<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
DEAR STOCKHOLDERS:
For the second quarter, USF&G Pacholder Fund, Inc. again outpaced the market
by posting a total return of 2.44%, compared to the CS First Boston High Yield
Index(TM) (the "Index") total return of 1.58%. On a year-to-date basis through
the second quarter, the Fund reported a total return of 6.91%, which is 3.14%
above the Index's total return of 3.77%. The Fund continues to believe that
maintaining a diversified core portfolio is the proper strategy in this market
environment. At the end of the quarter, the Fund held securities of 109 compa-
nies in its portfolio, 22.6% rated BB or higher, 68.9% rated B, and 8.5%
unrated or other rated securities. The Fund's higher weighted average coupon of
11.29%, compared to the Index's 10.55%, contributed to the portfolio's positive
performance during the recent period of rising interest rates.
Interest rates continued to climb during the second quarter ended June 30,
1996, as a result of concern over a stronger than anticipated domestic economy
and the market's expectation that the Federal Reserve will raise short-term in-
terest rates in order to keep inflation in check. The yield on the 10-year U.S.
Treasury Note rose 39 basis points (0.39%) during the quarter to close at a
6.72% yield resulting in a -0.10% total return for the second quarter and a -
4.35% total return for the six months. The total return of the high-yield bond
market exceeded the Treasury return in the second quarter as it did in the
first, primarily due to higher relative coupon income. The Index's spread rela-
tive to the comparable U.S. Treasury remained constant during the quarter at
approximately 418 basis points (4.18%).
The performance of the Fund compared to the Index is illustrated in the fol-
lowing table.
[PERFORMANCE COMPARISON* CHART APPEARS HERE]
We thank you for your support of the Fund and look forward to continuing to
serve your investment needs in the future.
Sincerely,
/s/ Anthony L. Longi, Jr.
Anthony L. Longi, Jr.
President
July 19, 1996
<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>
<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%, 3/15/06/2/ 1,000 1,007,500 0.9
National Fiberstock, Sr Nt,
11.625%, 6/15/02/2/ 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>
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>
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>
<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>
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>
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>
<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>
4
<PAGE>
USF&G PACHOLDER FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED)
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>
<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 / 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.
5
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS STATEMENTS OF CHANGES IN NET ASSETS
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.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER
(UNAUDITED) 31, 1996
- --------------------------------------------------------------------------------
<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 expenses).................. -- 22,022,960
------------ ------------
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.
6
<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 YEAR ENDED DECEMBER 31,
JUNE 30, 1996 ----------------------------------------------
(UNAUDITED) 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................... 46.38% 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.
7
<PAGE>
USF&G PACHOLDER FUND, INC.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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- --------------------------------------------------------------------------------
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 re-turn
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 ex-
change 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 pri-marily 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 liq-uid 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 esti-
mated expenses are accrued daily. Dividends to common stockholders are
paid from net investment income quarterly, and distributions of net
realized cap-ital 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 esti-
mates and assumptions that affect the reported amounts of assets and
liabil-ities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses dur-ing 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. Dur-
ing 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 Asso-
ciates, Inc. (an affiliate of the Fund's Investment Advisor), for 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
fi-nancial tests and restrictions as set forth in the Fund's Articles
Supplemen-tary 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 re-demption price equal to $20 per share, plus accumulated and
8
<PAGE>
USF&G PACHOLDER FUND, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
unpaid dividends. The preferred stock is also subject to special mandatory
redemptions at a redemption price of $20 per share, plus accumulated and un-
paid 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 advis-
ing 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, whjch was recorded as a
reduction of paid-in capital for common stockholders.
4. PURCHASES AND SALES OF SECURITIES -- Purchases and sales of securities (ex-
cluding 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 depre-
ciated 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 perfor-
mance of the Fund for the prior twelve-month period relative to the percent-
age 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 Bos-
ton 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 admin-
istrative services agreement changing from Investment Company Capital Corp.
to Kenwood Administrative Management, L.P. ("KAM") (an affiliate of the Advi-
sor) 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 aver-
age 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. re-
ceives 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 $100 million.
6. NET ASSETS CONSIST OF:
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31,
(UNAUDITED) 1995
------------ ------------
<S> <C> <C>
Common Stock
($.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>
9
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
The Dividend Reinvestment Plan offers you an automatic way to reinvest your
dividends and capital gains distributions in shares of the Fund. For an
enrollment form and detailed information about the Plan, please contact State
Street Bank and Trust Co., P.O. Box 366, MA 02101, (800) 426-5523.
-------------
This report is sent to the shareholders of USF&G Pacholder Fund, Inc. for their
information. It is not a prospectus, offering circular or other representation
intended for use in connection with the purchase or sale of shares of the Fund
or any securities mentioned in this report.
- --------------------------------------------------------------------------------
10
<PAGE>
USF&G
PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Asher O. Pacholder John C. Sweeney
Chairman Director
Anthony L. Longi, Jr. John F. Williamson
President Director
William J. Morgan George D. Woodard
Treasurer and Director Directorr
James P. Shanahan, Jr. James E. Gibson
Director and Secretary Senior Vice President
Daniel A. Grant Mark H. Prenger
Director Assistant Treasurer
INVESTMENT OBJECTIVE
A closed-end fund seeking 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.
EXECUTIVE OFFICES
USF&G Pacholder Fund, Inc.
Bank One Towers
8044 Montgomery Road
Suite 382
Cincinnati, Ohio 45236
INVESTMENT ADVISOR
Pacholder & Company
ADMINISTRATOR
Kenwood Administrative Management, L.P.
CUSTODIAN
Star Bank, N.A.
TRANSFER AGENT
State Street Bank & Trust Company
LEGAL COUNSEL
Piper & Marbury L.L.P.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
ACCOUNTING SERVICES AGENT
Pacholder Associates, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
USF&G
PACHOLDER FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1996
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- --------------------------------------------------------------------------------
