<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Registration No.
[_] Pre-Effective Amendment No.
[_] Post-Effective Amendment No.
and
[_] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Registration No. 811-5639
[X] Amendment No. 13
PACHOLDER FUND, INC.
Exact Name of Registrant as Specified in Charter
Bank One Towers, East Tower, 8044 Montgomery Road, Suite 382,
Cincinnati, Ohio 45236
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(513) 985-3200
Registrant's Telephone Number, including Area Code
James P. Shanahan, Jr., Secretary
Bank One Towers, East Tower, 8044 Montgomery Road, Suite 382,
Cincinnati, Ohio 45236
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Alan C. Porter, Esq.
Piper & Marbury l.l.p.
1200 Nineteenth Street, N.W.
Washington, DC 20036
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT BEING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED UNIT(1) OFFERING PRICE FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
and Rights to subscribe
therefor.................. 2,077,312 $15.81 $32,842,303 $11,325
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457 on the basis of $17.57 per share, the net asset value
per share on November 30, 1996.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USF&G PACHOLDER FUND, INC.
----------------
CROSS REFERENCE SHEET
Part A--Prospectus
<TABLE>
<CAPTION>
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
<C> <C> <S>
1. Outside Front Cover.......................................... Outside Front Cover
Inside Front and Outside
2. Inside Front and Outside Back Cover Page..................... Back Cover
3. Fee Table and Synopsis....................................... Summary of Fund
Expenses; Prospectus
Summary
4. Financial Highlights......................................... Financial Highlights,
Information Regarding
Senior Securities
5. Plan of Distribution......................................... Outside Front Cover;
Prospectus Summary; The
Offer
6. Selling Shareholders......................................... Not Applicable
7. Use of Proceeds.............................................. Use of Proceeds
8. General Description of the Registrant........................ Outside Front Cover;
Prospectus Summary; The
Fund; Investment
Objective and Policies;
Risks of Leverage
Financial Information
9. Management................................................... Prospectus Summary;
Management of the Fund-
Investment Advisory
Services
Description of Capital
10. Capital Stock, Long-Term Debt, and Other Securities.......... Stock
11. Defaults and Arrears on Senior Securities.................... Not Applicable
12. Legal Proceedings............................................ Not Applicable
13. Table of Contents of the Statement of Additional Information. Table of Contents of
Statement of Additional
Information
Part B--Statement of Additional Information
<CAPTION>
LOCATION IN STATEMENT OF
ITEMS IN PART B OF FORM N-2 ADDITIONAL INFORMATION
--------------------------- ------------------------
<C> <C> <S>
14. Cover Page................................................... Cover Page
15. Table of Contents............................................ Table of Contents
The Fund in the
16. General Information and History.............................. Prospectus
17. Investment Objective and Policies............................ Investment Objective and
Policies
18. Management................................................... Management of the Fund-
Investment Advisory
Services
19. Control Persons and Principal Holders of Securities.......... Management of the Fund;
Principal Shareholders
20. Investment Advisory and Other Services....................... Investment Advisory
Services; Distribution
Arrangements in the
Prospectus; Custodian
and Transfer Agent in
the Prospectus; Experts
21. Brokerage Allocation and Other Practices..................... Portfolio Transactions
22. Tax Status................................................... Taxation
23. Financial Statements......................................... Financial Statements
</TABLE>
Part C--Other Information
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 4, 1996
PROSPECTUS
USF&G PACHOLDER FUND, INC.
1,661,850 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES OF COMMON STOCK
-----------
USF&G Pacholder Fund, Inc. (the "Fund") is issuing to holders of its Common
Stock of record as of the close of business on January , 1997, non-
transferable Rights entitling them to subscribe for an aggregate of 1,661,850
shares of Common Stock at the rate of one Share for each three Rights held.
Shareholders who fully exercise their Rights will have an Over-Subscription
Privilege. The Subscription Price will be equal to % of the net asset value
of a share of Common Stock on the expiration date of the Offer. See "The
Offer."
The Fund announced its intention to make the Offer after the close of trading
on the Exchange on November 13, 1996. The net asset values per share of Common
Stock on November 7, 1996 (the Thursday preceding the day of the announcement)
and January , 1997 were $17.28 and $ , respectively, and the last reported
sale prices of a share of Common Stock on the Exchange on November 7, 1996 and
January , 1997 were $17.25 and $ , respectively. The Fund's Common Stock is
listed on the Exchange under the symbol "PHF."
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY , 1997,
UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund is a closed-end diversified management investment company whose
investment objective is to provide a high level of total return through current
income and capital appreciation by investing primarily in high yield, high risk
fixed-income securities of domestic companies. The Fund invests in a
diversified portfolio comprised primarily of publicly traded fixed-income
securities. The Fund's portfolio investments will generally not be rated or
will be rated below investment grade (i.e., BB or lower by Standard & Poor's
Ratings Group, or Ba or lower by Moody's Investors Service, Inc.).
INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES SPECIAL RISK
CONSIDERATIONS, INCLUDING THE RISKS ATTENDANT TO INVESTING IN HIGH YIELD
SECURITIES. IN ADDITION, THE FUND'S COMMON STOCK IS FINANCIALLY LEVERAGED AND
IS THEREFORE SUBJECT TO CERTAIN ADDITIONAL RISK CONSIDERATIONS. SEE "INVESTMENT
OBJECTIVE AND POLICIES" AND "RISKS OF LEVERAGE."
Because the Subscription Price will be less than the current net asset value
per share of the Fund's Common Stock, the Offer will result in a dilution of
the net asset value per share for all shareholders. If the Subscription Price
were to be substantially less than the current net asset value per share, such
dilution could be substantial. In addition, upon completion of the Offer,
shareholders who do not fully exercise their Rights will own a smaller
proportional interest in the Fund than would be the case if the Offer had not
been made. See "The Offer--Dilution."
(Continued on the following page)
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
SUBSCRIPTION ESTIMATED PROCEEDS TO
PRICE(1) SALES LOAD(2) FUND(3)(4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
- --------------------------------------------------------------------------------
Total................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Footnotes on the following page)
-----------
The date of this Prospectus is January , 1997
<PAGE>
(Continued from the previous page)
Capitalized terms used but not defined above have the meanings given to them
in the body of this Prospectus.
This Prospectus sets forth concisely the information about the Fund that a
shareholder should know before investing, and it should be read and retained
for future reference. A Statement of Additional Information dated January ,
1997 containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. A copy of the Statement of Additional
Information, the table of contents of which appears on page of this
Prospectus, may be obtained without charge by contacting the Information Agent
at (800) 733-8481, extension 351.
-----------------------------
(Footnotes from the previous page)
(1) Estimated on the basis of % of the net asset value per share of Common
Stock on January , 1997. Pursuant to the Over-Subscription Privilege, the
Fund may at its discretion increase the number of Shares subject to
subscription by up to 25% of the Shares offered hereby. If the Fund
increases the number of Shares subject to subscription by 25%, the
aggregate maximum Estimated Subscription Price, Estimated Sales Load and
Estimated Proceeds to the Fund will be $ , $ and $
respectively.
(2) In connection with the Offer, broker-dealers soliciting the exercise of
Rights will receive soliciting fees equal to % of the Subscription Price
per Share issued upon exercise of the Rights. The Fund has also agreed to
pay Winton Associates, Inc. (the "Dealer Manager") a fee for financial and
marketing advisory services in connection with the Offer equal to % of
the Subscription Price per Share issued upon exercise of the Rights.
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$ , including an aggregate of up to $ to be paid to the Dealer
Manager as reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest bearing account (which interest will
accrue to the benefit of the Fund) pending proration and distribution of
Shares.
2
<PAGE>
SUMMARY OF FUND EXPENSES
The purpose of the following table is to help shareholders understand all
fees and expenses that they, as holders of the Fund's Common Stock, bear
directly or indirectly. See "Management of the Fund," "Distribution
Arrangements" and "Dividend Reinvestment Plan" for additional information.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)..................... %
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to Common
Stock)
Management Fees(2).................................................... %
Administration Fees................................................... %
Other Expenses(3)..................................................... %
Total Annual Expenses............................................... %
</TABLE>
- --------
(1) Consists of Dealer Manager and soliciting fees.
(2) Based on the 0.90% "fulcrum fee" as required by Securities and Exchange
Commission regulations. The Fund pays an advisory fee which varies between
0.40% and 1.40% of the Fund's average net assets based on the Fund's total
return investment performance for the prior twelve-month period relative to
the percentage change in the CS First Boston High Yield Index(TM) for the
same period (the "Index Return"). The advisory fee is structured so that it
will be 0.90% if the Fund's investment performance for the preceding twelve
months (net of fees and expenses, including the advisory fee) equals the
Index Return. For the fiscal year ended December 31, 1996, the Fund paid
advisory fees equal to % of its average weekly net assets during the
period.
(3) The other expenses shown in the table are based on estimated amounts for
the Fund's current fiscal year and assume that shareholders of the Fund
exercise their Rights to purchase all of the Shares.
EXAMPLE
The following example illustrates the expenses that an exercising Rights
holder would pay on a $1,000 investment in the Fund's Common Stock, assuming a
5% annual return throughout the periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$ $ $ $
</TABLE>
The example set forth above reflects payment of the % Sales Load and other
expenses of the Fund incurred in connection with the Offer and assumes that the
shareholders of the Fund exercise their Rights to purchase all of the Shares.
The example also assumes reinvestment of all dividends and distributions at net
asset value and an expense ratio of %. The assumption of a 5% annual return
is required by Securities and Exchange Commission regulations applicable to all
investment companies.
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES OR ANNUAL RATES OF RETURN, WHICH MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
Terms of the Offer...... USF&G Pacholder Fund, Inc. (the "Fund") is issuing to
holders of its Common Stock, par value $.01 per share
(the "Common Stock"), of record as of the close of
business on January , 1997 ("Record Date Sharehold-
ers") rights ("Rights") to subscribe for an aggregate
of 1,661,850 shares (the "Shares") of Common Stock
(the "Offer"). Each Record Date Shareholder is being
issued one Right for each full share of Common Stock
held on January , 1997 (the "Record Date"). The
Rights entitle shareholders to acquire at the Sub-
scription Price (as hereinafter defined) one Share
for each three Rights held. Rights may be exercised
at any time during the period (the "Subscription Pe-
riod") that commences on January , 1997 and ends at
5:00 p.m., New York City time, on February , 1997,
unless extended by the Fund (the "Expiration Date").
In addition, any shareholder who fully exercises all
Rights held by him (other than those Rights that can-
not be exercised because they represent the right to
acquire less than one Share) is entitled to sub-
scribe, subject to certain limitations and to allot-
ment, for additional Shares (the "Over-Subscription
Privilege"). For purposes of determining the maximum
number of Shares a Record Date Shareholder may ac-
quire pursuant to the Offer, shareholders whose
shares are held of record by Cede & Co., Inc.
("Cede"), nominee for The Depository Trust Company,
or by any other depository or nominee will be deemed
to be the holders of the Rights issued to Cede or
such other depository or nominee on their behalf.
Pursuant to the Over-Subscription Privilege, the Fund
may at its discretion increase the number of Shares
subject to subscription by up to 25% of the Shares
offered hereby. Shares requested pursuant to the
Over-Subscription Privilege may be subject to allot-
ment, which is discussed more fully under "The Of-
fer--Over-Subscription Privilege."
The subscription price per Share (the "Subscription
Price") will be equal to % of the net asset value of
a share of Common Stock on the expiration date of the
Offer. Rights holders who decide to acquire Shares
will not know the Subscription Price when they make
their decision. The Rights are non-transferable and
therefore may not be purchased or sold. Application
will be made to list the Shares on the American Stock
Exchange, Inc. (the "Exchange"). See "The Offer."
4
<PAGE>
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date........................... January , 1997
Subscription Period................... January , 1997 to
Expiration Date....................... February , 1997*
Pricing Date.......................... February , 1997*
Confirmation to Participants.......... March , 1997*
Final Settlement for Shares........... March , 1997*
</TABLE>
Important Dates to
Remember...............
--------
* Unless extended as described herein.
Information Agent....... The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
(800) 733-8481, Ext. 351
Shareholders may also contact their brokers or nomi-
nees for information with respect to the Offer.
Distribution
Arrangements........... Winton Associates, Inc. (the "Dealer Manager") will
act as the dealer manager for the Offer. The Fund has
agreed to pay the Dealer Manager a fee for its finan-
cial and marketing advisory services equal to % of
the Subscription Price per Share issued upon exercise
of the Rights, and to pay broker-dealers fees for
their soliciting efforts equal to % of the Subscrip-
tion Price per Share issued upon exercise of the
Rights. See "Distribution Arrangements."
The Fund................ The Fund has been engaged in business as a closed-end
diversified management investment company since No-
vember 1988. The Fund's outstanding Common Stock is
listed and traded on the Exchange under the symbol
"PHF." The Fund has issued and outstanding 1,650,000
shares of 6.95% Cumulative Preferred Stock, par value
$.01 per share, with a liquidation preference of
$20.00 per share (the "Preferred Stock"). As of No-
vember 30, 1996, the net assets of the Fund were ap-
proximately $120.5 million. See "The Fund" and "Mar-
ket Price and Net Asset Value."
Investment Objective
and Policies........... The Fund's investment objective is to provide a high
level of total return through current income and cap-
ital appreciation by investing primarily in high
yield, high risk fixed-income securities of domestic
companies. The Fund invests in a diversified portfo-
lio comprised primarily of publicly traded bonds, de-
bentures, notes and preferred stocks. The Fund may
also invest in privately placed debt securities and
in hybrid securities, such as debt with warrants at-
tached, and other privately held obligations of, in
most cases, public companies. The Fund's portfolio
investments will generally not be rated or will be
rated below investment grade (i.e., BB or lower by
Standard & Poor's Ratings Group, or Ba or lower by
Moody's Investors Service, Inc.). Some of the Fund's
portfolio investments may not be current on payment
of interest or dividends or
5
<PAGE>
may be in default. No assurance can be given that the
Fund will be able to achieve its investment objec-
tive. See "Investment Objective and Policies."
Investment Advisory and
Other Services......... Pacholder & Company, an Ohio general partnership (the
"Adviser"), has served as the Fund's investment ad-
viser since its inception. The partners of the Ad-
viser are Pacholder Associates, Inc., an investment
advisory firm which specializes in high-yield fixed-
income securities, and USF&G Marketing Services Co.,
an indirect wholly-owned subsidiary of USF&G Corpora-
tion. The Fund pays the Adviser an advisory fee which
varies between 0.40% and 1.40% of the Fund's average
net assets based on the total return investment per-
formance of the Fund relative to the percentage
change in the CS First Boston High Yield Index (TM)
for the same period (the "Index Return"). For the
fiscal year ended December 31, 1996, the Adviser re-
ceived an advisory fee equal to % of the Fund's av-
erage net assets. The advisory fee paid by the Fund
has for certain periods exceeded, and may in the fu-
ture exceed, the advisory fees paid by most other in-
vestment companies. In addition, the Adviser may re-
ceive the maximum fee even if the Fund's absolute
performance is negative and may receive the minimum
fee in instances where the Fund experiences signifi-
cant positive performance. Because the Adviser's fee
is based on the assets of the Fund, the Adviser will
benefit from an increase in the Fund's assets result-
ing from the Offer. See "Management of the Fund--In-
vestment Advisory Services" and "--Advisory Fee" and
"The Offer--Impact on Certain Fees."
The Fund's administrator is Kenwood Administrative
Management, Limited Partnership (the "Administra-
tor"), an affiliate of the Adviser. The Administrator
receives a monthly fee from the Fund at the annual
rate of 0.10% of the Fund's average net assets. See
"Management of the Fund--Administrative and Account-
ing Services."
Distributions and
Dividend Reinvestment
Plan................... The Fund's policy is to pay quarterly dividends on
its Common Stock from net investment income remaining
after payment of dividends on the Preferred Stock. To
the extent capital gains are not required to satisfy
the dividend, redemption or liquidation preferences
of any outstanding shares of Preferred Stock, they
will be distributed to holders of the Common Stock.
Net short-term capital gains, if any, may be included
in quarterly dividends or distributed on such other
basis as may be determined from time to time by the
Board of Directors. Net long-term capital gains, if
any, will be distributed at least annually. It is ex-
pected that the first distribution payable on the
Shares offered hereby will be the regular dividend
for the second quarter, which will not be payable be-
fore June 1997. See "Dividends and Distributions" and
"Taxation."
Holders of the Common Stock may elect to have all
dividends and distributions automatically reinvested
in additional shares of Common
6
<PAGE>
Stock pursuant to the Fund's Dividend Reinvestment
Plan. See "Dividend Reinvestment Plan."
Risk Factors and
Special
Considerations......... Because the Subscription Price will be less than the
current net asset value per share of the Fund's Com-
mon Stock and because the number of shares outstand-
ing after completion of the Offer will increase in a
greater percentage than the increase in the size of
the Fund's assets, the Offer will result in a dilu-
tion of the net asset value per share for all share-
holders. Although it is not possible to state pre-
cisely the amount of the decrease at this time, the
dilution resulting from the Offer could be substan-
tial. In addition, upon completion of the Offer,
shareholders who do not fully exercise their Rights
will own a smaller proportional interest in the Fund
and experience a corresponding reduction in the vot-
ing power of their shares. The Fund has conducted
three previous rights offerings which resulted in di-
lution of the net asset per share of the Fund. See
"The Offer--Purposes of the Offer" and "--Dilution."
The leveraging of the Fund's Common Stock through the
issuance of the Preferred Stock involves certain
risks to holders of the Common Stock. These risks in-
clude a higher volatility of the net asset value and
potentially the market price of their shares. So long
as the Fund is able to realize a higher net return on
its investment portfolio than the dividend rate of
the Preferred Stock, the effect of leverage will be
to cause holders of the Common Stock to realize a
higher current rate of return than if the Fund were
not leveraged. However, if the net return on the
Fund's investment portfolio were to approach the div-
idend rate of the Preferred Stock, the benefit of
leverage to holders of the Common Stock would be re-
duced, and if the net return on the Fund's portfolio
were to be less than the dividend rate of the Pre-
ferred Stock, the Fund's leveraged capital structure
would result in a lower rate of return to holders of
the Common Stock. Similarly, since any decline in the
net asset value of the Fund's investment portfolio
would be borne entirely by holders of the Common
Stock, the effect of leverage in a declining market
will be to cause a greater decrease in the net asset
value of the Common Stock than if the Fund were not
leveraged, which would likely be reflected in a
greater decline in the market price of the Common
Stock. Upon completion of the Offer, the Fund in-
tends, subject to market conditions, to add incremen-
tal leverage by issuing an additionalseries of Pre-
ferred Stock so that the percentage of the Fund's as-
sets representing leverage is approximately the same
as it was prior to completion of the Offer. See
"Risks of Leverage."
Holders of the Common Stock will receive quarterly
dividends from net income only after payment of cumu-
lative dividends on the Preferred Stock, and will re-
ceive distributions of net capital gains, if any,
only after the dividend, redemption and liquidation
preferences of the Preferred Stock have been satis-
fied. In addition, so long as any shares of Preferred
Stock are outstanding, distributions on the Common
Stock will be subject to certain restrictions. Upon
any liquidation of the Fund, holders of the Preferred
Stock will be entitled to receive liquidating distri-
butions
7
<PAGE>
before any distribution is made to holders of the
Common Stock. If at any time dividends on the Pre-
ferred Stock were to be in arrears in an amount equal
to two full years' dividends, holders of all out-
standing shares of Preferred Stock, voting as a sepa-
rate class, will be entitled to elect a majority of
the Fund's directors. See "Risks of Leverage," "Divi-
dends and Distributions" and "Description of Capital
Stock--Preferred Stock."
Investment by the Fund in high yield securities (com-
monly known as "junk bonds") is speculative and in-
volves a high degree of risk which can result in sub-
stantial or total losses to the Fund. These invest-
ments may take considerable time to appreciate in
value and, in some cases, may become less valuable or
worthless. The market values of high yield securities
generally fluctuate in response to changes in inter-
est rates and economic conditions more than those of
higher rated securities. Also, with high yield secu-
rities, there is a greater possibility that an ad-
verse change in the financial condition of the issu-
er, particularly a highly leveraged issuer, may af-
fect its ability to make payments of income and prin-
cipal and increase the expenses of the Fund in seek-
ing recovery from the issuer. Further, with high
yield securities, there is a greater possibility of a
default or the bankruptcy of the issuer. Since there
may be no public market or only inactive trading mar-
kets for some of the securities in which the Fund in-
vests, these securities may be harder to value and
more susceptible to adverse publicity concerning the
issuer, and consequently the Fund may be required to
retain such investments for indefinite periods or
sell them at substantial losses. Some of the Fund's
portfolio securities may be issued by companies in-
volved, at the time of acquisition or soon thereaf-
ter, in reorganizations, capital restructurings or
bankruptcy proceedings. Such proceedings are highly
complex and may have unpredictable results. See "In-
vestment Objective and Policies--Special Risk Consid-
erations."
Holders of the Fund's Common Stock may dispose of
their shares on the Exchange or other markets on
which shares may trade, but since the Fund is a
closed-end investment company, shareholders do not
have the right to redeem their shares at net asset
value. The market price for shares of closed-end in-
vestment companies varies from their net asset value
and such shares frequently trade at a discount from
net asset value. Since the Fund commenced operations,
the Common Stock has traded in the market at, above
and below net asset value. See "Market Price and Net
Asset Value."
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides information about the financial history of the
Fund. The table expresses the information in terms of a single share
outstanding throughout the period. The data for the fiscal year ended December
31, 1995 has been derived from financial statements audited by Deloitte &
Touche LLP, independent accountants for the Fund. Their report on the
financial statements and financial highlights is included in the Annual
Report, which is incorporated by reference into the Statement of Additional
Information. The table should be read in conjunction with the Fund's financial
statements and the notes thereto, which may be obtained free of charge from
the Fund.
<TABLE>
<CAPTION>
NOVEMBER 11,
FOR THE SIX 1988*
MONTHS ENDED YEAR ENDED DECEMBER 31, THROUGH
JUNE 30, 1996 ----------------------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988
------------- --------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 16.02 $ 16.86 $ 19.23 $ 18.52 $ 17.37 $ 14.49 $ 16.58 $ 18.21 $ 18.60
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net investment income... 1.11 2.19 2.12 2.48 2.37 2.18 1.79 1.88 .16
Net realized and
unrealized gain (loss)
on investments.......... .18 (.06) (1.64) 1.42 1.32 2.84 (2.08) (1.41) (.03)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
in net asset value
resulting from
operations.............. 1.29 2.13 .48 3.90 3.69 5.02 (.29) .47 .13
--------- --------- ------- ------- ------- ------- ------- ------- -------
Distributions To
Stockholders From:
Preferred dividends..... (.23) (.29) (.24) (.38) (.33) -- -- -- --
Common:
Net investment income
and short-term gains... (.85) (1.90) (1.92) (2.09) (2.08) (2.14) (1.80) (2.10) (.18)
Net realized long-term
gains.................. -- -- -- (.21) -- -- -- -- --
--------- --------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (1.08) (2.19) (2.16) (2.68) (2.41) (2.14) (1.80) (2.10) (.18)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Capital Change Resulting
From The Issuance Of
Fund Shares:
Common Shares........... .04 (.67) (.69) (.51) -- -- -- -- (.34)
Preferred Shares........ -- (.11) -- -- (.13) -- -- -- --
--------- --------- ------- ------- ------- ------- ------- ------- -------
.04 (.78) (.69) (.51) (.13) -- -- -- (.34)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 16.27 $ 16.02 $ 16.86 $ 19.23 $ 18.52 $ 17.37 $ 14.49 $ 16.58 $ 18.21
========= ========= ======= ======= ======= ======= ======= ======= =======
Market value per share,
end of period........... $ 15.75 $ 17.38 $ 16.75 $ 21.25 $ 19.38 $ 17.25 $ 12.38 $ 15.50 $ 17.38
========= ========= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:(1)
Based on market value
per share............... (4.25%) 16.04% (11.12%) 22.41% 25.99% 56.78% (9.36%) (1.52%) (13.13%)
Based on net asset value
per share............... 6.91% 10.68% 0.72% 20.27% 18.78% 36.71% (0.87%) 3.72% (2.10%)
RATIOS TO AVERAGE NET
ASSETS:(2)
Expenses................ 1.52% 0.86% 1.64% 1.81% 1.90% 1.37% 2.34% 2.15% 2.10%***
Net investment income... 9.66% 10.45% 10.17% 10.33% 10.32% 12.94% 10.91% 10.41% 8.20%***
SUPPLEMENTAL DATA:
Net assets at end of
period, net of preferred
stock (000)............. $ 81,047 $ 79,596 $58,925 $44,458 $34,001 $31,678 $26,432 $30,246 $33,771
Average net assets
during period, net of
preferred stock (000)... $ 81,609 $ 79,614 $59,002 $43,275 $34,950 $30,724 $29,819 $32,870 $34,260
Portfolio turnover rate. 46% 83% 102% 97% 121% 48% 33% 102% --%**
Number of preferred
shares outstanding at
end of period........... 1,650,000 1,650,000 8,600 9,400 10,000 -- -- -- --
Asset coverage per share
of preferred stock
outstanding at end of
period.................. $ 69 $ 66 $ 7,852 $ 5,730 $ 4,400 -- -- -- --
Liquidation and average
market value per share
of preferred stock...... $ 20 $ 20 $ 1,000 $ 1,000 $ 1,000 -- -- -- --
</TABLE>
- ----
*Commencement of operations.
**No sales for the period, therefore, no portfolio turnover.
***Annualized.
(1) Total investment return excludes the effects of commissions. Total
investment return for other than full year periods are not annualized.
(2) Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
9
<PAGE>
INFORMATION REGARDING SENIOR SECURITIES
The following table provides certain information as of the end of each
fiscal year of the Fund for each class of senior securities of the Fund. On
April 15, 1992, the Fund issued 10,000 shares of 8.60% Cumulative Preferred
Stock, par value $.01 per share, in a private placement. In 1993, the Fund
redeemed shares of such stock having an aggregate liquidation value of
$600,000, and in 1994 the Fund redeemed shares having an aggregate liquidation
value of $800,000. On August 15, 1995, the remaining shares of 8.60%
Cumulative Preferred Stock were called for redemption and the Fund issued
1,650,000 shares of 6.95% Cumulative Preferred Stock, par value $.01 per
share, in a private placement. The Fund intends to issue an additional series
of preferred stock upon completion of the Offer. See "Risks of Leverage."
<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
TOTAL ASSET LIQUIDATION MARKET
AT AMOUNT COVERAGE PREFERENCE VALUE
DECEMBER 31 OUTSTANDING PER SHARE(1) PER SHARE PER SHARE(2)
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1992 10,000 $4,400 $1,000 --
1993 9,400 $5,730 $1,000 --
1994 8,600 $7,852 $1,000 --
1995 1,650,000 $66.00 $20.00 --
</TABLE>
- --------
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amount
by the aggregate liquidation preference of the outstanding Preferred
Stock.
(2) All shares of Preferred Stock have been issued in private placements and
there have been no market transactions.
THE FUND
USF&G Pacholder Fund, Inc. (the "Fund") was incorporated under the laws of
the State of Maryland on August 17, 1988, and is a closed-end diversified
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund commenced operations on November
11, 1988. The Fund's investment adviser is Pacholder & Company (the
"Adviser"). The principal office of the Fund is located at Bank One Towers,
8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236, and its telephone
number is (513) 985-3200.
The Fund's name as specified in its charter is "Pacholder Fund, Inc." and
the trademark "USF&G" has been licensed to the Fund by USF&G Corporation. The
Fund has entered into an agreement with USF&G Corporation which requires the
Fund to cease using the trademark "USF&G" upon the occurrence of certain
events, including termination of the affiliation between the Fund or the
Adviser and USF&G Corporation, determination by USF&G Corporation that the
goodwill associated with the trademark "USF&G" is being adversely affected and
failure of at least one person who is an executive officer of USF&G
Corporation or one of its wholly-owned subsidiaries to serve as a director of
the Fund.
CAPITALIZATION AT JANUARY , 1997
<TABLE>
<CAPTION>
AMOUNT HELD
AMOUNT AMOUNT BY FUND FOR
TITLE OF CLASS AUTHORIZED OUTSTANDING ITS ACCOUNT
-------------- --------------- -------------- -----------
<S> <C> <C> <C>
6.95% Cumulative Preferred Stock,
$.01 par value..................... 1,650,000 shs. 1,650,000 shs. 0 shs.
Common Stock, $.01 par value........ 48,350,000 shs. shs. 0 shs.
</TABLE>
10
<PAGE>
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to holders of its Common Stock, par value $.01 per share
(the "Common Stock"), of record as of the close of business on January , 1997
("Record Date Shareholders") non-transferable rights ("Rights") to subscribe
for an aggregate of 1,661,850 shares (the "Shares") of Common Stock (the
"Offer"). Each Record Date Shareholder is being issued one Right for each
share of Common Stock held on January , 1997 (the "Record Date"). The Rights
entitle shareholders to acquire at the Subscription Price (as hereinafter
defined) one Share for each three Rights held. No Rights will be issued for
fractional shares. Rights may be exercised at any time during the period (the
"Subscription Period") that commences on January , 1997 and ends at 5:00
p.m., New York City time, on February , 1997, unless extended (the
"Expiration Date"). The right to acquire during the Subscription Period at the
Subscription Price (as hereinafter defined) one Share for each three Rights
held is hereinafter referred to as the "Primary Subscription."
In addition, any shareholder who fully exercises all Rights held by him
(other than those Rights that cannot be exercised because they represent the
right to acquire less than one Share) is entitled to subscribe for additional
Shares (the "Over-Subscription Privilege"). For purposes of determining the
maximum number of Shares a Record Date Shareholder may acquire pursuant to the
Offer, shareholders whose shares are held of record by Cede & Co., Inc.
("Cede"), nominee for The Depository Trust Company, or by any other depository
or nominee will be deemed to be the holders of the Rights issued to Cede or
such other depository or nominee on their behalf. Pursuant to the Over-
Subscription Privilege, the Fund may at its discretion increase the number of
Shares subject to subscription by up to 25% of the Shares offered hereby.
Shares acquired pursuant to the Over-Subscription Privilege may be subject to
allotment, which is discussed more fully under "Over-Subscription Privilege"
below.
The Rights are evidenced by Subscription Certificates ("Subscription
Certificates") which are being sent to Record Date Shareholders. The number of
Rights issued to each Record Date Shareholder is stated on the Subscription
Certificate. Since fractional Shares will not be issued, shareholders who
receive, or who are left with, fewer than three Rights will be unable to
exercise such Rights and will not be entitled to receive any cash in lieu of
fractional Shares. The method by which Rights may be exercised and Shares paid
for is set forth below under "Method of Exercise of Rights" and "Payment for
Shares."
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interest of the Fund and its shareholders to increase the assets of the
Fund available for investment. In reaching its decision, the Board of
Directors was advised by the Adviser that the availability of new funds for
investment would enable the Fund to take advantage of opportunities in the
high-yield market without having to sell portfolio holdings that, in the
opinion of the Adviser, continue to hold significant value for the Fund. The
Board of Directors also considered that a well-subscribed rights offering may
reduce the Fund's expense ratio, which would be of long-term benefit to
shareholders. In addition, the Board of Directors considered that such a
rights offering could improve the liquidity of the trading market for the
shares of the Fund's Common Stock on the American Stock Exchange, Inc. (the
"Exchange"), where the shares are listed and traded. The Board of Directors
also considered that a rights offering would increase the recognition and
following among investors in the Fund. Finally, the Offer seeks to reward the
Fund's shareholders by giving them the opportunity to purchase additional
shares of Common Stock at a price below market value. After carefully
reviewing the proposed terms of the Offer, the expense of the Offer and its
anticipated dilutive effect (including the effect on non-exercising
shareholders), the Board of Directors determined that the expected benefits of
the Offer to the Fund and its shareholders outweigh the dilution resulting
from the Offer.
The Fund conducted rights offerings which commenced on January 5, 1993,
January 31, 1994 and January 27, 1995, respectively. In the 1993 offering, the
Fund issued non-transferable rights entitling holders to subscribe for an
aggregate of 459,088 shares of Common Stock, at the rate of one share for each
four rights
11
<PAGE>
held, and to subscribe for any shares not subscribed for through the primary
subscription. The subscription price per share was $16.56, which represented a
15% discount from the net asset value per share on the pricing date of the
offering. In the 1994 offering, the Fund issued non-transferable rights
entitling holders to subscribe for an aggregate of 1,160,115 shares of Common
Stock, at the rate of one share for each three rights held, and to subscribe
for any shares not subscribed for through the primary subscription. The
subscription price per share was $17.71, which represented a 10% discount from
the net asset value per share on the pricing date of the offering. In the 1995
offering, the Fund issued non-transferable rights entitling holders to
subscribe for an aggregate of 1,457,942 shares of Common Stock, at the rate of
one share for each three rights held, and to subscribe for any shares not
subscribed for through the primary subscription. The subscription price per
share was $15.65, which represented 90% of the net asset value per share as of
the pricing date of the offering. All three offerings were significantly over-
subscribed, resulting in the issuance of the maximum number of shares offered.
As a result of the 1993, 1994 and 1995 offerings, the net asset value per
share of the Fund's Common Stock was reduced by $.64 (3.3%), $.70 (3.6%), and
$.68 (3.9%) respectively. The Fund raised $7.4 million in the 1993 offering,
$20.4 million in the 1994 offering and $22 million in the 1995 offering.
The Fund may, in the future and at its discretion, make additional rights
offerings from time to time for a number of shares and on terms which may or
may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for through the Primary Subscription will be offered,
by means of the Over-Subscription Privilege, to shareholders who have
exercised all Rights held by them (other than those Rights that cannot be
exercised because they represent the right to acquire less than one Share) and
who wish to acquire more than the number of Shares for which the Rights held
by them are exercisable. Record Date Shareholders should indicate on the
Subscription Certificate, which they submit with respect to the exercise of
Rights issued to them, how many Shares they are willing to acquire pursuant to
the Over-Subscription Privilege. Broker-dealers whose shares are held of
record by Cede, or any other depository or nominee, must complete the DTC
Participant Over-Subscription Exercise Form available from the Information
Agent. If sufficient Shares are available after the Shares subscribed for
through the Primary Subscription have been allocated, all over-subscriptions
will be honored in full. If sufficient Shares are not available to honor all
over-subscriptions, the Fund may, at its discretion, increase the number of
Shares subject to subscription pursuant to the Offer by up to 25% (up to an
additional 415,462 shares) in order to satisfy such over-subscriptions.
Regardless of whether the Fund issues such additional Shares, to the extent
Shares are not available to honor all over-subscriptions, the available Shares
will be allocated among those exercising Rights holders who over-subscribe
based on the number of Rights originally issued to them by the Fund so that
the number of Shares issued to exercising Rights holders pursuant to the Over-
Subscription Privilege will generally be in proportion to the number of shares
of Common Stock owned by them on the Record Date. The percentage of available
Shares each over-subscribing Rights holder may acquire will be rounded up or
down to result in delivery of whole Shares. The allocation process may involve
a series of allocations to ensure that the total number of Shares available
for over-subscriptions is distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed for
through the Primary Subscription or pursuant to the Over-Subscription
Privilege.
SUBSCRIPTION PRICE
The subscription price per Share (the "Subscription Price") for the Shares
to be issued pursuant to the Rights will be % of the net asset value of a
share of Common Stock on the expiration date of the Offer (the "Pricing
Date"). See "Description of Capital Stock." The manner in which the net asset
value per share of Common Stock is calculated is described below under "Market
Price and Net Asset Value--Net Asset Value." Rights holders who decide to
acquire Shares through the Primary Subscription or pursuant to the Over-
Subscription Privilege will not know the Subscription Price for such Shares
when they make their
12
<PAGE>
decision. In addition, it is expected that the first distribution payable on
the Shares offered hereby will be the regular dividend for the second quarter,
which will not be payable before June 1997. See "Dividends and Distributions."
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on November 13, 1996. The net asset values per share
of Common Stock on November 7, 1996 (the Thursday preceding the day of the
announcement) and January , 1997 were $17.28 and $ , respectively, and the
last reported sale prices on the Exchange on November 7, 1996 and January ,
1997 were $17.25 and $ respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and therefore may not be purchased or sold.
The Rights will not be admitted for trading on the Exchange. However,
application has been made to list the Shares on the Exchange.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on February , 1997,
unless extended by the Fund. The Rights will expire on the Expiration Date and
thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company, Two Heritage
Drive, North Quincy, Massachusetts 02171, which will receive, for its
administrative, processing, invoicing and other services as subscription
agent, a fee estimated to be $ , plus reimbursement for its out-of-pocket
expenses related to the Offer. Shareholder communications should be directed
to (800) 837-2755. SIGNED SUBSCRIPTION CERTIFICATES MUST BE SENT TO STATE
STREET BANK AND TRUST COMPANY by one of the methods described below. The Fund
will accept only Subscription Certificates actually received on a timely basis
at any of the addresses listed.
(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive,
MB-2
North Quincy, MA 02171
(3) BY HAND:
State Street Bank and Trust Company
225 Franklin Street--Concourse Level
Boston, MA 02110
or
Bank Boston
61 Broadway--Third Floor
New York, NY 10006
13
<PAGE>
(4) BY FACSIMILE (TELECOPY):
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(617) 774-4511 with the original Subscription Certificate to be sent by
one of the three methods above. Confirm facsimile by telephone (617)
774-4514.
DELIVERY TO AN ADDRESS OTHER THAN THOSE ABOVE DOES NOT CONSTITUTE GOOD
DELIVERY.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate and mailing it in the envelope provided, or otherwise delivering
the completed and signed Subscription Certificate to the Subscription Agent,
together with payment for the Shares as described below under "Payment for
Shares." Rights may also be exercised by contacting your broker, banker or
trust company, which can arrange, on your behalf, to guarantee delivery of
payment and of a properly completed and executed Subscription Certificate. A
fee may be charged by your broker, banker or trust company for this service.
Fractional Shares will not be issued, and shareholders who receive, or who
have remaining, fewer than three Rights will not be able to purchase any
Shares upon the exercise of such Rights. Completed Subscription Certificates
must be received by the Subscription Agent at the addresses set forth above.
Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Subscription
Certificate and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Shareholders whose shares are
held by a nominee such as a broker or trustee, must contact that nominee to
exercise their Rights. In that case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares should be directed to Shareholder Communications
Corporation, the Information Agent for the Offer, at its address and telephone
number listed below:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
(800) 733-8481, Ext. 351
Shareholders may also contact their brokers or nominees for information with
respect to the Offer.
The Information Agent will receive a fee estimated to be $ and
reimbursement for all out-of-pocket expenses related to the Offer.
14
<PAGE>
PAYMENT FOR SHARES
Exercising Rights holders who subscribe for Shares through the Primary
Subscription or pursuant to the Over-Subscription Privilege may choose between
the following methods of payment:
(1) Shares may be subscribed for by delivering to the Subscription Agent
the Subscription Certificate together with payment of the estimated total
purchase price for the Shares acquired through the Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege based on the estimated subscription price of $ per Share. The
subscription will be accepted when such payment, together with the properly
completed and executed Subscription Certificate, is received by the
Subscription Agent, provided that the Subscription Certificate and such
payment are received by the Subscription Agent no later than 5:00 p.m., New
York City time, on the Expiration Date. The Subscription Agent will deposit
all checks received by it for the purchase of Shares in a segregated
interest-bearing account (the interest from which will accrue to the
benefit of the Fund) pending proration and distribution of the Shares.
PAYMENTS PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
USF&G PACHOLDER FUND, INC., AND MUST ACCOMPANY A PROPERLY COMPLETED AND
EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION TO BE ACCEPTED. The
Subscription Agent will not accept cash as a means of payment for Shares.
(2) Alternatively, a subscription will be accepted if, prior to 5:00
p.m., New York City time, on the Expiration Date, the Subscription Agent
has received a properly completed and executed notice of guaranteed
delivery in the form accompanying this Prospectus ("Notice of Guaranteed
Delivery") by facsimile (telecopier) or otherwise from a financial
institution that is a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock
Exchange Medallion Signature Program, guaranteeing delivery of (i) payment
of the full Subscription Price for the Shares subscribed for through the
Primary Subscription and any additional Shares subscribed for pursuant to
the Over-Subscription Privilege, and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed Subscription
Certificate is received by the Subscription Agent by the close of business
on the fifth business day after the Expiration Date and full payment for
the Shares is received by the Subscription Agent by the close of business
on the tenth business day after the Confirmation Date (as defined below).
Within five business days following the Expiration Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to Record Date
Shareholders showing (i) the number of Shares acquired through the Primary
Subscription; (ii) the number of Shares, if any, acquired pursuant to the
Over-Subscription Privilege; (iii) the Subscription Price and the total
purchase price for such Shares; and (iv) any additional amount payable to the
Fund or any excess payment to be refunded by the Fund, in each case based on
the Subscription Price as determined on the Pricing Date. Any additional
amount payable to the Fund must be received by the Subscription Agent within
ten business days after the Confirmation Date, and any excess payment
refundable by the Fund will be sent by the Subscription Agent as soon as
practicable.
Whichever of the two methods of payment described above is used, issuance
and delivery of the Shares subscribed for are subject to collection of checks
or receipt of actual payment pursuant to a Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTIONS AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If an exercising Rights holder does not make payment of any amounts due, the
Fund reserves the right to take any or all of the following actions: (i) find
other purchasers for such subscribed and unpaid for Shares; (ii) apply any
payment actually received by it toward the purchase of the greatest whole
number of Shares
15
<PAGE>
subscribed for that could be acquired by such exercising Rights holder; or
(iii) exercise any and all other rights or remedies to which it may be
entitled, including, without limitation, the right to set-off against payments
actually received by it with respect to such subscribed Shares.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Securities and Exchange Commission ("SEC"),
undertaken to suspend the Offer until it amends this Prospectus if subsequent
to January , 1997, the effective date of the Fund's registration statement
relating to the Offer, the Fund's net asset value declines more than 10% from
its net asset value on that date. Accordingly, the Fund will notify
shareholders of any such decline and thereby permit them to cancel their
exercise of Rights.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and therefore may not be purchased or sold.
DELIVERY OF STOCK CERTIFICATES
Record Date Shareholders who participate in the Fund's Dividend Reinvestment
Plan will have all Shares acquired pursuant to the Offer issued in book-entry
form and added to the shares held in their account, unless stock certificates
are specifically requested. Stock certificates for all other Shares acquired
in the Offer will be mailed as soon as practicable after full payment for the
Shares subscribed for has cleared and the Shares have been allocated pursuant
to the Over-Subscription Privilege.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to holders of the Common Stock with
respect to the Offer will be as follows:
The distribution of Rights to Record Date Shareholders will not result in
taxable income to such shareholders, nor will such shareholders realize
taxable income as a result of the exercise of Rights.
The basis of a Right distributed to a shareholder will be zero unless the
shareholder elects (by filing a statement with his federal income tax return
for the year in which the Right is received) to allocate the basis of the
Common Stock with respect to which the Right is distributed between the Right
and the Common Stock, based on their respective fair market values on the date
of distribution. The holding period of a Right received by a shareholder
includes the holding period of the Common Stock with respect to which the
Right is distributed.
A Right issued to a Record Date Shareholder will be a capital asset in the
hands of such shareholder if the Common Stock with respect to which the Right
was issued was a capital asset in the hands of such shareholder. If a Right
expires unexercised, no loss will be realized.
If Rights are exercised for Shares, the basis of the Shares received will
include the basis allocated to the Rights (if any) and the amount paid upon
exercise of the Rights. The holding period for Shares acquired upon the
exercise of Rights begins on the date the Rights are exercised.
For back-up withholding purposes, the Fund may be required to withhold 31%
of reportable payments paid to certain non-corporate shareholders.
The foregoing is only a summary of applicable federal income tax
consequences and does not address any state or local tax consequences to
holders of Rights. Shareholders should consult their tax advisers concerning
the tax consequences in their particular circumstances. See "Taxation".
16
<PAGE>
DILUTION
Because the Subscription Price will be less than the current net asset value
per share of the Fund's Common Stock and because the number of shares
outstanding after completion of the Offer will increase in a greater
percentage than the increase in the size of the Fund's assets, the Offer will
result in a dilution of the net asset value per share for all shareholders.
Although it is not possible to state precisely the amount of the decrease in
net asset value per share because it is not known at this time what the net
asset value per share will be on the Pricing Date or how many Shares will be
subscribed for, the dilution resulting from the Offer could be substantial.
The amount of the dilution will depend upon the extent to which the Offer is
subscribed. For example, assuming that all Rights are exercised on the
Expiration Date and assuming an estimated subscription price per Share of $
( % of the Fund's net asset value per share as of January , 1997), then the
Fund's net asset value per share would be reduced by approximately $ . In
addition, as a result of the terms of the Offer, shareholders who do not fully
exercise their Rights should also expect that they will, upon completion of
the Offer, own a smaller proportional interest in the Fund and experience a
corresponding reduction in the voting power of their shares.
IMPACT ON CERTAIN FEES
The Adviser and the Administrator will benefit from an increase in the
Fund's assets resulting from the Offer because the Adviser's and
Administrator's fees are based on the net assets of the Fund. It is not
possible to determine the precise amount of additional compensation the
Adviser and Administrator will receive as a result of the Offer because it is
not known at this time how many Shares will be subscribed for and because the
proceeds of the Offer will be invested in additional portfolio securities that
will fluctuate in value and, in the case of the Adviser, because the rate of
its fee varies based on the Fund's investment performance. However, assuming
that all Rights are exercised at an estimated subscription price of $ , that
the number of Shares subject to subscription pursuant to the Offer is
increased by 25% to satisfy over-subscriptions and that the Fund's investment
performance for the preceding twelve months equals the percentage change in
the CS First Boston High Yield IndexTM for the same period, the additional
annual advisory fee received by the Adviser as a result of the Offer would be
approximately $ , and the additional annual administrative fee received by
the Administrator would be approximately $ . The advisory fee paid by the
Fund varies based on the Fund's investment performance relative to the CS
First Boston High Yield IndexTM. See "Management of the Fund--Advisory Fee."
Four of the Fund's seven directors are "interested persons" of the Fund within
the meaning of the 1940 Act. The other three directors are not "interested
persons" of the Fund. Three of the interested directors, Messrs. Pacholder,
Morgan and Shanahan, could benefit from the Offer because of their indirect
ownership interests in the Adviser. See "Management of the Fund--Advisory Fee"
and the Statement of Additional Information.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are sold
at an estimated subscription price of $ per Share, are estimated to be
approximately $ , after payment of the estimated offering expenses,
including the Dealer Manager and soliciting fees. Expenses related to the
issuance of the Shares will be borne by the Fund and will reduce the net asset
value of the Common Stock. If the Fund increases the number of Shares subject
to subscription pursuant to the Offer by 25% (415,462 shares), in order to
satisfy over-subscriptions, the additional net proceeds will be approximately
$ . The Fund will invest the net proceeds of the Offer in accordance with
its investment objective and policies. Depending upon market conditions and
the availability of appropriate securities, investment of the proceeds of the
Offer may take up to three months from their receipt by the Fund. See
"Investment Objective and Policies."
17
<PAGE>
RISKS OF LEVERAGE
The leveraging of the Fund's Common Stock through the issuance of the
Preferred Stock involves certain risks to holders of the Common Stock. These
risks include a higher volatility of the net asset value and potentially the
market price of their shares. So long as the Fund is able to realize a higher
net return on its investment portfolio than the dividend rate of the Preferred
Stock, the effect of leverage will be to cause holders of the Common Stock to
realize higher current net investment income than if the Fund were not
leveraged. Currently, the Fund's portfolio must experience an annual return of
% (net of expenses) in order to cover the annual dividend payments on the
Preferred Stock.
The purpose of the following table is to assist shareholders in
understanding the effects of leverage. The returns set forth in the table are
hypothetical and actual returns may be greater or less than those assumed for
purposes of the table.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed Return on Portfolio (Net of
Expenses)............................. -10.00% -5.00% 0.00% % 5.00% 10.00%
Corresponding Return to Common
Stockholders.......................... - % - % - % 0.00% % %
</TABLE>
To the extent that the net return on the Fund's investment portfolio equal
to the aggregate redemption price of the Preferred Stock declines toward the
dividend rate of the Preferred Stock, the benefit of leverage to holders of
the Common Stock will be reduced. If the current dividend rate of the
Preferred Stock were to exceed the net return on any such portion of the
Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to holders of the Common Stock and in a lower net asset
value than if the Fund were not leveraged. Similarly, since any decline in the
net asset value of the Fund's investment portfolio would be borne entirely by
holders of the Common Stock, the effect of leverage in a declining market will
be a greater decrease in net asset value of the Common Stock than if the Fund
were not leveraged, which would likely be reflected in a greater decline in
the market price of the Common Stock. In an extreme case, if the Fund's
current investment income were not sufficient to meet dividend requirements of
the Preferred Stock or if the Fund failed to maintain the required asset
coverage, in order for the Fund to declare a cash dividend or other
distribution on the Common Stock it could be necessary for it to liquidate
certain portfolio investments at a time when it may be disadvantageous to do
so, thereby reducing the net asset value attributable to the Common Stock,
such liquidations could adversely affect the Fund's net asset value and yield.
Under the 1940 Act, the Fund is not permitted to issue shares of any
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Stock unless, at the
time of such declaration, the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or distribution) is at
least 200% of such liquidation value. On December 31, 1996, the asset coverage
of the Preferred Stock under the 1940 Act was %. The Fund may be required to
redeem shares of Preferred Stock from time to time to maintain the asset
coverage of the Preferred Stock at 200% or more or to meet certain other asset
coverage tests and restrictions. See "Description of Capital Stock--Preferred
Stock--Redemption."
Upon the completion of the Offer, the Fund intends, subject to market
conditions, to add incremental leverage by issuing an additional series of
Preferred Stock so that the percentage of the Fund's assets representing
leverage is approximately the same as it was prior to completion of the Offer.
18
<PAGE>
MARKET PRICE AND NET ASSET VALUE
MARKET PRICE
The Fund's outstanding Common Stock is listed on the Exchange. Since the
Fund commenced operations, the Common Stock has traded in the market at, above
and below net asset value. The last sale price on the Exchange and the net
asset value of a share of Common Stock on January , 1997 were $ and $
respectively.
The following table sets forth for the periods indicated the high and low
last sale prices of the Common Stock on the Exchange (as reported in the
American Stock Exchange Composite Tape), the high and low net asset values per
share, and the high and low percentages by which the Common Stock traded at a
premium over or discount from net asset value.
<TABLE>
<CAPTION>
NET ASSET PREMIUM OR
VALUE MARKET PRICE (DISCOUNT)
------------- ------------- ------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
1996
4thQ................................ $ -- $ -- $ -- $ -- -- % -- %
3rdQ................................ 17.03 16.24 17.50 15.63 2.24 (4.37)
2ndQ................................ 16.58 16.17 16.38 15.63 0.15 (3.67)
1stQ................................ 16.83 16.19 17.88 16.38 7.30 (0.40)
1995
4thQ................................ $16.55 $16.02 $18.50 $17.38 11.80% 5.43 %
3rdQ................................ 17.20 16.45 18.13 17.25 7.70 2.00
2ndQ................................ 17.27 16.60 17.88 15.88 4.10 (3.96)
1stQ................................ 17.39 16.45 17.38 15.50 0.24 (9.25)
</TABLE>
Shares of closed-end investment companies, and particularly those of closed-
end stock funds, have tended to trade at prices that generally have been at a
discount from their net asset value. There can, of course, be no assurance
that shares of the Fund's Common Stock will not trade at a discount from net
asset value in the future. Net asset value generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater in the case of a fund having a leveraged capital
structure. Since the market price of shares of the Fund's Common Stock will be
determined by such factors as relative demand for and supply of such shares in
the market, general market and economic conditions, and other factors beyond
the control of the Fund, the Fund cannot predict whether shares of Common
Stock will trade at, below or above net asset value, or at, below or above the
Subscription Price. Accordingly, the Common Stock is designed primarily for
long-term investors, and investors in the Common Stock should not view the
Fund as a vehicle for trading purposes. See "Special Leverage Considerations"
and "Share Repurchases; Conversion to Open-End Company."
NET ASSET VALUE
The Fund calculates and makes available for publication the net asset value
per share of its Common Stock as of the close of business on the Exchange
(currently 4:00 p.m., New York City time) on each Thursday the Exchange is
open for trading. The net asset value per share is determined by dividing the
value of the Fund's assets (including interest and dividends accrued but not
collected), less its liabilities (including accrued expenses) and the
liquidation value of any outstanding shares of preferred stock, by the number
of outstanding shares of Common Stock. In valuing the Fund's assets,
securities listed on an exchange or traded over-the- counter are valued by an
independent pricing service approved by the Board of Directors based on market
quotations. Securities for which market quotations are not readily available
and other assets are valued at fair value as determined by, or under the
direction of, the Board of Directors. Debt securities with remaining
maturities of 60 days or less when acquired are valued at amortized cost.
19
<PAGE>
Because it is expected that the Board of Directors of the Fund will set the
record date for the 1997 first quarter dividend so that the ex-dividend date
will occur after the Pricing Date, the net asset value of the Fund on the
Pricing Date is expected to include the amount of the distribution liability
for the first quarter dividend on the Common Stock. Nevertheless, it is
expected that the first distribution payable on the Shares offered hereby will
be the regular dividend for the second quarter, which will not be payable
before June 1997. See "Dividends and Distributions."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of total return
through current income and capital appreciation by investing primarily in high
yield, high risk fixed-income securities of domestic companies. No assurance
can be given that the Fund will be able to achieve its investment objective.
The Fund's investment objective may be changed by the Board of Directors
without shareholder approval. Additional information regarding the investment
policies of the Fund and certain investment transactions in which it may
engage is contained in the Statement of Additional Information.
INVESTMENT PHILOSOPHY AND ANALYSIS
The Adviser seeks to identify and purchase for the Fund fixed-income
securities which have a higher relative value and more favorable risk return
characteristics than the market as a whole. As part of this strategy, the Fund
seeks to invest a material portion of its portfolio in securities which are
trading at a discount from their face value or principal amount. Such
discounts are generally attributable to one or more factors. First, many
investors are risk averse and are unwilling to purchase or hold securities
that are rated below investment grade or are unrated. Second, certain
institutional investors may be required by statute, regulation or
organizational documents to divest themselves of investments in such
securities. Third, considerable financial and legal analysis is required to
evaluate these securities. The difficulty of analysis, reduced investor
interest and less active trading combine to discourage many securities
analysts from following or recommending investment in such companies. In
addition, shortly after a company experiences financial or operating
difficulties, certain investors may sell its securities at prices that do not
necessarily reflect their intrinsic value. These factors may create
substantially more sellers than buyers and significant differences may then
develop between the current market prices of such securities and the Adviser's
estimate of their intrinsic value, thereby providing opportunities for capital
appreciation. A deeply discounted fixed-income security offers the potential
for significant capital appreciation if the issuer is able to pay the security
at maturity or to redeem the issue at face value, or if the credit quality of
the security improves. Conversely, these securities may take considerable time
to appreciate in value and, in some cases, may become less valuable or
worthless, particularly in the event of a default or the bankruptcy of the
issuer.
The Adviser believes that the risks associated with investing in securities
trading at a discount from their face value or principal amount can be managed
through credit, financial and legal analysis and research, and through
portfolio diversification. The Adviser also attempts to manage risk through
acquisition of securities generally at or near its estimate of their
liquidation values.
In analyzing prospective investments for the Fund, the Adviser generally
considers a number of factors including the following:
1. Financial Condition. The Adviser performs credit and financial analysis,
emphasizing cash flow, on all investments. Generally, the Fund will avoid
investment in a distressed situation if the Adviser believes accurate
financial and business information is not available.
2. Value of Assets. The Adviser generally estimates the liquidation value of
a company to measure the risk of loss in case the company is unable to
continue operations. If the investment is purchased at or below
20
<PAGE>
liquidation value, the ultimate risk of loss may be reduced. Additionally, in
certain cases, sale of the assets of a company may provide more value than its
continued operation.
3. Business Prospects. The Adviser generally considers the industry outlook
and competitive factors, including supplier and customer relationships,
strengths and weaknesses of products, viability of product lines and other
considerations in an effort to determine the company's business prospects. In
most cases a high level of total return will be realized through the value
inherent in the continued operation of the company's business.
4. Capital Structure. The Adviser reviews the terms of each debt instrument
in order to assess the priority of the Fund's investment relative to other
debt and equity holders. The Fund generally will seek a position in the
capital structure of a company which will enable it to preserve the value of
its investment in the case of a liquidation. In some cases, seniority in the
capital structure, particularly when coupled with secured status, provides the
opportunity for significant influence in the event of a bankruptcy or
restructuring.
5. Management. The Adviser considers the depth and capabilities of the
management team to assess its ability to lead a company through financial or
operating difficulties. The Adviser also considers management's ownership
interest in the company. When management has a substantial equity stake in the
company, the Adviser believes management will be motivated to enhance and
protect its interest in the company and to avoid liquidation, reorganization
or bankruptcy.
6. Capital Requirements. The Adviser considers a company's needs for
additional capital and the potential sources for such capital.
PORTFOLIO INVESTMENTS
The Fund invests in a diversified portfolio comprised primarily of publicly
traded bonds, debentures, notes and preferred stocks issued by domestic
companies which generally have market capitalizations (including debt) of at
least $100 million. These securities are generally traded in the over-the-
counter market, but may be listed on an exchange. Debt securities in which the
Fund invests may or may not bear fixed or variable rates of interest, or carry
equity features, such as conversion or exchange rights, or warrants for the
acquisition of shares of stock of the same or a different company, and may or
may not have been issued in connection with a leveraged buy-out. The Fund may
also invest in privately placed debt securities and in hybrid securities, such
as debt with warrants attached, and other privately held obligations of, in
most cases, public companies, such as loans, credit paper and loan
participations. The Fund is not restricted as to the nature or type of debt or
equity securities in which it may invest. The Fund may from time to time
invest in certain industrial development bonds, including pollution control
revenue bonds. Industrial development bonds are issued by governmental
entities but are payable solely by the companies which own and operate the
facilities financed by the bonds. The Fund will not invest in industrial
development bonds to obtain any tax benefits associated with such investments.
The Fund's investments will generally not be rated or will be rated below
investment grade by Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's") (i.e., BB or lower by S&P, or Ba or lower
by Moody's). Securities below investment grade are considered to be of poor
standing and are speculative with respect to the company's capacity to pay
interest and principal in accordance with the terms of the obligation. A
description of the rating policies of S&P and Moody's appears in Appendix A to
the Statement of Additional Information. Securities ratings are based largely
on issuers' historical financial performances and the rating agencies'
investment analyses at the time of rating. The Adviser believes that the
rating assigned to a particular security is not necessarily indicative of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. For a discussion of the risks associated with investing
in securities rated below investment grade, see "Special Risk Considerations"
below.
21
<PAGE>
As of December 31, 1996, the percentage of the Fund's assets invested in
fixed-income securities within the various rating categories, determined on a
dollar-weighted average, were as follows:
<TABLE>
<CAPTION>
RATING CATEGORY PERCENTAGE*
--------------- -----------
<S> <C>
BB or Ba................................... %
B..........................................
CCC or Caa.................................
CC or Ca...................................
C..........................................
D..........................................
Common Stock/Warrants....................
Cash and cash equivalents................
------
Total Investments...................... 100.00%
</TABLE>
--------
* Based on the S&P rating if the security is
rated by S&P, otherwise based on the Moody's
rating. Includes unrated fixed-income
securities deemed by the Adviser to be of
comparable quality.
The Adviser anticipates that most of the companies issuing securities
acquired by the Fund will not be involved, at the time of acquisition or
thereafter, in reorganization, restructuring or bankruptcy proceedings.
However, the Fund may from time to time become an active participant in those
activities. It is the policy of the Fund not to invest in the securities of an
issuer for the purpose of exercising control or management. The Adviser may,
however, intentionally seek an active role in reorganization, restructuring or
bankruptcy proceedings at the time of investment, or may decide to assume such
a role as a result of subsequent events. Active participation is often
necessary to monitor a Non-Accruing Security and to avoid the divisive
techniques used by management and certain creditors to enhance their own
positions at the expense of other creditors. The Adviser's active
participation in reorganization, restructuring or bankruptcy proceedings,
whether as a member of creditors' or equity holders' committees or otherwise,
may restrict for some time the Fund's ability to sell the related portfolio
securities.
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
NON-ACCRUING SECURITIES. Some of the Fund's portfolio investments may not be
current on payment of interest or dividends or may be in default at the time
of acquisition ("Non-Accruing Securities"). Non-Accruing Securities may
present the opportunity for significant capital appreciation based on the
Adviser's estimation of their liquidation or reorganization value. There can
be no assurance, however, that such capital appreciation will occur or that it
will occur within the time frame estimated by the Adviser. Non-Accruing
Securities may be less liquid and more volatile than other portfolio
securities. Consistent with the Fund's objective of obtaining high levels of
current income, Non-Accruing Securities will generally comprise no more than
20% of the Fund's net assets. However, some portfolio securities may become
Non-Accruing Securities after they are acquired by the Fund. Given the
unpredictability of performance by the issuers of the Fund's portfolio
investments, it is impossible to estimate the amount of the Fund's assets
which could become invested in Non-Accruing Securities. Accordingly, there can
be no assurance that the level of Non-Accruing Securities will not exceed 20%
of the Fund's net assets. The Adviser will not purchase additional Non-
Accruing Securities for the Fund if, at the time of proposed acquisition, Non-
Accruing Securities comprise 20% or more of the net assets of the Fund.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in U.S.
dollar denominated securities or other obligations of foreign companies issued
or trading in the United States. Investing in the securities of foreign
issuers involves special risks not typically associated with investing in U.S.
companies. These risks include differences in accounting, auditing and
financial reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S.
22
<PAGE>
investment in foreign countries, and potential restrictions on the flow of
international capital and currencies. Foreign issuers may also be subject to
less government regulation than U.S. companies. Moreover, the dividends and
interest payable on foreign securities may be subject to foreign withholding
taxes, thus reducing the net amount of income available for distribution to
shareholders of the Fund. Further, foreign securities often trade with less
frequency and volume than domestic securities and, therefore, may exhibit
greater price volatility.
EQUITY SECURITIES. Equity securities will generally comprise no more than
10% of the Fund's total assets. Equity securities are defined as common stocks
and preferred stocks without mandatory redemption features and do not include
bonds, debentures or other debt obligations that are convertible into equity
securities. The Adviser will not purchase additional equity securities for the
Fund if, at the time of proposed acquisition, equity securities comprise 10%
or more of the Fund's total assets. However, there can be no assurance that
the Fund's investments in equity securities will not exceed 10% of its total
assets, particularly if issuers of portfolio securities become involved in
restructuring or reorganization proceedings that result in the conversion of
debt obligations into equity securities or if there is an increase in the
value of the equity securities held by the Fund relative to the Fund's debt
obligations.
TEMPORARY INVESTMENTS. There may be times when securities satisfying the
Adviser's investment criteria are unavailable or when, in the Adviser's
judgment, conditions in the securities markets render investment in such
securities inconsistent with the Fund's investment strategy and the best
interests of shareholders. During these periods, or pending investment in such
securities, the Fund may invest in temporary investments. Temporary
investments are defined as (i) corporate debt obligations with a remaining
term to maturity in excess of one year, such as increasing rate notes,
variable or floating rate notes and certain preferred stock issues, and (ii)
debt obligations with a remaining term to maturity of one year or less, such
as commercial paper, bank certificates of deposit, bankers' acceptances,
short-term obligations of the U.S. government, its agencies or
instrumentalities, and repurchase agreements with respect to any of the
foregoing. Temporary investments with longer maturities generally will have
structural characteristics that are intended to reduce the risk of principal
loss from interest rate fluctuations but may also be rated in the lower rating
categories classified by S&P and Moody's or may not be rated. The yield on
these securities will, as a general matter, tend to be lower than the yield on
the Fund's other portfolio investments. All temporary investments will be
paying interest currently at the time of purchase. It is impossible to predict
when, for how long or to what extent temporary investments will be utilized.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment
restrictions. The principal investment restrictions of the Fund are summarized
below. A complete listing is contained in the SAI. These restrictions are
fundamental policies and may only be changed with shareholder approval.
1. The Fund may not issue senior securities (as defined in the 1940 Act)
other than preferred stock or except to the extent such issuance might be
involved with respect to borrowing described under 2 below.
2. The Fund is authorized under its investment policies to borrow money
on a secured or unsecured basis in an amount up to 20% of the value of its
net assets at the time of borrowing. (Notwithstanding the foregoing, the
Fund's charter prohibits it from borrowing money at any time the Preferred
Stock is outstanding.)
3. The Fund may not invest more than 5% of its total assets in securities
of any one issuer, other than the U.S. government or its agencies or
instrumentalities, or acquire more than 10% of the outstanding voting
securities of any one issuer.
OTHER INVESTMENT POLICIES. The Fund may purchase securities on a when-
issued, delayed delivery or "when, as and if issued" basis and may invest in
private placements and repurchase agreements. Information concerning these
investments and the related risks is contained in the Statement of Additional
Information.
23
<PAGE>
SPECIAL RISK CONSIDERATIONS
Investment by the Fund in high yield securities (commonly known as "junk
bonds") is speculative and involves a high degree of risk which can result in
substantial or total losses to the Fund. The Fund may invest in companies that
are incurring operating losses, have substantial capital needs, have negative
net worths, are insolvent or are involved in bankruptcy or reorganization
proceedings. These investments may take considerable time to appreciate in
value and, in some cases, may become less valuable or worthless. It is very
difficult to value financially distressed companies and to estimate the
prospects for their financial recovery. Once a company experiences financial
or operating problems, its condition can deteriorate rapidly. Despite the
Adviser's efforts to obtain current, accurate financial and business
information, available information may be of limited utility. The market
values of high yield securities generally fluctuate in response to changes in
interest rates and economic conditions more than those of higher rated
securities. Also, with high yield securities, there is a greater possibility
that an adverse change in the financial condition of the issuer, particularly
a highly leveraged issuer, may affect its ability to make payments of income
and principal and increase the expenses of the Fund in seeking recovery from
the issuer. Further, with high yield securities, there is a greater
possibility of a default or the bankruptcy of the issuer. Since there may be
no public market or only inactive trading markets for some of the securities
in which the Fund invests, these securities may be harder to value and more
susceptible to adverse publicity concerning the issuer, and consequently the
Fund may be required to retain such investments for indefinite periods or sell
them at substantial losses. In addition, legislation may be enacted in the
future that could depress the value of high yield securities.
In the event companies issuing securities held by the Fund become involved
in bankruptcy proceedings, additional risks will be present. Bankruptcy or
other insolvency proceedings are highly complex, can be very costly and may
result in unpredictable outcomes. The bankruptcy court has extensive powers
and under certain circumstances may alter contractual obligations of the
bankrupt company. When a company seeks relief under the Federal Bankruptcy
Code (or has a petition filed against it), an automatic stay prevents all
entities, including creditors, from foreclosing or taking other actions to
enforce claims, perfect liens or reach collateral securing such claims.
Creditors who have claims against the company prior to the date of the
bankruptcy filing must then petition the court to permit actions protecting
their claims, but may be prohibited from doing so if the court concludes that
the value of the property in which the creditor has an interest will be
adequately protected during the proceedings. If the court's assessment of
adequate protection is inaccurate, a creditor's collateral may be diminished
without the creditor being afforded the opportunity to preserve it. Thus, even
if the Fund holds a secured claim, it may be prevented from collecting the
liquidation value of the collateral securing its debt and may be forced to
permit use of the collateral although the use diminishes the value of the
collateral, unless relief from the automatic stay is granted by the court.
Security interests are closely scrutinized and frequently challenged in
bankruptcy proceedings and may be invalidated for a variety of reasons. For
example, security interests may be set aside because, as a technical matter,
they have not been perfected properly under local rules or the Uniform
Commercial Code. If a security interest is invalidated, the secured creditor
loses the value of the collateral, becomes unsecured, and almost certainly
will experience a significant loss of investment. While the Fund intends to
scrutinize any security interests that secure the debt obligations it
purchases, there can be no assurance that such security interests will not be
challenged vigorously and found defective in some respect, or that the Fund
will be able to prevail against challenges.
Debt may be disallowed or subordinated to the claims of other creditors if
the creditor is found to have engaged in certain inequitable conduct resulting
in harm to other parties with respect to the affairs of a company filing for
protection from creditors under the Bankruptcy Code. Creditors' claims may be
treated as equity if they are deemed to be exerting undue control or influence
over the business affairs of the company prior to filing under the Bankruptcy
Code. If a creditor is found to have interfered with the company's affairs to
the detriment of other creditors or stockholders, the creditor may be held
liable for damages to injured parties. While the Fund will attempt to avoid
taking the types of action that would lead to equitable subordination or
creditor liability, there can be no assurance that such claims will not be
asserted or that the Fund will be able to defend against them successfully.
24
<PAGE>
MANAGEMENT OF THE FUND
Management of the Fund, including general supervision of the activities
performed by the Fund's investment adviser, is the responsibility of the Board
of Directors of the Fund. For certain information regarding the directors and
officers of the Fund, see "Management of the Fund--Directors and Officers" in
the SAI.
INVESTMENT ADVISORY SERVICES
Pacholder & Company, Bank One Towers, East Tower, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236, has served as the Fund's investment adviser
since the Fund commenced operations in November 1988. The Adviser was
organized in 1988 as an Ohio general partnership between Pacholder Associates,
Inc. ("Pacholder") and USF&G Marketing Services Co. ("Marketing Services"),
which each have a fifty-percent partnership interest in the Adviser. Pacholder
is an investment advisory firm formed in December 1983 which specializes in
high yield fixed-income securities. Pacholder currently manages in excess of
$550 million for institutional clients and provides research and consulting
services to those clients and others. Approximately $260 million of the
accounts currently managed by Pacholder are dedicated to investing in
securities similar to those eligible for purchase by the Fund. Marketing
Services is an indirect wholly-owned subsidiary of USF&G Corporation. USF&G
Corporation is composed of property/casualty and life insurance subsidiaries.
Its primary subsidiary is United States Fidelity and Guaranty Company. United
States Fidelity and Guaranty Company holds a $0.6 million 15% Promissory Note
due November 1997 of Pacholder and owns twenty percent of Pacholder's
outstanding securities. Asher O. Pacholder, William J. Morgan and James P.
Shanahan, Jr., officers and directors of the Fund, are shareholders, officers
or directors of Pacholder. John C. Sweeney, a director of the Fund, is an
officer of USF&G Corporation.
PORTFOLIO MANAGEMENT
The overall portfolio management strategy for the Fund is determined by the
Adviser under the general supervision and direction of Asher O. Pacholder. Dr.
Pacholder has been Chairman and Chief Executive Officer of Pacholder since its
founding in 1983. Prior to that time he was Vice President and Chief
Investment Officer of Union Central Life Insurance Company in Cincinnati,
Ohio. In that capacity he was responsible for investments aggregating $1.6
billion in fixed-income securities, equities and real estate. After graduating
with an M.S. and Ph.D. from Yale University, Dr. Pacholder began his
investment career at T. Rowe Price Associates and subsequently served as a
trust officer at Republic Bank of Dallas. Anthony L. Longi has been
responsible for the day-to-day management of the Fund's portfolio since
November 1994. Mr. Longi is an Executive Vice President of Pacholder where he
has worked as an investment grade and high-yield bond investment analyst and
trader, portfolio manager and special situations analyst for more than
nine years.
ADVISORY FEE
As full compensation for the services provided, facilities furnished and
expenses paid by the Adviser under its investment advisory agreement with the
Fund, the Adviser receives an annual investment advisory fee which increases
or decreases from a "fulcrum fee" of 0.90% of the Fund's average net assets
based on the total return investment performance of the Fund for the prior
twelve-month period relative to the percentage change in the CS First Boston
High Yield Index(TM) (the "Index") for the same period (the "Index Return"). A
general description of the Index, and the Index Return and total return
investment performance of the Fund for the twelve-month periods ended December
31, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996 are set forth in
Appendix B to the Statement of Additional Information.
The advisory fee is paid quarterly at an annual rate which varies between
0.40% and 1.40% of the Fund's average net assets. The advisory fee is
structured so that it will be 0.90% of the Fund's average net assets if
25
<PAGE>
the Fund's investment performance for the preceding twelve months (net of all
fees and expenses, including the advisory fee) equals the Index Return. The
advisory fee increases or decreases from the "fulcrum fee" of 0.90% by ten
percent of the difference between the Fund's investment performance during the
preceding twelve months and the Index Return during that period, up to the
maximum fee of 1.40% of average net assets or down to the minimum fee of
0.40%. The following table shows examples of the advisory fees which would be
applicable at the stated levels of the Fund's performance relative to the
Index Return for a particular twelve-month period.
<TABLE>
<CAPTION>
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
NET OF FEES AND EXPENSES)( WEEKLY NET ASSETS)*
- -------------------------- -------------------
<S> <C>
Index Return + 5%....................................... 1.40%
Index Return + 4........................................ 1.30
Index Return + 3........................................ 1.20
Index Return + 2........................................ 1.10
Index Return + 1........................................ 1.00
Index Return............................................ 0.90
Index Return - 1........................................ 0.80
Index Return - 2........................................ 0.70
Index Return - 3........................................ 0.60
Index Return - 4........................................ 0.50
Index Return - 5........................................ 0.40
</TABLE>
--------
* The advisory fee increases or decreases from a "fulcrum fee" of 0.90%.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Adviser
received advisory fees totaling $726,317, $391,534 and $ , respectively,
which represent 1.07%, 0.40% and %, respectively, of the Fund's average net
assets during such periods. The advisory fees paid by the Fund in respect of
periods ending prior to October 1, 1994 were calculated pursuant to a
different fee schedule, under which the annual investment advisory fee varied
between 0.40% and 1.40% of the Fund's average net assets. The prior schedule
was structured so that the advisory fee would be 1.20% of the Fund's average
net assets if the Fund's investment performance for the preceding twelve
months (net of all fees and expenses, including the advisory fee) equaled the
Index Return plus three percent. The current fee schedule became effective on
October 1, 1994. The investment advisory fee payable for the twelve-month
period commencing October 1, 1994 was the lesser of the fees calculated under
the prior and current schedules. The advisory fee paid by the Fund has for
certain periods exceeded, and may in the future exceed, the advisory fees paid
by most other investment companies. In addition, the "fulcrum fee" of 0.90% is
higher than the fees paid by most other investment companies and, accordingly,
the fee paid by the Fund may exceed the advisory fees paid by most other
investment companies, even if the investment performance of the Fund is less
than the Index Return. Also, the Adviser may receive the maximum fee even if
the Fund's absolute performance is negative and may receive the minimum fee in
instances where the Fund experiences significant positive performance.
ADMINISTRATIVE AND ACCOUNTING SERVICES
Kenwood Administrative Management, Limited Partnership (the "Administrator")
serves as administrator of the Fund pursuant to an Administration Agreement
dated June 5, 1996 (the "Administration Agreement"). The Administrator is an
Ohio limited partnership whose general and limited partners are wholly-owned
subsidiaries of Pacholder, a general partner of the Adviser. The Administrator
monitors the Fund's compliance with various regulatory requirements,
coordinates and monitors the activities of the Fund's other service providers,
handles various public and shareholder relations matters, and assists in the
preparation of financial and other reports. For the services rendered to the
Fund and related expenses borne by the Administrator, the Fund pays the
Administrator a fee, calculated and paid monthly, at the annual rate of 0.10%
the Fund's average net assets.
26
<PAGE>
Pursuant to an Accounting Services Agreement with the Fund, Pacholder, a
general partner of the Adviser, is responsible for (i) accounting relating to
the Fund and its investment transactions, (ii) determining the net asset value
per share of the Fund, (iii) maintaining the Fund's books of account, and (iv)
monitoring, in conjunction with the Fund's custodian, all corporate actions,
including dividends and distributions and stock splits, taken in respect of
securities held by the Fund. For these services the Fund pays Pacholder a
monthly fee at the annual rate of 0.025% of the first $100 million of the
Fund's average weekly net assets and 0.015% of such assets in excess of $100
million, and reimburses it for out-of-pocket expenses.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's policy, which may be changed by the Board of Directors, to
pay quarterly dividends on the Common Stock from net investment income
remaining after payment of dividends on the Preferred Stock. To the extent
capital gains are not required to satisfy the dividend, redemption or
liquidation preferences of any outstanding shares of Preferred Stock, they
will be distributed to holders of the Common Stock. Net short-term capital
gains, if any, may be included in quarterly dividends or distributed on such
other basis as may be determined from time to time by the Board of Directors.
Net long-term capital gains, if any, will be distributed at least annually.
Because it is expected that the record date for the 1997 first quarter
dividend, as fixed by the Board of Directors of the Fund, will be prior to the
date on which the Shares offered hereby will be issued, it is expected that
the first distribution payable on the Shares will be the regular dividend for
the second quarter, which will not be payable before June 1997.
The Fund seeks to pay a stable quarterly dividend on the Common Stock.
However, due to the nature of the Fund's investments, the Fund's investment
income and the amount available for distribution with respect to any
particular quarter may be subject to fluctuation. Accordingly, to maintain a
more stable quarterly distribution, the Fund may distribute less than the
entire amount of net investment income earned in a particular quarter. Such
undistributed net investment income will be available to supplement future
distributions which might otherwise have been reduced by a decrease in the
Fund's net income due to fluctuations in investment income or expenses. As a
result, the dividends paid by the Fund for any particular quarter may be more
or less than the amount of net investment income actually earned by the Fund
during the period. Any undistributed net investment income will be reflected
in the Fund's net asset value. No assurance can be given that the Fund will be
able to maintain a stable quarterly dividend on the Common Stock. See "Risks
of Leverage" and "Investment Objective and Policies--Special Risk
Considerations."
For tax purposes, the Fund is currently required to allocate net income and
net capital gains, if any, between the Common Stock and the Preferred Stock in
proportion to the total dividends paid to each class with respect to the
taxable year. See "Taxation."
While any shares of Preferred Stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Stock unless at
the time of such declaration (i) all accrued dividends on the Preferred Stock
have been paid and (ii) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value to the outstanding Preferred Stock.
This latter limitation on the Fund's ability to make distributions on its
Common Stock under certain circumstances could impair the ability of the Fund
to maintain its qualification for taxation as a regulated investment company.
See "Taxation."
27
<PAGE>
DIVIDEND REINVESTMENT PLAN
Each registered holder of Common Stock may elect to have all dividends and
capital gains distributions, or both, automatically reinvested by Fifth Third
Bank Corporate Trust Services, as agent for shareholders (the "Plan Agent"),
in additional full and fractional (computed to three decimal places) shares of
Common Stock under the Fund's Dividend Reinvestment Plan (the "Plan").
Shareholders who do not elect to participate in the Plan will receive all
distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name, then to
the nominee) by Fifth Third Bank Corporate Trust Services, as the Fund's
dividend disbursing agent.
The number of shares equivalent to the cash distribution will be determined
as follows:
(1) If shares of Common Stock are trading at net asset value or at a
premium above net asset value at the time of valuation, the Fund will issue
new shares at the greater of net asset value or 95% of the then current
market price; or
(2) If shares of Common Stock are trading at a discount from net asset
value at the time of valuation, the Plan Agent will receive the
distribution in cash and apply it to the purchase of shares of Common Stock
in the open market, on the Exchange or elsewhere, for the participants'
accounts. The Plan Agent will use all distributions received in cash to
purchase shares of Common Stock in the open market within thirty days of
the dividend payment date. Interest will not be paid on any uninvested cash
payments. If the Plan Agent is unable to invest the full amount of the
distribution in open-market purchases because the market discount has
shifted to a market premium or otherwise, the Fund will issue new shares
with respect to the uninvested portion of the distribution.
In the case of shareholders such as banks, brokers or nominees which hold
shares of Common Stock for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares certified
from time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve participants of
any income taxes that may be payable (or required to be withheld) on
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants. All questions and correspondence concerning the Plan should
be directed to Fifth Third Bank Corporate Trust Services, 38 Fountain Square
Plaza MD-1090D2, Cincinnati, Ohio 45263; telephone toll-free at (800) 837-
7755. For a more complete description of the Plan, see "Dividend Reinvestment
Plan" in the Statement of Additional Information.
TAXATION
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. So long as the
Fund qualifies for this tax treatment, it will be relieved of federal income
tax on amounts distributed to shareholders, but shareholders, unless otherwise
exempt, will pay income or capital gains taxes on amounts so distributed
(except distributions that constitute "exempt interest dividends" or that are
treated as a return of capital) regardless of whether such distributions are
paid in cash or reinvested in additional shares.
If at any time when shares of Preferred Stock are outstanding the Fund does
not meet the asset coverage requirement of the 1940 Act, the Fund will be
required to suspend distributions on the Common Stock until
28
<PAGE>
the asset coverage is restored. See "Description of Capital Stock--Preferred
Stock--Dividends." This may jeopardize the Fund's qualification for taxation
as a regulated investment company. Upon any failure to meet the asset coverage
requirement of the 1940 Act, the Fund may, in its sole discretion, redeem
shares of Preferred Stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders
of failing to qualify as a regulated investment company. There can be no
assurance, however, that any such action would achieve such objectives.
The Internal Revenue Service (the "IRS") currently requires a regulated
investment company that has two or more classes of stock to allocate its
income for the year to each class of stock based upon the percentage of total
dividends distributed to each class for the taxable year. So long as the IRS
maintains this position, the Fund intends to allocate net income, net capital
gain and other taxable income, if any, between the Common Stock and the
Preferred Stock in proportion to the total dividends paid to each class with
respect to the taxable year.
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
shares so received, and will have a cost basis in the shares of the same
amount.
For backup withholding purposes, the Fund may be required to withhold 31% of
reportable payments (which may include dividends, capital gain distributions,
and redemptions) to certain non-corporate shareholders. A shareholder,
however, may avoid becoming subject to this requirement by filing an
appropriate form certifying under penalty of perjury that such shareholder's
taxpayer identification number set forth on the form is correct and that he is
not subject to backup withholding, or is exempt from backup withholding.
The Fund will send written notices to shareholders annually regarding the
tax status of the distributions made by the Fund.
Shareholders are urged to consult their tax advisors concerning their own
tax situation, including the application of federal, state and local income
taxes to an investment in the Fund. A more detailed discussion of federal tax
matters is contained in the Statement of Additional Information.
SHARE REPURCHASES; CONVERSION TO OPEN-END COMPANY
The Fund is a closed-end investment company and as such its shareholders do
not have the right to present their shares for redemption by the Fund.
Instead, shares of the Fund's Common Stock trade in the open market at a price
that will be a function of several factors, including net asset value and
yield. In the event that the Fund's Common Stock trades at a significant
discount from net asset value, the Board of Directors is authorized to take
action intended to reduce or eliminate the discount, which may include the
repurchase of shares of Common Stock in the open market or in private
transactions, or the making of a tender offer for such shares. There can be no
assurance, however, that the Board of Directors will decide to take any of
these actions, or that share repurchases or tender offers, if undertaken, will
reduce market discount. In addition, at any time when shares of the Fund's
Preferred Stock are outstanding, the Fund may not purchase, redeem or
otherwise acquire any shares of its Common Stock unless (i) all accrued
dividends on the Preferred Stock have been paid and (ii) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's
portfolio (determined after deducting the acquisition price of the Common
Stock) is at least 200% of the liquidation value of the outstanding Preferred
Stock. The staff of the SEC currently requires that any tender offer made by a
closed-end investment company for shares of its stock must be at a price equal
to the net asset value of such stock on the close of business on the last day
of the tender offer. Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the
stated consideration to be paid to tendering shareholders.
29
<PAGE>
Subject to its investment and other limitations, the Fund may borrow to
finance the repurchase of shares or to make a tender offer. Interest on any
amounts borrowed to finance share repurchase transactions will increase the
Fund's expenses and such interest, or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders, will reduce the Fund's net
income. Any share repurchase or tender offer that might be approved by the
Board of Directors would have to comply with the Securities Exchange Act of
1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a significant discount
from net asset value will be made by the Board of Directors at the time it
considers the matter, it is the Board's present policy, which may be changed
by the Board, not to authorize repurchases of shares of Common Stock or a
tender offer for such shares if (i) such transactions, if consummated, would
(a) result in the delisting of the Common Stock from the Exchange, or (b)
impair the Fund's status as a regulated investment company under the Code
(which would make the Fund a taxable entity, causing the Fund's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund) or as a registered closed-end investment
company under the 1940 Act; (ii) the Fund would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Fund's
investment objective and policies in order to repurchase shares; or (iii)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on
prices for trading securities on the Exchange, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by
United States or New York State banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition that
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board of Directors
may in the future modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below net asset value
would result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders would reduce or eliminate a market discount from net asset value.
Nevertheless, the fact that the Fund's shares may be the subject of repurchase
or tender offers from time to time may reduce any spread between market price
and net asset value that might otherwise exist. A purchase by the Fund of
shares of its Common Stock will decrease the Fund's total assets which would
likely have the effect of increasing the Fund's expense ratio. Any purchase by
the Fund of Common Stock at a time when shares of Preferred Stock are
outstanding will increase the leverage applicable to the outstanding shares of
Common Stock then remaining. See "Risks of Leverage." Under Maryland law,
shares acquired by the Fund constitute authorized but unissued shares.
If the Fund's Common Stock is trading at a significant discount from net
asset value, the Board may also consider submission to shareholders of a
proposal to convert the Fund to an open-end investment company. In general,
conversion to an open-end company would require the approval of a majority of
the outstanding shares of Preferred Stock and a majority of the outstanding
shares of Common Stock, each voting as a separate class, and would have to be
declared advisable by the Board of Directors. For this purpose, a "majority of
the outstanding shares" means, for each class, the vote, at the annual or a
special meeting of shareholders, (i) of 67% or more of the shares present at
such meeting, if the holders of more than 50% of the outstanding shares are
present or represented by proxy; or (ii) of more than 50% of the outstanding
shares, whichever is the less. See "Description of Capital Stock--Special
Voting Requirements" for a discussion of the special voting provisions
applicable to mergers or similar fundamental corporate transactions. If the
Fund converted to an open-end company, it would be required to redeem all
shares of Preferred Stock then outstanding, and the Fund's Common Stock would
no longer be listed on the Exchange. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be
30
<PAGE>
in effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
companies typically engage in a continuous offering of their shares. Open-end
companies are thus subject to periodic asset in-flows and out-flows which can
complicate portfolio management. Open-end companies are also prohibited from
investing more than 15% of their assets in illiquid securities, and if the
Fund converted to an open-end company, the Fund's investments in restricted
and other illiquid securities would be subject to this limitation.
Before deciding whether to take any action in response to a discount from
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a significant discount, the Board of Directors may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
DESCRIPTION OF CAPITAL STOCK
The total number of shares of stock of all classes that the Fund has
authority to issue is 50,000,000 shares of capital stock, par value $.01 per
share, of which 48,350,000 have been classified as Common Stock and 1,650,000
have been classified as 6.95% Cumulative Preferred Stock. The Board of
Directors has the authority to reclassify any authorized but unissued shares
of capital stock into one or more additional or other classes or series of
stock.
COMMON STOCK
All shares of Common Stock have equal rights in all respects as to
dividends, assets and voting privileges and have no redemption or preemptive
rights. In the event of liquidation, each share is entitled to its proportion
of the Fund's assets after payment of debts and expenses and the liquidation
preference of the Preferred Stock. The outstanding shares of Common Stock are,
and when issued the Shares offered hereby will be, fully paid and non-
assessable. Holders of the Common Stock are entitled to one vote per share and
do not have cumulative voting rights.
The Fund's Common Stock is listed on the Exchange under the symbol "PHF."
The Fund may from time to time sell additional shares of Common Stock,
although it has no present intention of offering additional shares other than
pursuant to the Offer or under the Plan. See "Dividend Reinvestment Plan."
Other offerings, if made, would require the approval of the Fund's Board of
Directors. Any additional offering will be subject to the requirements of the
1940 Act that shares may not be sold at a price below net asset value
(exclusive of underwriting discounts and commissions) except in connection
with an offering to one or more classes of the Fund's capital stock or with
the consent of a majority of the outstanding shares of Common Stock.
PREFERRED STOCK
The outstanding shares of Preferred Stock are fully paid and non-assessable,
are not convertible into shares of Common Stock (or any other capital stock of
the Fund) and have no preemptive rights. The terms of the Preferred Stock, as
fixed by the Fund's Articles Supplementary Creating and Fixing the Rights of
6.95% Cumulative Preferred Stock dated August 15, 1996 (the "Articles
Supplementary"), are summarized below. The following summary does not purport
to be complete and is qualified in its entirety by reference to the Articles
Supplementary, which have been filed with the SEC as an exhibit to the
registration statement of which this Prospectus forms a part. See "Additional
Information."
Dividends. Holders of the Preferred Stock are entitled to receive cumulative
cash dividends payable quarterly at the annual rate of 6.95% of the
liquidation preference ($20 per share) of the Preferred Stock. A
31
<PAGE>
quarterly dividend may not be declared or paid on the Preferred Stock unless
full cumulative dividends have been or contemporaneously are declared and paid
on all outstanding shares of Preferred Stock through the most recent quarterly
dividend payment dates therefor. If full cumulative dividends have not been
paid, any dividends on the Preferred Stock are required to be paid pro rata on
all outstanding shares.
Under the 1940 Act and the Articles Supplementary, the Fund may not declare
or pay any dividend or distribution on the Common Stock, or repurchase any
shares of Common Stock, unless full cumulative dividends on all shares of
Preferred Stock have been declared and paid and unless immediately thereafter
the Preferred Stock has an "asset coverage" (as defined in the 1940 Act) of at
least 200% after deducting the amount of such dividend, distribution or
purchase price, as the case may be. See "Asset Coverage and Other Financial
Tests" below.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary,
holders of the Preferred Stock will be entitled to receive a preferential
liquidating distribution in the amount of $20 per share, plus an amount equal
to all accrued and unpaid dividends to the date of distribution, before any
distribution or payment is made in respect of the Common Stock. If the assets
of the Fund are insufficient to pay holders of the Preferred Stock the
liquidating distribution to which they are entitled, then holders of the
Preferred Stock will share ratably in any assets available for distribution.
Unless and until the liquidation preference of the Preferred Stock has been
paid in full, the Fund may not pay any dividends or distributions on the
Common Stock.
Redemption. On August 1, 2000, the Fund is required to redeem all of the
then outstanding shares of Preferred Stock at a price equal to $20 per share
plus accumulated and unpaid dividends through the date of redemption as
specified in the Articles Supplementary. In addition, if the financial
restrictions described below under "Asset Coverage and Other Financial Tests"
are not met as of the evaluation dates prescribed in the Articles
Supplementary, then the Fund may be required to redeem such number of shares
of Preferred Stock at the liquidation value thereof that, after giving effect
to such redemption, the restrictions would be met. The Fund may also redeem
the Preferred Stock, in whole or in part, at any time at a redemption price
equal to $20 per share, plus accumulated and unpaid dividends through the date
of redemption and a make-whole premium equal to the excess, if any, of the sum
of the present values of the redemption price (assuming that a pro rata
portion of all amounts required to be applied to subsequent scheduled
mandatory redemptions are applied when due to a partial redemption of such
share) and the dividends that would have been payable on such share (again
assuming scheduled mandatory redemptions are made when due) divided by the
redemption price of such share.
Voting Rights. Except as described below, holders of the Preferred Stock
have equal voting rights with holders of the Common Stock of one vote per
share, and holders of the Preferred Stock and the Common Stock vote together
as a single class. Under the Articles Supplementary, holders of the Preferred
Stock, as a class, are entitled to elect two directors; holders of the Common
Stock, as a class, are entitled to elect two directors; and holders of the
Common Stock and the Preferred Stock, voting together as a single class, are
entitled to elect the remaining directors of the Fund. In addition, if at any
time dividends on the Preferred Stock shall be unpaid in an amount equal to
two full years' dividends, or if the Fund shall have failed to redeem any
shares of Preferred Stock as required, then holders of the outstanding shares
of Preferred Stock will be entitled to elect a majority of the Fund's
directors.
As long as any shares of Preferred Stock are outstanding: (i) the Fund may
not be voluntarily liquidated, dissolved, wound up, merged or consolidated, or
converted to an open-end company, and may not sell all or substantially all of
its assets, without the approval of a majority of the outstanding shares of
Preferred Stock and a majority of the outstanding shares of Common Stock, each
voting as a separate class; (ii) the adoption of any plan of reorganization
adversely affecting either the Preferred Stock or the Common Stock requires
the separate approval of a majority of the outstanding shares of such class;
(iii) any action requiring a vote of security holders under Section 13(a) of
the 1940 Act requires the approval of a majority of the outstanding shares of
Preferred Stock and a majority of the outstanding shares of Common Stock, each
voting as a separate
32
<PAGE>
class; (iv) the approval of a majority of the outstanding shares of Preferred
Stock, voting separately as a class, is required to: amend, alter or repeal
any of the preferences, rights or powers of the Preferred Stock; increase or
decrease the number of shares of Preferred Stock authorized to be issued;
create, authorize, or issue any class or series of stock ranking at parity
with or senior to the Preferred Stock with respect to the payment of dividends
or the distribution of assets in liquidation, dissolution, or to winding up of
the affairs of the Fund; create, authorize, assume, or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, provided that the Fund shall not be prevented from clearing
securities transactions in the ordinary course of business or create, incur or
suffer to exist or agree to the creation, incurrence, or existence of any
lien, mortgage, pledge, charge, or security upon any of the assets of the
Fund; (v) holders of the Preferred Stock and the Common Stock vote as separate
classes in connection with the election of directors as described above; and
(vi) the Common Stock and the Preferred Stock vote as separate classes to the
extent otherwise required under Maryland law or the 1940 Act. For purposes of
the foregoing, a "majority of the outstanding shares" means the vote, at the
annual or a special meeting of shareholders, (i) of 67% or more of the shares
present at such meeting, if the holders of more than 50% of the outstanding
shares are present or represented by proxy; or (ii) of more than 50% of the
outstanding shares, whichever is the less. In addition, the Fund's charter
contains an election to be governed by certain provisions of the Maryland
General Corporation Law which require a "super-majority" vote with respect to
any merger or similar fundamental transaction. See "Special Voting
Requirements" below.
Asset Coverage and Other Financial Tests. The Articles Supplementary require
the Fund to determine periodically that certain asset coverage and other
financial tests have been met and that the Fund has complied with certain
other restrictions. In the event that, on any date of determination, the Fund
does not comply with an applicable asset coverage test or restriction, then
the Fund will be required to cure such violation within a stated cure period
or, if such violation cannot be cured, to redeem the Preferred Stock.
For so long as any shares of Preferred Stock are outstanding, the Fund is
required (i) to make bi-weekly determinations that the amount of certain
eligible assets (as defined in the Articles Supplementary) equals or exceeds
the aggregate liquidation value of the Preferred Stock and accrued operating
expenses; (ii) to determine (a) weekly and (b) immediately preceding the
declaration date of each dividend on the Common Stock, or any repurchase of
shares of Common Stock that the ratio of the value of the Fund's total assets,
less all liabilities and indebtedness not representing senior securities (as
defined in the 1940 Act), to the aggregate amount of senior securities
representing indebtedness of the Fund, plus the aggregate liquidation value of
all outstanding shares of Preferred Stock and the amount of all unpaid
dividends accrued to and including the date of determination on all
outstanding shares of Preferred Stock is at least 300%.
The Articles Supplementary provide that, for so long as any shares of
Preferred Stock are outstanding, the Fund may not: (i) fail to pay full
dividends on the Preferred Stock on any Dividend Payment Date; (ii) fail to
make required mandatory redemptions; (iii) borrow money or issue "senior
securities" (as defined in the 1940 Act) other than the Preferred Stock; (iv)
overdraw any bank account (except as may be necessary for the clearance of
securities transactions); (v) cease to employ the Adviser as its sole
investment adviser; (vi) fail to qualify as a regulated investment company
under Subchapter M of the Code; (vii) create, incur or suffer to exist, or
agree to create, incur or suffer to exist, or consent to cause to permit in
the future the creation, incurrence or existence of any lien, mortgage,
pledge, charge, security interest, security agreement, conditional sale or
trust receipt or other encumbrance of any kind in respect of any of its
property; (viii) cease to be a registered closed-end investment company under
the 1940 Act or take any action to liquidate the Fund; or (ix) sell or
otherwise transfer all or substantially all of the assets of the Fund in a
single transaction or group of related transactions.
SPECIAL VOTING REQUIREMENTS
The Fund's Articles of Incorporation contain an election to be governed by
Sections 3-601 through 3-603 of the Maryland General Corporation Law, which
require, among other things, a "super-majority" vote with respect to "business
combinations" (defined as any merger or similar fundamental transaction
subject to a
33
<PAGE>
statutory vote and certain transactions involving a transfer of assets or
securities to interested stockholders and their affiliates) between Maryland
corporations and "interested stockholders" (defined as beneficial owners of
more than 10% of the outstanding voting stock of such corporations). Unless
certain value and other standards are met (in the case of merger-type
transactions) or an exemption is available, business combinations with
interested stockholders may not be consummated unless recommended by the Board
of Directors of the Fund and approved by the affirmative vote of at least 80%
of the votes entitled to be cast by the shareholders and two-thirds of the
votes entitled to be cast by the shareholders other than the interested
stockholders.
The foregoing provisions will make it difficult to change the Fund's
management and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The Board of Directors, however, has
considered these anti-takeover provisions and believes that they are in the
shareholders' best interest and benefit shareholders by providing the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
continuity of the Fund's management.
DISTRIBUTION ARRANGEMENTS
Winton Associates, Inc. (the "Dealer Manager"), Bank One Towers, 8044
Montgomery Road, Cincinnati, Ohio 45236, is managing the Offer on behalf of
the Fund on a best efforts basis. Under the terms and subject to the
conditions contained in the Dealer Manager Agreement dated the date of this
Prospectus, the Dealer Manager has agreed to provide financial and marketing
advisory assistance and to engage and organize on behalf of the Fund the
activities of the broker-dealers who will solicit the exercise of the Rights.
Financial and marketing advisory assistance provided to the Fund by the Dealer
Manager includes advising the Fund regarding the structure of the Offer and
the materials utilized in connection therewith, coordinating the distribution
arrangements for the Offer, and providing information and support services, as
requested, to soliciting dealers. The Dealer Manager will not be engaged
directly in the solicitation from shareholders of the exercise of any Rights.
The Fund has agreed to pay the Dealer Manager a fee for its services in
connection with the Offer equal to % of the Subscription Price multiplied by
the number of Shares sold in the Offer. In addition, the Dealer Manager
Agreement contains covenants of indemnity and contribution among the Fund, the
Adviser and the Dealer Manager against certain liabilities, including
liabilities under the Securities Act.
In connection with the Offer, a broker-dealer that has signed a Soliciting
Dealer Agreement with the Fund will receive a soliciting fee (the "Soliciting
Dealer Fee") equal to % of the Subscription Price multiplied by (i) the
aggregate number of Shares purchased pursuant to Subscription Certificates on
which the soliciting broker-dealer is designated by name as having solicited
the exercise of such Rights plus (ii) Shares purchased pursuant to the Offer
through the soliciting broker-dealer by beneficial owners of the Fund's Common
Stock on whose behalf the soliciting broker-dealer acts as nominee. The
Soliciting Dealer Fee will be paid directly to the soliciting broker-dealer by
the Fund. If more than one broker-dealer is identified as having solicited the
exercise of identical Rights, the Soliciting Dealer Fee relating thereto will
be shared equally by all such designated broker-dealers. All questions as to
the form, validity and eligibility for Soliciting Dealer Fees will be
determined by the Fund, in its sole discretion, which determination shall be
final and binding.
The Dealer Manager is a wholly-owned subsidiary of Pacholder Associates,
Inc., one of the partners of the Adviser. See "Investment Advisory and Other
Services--Investment Adviser." Asher O. Pacholder, William J. Morgan and James
P. Shanahan, Jr., officers and directors of the Fund, are officers and
directors of the Dealer Manager.
34
<PAGE>
CUSTODIAN AND TRANSFER AGENT
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is the custodian
of the assets of the Fund and paying agent for the Preferred Stock. Fifth
Third Bank Corporate Trust Services, 38 Fountain Square Plaza, MD-1090D2,
Cincinnati, Ohio 45263, is the transfer agent, dividend disbursing agent and
registrar for the Common Stock.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
registration statement filed with the SEC under the Securities Act and the
1940 Act with respect to the Shares offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference. The
registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C., and copies of all or
any part thereof may be obtained upon the payment of certain fees prescribed
by the SEC. In addition, the SEC maintains a World Wide Web site on the
Internet at http://www.sec.gov. that contains the Prospectus, material
incorporated by reference, including the Statement of Additional Information,
and other information regarding registrants, including the Fund, that file
electronically with the SEC.
35
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Investment Restrictions.................................................... 4
Management of the Fund..................................................... 6
Portfolio Transactions..................................................... 11
Dividend Reinvestment Plan................................................. 12
Taxation................................................................... 13
Principal Shareholders..................................................... 17
Legal Matters.............................................................. 17
Experts.................................................................... 17
Financial Statements....................................................... 17
Index to Financial Statements.............................................. F-1
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Investment Performance of the Fund............................. B-1
</TABLE>
<PAGE>
USF&G PACHOLDER FUND, INC.
--------------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated January
__, 1997 (the "Prospectus"). This SAI does not include all information that a
shareholder should consider before purchasing additional shares of the Fund, and
shareholders should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge by calling (800) 733-8481,
extension 351, and from outside the United States by calling (212) 805-7000.
This SAI incorporates by reference the entire Prospectus.
-----------------------
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES......................................... 2
INVESTMENT RESTRICTIONS................................................... 4
MANAGEMENT OF THE FUND.................................................... 6
PORTFOLIO TRANSACTIONS.................................................... 11
DIVIDEND REINVESTMENT PLAN................................................ 12
TAXATION.................................................................. 13
PRINCIPAL SHAREHOLDERS.................................................... 17
LEGAL MATTERS............................................................. 17
EXPERTS................................................................... 17
FINANCIAL STATEMENTS...................................................... 17
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A -- RATINGS OF INVESTMENTS...................................... A-1
APPENDIX B -- INVESTMENT PERFORMANCE OF THE FUND.......................... B-1
-----------------------
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the Securities
and Exchange Commission upon payment of the fee prescribed, or inspected at the
Securities and Exchange Commission's office at no charge.
-----------------------
This Statement of Additional Information is dated
___________, 1996
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of total
return through current income and capital appreciation by investing primarily in
high yield, high risk fixed-income securities of domestic companies. No
assurance can be given that the Fund will be able to achieve its investment
objective. The Fund's investment objective may be changed by the Board of
Directors without shareholder approval.
When-Issued and Delayed Delivery Securities
- -------------------------------------------
The Fund may purchase securities on a when-issued or delayed delivery
basis. When-issued and delayed delivery transactions arise when securities are
purchased and sold with delivery and payment beyond the regular settlement date.
The settlement of when-issued transactions can take place a month or more after
the date of the transaction. The prices of the securities so purchased are
subject to market fluctuation during this period and no interest accrues to the
purchaser prior to the date of settlement. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value of the security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. An increase
in the percentage of the Fund's assets committed to the purchase of securities
on a when-issued or delayed delivery basis will have the effect of leverage and
may increase the volatility of the Fund's net asset value. In addition, since
the Fund is dependent on the party issuing the when-issued or delayed delivery
security to complete the transaction, failure by the other party to deliver the
securities as arranged would result in the Fund's loss of an investment
opportunity.
When, As and If Issued Securities
- ---------------------------------
The Fund may purchase securities on a "when, as and if issued" basis
under which the issuance of the security depends upon the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in the portfolio of the Fund until the Adviser determines that
issuance of the security is probable. At that time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security. An increase in the percentage of the Fund's assets committed to
the purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value.
Repurchase Agreements
- ---------------------
When cash may be available for only a few days, it may be invested by
the Fund in repurchase agreements until such time as it may otherwise be
invested or used for payments of obligations of the Fund. These agreements,
which are considered to be loans under the 1940 Act, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying securities ("collateral"), which are held by the Fund's custodian
bank, at a specified price and at a fixed time in the future, usually not more
than seven days from the date of purchase. The Fund will receive interest from
the institution until the date when the repurchase is to occur. Repurchase
agreements involve certain risks not associated with direct investments in debt
securities and the Fund will follow procedures designed to minimize these risks.
The procedures include effecting repurchase transactions only with larger, well-
capitalized and well-established financial institutions, whose financial
condition will be continually monitored. In addition, the Adviser will attempt
to ensure that the value of the collateral underlying the repurchase agreement
is always at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
selling financial institution, the Fund will seek to liquidate the collateral.
Exercise of the Fund's right to liquidate the collateral, however, could involve
certain costs or delays, and, to the extent that proceeds
-2-
<PAGE>
from any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. In addition, to the extent the
Fund's security interest in the collateral may not be properly perfected, the
Fund could suffer a loss of up to the entire amount of the collateral.
Borrowing
- ---------
The Fund is authorized under its investment policies to borrow money on
a secured or unsecured basis in an amount up to 20% of the value of its net
assets at the time of borrowing. However, notwithstanding the foregoing, the
Fund's charter prohibits it from borrowing money at any time the Preferred Stock
is outstanding. The Fund's investment policies allow the Fund to use borrowing
as a temporary source of liquidity to permit the purchase of new investments
consistent with the Fund's investment objective without the necessity of
liquidating existing investments under circumstances where liquidation would not
be prudent. Borrowing also may be used to provide flexibility in connection with
dividend distributions or repurchases of the Fund shares. See "Taxation" and
"Share Repurchases; Conversion to Open-End Company."
Although borrowing creates an opportunity for greater total return, it
increases exposure to capital risk. In addition, borrowed funds are subject to
interest costs that may offset or exceed the return earned on assets purchased
with the borrowed funds. If the investment performance of the securities
purchased with borrowed funds fails to equal at least their cost to the Fund
(including any interest paid on the money borrowed), then the net income per
share and the net asset value per share of the Fund will be less than would
otherwise be the case. Since the Fund's ability to borrow is limited, under
adverse market conditions the Fund might have to sell securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales.
Private Placements
- ------------------
The Fund may invest up to 25% of its total assets in securities that
are subject to restrictions on resale because they have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The Fund
may purchase restricted securities that, although privately placed, may be
offered and sold to "qualified institutional buyers" pursuant to Rule 144A under
the Securities Act. The Fund's Board of Directors may determine, when
appropriate, that specific Rule 144A securities are liquid and such securities
will not be subject to the 25% limitation. Should the Board of Directors make
this determination, it will carefully monitor the Rule 144A security (focusing
on such factors, among others, as trading activity and availability of
information) to determine that it continues to be liquid. It is not possible to
predict with assurance exactly how the market for restricted securities offered
and sold under Rule 144A will develop. Investment in Rule 144A securities could
have the effect of increasing the level of illiquidity of the Fund's portfolio
to the extent that qualified institutional buyers are for a time uninterested in
purchasing Rule 144A securities held by the Fund.
Portfolio Management and Turnover Rate
- --------------------------------------
Portfolio trading may be undertaken to accomplish the investment
objective of the Fund. In addition, a security or obligation may be sold and
another of comparable quality purchased at approximately the same time to take
advantage of what the Adviser believes to be a temporary disparity in the normal
yield relationship between the two securities. The Fund also may engage to a
limited extent in short-term trading consistent with its investment objective.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
-3-
<PAGE>
Subject to the foregoing, the Fund will attempt to achieve its
investment objective by thorough research and analysis and prudent selection of
portfolio securities with a view to holding them for investment. While there can
be no assurance thereof, the Fund anticipates that its annual portfolio turnover
rate (the lesser of the value of securities purchased or sold, divided by the
average value of securities owned during the year) will generally not exceed
100%. The rate of turnover will not be a limiting factor, however, when the Fund
deems it desirable to sell or purchase securities. Therefore, depending upon
market conditions, the annual portfolio turnover rate of the Fund may exceed
100% in particular years. The Fund's portfolio turnover rates for the years
ended December 31, 1995 and 1996 were 83% and _______%, respectively.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund
as fundamental policies. Under the 1940 Act, a fundamental policy may not be
changed without the vote of the holders of the lesser of (i) 67% of the shares
present at a meeting of shareholders, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund.
The Fund may not:
(1) Issue senior securities, as defined in the 1940 Act, other
than preferred stock or except to the extent such issuance might
be involved with respect to borrowings described under
"Borrowing" above;
(2) Make short sales of securities or purchase securities or
evidences of interests therein on margin (except it may make
covered short sales of securities and obtain short-term credit
necessary for the clearance of transactions), or write or
purchase put or call options (except to the extent that a
purchase of a stand-by commitment may be considered the purchase
of a put);
(3) Borrow money, except in amounts not exceeding 20% of the
Fund's assets as described under "Borrowing" above;
(4) Underwrite any issue of securities, except to the extent
that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under the
federal securities laws;
(5) Purchase or sell real estate, including limited
partnership interests therein (except securities which are
secured by real estate and securities of companies, such as real
estate investment trusts, that deal in real estate or interests
therein), or oil, gas or other mineral leases, commodities or
commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of
owning other securities, though securities will not be purchased
in order to acquire any of these interests;
(6) Make loans, except as described under "Investment
Objective and Policies" or by entering into repurchase
agreements;
(7) Purchase or sell municipal obligations, including debt
obligations issued by states, cities, local authorities and
possessions and territories of the United States except for
certain industrial development bonds as described under
"Investment Objective and Policies;"
-4-
<PAGE>
(8) Purchase or retain the securities of any company if, to
the knowledge of the Fund, those officers and directors of the
Fund or members of the Executive Committee of the Adviser who
each own beneficially more than 0.5% of the securities of that
company, together own more than 5% of the securities of the
company;
(9) Purchase or retain the securities of any company
controlled by an affiliate of the Fund or the Adviser or
purchase or sell any security from or to any account controlled
by the Adviser or its affiliates; and
(10) Invest more than 5% of its total assets (valued at the
time of investment) in securities of any one issuer, except that
this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities, or acquire more than 10% of the outstanding
voting securities of any one issuer (at the time of
acquisition); except that up to 25% of the Fund's total assets
(at the time of investment) may be invested without regard to
the limitations set forth in this paragraph 10.
A majority of the members of the Board of Directors of the
Fund who are not "interested persons" of the Fund (as defined in the 1940 Act)
must approve any investment which, at the time of acquisition, would result in
more than 5% of the outstanding voting equity securities of a company being held
by the Fund.
All percentage limitations on investments will apply at the
time of the making of an investment and are not considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
The Fund's portfolio investments are also subject to certain
asset coverage and other financial tests and restrictions adopted in connection
with the issuance of the Preferred Stock. These tests and restrictions will
remain in effect so long as any shares of Preferred Stock are outstanding. In
general, under the asset coverage tests, the Fund is required to maintain
sufficient eligible assets such that, when discounted by applicable factors and
reduced by certain accrued and projected liabilities of the Fund, the required
asset coverage will be met. To the extent that any portfolio investment held by
the Fund does not qualify as an eligible asset, its value will not be included
for purposes of calculating the required asset coverage. The asset coverage
tests do not impose any limitation on the amount of Fund assets which may be
invested in non-eligible assets, and the amount of such holdings may vary from
time to time based upon the nature of the Fund's other investments. The Fund is
also required, under the asset coverage tests, to maintain cash or certain
liquid assets in an amount at least equal to its current dividend and redemption
obligations in respect of the Preferred Stock. Finally, the Fund is required to
comply with certain investment restrictions, which are in addition to and more
limiting than the investment restrictions set forth above, relating to (i) the
diversification of its portfolio, (ii) the amount invested in any one issue of
securities or in securities other than publicly traded domestic fixed-income
securities, and (iii) the incurrence of debt. The asset coverage and other
financial tests and restrictions adopted in connection with the issuance of the
Preferred Stock are not expected to have a material adverse effect on holders of
the Fund's Common Stock or on the Fund's ability to achieve its investment
objective. See "Description of Capital Stock--Preferred Stock--Asset Coverage
and Other Financial Tests" in the Prospectus.
-5-
<PAGE>
MANAGEMENT OF THE FUND
Management of the Fund, including general supervision of the activities
performed by the Fund's investment adviser, is the responsibility of the Board
of Directors of the Fund. The names and business addresses of the directors and
officers of the Fund, and their principal occupations during the past five
years, are set forth below. There are seven directors of the Fund, three of whom
are not "interested persons" of the Fund (as defined in the 1940 Act) and four
of whom are "interested persons." The directors who are "interested persons" of
the Fund are indicated by an asterisk.
-6-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position(s) with the Firm During Past Five Years
--------------------- ------------------------- ----------------------
<S> <C> <C>
Asher O. Pacholder* Chairman of the Board Chairman and Chief Executive Officer,
Bank One Towers Pacholder Associates, Inc.; Chairman and
8044 Montgomery Road Chief Financial Officer, ICO, Inc. (since
Cincinnati, OH 45236. 1995).
Age 59.
William J. Morgan* Executive Vice President, President and Secretary, Pacholder
Bank One Towers Treasurer and Director Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 42.
James P. Shanahan, Jr.* Secretary and Director Executive Vice President and General
Bank One Towers Counsel, Pacholder Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 35.
Daniel A. Grant Director President, Utility Management Services
1440 Greenfield Crossing Court (since 1991); Vice President and
Ballwin, MO 63021. Assistant Treasurer, Community Federal
Age 52. Savings and Loan Association for more
than five years prior thereto.
John C. Sweeney* Director Senior Vice President and Chief Investment
100 Light Street Officer, USF&G Investment Management Group,
Baltimore, MD 21202. Inc. (since 1992); Principal and Practice
Age 58. Director, Towers Perrin Asset Consulting
Services (1985 to 1992).
John F. Williamson Director Executive Vice President and Chief Financial
4740 Roanoke Parkway Officer of Asset Allocation Concepts, Inc.
#601 (since 1995); Vice President and Senior
Kansas City, MO 64112. Portfolio Manager, American Life & Casualty
Age 58. Insurance Co. (1993 to 1994); Financial
Consultant (1991 to 1992); Senior Vice
President and Treasurer, Community Federal
Savings and Loan Association for more than
five years prior thereto.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position(s) with the Firm During Past Five Years
--------------------- ------------------------- ----------------------
<S> <C> <C>
George D. Woodard Director Principal, George D. Woodard, C.P.A.
13440 N. 13th Street (since October 1995); Vice President,
Phoenix, AZ 85022. Rider Kenley & Associates (accounting and
Age 50. tax services) 1994 to 1995; Principal,
George D. Woodard, C.P.A. for more than
five years prior thereto.
Anthony L. Longi, Jr. President and Assistant Executive Vice President, Pacholder
Bank One Towers Treasurer Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 31
James E. Gibson Senior Vice President Senior Vice President, Pacholder
Bank One Towers Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 32
Mark H. Prenger Assistant Treasurer Assistant Vice President, Pacholder
Bank One Towers Associates, Inc. (since June 1994);
8044 Montgomery Road full-time university student prior thereto.
Cincinnati, OH 45236.
Age 26
</TABLE>
Under the Fund's charter, holders of the outstanding shares of
Preferred Stock, voting as a separate class, are entitled to elect two
directors; holders of the outstanding shares of Common Stock, voting as a
separate class, are entitled to elect two directors; and holders of the
outstanding shares of Preferred Stock and Common Stock, voting together as a
single class, are entitled to elect the remaining directors of the Fund. Messrs.
Shanahan and Woodard have been elected by holders of the Preferred Stock and
Messrs. Morgan and Pacholder by holders of the Common Stock. Holders of the
Preferred Stock are entitled to elect a majority of the Fund's directors under
certain circumstances. See Description of Capital Stock--Preferred Stock--Voting
Rights."
Directors and officers of the Fund who are employed by the Adviser or a
corporate affiliate of the Adviser, or are retired from such employment, serve
without compensation from the Fund. The Fund pays each director who is not an
employee of the Adviser or any corporate affiliate of the Adviser an annual fee
of $10,000 plus $1,000 for each meeting of the Board of Directors attended, and
reimburses directors for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings.
The following table provides compensation information for the fiscal
year ended December 31, 1996 for all of the Fund's directors and the highest-
paid executive officers who received compensation form the Fund in excess of
$60,000.
-8-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Total Compensation
Aggregate Accrued as Estimated from Fund and Fund
Compensation from part of Fund Annual Benefits Complex Paid to
Name of Person, Position Fund Expenses upon Retirement Directors
------------------------ ---- -------- --------------- ---------
<S> <C> <C> <C> <C>
Asher O. Pacholder,
Chairman of the Board 0 0 0 0
James P. Shanahan, Jr.
Secretary and Director 0 0 0 0
William J. Morgan,
Executive Vice President,
Treasurer and Director 0 0 0 0
Daniel A. Grant,
Director ________ 0 0 ________
John C. Sweeney,
Director 0 0 0 0
John F. Williamson,
Director ________ 0 0 ________
George D. Woodard,
Director ________ 0 0 ________
</TABLE>
For the fiscal year ended December 31, 1996, the directors of the Fund
as a group received aggregate remuneration from the Fund of ________________.
The Board of Directors has an Audit Committee which makes
recommendations to the Board of Directors with respect to the engagement of the
Fund's independent accountants and reviews with the independent accountants the
scope and results of the audit engagement and matters having a material effect
upon the financial operations of the Funds. The members of the Audit Committee
are Daniel A. Grant, John F. Williamson and George D. Woodard. The Board of
Directors does not have a Nominating Committee.
The Articles of Incorporation of the Fund provide that the Fund will
indemnify its directors and officers to the full extent provided by the general
laws of the State of Maryland now or hereafter in force, including the advance
of expenses under the procedures provided by such laws. Under Maryland law, a
corporation may indemnify any director or officer made a party to any proceeding
by reason of service in that capacity unless it is proved that (i) the act or
omission of the director or officer was material to the cause of action
adjudicated in the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the conduct was unlawful. The Articles of
Incorporation
-9-
<PAGE>
further provide that directors and officers of the Fund will not be liable to
the Fund or its shareholders for money damages, except where the conduct
described in the foregoing clauses (i) or (ii) is proved. Nothing in the
Articles of Incorporation of the Fund, however, indemnifies directors, officers,
employees or agents against, or limits their liability (including any monetary
liability to which they would otherwise be subject) for, willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office. No insurance obtained by the Fund may protect or
purport to protect officers or directors of the Fund against any liability to
the Fund or its shareholders to which they would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
their obligations and duties.
Investment Advisory Services
- ----------------------------
The Adviser serves pursuant to an Investment Advisory Agreement dated
November 16, 1988, as amended (the "Agreement"). Under the Agreement, the
Adviser, subject to the supervision of the Fund's Board of Directors and in
accordance with the Fund's investment objective, policies and restrictions,
identifies securities suitable for investment by the Fund, makes investment
decisions, and places purchase and sale orders. The Agreement provides that the
Adviser will obtain and evaluate such information and advice relating to the
economy, securities markets and specific securities as it considers necessary or
useful to make investment decisions on behalf of the Fund and will manage
continuously the assets of the Fund in a manner consistent with its investment
objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Adviser maintains certain of the Fund's records and furnishes,
at its own expense, such office space, facilities, equipment, clerical help and
bookkeeping as the Fund may reasonably require in the conduct of its business.
In addition, the Adviser pays the salaries of all personnel, including officers
of the Fund, who are employees of the Adviser.
Expenses not expressly assumed by the Adviser under the Agreement are
paid by the Fund. The expenses borne by the Fund include, but are not limited
to, the following: investment advisory fees; fees and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; expenses of registration of the Fund and its shares under federal and
state securities laws; all expenses of shareholders' and directors' meetings and
of preparing, printing and mailing prospectuses, proxy statements and reports to
shareholders; directors' fees and expenses; expenses incident to any dividend
reinvestment program; charges and expenses of any outside service used for
pricing of the Fund's portfolio securities; fees and expenses of legal counsel
and independent accountants; membership dues of industry associations; interest
on borrowings; fees and expenses incident to the listing of the Fund's shares on
any stock exchange; insurance premiums; and extraordinary expenses (including,
but not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto).
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder the
Adviser is not liable to the Fund or its shareholders for any act or omission by
the Adviser or for any losses sustained by the Fund or its shareholders. The
Agreement in no way restricts the Adviser from acting as investment manager or
adviser to others, including entities that may have investment objectives
similar or identical to those of the Fund.
Advisory Fee
- ------------
In the event the Index is no longer published or available or becomes
an inappropriate measure of the Fund's performance, the Board of Directors will
meet to approve another appropriate index or will negotiate a fixed advisory fee
with the Adviser, in which event the advisory fee payable for the immediately
preceding 180-day period will be the lesser of the fee payable under the
Agreement or the fee payable under the new advisory agreement.
-10-
<PAGE>
Unless sooner terminated in accordance with its terms, the Agreement
will continue in effect until May 31, 1994, and may be continued from year to
year thereafter, provided that such continuance is approved at least annually by
vote of the holders of a "majority of the outstanding voting securities" of the
Fund (as defined in the 1940 Act), or by the Board of Directors of the Fund, and
in either event by vote of a majority of the directors of the Fund who are not
parties to the Agreement or "interested persons" (as defined in the 1940 Act) of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
The Agreement will automatically terminate if assigned and may be
terminated without penalty at any time (i) by majority vote of the entire Board
of Directors of the Fund or by majority vote of the Fund's outstanding shares on
30 days' written notice to the Adviser, or (ii) by the Adviser on 180 days'
written notice to the Fund.
Administrative Services
- -----------------------
Kenwood Administrative Management, Limited Partnership (the
"Administrator") serves as administrator of the Fund pursuant to an
Administration Agreement dated June 5, 1996. James E. Gibson, William J. Morgan,
James P. Shanahan, Jr. and Mark H. Prenger, officers and/or directors of the
Fund, are also officers of the corporate general partner of the Administrator.
For the fiscal year ended December 31, 1996, the Administrator received
administrative fees totaling $_________, which represent ____% of the Fund's
average weekly net assets during such periods. The Administration Agreement may
be terminated at any time, without payment of any penalty, by the Fund or by the
Administrator on 60 days' written notice
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors
of the Fund, the Adviser is responsible for decisions to buy and sell securities
for the Fund, the selection of brokers and dealers to effect the transactions,
and the negotiation of brokerage commissions, if any. The Fund expects that the
primary market for the securities in which it invests will generally be the
over-the-counter market or one or more national securities exchanges. Securities
are generally traded in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without charging a stated
commission, although the price of the security usually includes a profit to the
dealer. Securities transactions on national securities exchanges are effected by
brokers who charge a commission for their services. The Adviser may
-11-
<PAGE>
at times purchase securities for the Fund in underwritten offerings, where the
price includes a fixed amount of compensation, generally referred to as the
underwriters' concession or discount. On occasion, the Fund may also purchase
certain loan participations and other obligations directly from a company or
creditor, in which case no commission or discount will generally be paid.
The policy of the Fund regarding purchases and sales of securities for
its portfolio is to obtain the most favorable prices and efficient execution of
transactions. In seeking to implement this policy, the Adviser will place orders
in such manner as, in its opinion, will offer the most favorable price and
efficient execution of each transaction. In effecting portfolio transactions for
the Fund, the Adviser may select broker-dealers that also furnish research
services to the Adviser, even if the Fund pays a higher commission than the
commission another broker-dealer would have charged for effecting the
transaction. The adviser will place brokerage transactions with broker-dealers
furnishing brokerage and research services only if it believes that the amount
of commission is reasonable in relation to the value of the brokerage and
research services provided, viewed in terms of either the particular transaction
or the Adviser's overall responsibilities with respect to the accounts as to
which it exercises investment discretion. Research services furnished to the
Adviser may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investments; wire
services; and appraisals or evaluations of portfolio securities. These services
are supplemental to the Adviser's own research efforts. The Adviser cannot
readily determine the extent to which commission rates or net prices charged by
broker-dealers reflect the value of their research services. Research services
furnished by broker-dealers may be useful to the Adviser in servicing its other
clients.
The Adviser may advise other investment accounts which have investment
objectives similar to those of the Fund. Subject to applicable laws and
regulations, the Adviser will attempt to allocate portfolio transactions
equitably among the Fund and its other clients whenever simultaneous decisions
are made to purchase or sell the same securities on behalf of the Fund and one
or more other clients. In making allocations, the main factors considered will
be the respective investment objectives of the Fund and the other clients, the
relative sizes of portfolio holdings of the same or comparable securities, the
availability of cash for investment by the Fund and the other clients, the size
of investment commitments generally held by the Fund and the other clients, and
the opinions of the persons responsible for recommending the investments to the
Fund and the other clients. While from time to time this procedure could have a
detrimental effect on the price or amount of securities available to the Fund,
it is the opinion of the Fund's Board of Directors that the benefits available
from the Adviser's organization will outweigh any disadvantage that may arise
from simultaneous transactions.
Under the 1940 Act, an investment adviser may effect portfolio
transactions on a principal basis with accounts managed by its investment
adviser or its affiliates, provided that such transactions are effected in
compliance with regulations promulgated by the SEC. Notwithstanding the
availability of these regulations, the Fund will not purchase or sell any
security from or to any account managed by the Adviser or its affiliates.
During the fiscal years ended December 31, 1994, 1995 and 1996, the
Fund incurred brokerage commissions of $3,103, $0 and $____________,
respectively.
DIVIDEND REINVESTMENT PLAN
Each registered holder of Common Stock may elect to have all dividends
and capital gains distributions, or both, automatically reinvested by Fifth
Third Bank Corporate Trust Services, as agent for shareholders (the "Plan
Agent"), in additional full and fractional (computed to three decimal places)
shares of Common Stock under the Fund's dividend reinvestment plan (the "Plan").
Shareholders who do not elect to participate in the Plan will receive all
distributions in cash paid by check mailed
-12-
<PAGE>
directly to the shareholder of record (or, if the shares are held in street or
other nominee name, then to the nominee) by Fifth Third Bank Corporate Trust
Services, as the Fund's dividend disbursing agent.
The number of shares equivalent to the cash distribution will be
determined as follows:
(1) If shares of Common Stock are trading at net asset value or at a
premium above net asset value at the time of valuation, the Fund will
issue new shares at the greater of net asset value or 95% of the then
current market price; or
(2) If shares of Common Stock are trading at a discount from net asset
value at the time of valuation, the Plan Agent will receive the dividend
or distribution in cash and apply it to the purchase of shares of Common
Stock in the open market, on the Exchange or elsewhere, for the
participants' accounts. The Plan Agent will use all dividends and
distributions received in cash to purchase shares of Common Stock in the
open market within thirty days of the dividend payment date. Interest
will not be paid on any uninvested cash payments. If the Plan Agent is
unable to invest the full amount of the distribution in open-market
purchases because the market discount has shifted to a market premium or
otherwise, the Fund will issue new shares with respect to the uninvested
portion of the distribution.
Participants in the Plan may withdraw from the Plan upon written notice
to the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan, certificates for whole shares credited to his account
under the Plan will be issued and a cash payment will be made for any fraction
of a share credited to such account; or if the participant desires, the Plan
Agent will sell his shares in the Plan and send the proceeds to the participant,
less brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Shares of Common Stock in
the account of each Plan participant will be held by the Plan Agent in non-
certificated form in the name of the participant, and each shareholder's proxy
will include shares received pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which
hold shares of Common Stock for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares certified
from time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of distributions payable either in shares or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants. All questions and correspondence concerning the Plan should be
directed to Fifth Third Bank Corporate Trust Services, 38 Fountain Square Plaza
MD-1090D2, Cincinnati, Ohio 45263; telephone toll-free at (800) 837-2755.
-13-
<PAGE>
TAXATION
The Fund has qualified, and intends to qualify, each year as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In order to so qualify the Fund must, among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale or other
disposition of stock or securities, or other income derived with respect to the
Fund's business of investing in stocks or securities; (ii) derive less than 30%
of its annual gross income from the sale or other disposition of stock or
securities or certain other types of investment contracts held for less than
three months; and (iii) diversify its holdings so that, at the end of each
quarter, (a) at least 50% of the value of the Fund's assets is represented by
cash and cash items, U.S. government securities, securities of other regulated
investment companies and other securities, with those other securities limited
in respect of any one issuer to an amount not greater than 5% of the value of
the Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the market value of the
Fund's total assets is invested in the securities (other than U.S. government
securities or securities of other regulated investment companies) of any one
issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses.
In meeting the requirements of Subchapter M of the Code, the Fund may be
restricted in selling securities held for less than three months and in
utilizing certain of the investment techniques described under "Investment
Objective and Policies." Legislation has been proposed which would repeal the
requirement that a regulated investment company must derive less than 30% of its
gross income from the sale or other disposition of assets held for less than
three months; however, it is currently uncertain whether this legislation will
become law.
As a regulated investment company, the Fund will not be subject to
federal income tax on the portion of its taxable income for any taxable year
that it distributes to its shareholders, provided that its ordinary dividend
distributions are not less than 90% of its investment company taxable income for
the taxable year (determined before giving effect to any such distributions).
Investment company taxable income includes dividends, interest and net short-
term capital gains in excess of net long-term capital losses, but does not
include net long-term capital gains in excess of net short-term capital losses
("net capital gain"). If it meets the 90% distribution requirement, the Fund
will nonetheless be subject to tax on any investment company taxable income that
remains in the Fund after giving effect to the ordinary dividend distributions.
If the Fund fails to satisfy the 90% distribution requirement or otherwise fails
to qualify as a regulated investment company in any taxable year, it will be
subject to tax in such year on all of its taxable income, whether or not the
Fund makes any distributions to its shareholders.
The Fund intends to acquire a significant number of securities at a
market discount. In the case of securities issued after July 18, 1984, although
market discount is not includable in income currently, it is treated as accruing
ratably (or, if the taxpayer elects, on an economic accrual basis) over the
remaining term of the bond. Any gain realized on the sale of the bond or upon
its maturity would be treated as ordinary income to the extent of accrued market
discount.
The Fund may acquire certain securities issued with original issue
discount (including zero-coupon securities). Current federal tax law requires
that a holder (such as the Fund) of such a security must include in taxable
income a portion of the original issue discount that accrues during the tax year
on such security even if no payment in cash is received on the security during
the year. Accordingly, in order to pay out at least 90% of its investment
company taxable income each year, the Fund may be required to pay out as an
income distribution each year an amount which is greater than the total amount
of cash interest the Fund actually received. If necessary, the Fund may borrow
or liquidate portfolio securities to make such distributions. If a distribution
of cash necessitates the liquidation of portfolio investments, the Adviser will
select which securities to sell and the Fund may realize a gain or loss. In the
event the Fund
-14-
<PAGE>
realizes capital gains from these transactions, shareholders may receive a
larger distribution of net capital gain, if any, than they would in the absence
of such transactions.
If at any time when shares of Preferred Stock are outstanding the Fund
does not meet the asset coverage requirement of the 1940 Act, the Fund will be
required to suspend distributions on the Common Stock until the asset coverage
is restored. See "Description of Capital Stock -- Preferred Stock --Dividends"
in the Prospectus. This may prevent the Fund from satisfying the 90%
distribution requirement, and may therefore jeopardize the Fund's qualification
for taxation as a regulated investment company. Upon any failure to meet the
asset coverage requirement of the 1940 Act, the Fund may, in its sole
discretion, redeem shares of Preferred Stock in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to qualify as a regulated investment company. There can
be no assurance, however, that any such action would achieve such objectives.
As a regulated investment company, the Fund also will not be subject to
federal income tax on any net capital gain (as reduced by any capital loss
carryovers from the prior eight years) that it distributes to its shareholders
in the form of a capital gain dividend. If the Fund retains for reinvestment or
otherwise any amount of net capital gain, it will be subject to a tax of up to
35% of the amount retained and it will have the power to require shareholders to
include some portion or all of such undistributed gain in income as net capital
gain. The Board of Directors of the Fund will determine at least once a year
whether to distribute any net capital gain in excess capital loss carryovers
from prior years. The Fund expects to designate any amounts retained as
undistributed capital gains in a notice to its shareholders who, if subject to
federal income taxation on net capital gain, (i) will be required to include in
income for federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, and (ii) will be entitled to
credit against their federal income tax liabilities their proportionate shares
of the tax paid by the Fund on the undistributed amount and to claim refunds to
the extent that their credits exceed their liabilities. For federal income tax
purposes, the basis of shares owned by a shareholder of the Fund will be
increased by an amount equal to 65% of the amount of undistributed capital gains
included in the shareholder's income.
The Internal Revenue Service (the "IRS") currently requires a regulated
investment company that has two or more classes of stock to allocate its income
for the year to each class of stock based upon the percentage of total dividends
distributed to each class for the taxable year. So long as the IRS maintains
this position, the Fund intends to allocate net income, net capital gain and
other taxable income, if any, between the Common Stock and the Preferred Stock
in proportion to the total dividends paid to each class with respect to the
taxable year.
Under the Code, the Fund may be subject to a 4% excise tax on a portion
of its undistributed income. To avoid the tax, the Fund must distribute annually
at least 98% of its ordinary income (not taking into account any capital gains
or losses) for the calendar year and at least 98% of its capital gain net income
for the twelve-month period ending, as a general rule, on October 31 of the
calendar year. For this purpose, any income or gain retained by the Fund that is
subject to corporate income tax will be treated as having been distributed at
year end. In addition, the minimum amounts that must be distributed in any year
to avoid the excise tax will be increased or decreased to reflect any under-
distribution or over-distribution, as the case may be, in the previous year. For
a distribution to qualify under the foregoing test, it generally must be
declared and paid during the year. Any dividend declared by the Fund in October,
November or December of any year payable to shareholders of record on a date in
such a month will be deemed to have been received by each shareholder on
December 31 of that year and to have been paid by the Fund not later than
December 31 of that year, provided that the dividend is actually paid by the
Fund no later than January 31 of the following year.
-15-
<PAGE>
Dividend distributions of investment company taxable income are taxable
to a shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in shares. Since the
Fund will generally not invest in the stock of corporations, it is not likely
that the corporate shareholders of the Fund will be entitled to treat any amount
of dividends received from the Fund as eligible for the 70% deduction of
dividends received by corporations. The Fund may from time to time acquire tax-
exempt industrial development bonds, including pollution control revenue bonds;
however, since the Fund does not expect that 50% or more of its assets will be
invested in such bonds, the Fund will not be qualified to pay exempt-interest
dividends to shareholders. Accordingly, any dividends attributable to such bonds
will be taxable to shareholders. Distributions of net capital gain by the Fund
will be taxable to its shareholders as long-term capital gains, whether paid in
cash or in shares and regardless of how long the shareholder has held the Fund's
shares. Such distributions of net long-term capital gains are not eligible for
the dividends-received deduction. A distribution may be taxable even though it
reduces the net asset value of Fund shares below a shareholder's cost and, in
effect, represents a return of invested capital. Investors should carefully
consider the tax implications of buying shares of Common Stock just prior to a
dividend, since the price of the shares purchased may reflect the amount of the
forthcoming distribution which will, except in unusual circumstances, be taxable
when received. Shareholders will be notified annually as to the federal income
tax status of their dividends and distributions.
Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan will be treated for federal income tax
purposes as receiving a distribution in an amount equal to the fair market value
of the shares so received, and will have a cost basis in the shares of the same
amount.
For backup withholding purposes, the Fund may be required to withhold
31% of reportable payments (which may include dividends, capital gain
distributions, and redemptions) to certain non-corporate shareholders. A
shareholder, however, may avoid becoming subject to this requirement by filing
an appropriate form certifying under penalty of perjury that such shareholder's
taxpayer identification number set forth on the form is correct and that he is
not subject to backup withholding, or is exempt from backup withholding.
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss depending upon the amount realized and the shareholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands, and will be long-
term if the shareholder's holding period for the shares is more than twelve
months and otherwise will be short-term. Any loss realized on a sale or exchange
will be disallowed to the extent that the shares disposed of are replaced
(including replacement though the reinvesting of dividends and capital gains
distributions in the Fund) within a period of sixty-one days beginning thirty
days before and ending thirty days after the disposition of the shares. In such
a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of Fund shares
held by the shareholder for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such shares.
An amount received by a shareholder from the Fund in exchange for
shares of the Fund (pursuant to a repurchase of shares or a tender offer or
otherwise) generally will be treated as a payment in exchange for the shares
tendered, which may result in taxable gain or loss as described above. However,
if the amount received by a shareholder exceeds the fair market value of the
shares tendered, or if a shareholder does not tender all of the shares of the
Fund owned or deemed to be owned by the shareholder, all or a portion of the
amount received may be treated as a dividend taxable as ordinary income or as a
return of capital. In addition, if a tender offer is made, any shareholders who
do not tender their shares could be deemed, under certain circumstances, to have
received a taxable distribution of shares of the Fund as a result of their
increased proportionate interest in the Fund.
-16-
<PAGE>
Marginal tax rates on ordinary income for taxpayers filing
joint returns are currently 36% of taxable income in excess of $147,700
($121,300 for taxpayers filing individual returns) and 39.6% of taxable income
in excess of $263,750 for taxpayers filing either individual or joint returns.
Different taxable income thresholds apply in the cases of married persons filing
separately, heads of household and trusts. The maximum rate at which net capital
gains of noncorporate taxpayers is taxed is currently 28%. Noncorporate
taxpayers who are subject to the alternative minimum tax compute that tax at a
maximum rate of 28%. The maximum marginal corporate income tax rate is currently
35% of taxable income (including net capital gains) in excess of $10,000,000.
Corporations that are subject to the alternative minimum tax compute that tax at
a maximum rate of 20%.
The foregoing is a general, abbreviated summary of the
provisions of the Code and regulations thereunder presently in effect as they
directly govern the taxation of the Fund and its shareholders. These provisions
are subject to change by legislative or administrative action, and any such
change may be retroactive with respect to Fund transactions. This summary does
not take into account the effect of state and local taxes on shareholders of the
Fund. Shareholders are advised to consult with their own tax advisers for more
detailed information concerning federal, state and local tax matters.
PRINCIPAL SHAREHOLDERS
To the knowledge of the Fund, there are no persons who "control" the
Fund within the meaning of Section 2(a)(9) of the 1940 Act. As of December 31,
1996, Cede & Co., nominee for The Depository Trust Company, 55 Water Street, New
York, New York 10046, held of record (and not beneficially) _____% of the Fund's
outstanding Common Stock. According to information available to the Fund, on
December 31, 1996, USF&G Corporation, 100 Light Street, Baltimore, Maryland
21202, and its affiliates (including their employee benefit plans) were the
beneficial owners of ____% of the Fund's outstanding Common Stock. As of
December 31, 1996, Principal Mutual Life Insurance Company, 711 High Street, Des
Moines, Iowa, owned of record all of the Fund's outstanding 6.95% Cumulative
Preferred Stock.
As of December 31, 1996, the directors and officers of the Fund as a
group owned less than one percent of the shares of the Fund.
LEGAL MATTERS
Certain legal matters in connection with the shares offered
hereby will be passed upon for the Fund by Piper & Marbury L.L.P., Washington,
D.C., and for the Dealer Manager by James P. Shanahan, Jr., Executive Vice
President and General Counsel of the Dealer Manager.
EXPERTS
The Statement of Net Assets of the Fund at December 31, 1995,
and the related Statement of Operations for the year then ended, the Statements
of Changes in Net Assets for each of the two years in the period then ended, and
the Financial Highlights for each of the seven years in the period then ended
and the period November 11, 1988 (commencement of operations) to December 31,
1988, incorporated by reference herein, have been audited by Deloitte & Touche
LLP, independent auditors, as indicated in their report with respect thereto,
and are incorporated in reliance upon such report and upon the authority of such
firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The Fund's financial statements and financial highlights for the
fiscal year ended December 31, 1995 and the six months ended June 30, 1996
follow and are incorporated herein by reference. The Fund's financial statements
for the fiscal year ended December 31, 1995 have been audited by Deloitte &
Touche LLP, independent auditors, as indicated in their report with respect
thereto, and are incorporated in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing.
-17-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Unaudited Financial Statements For the Six Months Ended June 30, 1996
Statement of Net Assets at June 30, 1996 (Unaudited)............................................. F-2
Statement of Operations For the Six Months Ended June 30, 1996 (Unaudited)....................... F-10
Statement of Changes in Net Assets For the Six Months Ended June 30, 1996 (Unaudited)
and For the Year Ended December 31, 1995................................................... F-11
Financial Highlights (Unaudited as to June 30, 1996)............................................. F-12
Notes to Unaudited Financial Statements.......................................................... F-13
Financial Statements For the Year Ended December 31, 1995
Statement of Net Assets at December 31, 1995..................................................... F-16
Statement of Operations For the Year Ended December 31, 1995..................................... F-23
Statement of Changes in Net Assets For the Years Ended December 31, 1995 and 1994................ F-24
Financial Highlights............................................................................. F-25
Notes to Unaudited Financial Statements.......................................................... F-26
Independent Auditors' Report..................................................................... F-29
</TABLE>
The unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. All such adjustments are of a normal
recurring nature.
F-1
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES- 96.8%
AEROSPACE & DEFENSE--2.0%
BE Aerospace, Sr Sub Nt,
9.875%, 2/1/06 $ 500 $ 491,875 0.4%
Greenwich Air, Sr Nt,
10.5%, 6/1/06 750 744,375 0.7
Howmet Inc., Sr Sub Nt,
10%, 12/1/03/2/ 500 526,250 0.5
Sabreliner Corp., Sr Nt,
12.5%, 4/15/03/2/ 500 417,500 0.4
--------- ----
2,180,000 2.0
AUTO PARTS & EQUIPMENT--2.6%
APS Inc., Sr Sub Nt,
11.875%, 1/15/06/2/ 500 520,000 0.4
Collins & Aikman, Sr Sub,
11.5%, 4/15/06 1,100 1,116,500 1.0
JPS Automotive Products Corp., Sr Nt,
11.125%, 6/15/01 1,350 1,380,375 1.2
--------- ----
3,016,875 2.6
BEVERAGE & TOBACCO--.8%
Cott Corp., Sr Nt,
9.375%, 7/1/05 1,000 957,500 0.8
--------- ----
BROADCAST RADIO & TV--3.6%
Argyle Television, Sr Sub Nt,
9.75%, 11/1/05 750 703,125 0.6
Granite Broadcasting Corp., Sr Sub Nt,
10.375%, 5/15/05 1,100 1,064,250 0.9
Sinclair Broadcast Group, Sr Sub Nt,
10%, 9/30/05 1,500 1,455,000 1.3
Young Broadcasting, Sr Sub Nt,
9%, 1/15/06 1,000 890,000 0.8
--------- ----
4,112,375 3.6
BUILDING--2.6%
Harrow Industries Inc., Sr Sub Deb,
12.375%, 4/15/02 2,000 1,960,000 1.7
Triangle Pacific Corp., Sr Nt,
10.5%, 8/1/03 1,000 1,025,000 0.9
--------- ----
2,985,000 2.6
</TABLE>
F-2
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
BUSINESS SERVICES &
EQUIPMENT -- 7.3%
Data Documents, Sr Sec Nt,
13.5%, 7/15/02 $ 1,500 $ 1,635,000 1.4%
Day International Group Inc., Sr Sub Nt,
11.125%, 6/1/05 1,000 1,020,000 0.9
Knoll Inc., Sr Sub Nt,
10.875%, 3/15/0622 1,000 1,007,500 0.9
National Fiberstock, Sr Nt,
11.625%, 6/15/0222 500 498,750 0.4
San Jacinto Holdings, Sr Sub Nt,
12%, 12/31/02 2,823 2,173,402 1.9
United Stationer Supplies, Sr Nt,
12.75%, 5/1/05 1,250 1,340,625 1.2
Vis Capital Corp., Sr Sub Deb,
12.375%, 7/1/98 633 633,000 0.6
---------- ---
8,308,277 7.3
CABLE TELEVISION -- 6.2%
CAI Wireless Systems Inc., Sr Nt,
12.25%, 9/15/02 1,000 1,045,000 0.9
Cablevision Systems Corp., Sr Sub Nt,
9.25%, 11/1/05 500 465,000 0.4
Cablevision Systems Corp., Sr Sub Nt,
10.5%, 5/15/16 1,000 970,000 0.9
Comcast Corporation, Sr Sub Nt,
9.125%, 10/15/06 1,500 1,417,500 1.2
Fundy Cable Ltd., Sr Nt,
11%, 11/15/05 1,000 1,012,500 0.9
Jones Intercable, Sr Sub Nt,
11.5%, 7/15/04 1,000 1,095,000 1.0
Rifkin Acq. Partners LP, Sr Sub Nt,
11.125%, 1/15/06 1,000 985,000 0.9
---------- ---
6,990,000 6.2
CHEMICALS/PLASTIC -- 7.0%
Applied Extrustion Technologies Inc.,
Sr Unsecd Nt, 11.5%, 4/1/02 1,500 1,515,000 1.3
Berry Plastics Corp., Sr Sub Nt,
12.25%, 4/15/04 1,400 1,505,000 1.3
Calmar Inc., Deb,
11.5%, 8/1/05 1,500 1,462,500 1.3
Envirodyne Industries, Sr Nt,
12%, 6/15/00 1,000 1,032,500 0.9
Plastic Specialties & Technologies
Inc., Sr Nt, 11.25%, 12/1/03 1,250 1,237,500 1.1
Portola Packaging Inc., Sr Nt,
10.75%, 10/1/05 1,250 1,256,250 1.1
--------- ---
8,008,750 7.0
</TABLE>
F-3
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CLOTHING & TEXTILE -- 3.7%
Ithaca Industries, Sr Sub Nt,
11.125, 12/15/02 /1,3/ $ 300 $ 137,250 0.1%
PT Polysindo, Co Guarantee,
11.375%, 6/15/06 1,000 1,020,000 0.9
Synthetic Industries Inc., Deb,
12.75%, 12/1/02 1,500 1,586,250 1.4
Tultex Corp, Sr Nt,
10.625%, 3/15/05 1,000 1,020,000 0.9
US Leather Inc., Sr Nt,
10.25%, 7/31/03 500 420,000 0.4
--------- ------
4,183,500 3.7
CONGLOMERATE -- 1.7%
Interlake Corp., Sr Sub Deb,
12.125%, 3/1/02 1,500 1,494,375 1.3
Siebe Inc., Sr Sec Nt,
11.22%, 1/29/01 /4/ 435 434,682 0.4
--------- ------
1,929,057 1.7
COSMETICS/TOILETRIES -- 2.6%
Chattem Inc., Sr Sub Nt,
12.75%, 6/15/04 1,200 1,218,000 1.0
JB Williams Holdings Inc., Sr Nt,
12%, 3/1/04 1,000 982,500 0.9
Remington Products, Sr Sub Nt,
11%, 5/15/06 750 742,500 0.7
--------- ------
2,943,000 2.6
DRUGS -- .7%
Twin Labs, Sr Sub,
10.26%, 5/15/06 760 759,375 0.7
--------- ------
ECOLOGICAL SERVICES &
EQUIPMENT -- 2.0%
ICF Kaiser International Inc.,
Sr Sub Nt w/warrant,
13%, 12/31/03 1,500 1,432,500 1.3
Norcal Waste, Sr Nt
12.5%, 11/15/05 /2/ 750 791,250 0.7
--------- ------
2,223,750 2.0
ELECTRONICS/ELECTRIC -- .9%
Communications & Power Industries,
Sr Sub Nt, 12%, 8/1/05 1,000 1,057,500 0.9
--------- ------
</TABLE>
F-4
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
EQUIPMENT LEASING -- 1.1%
Coinmach Corp., Sr Nt,
11.75%, 11/15/05 $ 1,250 $ 1,300,000 1.1%
---------- -----
FARMING & AGRICULTURE -- 1.7%
Darling International Inc., Sr Sub Nt,
11%, 7/15/00 2,000 1,945,000 1.7
----------- -----
FOOD/DRUG RETAILERS -- 4.4%
Bruno's Inc., Sr Sub Nt,
10.5%, 8/1/05 1,500 1,481,250 1.3
Jitney Jungle Stores, Sr Nt,
12%, 3/1/06 900 918,000 0.8
P&C Food Markets Inc., Deb,
11.5%, 10/15/01 1,000 952,500 0.8
Ralph's Grocery Co., Sr Nt,
10.45%, 6/15/04 750 718,125 0.6
Smith's Food/Drug, Sr Sub,
11.25%, 5/15/07 1,000 1,012,500 0.9
----------- -----
5,082,375 4.4
FOOD SERVICE -- 4.2%
Beatrice Foods Inc., Sr Sub Nt,
12%, 12/1/01 /1,3/ 2,500 750,000 0.7
Carrols Corp., Sr Nt,
11.5%, 8/15/03 1,500 1,522,500 1.3
Fleming Companies Inc., Sr Nt,
10.625%, 12/15/01 1,500 1,372,500 1.2
Host Marriott Travel Plaza, Sr Nt,
9.5%, 5/15/05 1,250 1,193,750 1.0
----------- -----
4,838,750 4.2
FOREST PRODUCTS -- 4.2%
APP International Finance, Gtd Sec Nt,
11.75%, 10/1/05 1,250 1,278,125 1.1
Florida Coast Paper, 1st Mtg,
12.75%, 6/1/03 /2/ 1,000 1,042,500 0.9
Repap Wisconsin Inc., Sr Nt,
9.25%, 2/1/02 1,000 942,500 0.8
Stone Container Corp., 1st Mtg Bond,
10.75%, 10/1/02 1,500 1,503,750 1.4
--------- ---
6,737,500 4.2
</TABLE>
F-5
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
HEALTH CARE -- 3.5%
Dade International Inc., Sr Sub,
11.125%, 5/1/06/2/ $ 750 $ 776,250 0.7%
Grancare Inc., Sr Sub Nt,
9.375%, 9/15/05 1,250 1,200,000 1.0
Ornda Healthcorp, Sr Sub Nt,
11.375%, 8/15/04 1,000 1,100,000 1.0
Regency Health Services, Sr Sub,
9.875%, 10/15/02 1,000 957,500 0.8
--------- -----
4,033,750 3.5
HOTEL & CASINOS -- 6.9%
Alliance Gaming, Sr Secd Nt,
12.875%, 6/30/03 900 897,750 0.8
Argosy Gaming, 1st Mtg,
13.25%, 6/1/04/2/ 500 507,500 0.4
Courtyard by Marriott, Sr Nt,
10.75%, 2/1/08 1,000 975,000 0.9
GNF Corp (Bally Grand), 1st Mtg,
10.625%, 4/1/03 1,500 1,638,750 1.5
HMH Properties Inc., Sr Nt,
9.5%, 5/15/05 1,000 950,000 0.8
Harvey's Casino, Sr Sub Nt,
10.625%, 6/1/06 500 500,000 0.4
Majestic Star Casino, Sr Nt,
12.75%, 5/15/03 500 540,000 0.5
Showboat Marina, 1st Mtg,
13.5%, 3/15/03/2/ 500 537,500 0.5
Trump Atlantic City, 1st Mtg,
11.25%, 5/1/06 1,250 1,256,250 1.1
--------- -----
7,802,750 6.9
INDUSTRIAL EQUIPMENT -- 2.0%
Clark-Schwebel, Sr Nt,
10.5%, 4/15/06/2/ 500 510,000 0.4
Specialty Equipment Inc., Sr Sub Deb,
11.375%, 12/1/03 1,750 1,820,000 1.6
--------- -----
2,330,000 2.0
INSURANCE -- .8%
Riverside Group Inc., Sub Nt,
13%, 9/30/99/4/ 1,000 900,000 0.8
--------- -----
</TABLE>
F-6
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
LEISURE -- 5.4%
Alliance Entertainment, Sr Sub Nt,
11.25%, 7/15/05 $ 1,000 $ 940,000 0.8%
Doane Products Co., Sr Nt,
10.625%, 3/1/06 1,000 1,000,000 0.9
Guitar Center, Sr Nt,
11%, 7/1/06/2/ 500 507,500 0.4
Hines Horticulture, Sr Sub Nt,
11.75%, 10/15/05 750 776,250 0.7
Selmer Company, Sr Sub Nt,
11%, 5/15/05 1,500 1,597,500 1.4
United Artists, Sr Nt,
11.5%, 5/1/02 1,250 1,312,500 1.2
--------- -----
6,133,750 5.4
NON-FERROUS METALS -- 3.5%
Easco Corp., Sr Nt,
10%, 3/15/01 1,000 1,005,000 0.9
Haynes International Inc.,
Sr Sec Nt, Ser B,
11.25%, 6/15/98 850 879,750 0.8
Magma Copper Co., Sr Sub Nt,
12%, 12/15/01 1,000 1,083,360 0.9
Renco Metals Inc., Sr Nt,
11.5%, 7/1/03 1,000 1,000,000 0.9
--------- -----
3,968,110 3.5
OIL & GAS -- 4.0%
Giant Industries Inc., Sr Sub Nt,
9.75%, 11/15/03 1,000 977,500 0.9
KCS Energy Inc., Sr Nt,
11%, 1/15/03 500 527,500 0.5
Petro PSC Properties, Sr Nt,
12.5%, 6/1/02 1,500 1,447,500 1.3
Transamerica Refining, 1st Mtg,
16.5%, 2/15/02 650 588,250 0.5
United Refining Corp., Sr Nt w/warrant,
11.5%, 12/31/03 1,000 880,000 0.8
--------- -----
4,420,750 4.0
PUBLISHING -- .4%
Adams Outdoor Advertising, Sr Nt,
10.75%, 3/15/06/2/ 500 513,125 0.4
--------- -----
</TABLE>
F-7
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
RETAILERS -- 1.2%
Herff Jones Inc., Sr Sub Nt,
11%, 8/15/05 $ 1,000 $ 1,040,000 0.9%
Musicland Stores, Sr Sub Nt,
9%, 6/15/03 500 340,000 0.3
----------- -----
1,380,000 1.2
STEEL -- 2.5%
Algoma Steel, 1st Mtg,
12.375%, 7/15/05 1,000 975,000 0.9
Gulf States Steel, 1st Mtg,
13.5%, 4/15/03 1,000 890,000 0.8
NS Group Inc., Sr Nt,
13.5%, 7/15/03 1,000 968,750 0.8
----------- -----
2,833,750 2.5
TRANSPORTATION -- 3.4%
Moran Transport Co., 1st Mtg Nt,
11.75%, 7/15/04 1,500 1,492,500 1.3
Trism Inc., Sr Sub Nt,
10.75%, 12/15/00 1,250 1,171,875 1.0
Teekay Shipping, Sr Sec Nt,
9.625%, 7/15/03 1,250 1,250,000 1.1
3,914,375 3.4
TELECOMMUNICATIONS/CELLULAR
COMMUNICATION -- 3.9%
Brooks Fiber Properties, Sr Dis Nt,
0%, 3/1/06/2/ 500 266,250 0.2
Metrocall Inc., Sr Sub Nt,
10.375%, 10/1/07 1,000 935,000 0.8
Mobilemedia Corp., Sr Sub Nt,
9.375%, 11/1/07 1,000 895,000 0.8
Nextlink Communications, Sr Nt,
12.5%, 4/15/06/2/ 1,000 995,000 0.9
Pronet Inc., Sr Sub Nt,
10.875%, 9/15/06 500 478,750 0.4
Teleport Communications, Sr Nt,
9.875%, 7/1/06 500 500,000 0.4
Vanguard Cellular, Deb,
9.375%, 4/15/06 500 485,000 0.4
----------- -----
4,555,000 3.9
----------- -----
Total Corporate Debt Securities
(cost $110,819,208) 110,373,319 96.8
----------- -----
</TABLE>
F-8
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (concluded)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Shares/ Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
EQUITY INVESTMENTS -- .2%
Data Documents, Warrants,
7/15/02/1/ 2,000 $224,000 0.2%
Sabreliner Corp., Warrants, 4/15/03/1/ 500 2,500 0.0
San Jacinto Holdings, Common Stock/1/ 2,246 8,984 0.0
Terex Corp., Stock Appreciation Rights,
7/31/96/1/ 4,905 -- --
US Trails Inc., Warrants, 6/30/99/1/ 33,081 -- --
------------ -------
Total Equity Investments
(cost $2,500) 235,484 0.2
------------ -------
COMMERCIAL PAPER -- 3.6%
American General Finance,
5.33%, 7/9/96 $ 700 699,171 0.6
Ford Motor Credit, 5.37%, 7/9/96 1,000 998,807 0.9
General Electric Capital Corp.,
5.37%, 7/2/96 1,000 999,851 0.9
General Electric Capital Corp.,
5.33%, 7/9/96 700 699,171 0.6
Householde Finance Corp.,
5.34%, 7/9/96 700 699,169 0.6
------------ -------
Total Commercial Paper
(at amortized cost) 4,096,169 3.6
------------ -------
TOTAL INVESTMENTS
(cost $114,917,877) $114,704,972 100.6
Liabilities in Excess of Other Assets (658,066) (0.6)
------------- -------
Net Assets $114,046,906 100.0%
Less: 1,650,000 shares of Preferred Stock
Outstanding (33,000,000)
------------
Net Assets Applicable to 4,980,145 Shares of
Common Stock Outstanding $81,046,906
============
Net Asset Value Per Common Share
($81,046,906 divided by 4,980,145) $16.27
============
</TABLE>
/1/Non-income producing security.
/2/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. These securities
amounted to $10,176,250 or 8.9% of net assets.
/3/Security is in default.
/4/Board valued security. These securities amounted to $1,334,682 or 1.2% of net
assets.
See accompanying Notes to Financial Statements.
F-9
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Operations
For the Six Months Ended June 30, 1996
(Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $6,410,256
EXPENSES:
Investment advisory fee (Note 5)............................ 617,814
Administrative fee (Note 5)................................. 87,327
Custodian, transfer agent and accounting fees............... 39,919
Directors' fees............................................. 28,158
Printing and postage........................................ 35,280
Audit fee................................................... 19,970
Legal fees.................................................. 38,735
Miscellaneous............................................... 6,626
----------
Total expenses............................................ 873,829
----------
Net investment income..................................... 5,536,427
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 114,246
Net unrealized appreciation of investments.................. 984,304
----------
Net realized and unrealized gain on investments........... 1,098,550
----------
Net increase in net assets resulting from operations.......... 6,634,977
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS....................... (1,140,379)
----------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON
STOCKHOLDERS RESULTING FROM OPERATIONS AND
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS..................... $5,494,598
==========
</TABLE>
See accompanying Notes to Financial Statements.
F-10
<PAGE>
USF&G PACHOLDER FUND, INC.
Statements of Changes In Net Assets For the Six Months Ended June 30, 1996
(Unaudited) and the Year Ended December 31, 1995
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
June 30, 1996 December
(Unaudited) 31, 1995
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income.................... $ 5,536,427 $ 10,237,987
Net realized gain/(loss) on
investments............................ 114,246 (2,728,589)
Net unrealized appreciation of
investments............................ 984,304 1,562,889
------------ ------------
Net increase in net assets resulting
from operations........................ 6,634,977 9,072,287
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS
FROM:
Preferred dividends ($0.69 and $2.20
per share, respectively)............... (1,140,379) (1,374,239)
Common dividends:
Net investment income and short-
term gains of $0.85 and $1.90
per share, respectively.............. (4,230,704) (8,733,897)
------------ ------------
Total decrease in net assets from
distributions to stockholders............ (5,371,083) (10,108,136)
------------ ------------
FUND SHARE TRANSACTION
(NOTES 2 AND 3):
Net proceeds from issuance of preferred
stock.................................. -- 32,752,380
Redemption of preferred stock............ -- (8,922,804)
Value of 11,507 and 15,088 shares
issued in reinvestment of dividends,
respectively........................... 186,785 254,686
Net proceeds from common stock issued
(1,457,942 shares) in rights offering
(after deducting $793,832 of offering -- 22,022,960
expenses).............................. ------------ ------------
Total increase in net assets derived from
fund share transactions.................. 186,785 46,107,222
------------ ------------
Total net increase in net assets........... 1,450,679 45,071,373
NET ASSETS:
Beginning of year........................ 112,596,227 67,524,854
------------ ------------
End of year.............................. $114,046,906 $112,596,227
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-11
<PAGE>
USF&G PACHOLDER FUND, INC.
Financial Highlights
(Contained below is per share operating performance data for a share of common
stock outstanding, total return performance, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1996
(Unaudited) Year Ended December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $16.02 $16.86 $19.23 $18.52 $17.37 $14.49
---------- -------- --------- -------- ------- ------
Net investment income........................................... 1.11 2.19 2.12 2.48 2.37 2.18
Net realized and unrealized gain/(loss) on investments.......... 0.18 (0.06) (1.64) 1.42 1.32 2.84
---------- -------- --------- -------- ------- ------
Net increase in net asset value resulting from operations....... 1.29 2.13 0.48 3.90 3.69 5.02
---------- -------- --------- -------- ------- ------
Distributions to Stockholders from:
Preferred dividends............................................. (0.23) (0.29) (0.24) (0.38) (0.33) --
Common:
Net investment income and short-term gains................... (0.85) (1.90) (1.92) (2.09) (2.08) (2.14)
Net realized long-term gains................................. -- -- -- (0.21) -- --
---------- -------- --------- -------- ------- ------
Total distributions to preferred and common stockholders........ (1.08) (2.19) (2.16) (2.68) (2.41) (2.14)
---------- -------- --------- -------- ------- ------
Capital Change Resulting from the Issuance of Fund Shares:
Common Shares................................................... 0.04 (0.67) (0.69) (0.51) -- --
Preferred Shares................................................ -- (0.11) -- -- (0.13) --
---------- -------- --------- -------- ------- ------
0.04 (0.78) (0.69) (0.51) (0.13) --
---------- -------- --------- -------- ------- ------
Net asset value, end of period.................................. $16.27 $16.02 $16.86 $19.23 $18.52 $17.37
========== ======== ========= ======== ======= ======
Market value per share, end of period........................... $15.75 $17.38 $16.75 $21.25 $19.38 $17.25
========== ======== ========= ======== ======= ======
TOTAL INVESTMENT RETURN:/1/
Based on market value per share................................. (4.25)% 16.04% (11.12)% 22.41% 25.99 56.78%
Based on net asset value per share.............................. 6.91% 10.68% 0.72% 20.27% 18.78 36.71%
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses..................................................... 1.52%* 0.86% 1.64% 1.81% 1.90 1.37%
Net investment income........................................ 9.66%* 10.45% 10.17% 10.33% 10.32 12.94%
SUPPLEMENTAL DATA:
Net assets at end of period, net of preferred stock (000)....... $81,047 $79,596 $58,925 $44,458 $34,001 $31,678
Average net assets during period, net of preferred stock (000).. $81,609 $79,614 $59,002 $43,275 $34,950 $30,724
Portfolio turnover rate......................................... 46% 83% 102% 97% 121% 48%
Number of preferred shares outstanding at end of period......... 1,650,000 1,650,000 8,600 9,400 10,000 --
Asset coverage per share of preferred stock outstanding at end
of period..................................................... $69 $66 $7,852 $5,730 $4,400 --
Liquidation and average market value per share of preferred
stock......................................................... $20 $20 $1,000 $1,000 $1,000 --
</TABLE>
- ------------------
*Annualized.
/1/Total investment return excludes the effects of commissions. Total investment
returns for other than full periods are not annualized.
/2/Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
See accompanying Notes to Financial Statements.
F-12
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials
1. SIGNIFICANT ACCOUNTING POLICIES--USF&G Pacholder Fund, Inc. (the "Fund") is
a closed-end, diversified management investment company, registered under the
Investment Company Act of 1940. The Fund seeks a high level of total return
through current income and capital appreciation by investing primarily in
high yield, high risk fixed-income securities of domestic companies. The Fund
was incorporated under the laws of the State of Maryland in August 1988.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
A. SECURITY VALUATIONS--Portfolio securities traded primarily on an exchange
are valued at the closing sale price or, if there have been no sales, at
the last reported bid price on the valuation date. Securities traded
primarily in the over-the-counter market are valued at prices provided by
an independent pricing service. Restricted securities and other securities
for which market quotations are not readily available are valued at fair
value as determined under procedures established by the Board of
Directors. There were Board valued securities of $1,334,682 or 1.2% of net
assets as of June 30, 1996. Short-term obligations with remaining
maturities of 60 days or less at the date of purchase are valued at
amortized cost.
B. FEDERAL TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute to its shareholders all of its net investment income and
realized gains on securities transactions. Therefore, no federal tax
provision is required.
C. SECURITIES TRANSACTIONS--Securities transactions are accounted for on the
date the securities are purchased or sold (trade date). Realized gains and
losses on securities transactions are determined on an identified cost
basis. Interest income is recorded on an accrual basis. The Fund amortizes
discounts or premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. The Fund has
elected to defer the accretion of market discount until disposition of the
security.
D. WHEN, AS AND IF ISSUED SECURITIES--The Fund may engage in "when-issued" or
"delayed delivery" transactions. The Fund records when-issued securities
on the trade date and maintains security positions such that sufficient
liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market weekly and begin earning interest on the settlement
date. No when "when-issued" or "delayed delivery" purchase commitments
were included in the portfolio of investments as of June 30, 1996.
E. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and
estimated expenses are accrued daily. Dividends to common stockholders are
paid from net investment income quarterly, and distributions of net
realized capital gains are to be paid at least annually.
F. 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.
2. COMMON STOCK--At June 30, 1996, there were 48,350,000 shares of common stock
with a $.01 par value authorized and 4,980,145 shares outstanding. During
1996, 11,507 shares of common stock were issued in connection with the Fund's
dividend reinvestment plan.
On March 16, 1995, 1,457,942 shares of common stock were issued at $15.65 per
share as part of a rights offering for the common stockholders of the Fund.
Expenses related to the rights offering totaling $793,832 were recorded as a
reduction to the proceeds from the offering. These expenses included $205,351
paid to Winton Associates, Inc., a wholly-owned subsidiary of Pacholder
Associates, Inc. (an affiliate of the Fund's Investment Advisor), for
F-13
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials (continued)
financial and advisory services including advising the Fund regarding the
structure of the rights offering and the materials utilized therewith,
coordinating the distribution arrangements for the rights offering and
providing information and support services to soliciting broker-dealers.
3. PREFERRED STOCK--On August 15, 1995, the Fund issued 1,650,000 shares of
6.95% Cumulative Preferred Stock in a private sale at an offering price of
$20 per share. Dividends on these shares are payable quarterly at an annual
rate of 6.95%. The Fund is required to maintain certain asset coverage, other
financial tests and restrictions as set forth in the Fund's Articles
Supplementary Creating and Fixing the Rights of 6.95% Cumulative Preferred
Stock. The preferred stock is subject to mandatory redemption on August 1,
2000, at a redemption price equal to $20 per share, plus accumulated and
unpaid dividends. The preferred stock is also subject to special mandatory
redemptions at a redemption price of $20 per share, plus accumulated and
unpaid dividends and a premium, as defined, if the Fund is not in compliance
with the required coverages, tests and restrictions. In general, the holders
of the preferred stock and the common stock vote together as a single class,
except that the preferred stockholders, as a separate class, vote to elect
two members of the Board of Directors, and separate votes are required on
certain matters that affect the respective interests of the preferred stock
and common stock. The preferred stock has a liquidation preference of $20 per
share, plus accumulated and unpaid dividends. The offering expenses of the
preferred stock were $247,620 which were recorded as a reduction in paid-in
capital for common stockholders. These expenses included $123,750 paid to
Winton Associates, Inc. for financial and advisory services including
advising the Fund regarding the structure of the preferred stock offering and
the materials utilized therewith, and the coordinating of the arrangements of
the preferred stock.
On September 14, 1995, the Fund redeemed the 8,050 outstanding shares of the
8.60% Cumulative Preferred Stock at a redemption price of $1,000 per share plus
accumulated and unpaid dividends and a premium. The redemption was made in
accordance with the Fund's Purchase Agreement and Articles Supplementary. The
premium relating to the redemption was $322,804, which was recorded as a
reduction of paid-in capital for common stockholders.
4. PURCHASES AND SALES OF SECURITIES--Purchases and sales of securities
(excluding commercial paper and repurchase agreements) for the six months
ended June 30, 1996 aggregated $53,153,499 and $52,035,042, respectively.
At June 30, 1996, the federal income tax basis of securities was
$110,821,708; unrealized depreciation aggregated $212,905, of which
$3,048,533 related to appreciated securities and $3,261,438 related to
depreciated securities.
5. TRANSACTIONS WITH INVESTMENT ADVISOR, ADMINISTRATOR AND ACCOUNTING SERVICES
AGENT--The Fund has an agreement with Pacholder & Company (the "Advisor") to
serve as the Fund's Investment advisor. The Fund pays the Advisor a fee that
will increase or decrease based on the total return investment performance of
the Fund for the prior twelve-month period relative to the percentage change
in the CS First Boston High Yield Index.(TM) The fee ranges from a maximum of
1.4% to a minimum of .40% (on an annualized basis) of the average weekly net
assets. For the six months ended June 30, 1996, the Fund's total return was
6.91%. For the same period, the total return of the CS First Boston High
Yield Index(TM) was 3.77%. The 1996 advisory fee is calculated based on 1.21%
of average weekly net assets. Certain officers and directors of the Fund are
also executive committee members of the Advisor. At June 30, 1996, accrued
advisory fees were $216,442.
During 1996 the Fund received shareholder approval to enter into a new
administrative services agreement changing from Investment Company Capital Corp.
to Kenwood Administrative Management, L.P. ("KAM") (an affiliate of the Advisor)
to render certain administrative services to the Fund. KAM receives from the
Fund a fee, calculated and paid monthly, at the rate of .10% of the average
weekly net assets. At June 30, 1996, accrued administrative fees were $8,254.
The Fund has an agreement with Pacholder Associates, Inc. (an affiliate of
the Advisor) to provide accounting services. Pacholder Associates, Inc.
receives from the Fund a fee, calculated and paid monthly, at the annual rate
of .025% of the first $100 million of the Fund's average weekly net assets
and .015% of such assets in excess of $100 million.
F-14
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (Concluded)
6. NET ASSETS CONSIST OF:
<TABLE>
<CAPTION>
June 30,
--------
1996 December 31,
---- ------------
(Unaudited) 1995
----------- ----
<S> <C> <C>
Common Stock
($.01 par value)........................... $ 49,801 $ 49,686
Preferred Stock................................ 33,000,000 33,000,000
Paid-in capital................................ 83,726,191 83,539,521
Undistributed net investment income............ 337,593 172,249
Accumulated net realized loss on investments... (2,853,774) (2,968,020)
Unrealized depreciation on investments......... (212,905) (1,197,209)
------------- -------------
$ 114,046,906 $ 112,596,227
============= =============
</TABLE>
F-15
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- 96.1%
AEROSPACE & DEFENSE -- 0.9%
Coltec Industries Inc., Sr Nt,
9.75%, 11/1/99 $ 500 $ 516,250 0.4%
Howmet Inc., Sr Sub Nt,
10.0%, 12/1/03/2/ 500 520,000 0.5
------------ ------
1,036,250 0.9
AUTO PARTS & EQUIPMENT -- 1.7%
JPS Automotive Products Corp.,
Sr Nt, 11.125%, 6/15/01 2,000 1,920,000 1.7
------------ ------
BROADCAST RADIO & TV -- 2.9%
Argyle Television, Sr Sub Nt,
9.75%, 11/1/05 750 744,375 0.6
Granite Broadcasting Corp., Sr Sub Nt,
10.375%, 5/15/05 1,000 1,025,000 0.9
Sinclair Broadcast Group, Sr Sub Nt,
10.0%, 9/30/05 1,500 1,533,750 1.4
------------ ------
3,303,125 2.9
BUILDING -- 4.5%
Harrow Industries Inc., Sr Sub Deb,
12.375%, 4/15/02 2,000 1,860,000 1.7
Southdown Inc., Sr Sub Nt,
14.0%, 10/15/01 2,000 2,185,000 1.9
Triangle Pacific Corp., Sr Nt,
10.5%, 8/1/03 1,000 1,050,000 0.9
------------ ------
5,095,000 4.5
BUSINESS SERVICES & EQUIPMENT -- 1.3%
AM International Inc., Trade Claim,
5.0%, 9/30/98/2,3/ 579 466,416 0.4
Day International Group Inc., Sr Sub Nt,
11.125%, 6/1/05 1,000 1,000,000 0.9
------------ ------
1,466,416 1.3
CABLE TELEVISION -- 5.1%
CAI Wireless Systems Inc., Sr Nt,
12.25%, 9/15/02 1,000 1,070,000 1.0
Cablevision Systems Corp., Sr Sub Nt,
9.25%, 11/1/05 1,000 1,032,500 0.9
Comcast Corporation, Sr Sub,
9.125%, 10/15/06 1,500 1,560,000 1.4
Continental Cablevision, Sr Nt,
8.3%, 5/15/06 500 501,250 0.5
Fundy Cable Ltd., Sr Nt,
11.0%, 11/15/05 1,000 1,040,000 0.9
Lenfest Communications, Sr Nt,
8.375%, 11/1/05 500 500,000 0.4
------------ ------
5,703,750 5.1
</TABLE>
F-16
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
Percent
Par of Net
Description (000) Value Assets
CHEMICALS/PLASTICS -- 7.2%
Applied Extrusion Technologies Inc., Sr
Unsecd Nt, 11.5%, 4/1/02 $1,500 $ 1,605,000 1.4%
Berry Plastics Corp., Sr Sub Nt,
12.25%, 4/15/04 1,400 1,484,000 1.3
Buckeye Cellulose Corp., Sr Sub Nt,
8.5%, 12/15/05 500 509,375 0.5
Envirodyne Industries, Sr Nt,
12.0%, 6/15/00 500 482,500 0.4
Plastic Specialties and Technologies,
Inc., Sr Nt, 11.25%, 12/1/03 2,000 1,800,000 1.6
Portola Packaging Inc., Sr Nt,
10.75%, 10/1/05 1,250 1,287,500 1.2
Uniroyal Technology Corp., Sr Nt
w/warrant, 11.75%, 6/1/03 1,000 935,000 0.8
------------ ------
8,103,375 7.2
CLOTHING & TEXTILE -- 2.8%
Fieldcrest Cannon Inc., Sr Sub Deb,
11.25%, 6/15/04 500 462,500 0.4
Reeves Industries Inc., Sub Deb,
13.75%, 5/1/01 1,489 1,191,200 1.1
Synthetic Industries Inc., Deb,
12.75%, 12/1/02 1,500 1,470,000 1.3
------------ ------
3,123,700 2.8
CONGLOMERATE -- 1.9%
Interlake Corp., Sr Sub Deb,
12.125%, 3/1/02 1,500 1,415,625 1.3
Siebe Inc., Sr Sec Nt, 11.22%,
1/29/01/2.4/ 479 479,027 0.4
Valcor Inc., Sr Nt, 9.625%, 11/1/03 250 230,000 0.2
------------ ------
2,124,652 1.9
CONTAINERS -- 2.7%
Calmar Inc., Deb, 11.5%, 8/1/05/2/ 1,500 1,522,500 1.3
Stone Container Corp., 1st Mtg Bond,
10.75%, 10/1/02 1,500 1,537,500 1.4
------------ ------
3,060,000 2.7
COSMETICS/TOILETRIES -- 1.6%
Chattem Inc., Sr Sub Nt, 12.75%,
6/15/04 873 809,708 0.7
JB Williams Holdings Inc., Sr Nt,
12.0%, 3/1/04 1,000 995,000 0.9
------------ ------
1,804,708 1.6
F-17
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
ECOLOGICAL SERVICES &
EQUIPMENT -- 2.7%
Clean Harbors Inc., Sr Nt,
12.5%, 5/15/01 $1,400 $ 490,000 0.4%
ICF Kaiser International Inc.:
Sr Sub Nt w/warrant,
12.0%, 12/31/03 1,500 1,357,500 1.2
Sr Sub Nt, 12.0%, 12/31/03 500 450,000 0.4
Norcal Waste, Sr Nt, 12.5%, 11/15/05/2/ 750 748,125 0.7
------------ ------
3,045,625 2.7
ELECTRONICS/ELECTRIC -- 0.9%
Communications & Power Industries, Sr
Sub Nt, 12.0%, 8/1/05/2/ 1,000 1,010,000 0.9
------------ ------
EQUIPMENT LEASING -- 4.1%
Genicom Corp., Sr Sub Nt,
12.5%, 2/15/97 2,000 2,000,000 1.8
San Jacinto Holdings, Sr Sub Nt w/Sub
Int, 8.0%, 12/31/00 2,382 1,857,960 1.7
Vis Capital Corp., Sr Sub Deb,
12.375%, 7/1/98 633 633,000 0.6
------------ ------
4,490,960 4.1
FARMING & AGRICULTURE -- 1.8%
Darling International Inc., Sr Sub Nt,
11.0%, 7/15/00 2,000 2,000,000 1.8
------------ ------
FINANCIAL INTERMEDIARIES -- 3.0%
GNF Corp. (Bally Grand), 1st Mtg,
10.625%, 4/1/03 1,500 1,387,500 1.2
Trump Plaza Funding, 1st Mtg. Nt,
10.875%, 6/15/01 1,000 1,035,000 0.9
Trump Taj Mahal Funding Inc., Deb,
Series A, 11.35%, 11/15/99 1,030 978,144 0.9
------------ ------
3,400,644 3.0
FOOD/DRUG RETAILERS -- 3.9%
Bruno's Inc., Sr Sub Nt, 10.5%, 8/1/05 1,500 1,477,500 1.3
P&C Food Markets Inc., Deb,
11.5%, 10/15/01 1,000 970,000 0.9
Ralph's Grocery Co., Sr Nt,
10.45%, 6/15/04 1,000 1,010,000 0.9
Smitty's Super Value Inc., Sr Sub Nt,
12.75%, 6/15/04 1,000 960,000 0.8
------------ ------
4,417,500 3.9
</TABLE>
F-18
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
FOOD SERVICE -- 5.3%
ARA Group Inc., Sub Deb,
13.0%, 1/15/97 $ 250 $ 250,313 0.2%
Beatrice Foods Inc., Sr Sub Nt,
12.0%, 12/1/01/5/ 2,000 590,000 0.5
Carrols Corp., Sr Nt, 11.5%, 8/15/03 1,500 1,492,500 1.3
Coinmach Corp., Sr Nt,
11.75%, 11/15/05/2/ 1,055 1,065,550 1.0
Cott Corp., Sr Nt, 9.375%, 7/1/05 1,000 995,000 0.9
Flagstar Corp., Sr. Nt,
10.875%, 12/1/02 1,750 1,583,750 1.4
---------- ------
5,977,113 5.3
FOREST PRODUCTS -- 4.9%
APP International Finance, Gtd Sec Nt,
11.75%,10/1/05 1,250 1,206,250 1.1
Data Documents, Sr Sec Nt,
7/15/02 1,502 1,635,000 1.5
Repap Wisconsin Inc., Sr Nt,
9.25%, 2/1/02 1,000 942,500 0.8
United Stationer Supplies, Sr Nt,
12.75%, 5/1/05 1,250 1,362,500 1.2
Wickes Lumber Co., Sr Sub Nt,
11.625%, 12/15/03 550 371,250 0.3
---------- ------
5,517,500 4.9
HEALTH CARE -- 3.0%
Grancare Inc., Sr Sub Nt,
9.375%, 9/15/05 1,250 1,265,625 1.1
Ornda Healthcorp, Sr Sub Nt,
11.375%, 8/15/04 1,000 1,117,500 1.0
Regency Health Services, Sr Sub,
9.875%, 10/15/02 1,000 990,000 0.9
---------- ------
3,373,125 3.0
HOME FURNISHINGS -- 1.1%
Congoleum Corp., Sr Nt, 9.0%, 2/1/01 1,250 1,203,125 1.1
---------- ------
HOTELS & CASINOS -- 4.9%
Grand Casinos Inc., 1st Mtg.,
10.125%, 12/1/03 1,000 1,042,500 0.9
HMH Properties Inc., Sr Nt,
9.5%, 5/15/05 1,000 1,020,000 0.9
Hollywood Casino Corp., Sr Nt,
12.75%, 11/1/03 500 450,000 0.4
Host Marriott Travel Plaza, Sr Nt,
9.5%, 5/15/05 1,250 1,234,375 1.1
Resorts International, Mtg Bond,
11.0%, 9/15/03 2,000 1,840,000 1.6
---------- ------
5,586,875 4.9
</TABLE>
F-19
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
INDUSTRIAL EQUIPMENT -- 1.6%
Specialty Equipment Inc., Sr Sub Deb,
11.375%, 12/1/03 $1,750 $ 1,776,250 1.6%
----------- -------
INSURANCE -- 0.8%
Riverside Group Inc., Sub Nt,
13.05, 9/30/99/2.4/ 1,000 900,000 0.8
----------- -------
LEISURE -- 3.9%
Alliance Entertainment, Sr Sub Nt,
11.25%, 7/15/05 1,000 1,002,500 0.9
Hines Horticulture, Sr Sub Nt,
11.75%, 10/15/05 750 780,000 0.7
The Selmer Company, Sr Sub Nt,
11.0%, 5/15/05 1,500 1,485,000 1.3
United Artists, Sr Nt, 11.5%, 5/1/02 1,000 1,070,000 1.0
----------- -------
4,377,500 3.9
NON-FERROUS METALS/
MINERALS -- 4.3%
Easco Corp., Sr Nt, 10.0%, 3/15/01 1,000 990,000 0.9
Great Lakes Carbon Corp., Sr Nt,
10.0%, 1/1/06 500 512,500 0.5
Magma Copper Co., Sr Sub Nt,
12.0%, 12/15/01 1,600 1,792,000 1.6
Renco Metals, Inc., Sr Nt, 12.0%,
7/15/00 1,400 1,512,000 1.3
----------- -------
4,806,500 4.3
OIL & GAS -- 5.0%
Giant Industries Inc., Sr Sub Nt,
9.75%, 11/15/03 1,000 1,010,000 0.9
Petro PSC Properties, Sr Nt,
12.5%, 6/1/02 1,500 1,395,000 1.2
Petroleum Heat & Power Co. Inc., Sub
Deb, 12.25%, 2/1/05 750 828,750 0.7
Tesoro Petroleum Corp., Sub Deb,
13.0%, 12/1/00 1,500 1,522,500 1.4
United Refining Corp., Sr Nt w/warrant,
11.5%, 12/31/03/2/ 1,000 925,000 0.8
----------- -------
5,681,250 5.0
RETAILERS -- 0.9%
Herff Jones Inc., Sr Sub Nt,
11.0%, 8/15/05 1,000 1,055,000 0.9
----------- -------
</TABLE>
F-20
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Shares/ Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
STEEL -- 2.4%
Algoma Steel, 1st Mtg. Bond,
12.375%, 7/15/05 $1,000 $ 900,000 0.8%
Gulf States Steel, 13.5%, 4/15/03 1,000 880,000 0.8
NS Group Inc., Sr Nt, 13.5%, 7/15/03 1,000 870,000 0.8
----------- -------
2,650,000 2.4
SURFACE TRANSPORT -- 3.9%
Moran Transport Co., 1st Mtg Nt,
11.75%, 7/15/04 2,000 1,885,000 1.7
Trism Inc., Sr Sub Nt,
10.75%, 12/15/00 1,250 1,212,500 1.1
Viking Star Shipping Inc., 1st Pfd Mtg
Nt, 9.625%, 7/15/03 1,250 1,287,500 1.1
----------- -------
4,385,000 3.9
TELECOMMUNICATIONS/CELLULAR
COMMUNICATION -- 3.7%
A+Network Inc., Sr Sub,
11.875%, 11/1/05 750 755,625 0.7
Metrocall Inc., Sr Sub Nt,
10.375%, 10/1/07 750 792,188 0.7
Mobilemedia Corp., Sr Sub Nt,
9.375%, 11/1/07 1,000 1,025,000 0.9
Paging Network Inc., Sr Sub Nt,
10.125%, 8/1/07 1,500 1,633,125 1.4
----------- -------
4,205,938 3.7
UTILITIES -- 1.4%
The Coastal Corporation, Deb,
11.75%, 6/15/06 1,500 1,586,250 1.4
----------- -------
Total Corporate Debt Securities
(amortized cost $109,504,340) 108,147,131 96.1
----------- -------
EQUITY INVESTMENTS -- 0.1%
Data Documents, Warrants,
7/15/02/1/ 2,000 160,000 0.1
Terex Corp., Stock Appreciation Rights,
7/01/97/1/ 4,905 -- --
U.S. Trails, Inc., Warrants,
6/30/99/1/ 33,081
----------- -------
Total Equity Investments
(cost $0) 160,000 0.1
</TABLE>
F-21
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (concluded)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
COMMERCIAL PAPER -- 3.5% Cargill Inc.:
5.95%, 1/4/96 $ 1,500 $1,499,504 1.3%
General Electric Capital Corp.:
5.79%, 1/5/96 2,500 2,498,392 2.2
---------- --------
Total Commercial Paper
(at amortized cost) 3,997,896 3.5
---------- --------
Percent
of Net
Description Value Assets
TOTAL INVESTMENTS
(amortized cost $113,502,236) $112,305,027 99.7%
Other Assets in Excess of Liabilities........ 291,200 0.3
------------ --------
Net Assets................................... $112,596,227 100.0%
Less: Outstanding Preferred Stock............ (33,000,000)
------------
Net Assets Applicable to
4,968,638 Shares of
Common Stock Outstanding................... $ 79,596,227
============
Net Asset Value Per Common Share
($79,596,227 / 4,968,638).................. $16.02
============
</TABLE>
- -------------------
/1/Non-income producing security.
/2/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. These securities
amounted to $7,636,718 or 6.8% of net assets.
/3/A Director of the Fund also serves as a Director of this company.
/4/Board valued security. These securities amounted to $1,379,027 or 1.2% of net
assets.
/5/Security is in default.
See accompanying Notes to Financial Statements.
F-22
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Operations
For the Year Ended December 31, 1995
INVESTMENT INCOME:
Interest........................................... $11,076,858
EXPENSES:
Investment advisory fee (Note 5)................... 391,534
Administrative fee (Note 5)........................ 170,185
Custodian, transfer agent and accounting fees...... 84,929
Directors' fees.................................... 64,301
Printing and postage............................... 55,335
Audit fee.......................................... 40,550
Legal fees......................................... 24,442
Miscellaneous...................................... 7,595
-----------
Total expenses................................... 838,871
-----------
Net investment income............................ 10,237,987
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS:
Net realized loss on investments................... (2,728,589)
Net unrealized appreciation of investments......... 1,562,889
-----------
Net realized and unrealized loss on investments.. (1,165,700)
-----------
Net increase in net assets resulting from operations. 9,072,287
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS.............. (1,374,239)
-----------
NET INCREASE IN NET ASSETS APPLICABLE TO
COMMON STOCKHOLDERS RESULTING FROM
OPERATIONS AND DISTRIBUTIONS TO
PREFERRED
STOCKHOLDERS....................................... $ 7,698,048
============
See accompanying Notes to Financial Statements.
F-23
<PAGE>
USF&G PACHOLDER FUND, INC.
Statements of Changes In Net Assets
For the Year Ended
------------------
December 31,
------------
1995 1994
INCREASE IN NET ASSETS:
Operations:
Net investment income.................. $10,237,987 $ 6,928,038
Net realized loss on investments....... (2,728,589) (240,392)
Net unrealized
appreciation/(depreciation) of
investments.......................... 1,562,889 (6,181,006)
------------------ ------------
Net increase in net assets resulting
from operations...................... 9,072,287 506,640
------------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS
FROM:
Preferred dividends ($2.20 and $86.00
per share, respectively)............. (1,374,239) (782,600)
Common dividends:
Net investment income and short-
term gains of $1.90 and $1.92 per
share, respectively................ (8,733,897) (6,125,564)
------------------
Total decrease in net assets from
distributions to stockholders.......... (10,108,136) (6,908,164)
------------------ ------------
FUND SHARE TRANSACTIONS
(NOTES 2 AND 3):
Net proceeds from issuance of
preferred stock...................... 32,752,380 --
Redemption of preferred stock.......... (8,922,804) (800,000)
Value of 15,088 and 24,020 shares
issued in reinvestment of dividends,
respectively......................... 254,686 446,843
Net proceeds from common stock issued
(1,457,942 and 1,160,115 shares,
respectively) in rights offering
(after deducting $793,832 and $123,847
of offering expenses, respectively).. 22,022,960 20,421,789
------------------ ------------
Total increase in net assets derived from
fund share transactions................ 46,107,222 20,068,632
------------------ ------------
Total net increase in net assets......... 45,071,373 13,667,108
NET ASSETS:
Beginning of year...................... 67,524,854 53,857,746
------------------ ------------
End of year............................ $112,596,227 $67,524,854
================== ============
See accompanying Notes to Financial Statements.
F-24
<PAGE>
USF&G PACHOLDER FUND, INC.
Financial Highlights
(Contained below is per share operating performance data for a share of common
stock outstanding, total return performance, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................. $16.86 $19.23 $18.52 $17.37 $14.49
-------- -------- -------- -------- --------
Net investment income.......................................... 2.19 2.12 2.48 2.37 2.18
Net realized and unrealized gain/(loss) on investments......... (.06) (1.64) 1.42 1.32 2.84
-------- -------- -------- -------- --------
Net increase in net asset value resulting from operations...... 2.13 .48 3.90 3.69 5.02
-------- -------- -------- -------- --------
Distributions to Stockholders from:
Preferred dividends............................................ (.29) (.24) (.38) (.33) --
Common:
Net investment income and short-term gains.................. (1.90) (1.92) (2.09) (2.08) (2.14)
Net realized long-term gains................................ -- -- (.21) -- --
-------- -------- -------- -------- --------
Total distributions to preferred and common stockholders....... (2.19) (2.16) (2.68) (2.41) (2.14)
-------- -------- -------- -------- --------
Capital Change Resulting from the Issuance of Fund Shares:
Common Shares.................................................. (.67) (.69) (.51) -- --
Preferred Shares............................................... (.11) -- -- (.13) --
-------- -------- -------- -------- --------
(.78) (.69) (.51) (.13) --
-------- -------- -------- -------- --------
Net asset value, end of year................................... $16.02 $16.86 $19.23 $18.52 $17.37
======== ======== ======== ======== ========
Market value per share, end of year............................ $17.38 $16.75 $21.25 $19.38 $17.25
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(1)
Based on market value per share................................ 16.04% (11.12%) 22.41% 25.99% 56.78%
Based on net asset value per share............................. 10.68% 0.72% 20.27% 18.78% 36.71%
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses.................................................... .86% 1.64% 1.81% 1.90% 1.37%
Net investment income....................................... 10.45% 10.17% 10.33% 10.32% 12.94%
SUPPLEMENTAL DATA:
Net assets at end of year, net of preferred stock (000)........ $79,596 $ 58,925 $ 44.458 $ 34,001 $ 31,678
Average net assets during year, net of preferred stock (000)... $79,614 $ 59,002 $ 43,275 $ 34,950 $ 30,724
Portfolio turnover rate........................................ 83% 102% 97% 121% 48%
Number of preferred shares outstanding at end of year.......... 1,650,000 8,600 9,400 10,000 --
Asset coverage per share of preferred stock outstanding at end
of year........................................................ $66 $7,852 $5,730 $4,400 --
Liquidation and average market value per share of preferred
stock.......................................................... $20 $1,000 $1,000 $1,000 --
</TABLE>
(1) Total investment return excludes the effects of commissions.
(2) Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
See accompanying Notes to Financial Statements.
F-25
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials
1. SIGNIFICANT ACCOUNTING POLICIES -- USF&G Pacholder Fund, Inc. (the "Fund") is
a closed-end, diversified management investment company, registered under the
Investment Company Act of 1940, as amended. The Fund seeks a high level of
total return through current income and capital appreciation by investing
primarily in high yield, high risk fixed-income securities of domestic
companies. The Fund was incorporated under the laws of the State of Maryland
in August 1988.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
A.SECURITY VALUATIONS -- Portfolio securities listed on a national securities
exchange are valued at the last sale price on that exchange. Securities for
which over-the-counter market quotations are readily available are valued
at the latest bid price. Restricted securities and other securities for
which market quotations are not readily available are valued at fair value
as determined under procedures established by the Board of Directors. There
were Board valued securities of $1,379,027 or 1.2% of net assets as of
December 31, 1995. Short-term obligations with remaining maturities of 60
days or less at the date of purchase are stated at amortized cost which is
equivalent to value.
B.FEDERAL TAXES -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its net investment income and
realized gains on securities transactions. Therefore, no federal tax
provision is required.
C.SECURITIES TRANSACTIONS -- Securities transactions are accounted for on the
date the securities are purchased or sold (trade date). Realized gains and
losses on securities transactions are determined on an identified cost
basis. Interest income is recorded on an accrual basis. The Fund amortizes
discounts or premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. The Fund has elected
to defer the accretion of market discount until disposition of the
security.
D.WHEN, AS AND IF ISSUED SECURITIES -- The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security
depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization or debt restructuring. The commitment for
the purchase of any such security will not be recognized in the portfolio
of the Fund until the Fund's investment advisor determines that issuance of
the security is probable. At that time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value
of the security. No "when, as and if issued" purchase commitments were
included in the portfolio of investments as of December 31, 1995.
E.INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
estimated expenses are accrued daily. Dividends to common stockholders are
paid from net investment income quarterly, and distributions of net
realized capital gains are to be paid at least annually.
F.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.
2. COMMON STOCK -- At December 31, 1995, there were 48,340,000 shares of Common
Stock with a $.01 par value authorized and 4,968,638 shares outstanding.
During 1995, 15,088 shares of common stock were issued in connection with the
Fund's dividend reinvestment plan.
On March 16, 1995, 1,457,942 shares of common stock were issued at $15.65 per
share as part of a rights offering for the common stockholders of the Fund.
Expenses related to the rights offering totaling $793,832 were recorded as a
reduction to the proceeds from the offering. These expenses included $205,351
paid to Winton Associates, Inc., a wholly-owned subsidiary of Pacholder
Associates, Inc. (an affiliate of the Advisor), for financial and advisory
services including advising the Fund regarding the structure of the rights
offering and the materials utilized
F-26
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (continued)
therewith, coordinating the distribution arrangements for the rights offering
and providing information and support services to soliciting broker-dealers.
3. PREFERRED STOCK -- On August 15, 1995, the Fund issued 1,650,000 shares of
6.95% Cumulative Preferred Stock in a private sale at an offering price of $20
per share. Dividends on these shares are payable quarterly at an annual rate of
6.95%. The Fund is required to maintain certain asset coverage, other financial
tests and restrictions as set forth in the Fund's Articles Supplementary
Creating and Fixing the Rights of 6.95% Cumulative Preferred Stock. The
preferred stock is subject to mandatory redemption, on August 1, 2000, at a
redemption price equal to $20 per share, plus accumulated and unpaid dividends.
The preferred stock is also subject to special mandatory redemptions, at a
redemption price of $20 per share, plus accumulated and unpaid dividends and a
premium, as defined, if the Fund is not in compliance with the required
coverages, tests and restrictions. In general, the holders of the preferred
stock and the common stock vote together as a single class, except that the
preferred stockholders, as a separate class, vote to elect two members of the
Board of Directors, and separate votes are required on certain matters that
affect the respective interests of the preferred stock and common stock. The
preferred stock has a liquidation preference of $20 per share, plus accumulated
and unpaid dividends. The offering expenses of the preferred stock were $247,620
which were recorded as a reduction in paid-in capital for common stockholders.
These expenses included $123,750 paid to Winton Associates, Inc. for financial
and advisory services including advising the Fund regarding the structure of the
preferred stock offering and the materials utilized therewith, and the
coordinating of the arrangements of the preferred stock.
On September 14, 1995, the Fund redeemed the 8,050 outstanding shares of the
8.60% Cumulative Preferred Stock at a redemption price of $1,000 per share plus
accumulated and unpaid dividends and a premium. The redemption was made in
accordance with the Fund's Purchase Agreement and Articles Supplementary. The
premium relating to the redemption was $322,804, which was recorded as a
reduction of paid-in capital for common stockholders.
4. PURCHASES AND SALES OF SECURITIES -- Purchases and sales of securities
(excluding commercial paper and repurchase agreements) for the year ended
December 31, 1995 aggregated $118,792,110 and $71,209,431, respectively.
At December 31, 1995, the federal income tax basis of securities was
$109,504,340; unrealized depreciation aggregated $1,197,209, of which
$2,939,965 related to appreciated securities and $4,137,174 related to
depreciated securities.
At December 31, 1995, the Fund had available a capital loss carryforward of
$2,968,020, of which $239,431 expires in 2002 and the remainder expires in
2003, to offset any future net capital gains.
5. TRANSACTIONS WITH INVESTMENT ADVISOR, ADMINISTRATOR AND ACCOUNTING
SERVICES AGENT -- The Fund has an agreement with Pacholder & Company (the
"Advisor") to serve as the Fund's investment advisor. The Fund pays the Advisor
a fee that will increase or decrease based on the total return investment
performance of the Fund for the prior twelve-month period relative to the
percentage change in the CS First Boston High Yield Index.TM The fee ranges from
a maximum of 1.4% to a minimum of .40% (on an annualized basis) of the average
weekly net assets. For the year ended December 31, 1995, the Fund's total return
was 10.68%. For the same period, the total return of the CS First Boston High
Yield IndexTM was 17.38%. The 1995 advisory fee is calculated based on .40% of
average weekly net assets. Certain officers and directors of the Fund are also
executive committee members of the Advisor. At December 31, 1995, accrued
advisory fees were $59,924.
The Fund has an agreement with Investment Company Capital Corp. ("ICC") to
render certain administrative services to the Fund. ICC receives from the
Fund a fee, calculated and paid monthly, at the annual rate of .20% of the
first $50 million of the Fund's average weekly net assets, .15% of such
assets in excess of $50 million, but less than $100 million and .10% of such
assets in excess of $100 million. At December 31, 1995, accrued
administrative fees were $15,483.
F-27
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (concluded)
The Fund has an agreement with Pacholder Associates, Inc. (an affiliate of
the Advisor) to provide accounting services for $1,500 per month.
6. NET ASSETS CONSIST OF:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Common Stock
($.01 par value).............................. $49,686 $34,956
Preferred Stock.................................. 33,000,000 8,600,000
Paid-in capital.................................. 83,539,521 61,847,038
Undistributed net investment income.............. 172,249 42,389
Accumulated net realized loss on investments..... (2,968,020) (239,431)
Unrealized depreciation on investments........... (1,197,209) (2,760,098)
------------ -----------
$112,596,227 $67,524,854
============ ===========
</TABLE>
F-28
<PAGE>
USF&G PACHOLDER FUND, INC.
Independent Auditors' Report
To the Stockholders and Directors
USF&G Pacholder Fund, Inc.
We have audited the accompanying statement of net assets of USF&G Pacholder
Fund, Inc. as of December 31, 1995, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
USF&G Pacholder Fund, Inc. at December 31, 1995, and the results of its
operations, changes in its net assets and financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
February 13, 1996
F-29
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors
Service, Inc. ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
Aaa: Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuations of protective
elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat
larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa: Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or maintenance of other terms of the contract over
any long period of time may be small.
Caa: Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
A-1
<PAGE>
Con(...) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. The parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Those bonds within the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest credit attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Standard & Poor's Corporation
A brief description of the applicable Standard & Poor's Corporation
("S&P") rating symbols and their meanings (as published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
Investment Grade
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
A-2
<PAGE>
A: Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB--" rating.
B: Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB--" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B--"
rating.
CC: The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C: The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC--"
debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating "CI" is reserved for income bonds on which no
interest is being paid.
D: Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
A-3
<PAGE>
Plus(+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative
standing within the major rating categories.
L: The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is federally insured by the
Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.* and interest is adequately collateralized. In
the case of certificates of deposit, the letter "L" indicates
that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured institution
or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of
an executed copy of the escrow agreement or closing
documentation confirming investments and cash flow.
N.R.: Indicates no rating has been reported, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter
of policy.
A-4
<PAGE>
APPENDIX B
INVESTMENT PERFORMANCE OF THE FUND
Historical Performance
The following chart compares the historical total return
investment performance of the Fund for the twelve-month periods indicated
relative to the percentage changes in the CS First Boston High Yield Index(TM)
(the "Index") for the same periods (the "Index Returns"). The total return
investment performance of the Fund means the sum of (i) the change in the net
asset value per share of the Fund's Common Stock during the period, (ii) the
value of the cash distributions per share of Common Stock accumulated to the end
of the period, and (iii) the value of capital gains taxes per share paid or
payable on undistributed realized long-term capital gains accumulated to the end
of the period. For this purpose, the value of distributions per share of
realized capital gains, of dividends per share paid from investment income and
of capital gains taxes paid or payable on undistributed realized long-term
capital gains will be treated as reinvested in shares of the Fund's Common Stock
at the net asset value per share in effect at the close of business on the
record date for the payment of such dividends and distributions and the date on
which provision is made for such taxes, after giving effect to such dividends,
distributions, and taxes. The calculation of the Index Returns reflects cash
distributions having an ex-dividend date occurring within the period made by the
companies whose securities comprise the Index. While neither the Index nor the
net asset value per share of the Fund reflects the reinvestment of dividends and
distributions, management of the Fund believes the Index provides a reasonable
comparison for measuring the Fund's performance. It is important to remember
that past performance is no guarantee of future results.
<TABLE>
<CAPTION>
Total Return (%) for the 12-Month Period Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Fund 10.68 0.72 20.27 18.78 36.71 -0.87 3.72
The Index 17.38 -0.97 18.91 16.66 43.75 -6.38 0.38
</TABLE>
The Index is an index of high yield corporate debt securities,
which at December 31, 1996 included _______ issues with an aggregate par value
of $_______ billion and an aggregate market value of $_______ billion. The
securities comprising the Index are selected primarily on the basis of size,
liquidity and diversification. The factors considered with regard to
diversification are industry, rating, yield and duration. With regard to size,
an issue is added to the Index if it is larger than $75 million at the end of
the issue month. Securities issued as investment grade securities but which
subsequently are reduced to a rating below investment grade may be included in
the Index subject to the same criteria, except that market value is used instead
of par value and a three-month period is required prior to addition. A security
that goes into default after inclusion in the Index whose market value declines
below $20 million for six consecutive months is deleted from the Index.
Likewise, non-defaulted issues whose market value falls below $50 million for
six consecutive months are deleted from the Index. On December 31, 1996, of the
_______ issues comprising the Index, _______ (_______% of market value) were
cash paying issues not in default, ___ issues (_______% of market value) were
zero coupon or deferred interest issues not in default, and ___ issues (_______%
of market value) were in default. The Index is calculated daily and published
monthly by CS First Boston Corporation High Yield Research Group. CS First
Boston Corporation High Yield Research Group may rebalance or reweight the Index
every year to match the industry and rating breakdown of the universe of the
high yield public debt market.
Morningstar Ranking
The Fund has received a four-star rating from Morningstar,
Inc., an independent publisher of financial information and investment company
ratings. The Fund's four-star rating is based
B-1
<PAGE>
upon its performance for the five-year period ended October 30, 1996. The Fund
received a four-star rating for the five-year period ended July 31, 1996 and an
average historical rating of three-stars over the preceding 36 months.
Morningstar ratings involve comparisons of funds with similar investment
objectives and represent a proprietary measure of risk-adjusted performance
relative to three-month U.S. Treasury bill returns. A five-star rating is
characterized as "Highest" and is limited to the top 10% of scores in a rating
group; a four-star rating is characterized as "Above Average" and is limited to
the next 22.5% of scores in the rating group. A three-star rating is
characterized as "Average" or "Neutral" and is limited to the next 35% of scores
in the rating group. The Fund is included among twenty-five closed-end funds in
Morningstar's "Corporate Bond High-Yield" objective category. Morningstar
ratings may change every four weeks and do not take into account brokerage
commissions, sales loads or other charges that may be payable in connection with
the purchase of shares. Morningstar ratings are based on historical performance
and are not predictive of future results.
B-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE ADVISER OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER IN SUCH JURISDICTION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Fund Expenses................................................... 3
Prospectus Summary......................................................... 4
Financial Highlights....................................................... 9
Information Regarding Senior Securities.................................... 10
The Fund................................................................... 10
Capitalization at January , 1997.......................................... 10
The Offer.................................................................. 11
Use of Proceeds............................................................ 17
Risks of Leverage.......................................................... 18
Market Price and Net Asset Value........................................... 19
Investment Objective and Policies.......................................... 20
Management of the Fund..................................................... 25
Dividends and Distributions................................................ 27
Dividend Reinvestment Plan................................................. 28
Taxation................................................................... 28
Share Repurchases; Conversion to Open-End Company.......................... 29
Description of Capital Stock............................................... 31
Distribution Arrangements.................................................. 34
Custodian and Transfer Agent............................................... 35
Additional Information..................................................... 35
Table of Contents of Statement of Additional Information...................
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
USF&G PACHOLDER FUND, INC.
1,661,850 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES OF COMMON STOCK
----------------
PROSPECTUS
----------------
JANUARY , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART C--OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS:
Included in Parts A and B:
Statement of Net Assets at June 30, 1996 (Unaudited)
Statement of Operations For the Six Months Ended June 30, 1996
(Unaudited)
Statements of Changes in Net Assets For the Six Months Ended June 30,
1996 (Unaudited) and For the Year Ended December 31, 1995
Financial Highlights (Unaudited as to June 30, 1996)
Notes to Unaudited Financial Statements
Statement of Net Assets at December 31, 1995
Statement of Operations For the Year Ended December 31, 1995
Statements of Changes in Net Assets For the Years Ended December 31,
1995 and 1994
Financial Highlights
Notes to Financial Statements
Independent Auditors' Report
Included in Part C:
Independent Auditors' Consent
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing do not
exist.
2. EXHIBITS:
a. (i)
Articles of Incorporation. Incorporated herein by reference to Amendment
No. 5 to the Registration Statement on Form N-2 (File No. 811-5639) (the
"Registration Statement") filed on November 16, 1988.
(ii)Articles of Amendment. Incorporated herein by reference to Amendment No.
6 to the Registration Statement filed on March 19, 1992.
(iii)
Articles Supplementary Creating and Fixing the Rights of 8.60%
Cumulative Preferred Stock. Incorporated herein by reference to
Amendment No. 7 to the Registration Statement filed on October 21, 1992.
(iv)Articles Supplementary Creating and Fixing the Rights of 6.95%
Cumulative Preferred Stock.*
b. Amended and Restated By-Laws.*
c. Not applicable.
d. (i)
Specimen certificate for Common Stock. Incorporated herein by reference
to Amendment No. 3 to the Registration Statement filed on November 10,
1988.
(ii)Specimen certificate for 8.60% Cumulative Preferred Stock. Incorporated
herein by reference to Amendment No. 7 to the Registration Statement
filed on October 21, 1992.
(iii)
Specimen certificate for 6.95% Cumulative Preferred Stock.*
(iv)Subscription Certificate for subscribing for shares of Common Stock
pursuant to the Offer.*
(v)Notice of Guaranteed Delivery for subscribing for shares of Common Stock
pursuant to the Offer.*
- --------
* To be filed by amendment.
C-1
<PAGE>
e.
Amended Dividend Reinvestment Plan.*
f. Not applicable.
g. Investment Advisory Agreement dated November 16, 1988 is incorporated
herein by reference to Amendment No. 3 to the Registration Statement
filed on November 10, 1988. Amendment No. 1 to the Investment Advisory
Agreement is incorporated herein by reference to Amendment No. 1 to the
Registration Statement filed on January 20, 1995.
h. (i)
Dealer Manager Agreement.*
(ii)Soliciting Dealer Agreement.*
i. Not applicable.
j. Custody Agreement dated May 1, 1996.*
k. (i)
Transfer Agency and Service Agreement dated September 23, 1996.*
(ii)Administration Agreement dated June 5, 1996.*
(iii)
Accounting Services Agreement is incorporated herein by reference to
Amendment No. 7 to the Registration Statement filed on October 21, 1992.
Amended fee schedule to the Accounting Services Agreement.*
(iv)Agreement Regarding Use of Trademark. Incorporated herein by reference
to Amendment No. 3 to the Registration Statement filed on November 10,
1988.
l. Opinion and Consent of Piper & Marbury L.L.P.*
m. Not applicable.
n. Consent of Deloitte & Touche LLP.
o. Not applicable.
p. Subscription Agreement. Incorporated herein by reference to Amendment
No. 3 to the Registration Statement filed on November 10, 1988.
q. Not applicable.
r. Not applicable.
s. Power of Attorney.
- --------
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit h(i).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the Offer, all of which are being borne by
the Registrant, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees........................... $11,325
American Stock Exchange Listing Fees.............................. *
Blue Sky Filing Fees and Expenses................................. *
Subscription Agent Fee............................................ *
Information Agent fee and Expenses................................ *
Dealer Manager Expenses........................................... *
Accounting Expenses............................................... *
Legal Fees........................................................ *
Printing and Engraving Expenses................................... *
Miscellaneous Expenses............................................ *
-------
Total........................................................... *
=======
</TABLE>
- --------
* To be completed by amendment.
C-2
<PAGE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below are the number of record holders as of November 30, 1996, of
each class of securities of the Registrant:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Stock, par value $.01 per share............. 449
6.95% Cumulative Preferred Stock, par value $.01
per share......................................... 2
</TABLE>
ITEM 29. INDEMNIFICATION
Article NINTH, Section 5 of the Registrant's Articles of Incorporation
provides as follows:
"(5) The Corporation shall indemnify (a) its directors to the full extent
provided by the general laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures provided by
such laws; (b) its officers to the same extent it shall indemnify its
directors; and (c) its officers who are not directors to such further
extent as shall be authorized by the Board of Directors and be consistent
with law; provided, however, that nothing herein shall be construed to
protect any director or officer of the Corporation against any liability to
which such director or officer would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his or her office. The foregoing
shall not limit the authority of the Corporation to indemnify other
employees and agents consistent with law."
Officers and directors of the Registrant are covered by an insurance policy
against liabilities and expenses of claims of wrongful acts arising out of
their position with the Registrant, except for matters which involve willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the Registrant
against the cost of indemnification payments to officers and directors under
certain circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions described
in this Item 29, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Pacholder & Company is engaged primarily in the business of providing
investment advisory services. A description of the general partners of
Pacholder & Company and other required information is included in the Form ADV
and schedules thereto of Pacholder & Company on file with the Securities and
Exchange Commission (File No. 801-32589) and is incorporated herein by
reference.
C-3
<PAGE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder
at its principal office located at Bank One Towers, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236. Certain records, including records relating
to the Registrant's shareholders, may be maintained pursuant to Rule 31a-3 at
the offices of the Registrant's transfer agent and registrar, Fifth Third Bank
Corporate Trust Services, located at 38 Fountain Square Plaza MD-1090D2,
Cincinnati, Ohio 45263. Certain records relating to the physical possession of
the Registrant's securities may be maintained at the offices of the
Registrant's custodian, Star Bank, N.A., located at 425 Walnut Street,
Cincinnati, Ohio 45202.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend offering of shares until the
prospectus is amended if (i) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent
from its net asset value as of the effective date of this Registration
Statement or (ii) the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to 497(h) under the
Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. Not applicable.
C-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF CINCINNATI, AND STATE OF OHIO, ON
THE 4TH DAY OF DECEMBER, 1996.
USF&G Pacholder Fund, Inc.
/s/ Anthony L. Longi, Jr.
By: _________________________________
ANTHONY L. LONGI, JR.,
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
ASHER O. PACHOLDER* Chairman of the
Board (principal
executive officer)
WILLIAM J. MORGAN* Executive Vice
President,
Treasurer
(principal
financial and
accounting officer)
and Director
JAMES P. SHANAHAN, JR.* Secretary and
Director
DANIEL A. GRANT* Director
JOHN C. SWEENEY* Director
JOHN F. WILLIAMSON*
Director
GEORGE D. WOODARD*
Director
/s/ Anthony L. Longi, Jr. December 4, 1996
*By: ________________________________
ANTHONY L. LONGI, JR.
ATTORNEY-IN-FACT
Original powers of attorney authorizing Anthony L. Longi, Jr., James P.
Shanahan, Jr., and Alan C. Porter, and each of them, to execute this
Registration Statement, and amendments hereto, for each of the officers and
directors of Registrant on whose behalf this Registration Statement is filed,
have been executed and filed with the Securities and Exchange Commission.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
LETTER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
a.(iv) Articles Supplementary Creating and Fixing the Rights of
6.95% Cumulative Preferred Stock*......................
b. Amended and Restated By-Laws*...........................
d.(iii) Specimen certificate for 6.95% Cumulative Preferred
Stock*.................................................
d.(iv) Subscription Certificate for subscribing for shares of
Common Stock pursuant to the Offer*....................
d.(v) Notice of Guaranteed Delivery for subscribing for shares
of Common Stock*.......................................
e. Amended Dividend Reinvestment Plan*.....................
h.(i) Dealer Manager Agreement*...............................
h.(ii) Soliciting Dealer Agreement*............................
j. Custody Agreement*......................................
k.(i) Transfer Agency and Service Agreement*..................
k.(ii) Administration Agreement*...............................
k.(iii) Amended Fee Schedule to Accounting Services Agreement*..
l. Opinion and Consent of Piper & Marbury L.L.P.*..........
n. Consent of Deloitte & Touche LLP........................
s. Power of Attorney.......................................
</TABLE>
- --------
* To be filed by amendment
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form N-2 under the Securities Act of 1933 and the Investment Company Act of 1940
(Amendment No. 13: 811-5639) of our report dated February 13, 1996, relating to
the USF&G Pacholder Fund, Inc., incorporated by reference in the Statement of
Additional Information and to the reference to us under the caption "Experts",
in such Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dayton, Ohio
December 3, 1996
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of USF&G Pacholder Fund, Inc. do hereby severally constitute and
appoint Anthony L. Longi, Jr., James P. Shanahan, Jr., and Alan C. Porter, or
any of them, the true and lawful agents and attorneys-in-fact of the undersigned
with respect to all matters arising in connection with the Registration
Statement on Form N-2 relating to the registration under the Securities Act of
1933, as amended, of shares of Common Stock, par value $.01 per share, and
Rights to Subscribe for such shares, of USF&G Pacholder Fund, Inc., with full
power and authority to execute said Registration Statement, and any and all
amendments (including post-effective amendments) thereto, for and on behalf of
the undersigned, in our names and in the capacities indicated below, and to file
the same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned hereby
give to said agents and attorneys-in-fact full power and authority to act in the
premises, including, but not limited to, the power to appoint a substitute or
substitutes to act hereunder with the same power and authority as said agents
and attorneys-in-fact would have if personally acting. The undersigned hereby
ratify and confirm all that said agents and attorneys-in-fact, or any
substitute or substitutes, may do by virtue hereof.
WITNESS the due execution hereof on the date and in the capacities set
forth below.
Signature Title Date
- --------- ----- ----
/s/ Asher O. Pacholder Chairman of the Board December 3, 1996
- ------------------------ (principal executive officer)
Asher O. Pacholder
/s/ William J. Morgan Executive Vice President, December 3, 1996
- ------------------------ Treasurer (principal financial
William J. Morgan and accounting officer) and
Director
/s/ James P. Shanahan, Jr. Secretary and Director December 3, 1996
- ------------------------
James P. Shanahan, Jr.
/s/ Daniel A. Grant Director December 3, 1996
- ------------------------
Daniel A. Grant
/s/ John C. Sweeney Director December 3, 1996
- ------------------------
John C. Sweeney
/s/ John F. Williamson Director December 3, 1996
- ------------------------
John F. Williamson
-1-
<PAGE>
/s/ George D. Woodard Director December 3, 1996
- -------------------------
George D. Woodard
/s/ Anthony L. Longi, Jr. President December 3, 1996
- -------------------------
Anthony L. Longi, Jr.
-2-
