options | Exchange | Swap | ||||||||||||||||||
Derivatives | Options | Contracts | Contracts | Contracts | Total | ||||||||||||||||
Equity contracts | $ | (29,419,208 | ) | $ | 43,520,909 | $ | — | $ | 58,198,326 | $ | 72,300,027 | ||||||||||
Foreign exchange | |||||||||||||||||||||
contracts | — | — | (72,053,306 | ) | — | (72,053,306 | ) | ||||||||||||||
Total | $ | (29,419,208 | ) | $ | 43,520,909 | $ | (72,053,306 | ) | $ | 58,198,326 | $ | 246,721 |
Change in Unrealized Appreciation (Depreciation) on Derivatives
Forward | |||||||||||||||||||||
Written | Currency | ||||||||||||||||||||
Purchased | Options | Exchange | Swap | ||||||||||||||||||
Derivatives | Options | Contracts | Contracts | Contracts | Total | ||||||||||||||||
Equity contracts | $ | (3,863,118 | ) | $ | (37,568,074 | ) | $ | — | $ | 9,947,103 | $ | (31,484,089 | ) | ||||||||
Foreign exchange | |||||||||||||||||||||
contracts | — | — | 34,016,363 | — | 34,016,363 | ||||||||||||||||
Total | $ | (3,863,118 | ) | $ | (37,568,074 | ) | $ | 34,016,363 | $ | 9,947,103 | $ | 2,532,274 |
29
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 3 — AGREEMENTS
Until December 31, 2010, the Fund’s investment adviser was Westchester Capital Management, Inc. (“Westchester”) pursuant to an investment advisory agreement dated January 31, 1989. Under the terms of this agreement, Westchester was 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. Effective August 1, 2004, Westchester agreed to voluntarily waive 0.10% of its fee at net asset levels between $1.5 billion through $2 billion, and Westchester agreed to voluntarily waive 0.20% of its fee at net asset levels between $2 billion through $5 billion. Effective January 16, 2010, Westchester agreed to voluntarily waive 0.25% of its fee at net asset levels exceeding $5 billion.
On October 12, 2010, Westchester entered into an agreement to transfer substantially all of its business and assets to Westchester Capital Management, LLC (the “Adviser”), a newly formed company which is controlled by two of Westchester’s portfolio managers and has a minority investor that is an affiliate of Lincoln Peak Capital Management, LLC (the “Transaction”). The closing of the Transaction occurred on December 31, 2010 (the “Closing”).
Under the 1940 Act, the Closing caused the Fund’s previous investment advisory agreement with Westchester (the “Previous Advisory Agreement”) to terminate. In connection with the Transaction, the Fund’s Board of Trustees (the “Board”) considered and approved an investment advisory agreement with the Adviser (the “Advisory Agreement”) to take effect upon the Closing of the Transaction, subject to shareholder approval of the Advisory Agreement. The Advisory Agreement has the same advisory fee rate and otherwise is the same in all material respects as the Previous Advisory Agreement. The Advisory Agreement with the Adviser was approved by the Fund’s shareholders at a special meeting held on November 24, 2010. The Adviser also entered into a separate fee-waiver agreement that is the same in all material respects as the previous fee-waiver agreement between the Fund and Westchester.
Investment advisory fees voluntarily waived by Westchester and the Adviser for the six months ended March 31, 2011 were $2,195,105. Certain officers of the Fund are also officers of the Adviser.
U.S. Bancorp Fund Services, LLC, a subsidiary of U.S. Bancorp, a publicly held bank holding company, serves as transfer agent, administrator, dividend paying agent and shareholder servicing agent for the Fund. U.S. Bank, N.A. serves as custodian for the Fund.
Distribution services are performed pursuant to distribution contracts with broker-dealers and other qualified institutions.
Note 4 — SHARES OF BENEFICIAL INTEREST
The Board of Trustees has the authority to issue an unlimited amount of shares of beneficial interest without par value.
30
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 4 — SHARES OF BENEFICIAL INTEREST (continued)
Changes in shares of beneficial interest were as follows:
Six Months Ended | Year Ended | ||||||||||||||||
March 31, 2011 | September 30, 2010 | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||
Issued | 84,267,138 | $ | 1,345,518,369 | 168,630,399 | $ | 2,646,030,009 | |||||||||||
Issued as reinvestment | |||||||||||||||||
of dividends | 3,547,242 | 55,977,090 | 2,419 | 37,612 | |||||||||||||
Redemption fee | — | 157,681 | — | 465,767 | |||||||||||||
Redeemed | (39,522,764 | ) | (631,326,963 | ) | (62,995,581 | ) | (991,361,358 | ) | |||||||||
Net increase | 48,291,616 | $ | 770,326,177 | 105,637,237 | $ | 1,655,172,030 |
Note 5 — INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended March 31, 2011 (excluding short-term investments, options, forward contracts, swap contracts and short positions) aggregated $5,796,603,908 and $4,434,343,305, respectively. There were no purchases or sales of U.S. Government securities.
At September 30, 2010, the components of accumulated earnings (losses) on a tax basis were as follows:
Cost of investments | $ | 3,248,868,558 | |||
Gross unrealized appreciation | 235,379,585 | ||||
Gross unrealized depreciation | (156,878,534 | ) | |||
Net unrealized appreciation | $ | 78,501,051 | |||
Undistributed ordinary income | $ | 70,274,288 | |||
Undistributed long-term capital gain | — | ||||
Total distributable earnings | $ | 70,274,288 | |||
Other accumulated losses | (87,876,064 | ) | |||
Total accumulated gains | $ | 60,899,275 |
The tax components of dividends paid during the six months ended March 31, 2011 and the fiscal year ended September 30, 2010 were as follows:
2011 | 2010 | ||||||||
Distributions paid from: | |||||||||
Ordinary Income | $ | 70,276,450 | $ | 42,329 | |||||
Long Term Capital Gain | — | — | |||||||
Total Distributions Paid | $ | 70,276,450 | $ | 42,329 |
31
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 5 — INVESTMENT TRANSACTIONS (continued)
The Fund incurred a post-October capital loss of $10,305,450 for securities and $30,546,678 for currency, which is deferred for tax purposes until the next fiscal year.
For the fiscal year ended September 30, 2010, certain dividends paid by the Fund may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from net investment income designated as qualified dividend income for the fiscal year ended September 30, 2010 was 37.27% (unaudited) for the Fund.
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends-received deduction for the fiscal year ended September 30, 2010 was 30.92% (unaudited) for the Fund. The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)(2)(c) for the fiscal year ended September 30, 2010 was 100.00% (unaudited) for the Fund.
Note 6 — WRITTEN OPTION CONTRACTS
The premium amount and the number of option contracts written during the six months ended March 31, 2011 were as follows:
Premium Amount | Number of Contracts | ||||||||
Options outstanding at September 30, 2010 | $ | 36,582,592 | 207,570 | ||||||
Options written | 310,532,062 | 7,788,208 | |||||||
Options closed | (128,083,481 | ) | (6,357,337 | ) | |||||
Options exercised | (118,789,685 | ) | (538,472 | ) | |||||
Options expired | (28,518,444 | ) | (681,643 | ) | |||||
Options outstanding at March 31, 2011 | $ | 71,723,044 | 418,326 |
Note 7 — DISTRIBUTION PLAN
The Fund has adopted an Amended and Restated Plan of Distribution (the “Plan”) dated July 19, 2005, pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund will compensate broker-dealers or other qualified institutions with whom the Fund has entered into a contract to distribute Fund shares. 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 recordkeeping, subaccounting, subtransfer agency and/or shareholder liaison services. For the six months ended March 31, 2011, the Fund incurred $4,925,389 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.
32
The Merger Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
March 31, 2011 (Unaudited)
Note 8 — TRANSACTIONS WITH AFFILIATES
Pursuant to Section (2)(a)(3) of the 1940 Act, if the Fund owns 5% or more of the outstanding voting securities of an issuer, the issuer is deemed to be an affiliate of the Fund. During the six months ended March 31, 2011, the Fund owned the following positions in such companies for investment purposes only:
Share | Share | Market | ||||||||||||||||||||||||||
Balance at | Balance at | Value at | ||||||||||||||||||||||||||
October 1, | March 31, | March 31, | Dividend | Realized | ||||||||||||||||||||||||
Issuer Name | 2010 | Purchases | Sales | 2011 | 2011 | Income | Gains | |||||||||||||||||||||
ADC | ||||||||||||||||||||||||||||
Telecommunications, | ||||||||||||||||||||||||||||
Inc | 6,612,757 | — | 6,612,757 | — | $ | — | $ | — | $ | 1,573,472 | ||||||||||||||||||
AirTran | ||||||||||||||||||||||||||||
Holdings, Inc. | 4,633,400 | 2,607,800 | — | 7,241,200 | 53,946,940 | — | — | |||||||||||||||||||||
Bowne & Co. Inc. | 2,403,250 | — | 2,403,250 | — | — | 132,179 | 857,923 | |||||||||||||||||||||
Dollar Thrifty | ||||||||||||||||||||||||||||
Automotive | ||||||||||||||||||||||||||||
Group, Inc. | 1,939,580 | 948,951 | 712,430 | 2,176,101 | 145,211,220 | — | 11,575,434 | |||||||||||||||||||||
Gymboree Corp. | — | 1,860,599 | 1,860,599 | — | — | — | 1,691,125 | |||||||||||||||||||||
Psychiatric | ||||||||||||||||||||||||||||
Solutions, Inc. | 2,936,252 | — | 2,936,252 | — | — | — | 4,035,048 | |||||||||||||||||||||
$ | 199,158,160 | $ | 132,179 | $ | 19,733,002 |
33
The Merger Fund
AVAILABILITY OF PROXY VOTING INFORMATION
Information regarding how the Fund generally votes proxies relating to portfolio securities may be obtained without charge by calling the Fund’s Transfer Agent at 1-800-343-8959 or by visiting the SEC’s website at www.sec.gov. Information regarding how the Fund voted proxies during the most recent 12-month period ended June 30 is available on the SEC’s website or by calling the toll-free number listed above.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-202-551-8090.
34
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Investment Adviser
Westchester Capital Management, LLC
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600
www.mergerfund.com
Administrator, Transfer Agent, Dividend Paying
Agent and Shareholder Servicing Agent
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
Custodian
U.S. Bank, N.A.
1555 North RiverCenter Drive, Suite 302
Milwaukee, WI 53212
(800) 343-8959
Trustees
Roy Behren
Michael J. Downey
James P. Logan, III
Barry Hamerling
Executive Officers
Roy Behren, Co-President and Treasurer
Michael T. Shannon, Co-President
Bruce Rubin, Vice President and
Chief Compliance Officer
Jane Perl, Secretary
Counsel
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
Item 6. Investments.
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end management investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to open-end management investment companies.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to open-end management investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of trustees.
Item 11. Controls and Procedures.
(a) | The Registrant’s Co-Presidents/Principal Executive Officers and Treasurer/Principal Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider. |
(b) | There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. |
Item 12. Exhibits.
(a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith. |
(2) A separate certification for each principal executive and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end management investment companies.
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Merger Fund
By (Signature and Title) /s/ Michael T. Shannon
Michael T. Shannon, Co-President
Date �� 5/27/2011
By (Signature and Title) /s/ Roy Behren
Roy Behren, Co-President and Treasurer
Date 5/27/2011
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* /s/ Michael T. Shannon
Michael T. Shannon, Co-President
Date_5/27/2011
By (Signature and Title)* /s/ Roy Behren
Roy Behren, Co-President and Treasurer
Date__5/27/2011
* Print the name and title of each signing officer under his or her signature.