<PAGE>
USF&G
PACHOLDER FUND, INC.
QUARTERLY REPORT
MARCH 31, 1996
USF&G
PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Asher O. Pacholder John C. Sweeney
Chairman Director
James P. Shanahan, Jr. John F. Williamson
Director and Secretary Director
William J. Morgan Anthony L. Longi, Jr.
Executive Vice President, President and Assistant Treasurer
Treasurer and Director
Daniel A. Grant James E. Gibson
Director Senior Vice President
Mark H. Prenger
George D. Woodard Assistant Treasurer
Director
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
Investment Company Capital Corp.
CUSTODIAN
The Provident Bank
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.
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
DEAR STOCKHOLDERS:
- --------------------------------------------------------------------------------
During the first quarter of 1996, interest rates reversed their downward
trend which began at the end of 1994. Market expectations for additional rate
cuts by the Federal Reserve Board were not met as economic reports released
during the quarter indicated that the U.S. economy was not as weak as most ex-
pected. The yield on the 10-year U.S. Treasury Note rose 75 basis points
(0.75%) from 5.57% to 6.32% resulting in nearly a 5.85% drop in principal and a
negative total return of more than -4.25%. However, the rise in the interest
rates did not have as significant an effect on the high-yield bond market. The
CS First Boston High Yield Index(TM) (the "Index") posted a total return of
2.16% for the first quarter of 1996 as a result of both higher interest income
relative to U.S. Treasury securities and spread tightening. The Index's inter-
est rate spread over comparable U.S. Treasury securities tightened by approxi-
mately 66 basis points (0.66%), from 484 basis points on December 29, 1995 to
418 basis points on March 29, 1996. Improved investor confidence and signifi-
cant demand for high-yield securities have helped fuel the high-yield market's
positive performance in the most recent period.
USF&G Pacholder Fund, Inc. posted a total return of 4.37% for the first quar-
ter compared to the Index return of 2.16%, exceeding it by 2.21%. This strong
performance is partially the result of the portfolio repositioning which took
place in the latter part of 1995. The Fund implemented a strategy of increasing
diversification and upgrading the overall credit quality of its core portfolio.
At the end of the quarter, the Fund held securities of 104 companies in its
portfolio, 23.8% of which are BB-rated or higher. Certain sectors in which the
Fund had investments, most notably the steel sector, recovered dramatically in
the first quarter, helping boost the Fund's performance. The Fund's gaming in-
vestments also performed well in the first quarter. In addition, a number of
our more aggressive, total-return investments have begun to pick up momentum.
For example, the investment in San Jacinto Holdings was converted from an 8%
Note to a new 12% Note, and a contingent subordinated interest claim was con-
verted into the new 12% Note at 100% of its claim. We believe the portfolio is
well-positioned to continue its solid performance as we move forward in 1996.
The performance of the Fund as compared to the CS First Boston High Yield
Index(TM) is illustrated in the following chart:
_______________________________________________________________________________
Performance Comparisons*
(For the periods ended March 31, 1996)
_______________________________________________________________________________
<TABLE>
<CAPTION>
Since
Three Inception**
Months (Annualized)
<S> <C> <C>
USF&G Pacholder Fund,Inc. 4.37% 11.92%
- --------------------------------------------------------------------------------
CS First Boston High Yield Index(TM) 2.16% 11.62%
- --------------------------------------------------------------------------------
</TABLE>
* The CS First Boston High Yield Index(TM) is an unmanaged indes that is
widely used as a measure of high yield market performance. These figures
assume reinvestment of interest, dividends and capital gains distributions.
** Inception date__November 11, 1988.
On March 13, 1996, the Fund's Board of Directors declared a $.425 regular
quarterly dividend to common stockholders. As discussed in the 1995 Annual Re-
port, due to the significant decline in interest rates available in the high-
yield market over the past several years, the Fund's current income level is no
longer sufficient to sustain a higher quarterly dividend. The new regular dis-
tribution rate results in an attractive 10.5% dividend yield based on the April
8, 1996 closing price of $16.125.
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
April 11, 1996
1
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
MARCH 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- 96.1%
AEROSPACE & DEFENSE -- 1.8%
BE Aerospace, Sr Sub Nt,
9.875%, 2/1/06/2/ $ 500 $ 500,000 0.4%
Coltec Industries Inc., Sr Nt,
9.75%, 11/1/99 500 525,000 0.5
Howmet Inc., Sr Sub Nt,
10.0%, 12/1/03/2/ 500 521,250 0.5
Sabreliner Corp., Sr Nt,
12.5%, 4/15/03 500 472,500 0.4
------------ ---
2,018,750 1.8
AUTO PARTS & EQUIPMENT -- 1.6%
APS Inc., Sr Sub Nt,
11.875%, 1/15/06/2/ 500 511,250 0.4
JPS Automotive Products Corp., Sr Nt, 11.125%,
6/15/01 1,350 1,329,750 1.2
------------ ---
1,841,000 1.6
BEVERAGE & TOBACCO -- 0.9%
Cott Corp., Sr Nt,
9.375%, 7/1/05 1,000 1,000,000 0.9
------------ ---
BROADCAST RADIO & TV -- 3.7%
Argyle Television, Sr Sub Nt,
9.75%, 11/1/05 750 723,750 0.6
Granite Broadcasting Corp., Sr Sub Nt, 10.375%,
5/15/05 1,100 1,100,000 1.0
Sinclair Broadcast Group, Sr Sub Nt, 10.0%,
9/30/05 1,500 1,477,500 1.3
Young Broadcasting, Sr Sub Nt,
9.0%, 1/15/06/2/ 1,000 940,000 0.8
------------ ---
4,241,250 3.7
BUILDING -- 2.6%
Harrow Industries Inc., Sr Sub Deb, 12.375%,
4/15/02 2,000 1,910,000 1.7
Triangle Pacific Corp., Sr Nt,
10.5%, 8/1/03 1,000 1,050,000 0.9
------------ ---
2,960,000 2.6
BUSINESS SERVICES &
EQUIPMENT -- 1.8%
Day International Group Inc., Sr Sub Nt,
11.125%, 6/1/05 1,000 1,010,000 0.9
Knoll Inc., Sr Sub Nt,
10.875%, 3/15/06/2/ 1,000 1,006,250 0.9
------------ ---
2,016,250 1.8
</TABLE>
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CABLE TELEVISION -- 5.3%
CAI Wireless Systems Inc., Sr Nt, 12.25%, 9/15/02 $ 1,000 $ 1,057,500 0.9%
Cablevision Systems Corp.,
Sr Sub Nt, 9.25%, 11/1/05 1,000 995,000 0.9
Comcast Corporation, Sr Sub,
9.125%, 10/15/06 1,500 1,492,500 1.3
Fundy Cable Ltd., Sr Nt,
11.0%, 11/15/05 1,000 1,005,000 0.9
Lenfest Communications, Sr Nt, 8.375%, 11/1/05 500 480,000 0.4
Rifkin Acq. Partners LP, Sr Sub Nt, 11.125%,
1/15/06/2/ 1,000 1,000,000 0.9
------------ ---
6,030,000 5.3
CHEMICALS/PLASTICS -- 6.2%
Applied Extrusion Technologies Inc., Sr Unsecd
Nt, 11.5%, 4/1/02 1,500 1,560,000 1.4
Berry Plastics Corp., Sr Sub Nt,
12.25%, 4/15/04 1,400 1,519,000 1.3
Buckeye Cellulose Corp., Sr Sub Nt, 8.5%,
12/15/05 500 487,500 0.4
Envirodyne Industries, Sr Nt,
12.0%, 6/15/00 1,000 980,000 0.8
Plastic Specialties and Technologies, Inc., Sr
Nt, 11.25%, 12/1/03 1,250 1,200,000 1.1
Portola Packaging Inc., Sr Nt,
10.75%, 10/1/05 1,250 1,300,000 1.2
------------ ---
7,046,500 6.2
CLOTHING & TEXTILE -- 1.9%
Ithaca Industries, Sr Sub Nt,
11.125%, 12/15/02/1/,/3/ 300 126,000 0.1
Synthetic Industries Inc., Deb,
12.75%, 12/1/02 1,500 1,575,000 1.4
U.S. Leather Inc., Sr Nt,
10.25%, 7/31/03 500 420,000 0.4
------------ ---
2,121,000 1.9
CONGLOMERATE -- 2.6%
Interlake Corp., Sr Sub Deb,
12.125%, 3/1/02 1,500 1,383,750 1.3
Siebe Inc., Sr Sec Nt,
11.22%, 1/29/01/4/ 479 479,027 0.4
Valcor Inc., Sr Nt, 9.625%, 11/1/03 1,150 1,069,500 0.9
------------ ---
2,932,277 2.6
</TABLE>
2
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONTINUED)
MARCH 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CONTAINERS -- 2.6%
Calmar Inc., Deb, 11.5%, 8/1/05/2/ $ 1,500 $ 1,496,250 1.3%
Stone Container Corp., 1st Mtg Bond, 10.75%,
10/1/02 1,500 1,485,000 1.3
------------ ---
2,981,250 2.6
COSMETICS/TOILETRIES -- 1.7%
Chattem Inc., Sr Sub Nt,
12.75%, 6/15/04 1,000 972,500 0.8
JB Williams Holdings Inc., Sr Nt,
12.0%, 3/1/04 1,000 1,000,000 0.9
------------ ---
1,972,500 1.7
ECOLOGICAL SERVICES &
EQUIPMENT -- 1.2%
ICF Kaiser International Inc.:
Sr Sub Nt w/warrant,
12.0%, 12/31/03 1,500 1,417,500 1.2
------------ ---
ELECTRONICS/ELECTRIC -- 1.3%
Communications & Power Industries, Sr Sub Nt,
12.0%, 8/1/05/2/ 1,000 1,030,000 0.9
IMO Industries Inc., Sr Sub Deb,
12.25%, 8/15/97 500 501,250 0.4
------------ ---
1,531,250 1.3
EQUIPMENT LEASING -- 3.2%
Norcal Waste, Sr Nt,
12.5%, 11/15/05/2/ 750 776,250 0.7
San Jacinto Holdings, Sr Sub Nt w/Sub Int,
12.0%, 12/31/02 2,823 2,229,854 1.9
Vis Capital Corp., Sr Sub Deb,
12.375%, 7/1/98 633 633,000 0.6
------------ ---
3,639,104 3.2
FARMING & AGRICULTURE -- 1.8%
Darling International Inc., Sr Sub Nt, 11.0%,
7/15/00 2,000 2,000,000 1.8
------------ ---
FINANCIAL INTERMEDIARIES -- 3.2%
GNF Corp. (Bally Grand), 1st Mtg, 10.625%,
4/1/03 1,500 1,500,000 1.3
Trump Plaza Funding, 1st Mtg. Nt, 10.875%,
6/15/01 1,000 1,113,750 1.0
Trump Taj Mahal Funding Inc., Deb, Series A,
11.35%, 11/15/99 1,030 1,075,958 0.9
------------ ---
3,689,708 3.2
</TABLE>
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOOD/DRUG RETAILERS -- 4.5%
Bruno's Inc., Sr Sub Nt, 10.5%, 8/1/05 $ 1,500 $ 1,443,750 1.2%
Jitney Jungle Stores, Sr Nt,
12.0%, 3/1/06 900 893,250 0.8
P&C Food Markets Inc., Deb,
11.5%, 10/15/01 1,000 1,005,000 0.9
Ralph's Grocery Co., Sr Nt,
10.45%, 6/15/04 750 718,125 0.6
Smitty's Super Value Inc., Sr Sub Nt, 12.75%,
6/15/04 1,000 1,100,000 1.0
------------ ---
5,160,125 4.5
FOOD SERVICE -- 5.2%
Beatrice Foods Inc., Sr Sub Nt,
12.0%, 12/1/01/1/,/3/ 2,500 700,000 0.6
Carrols Corp., Sr Nt, 11.5%, 8/15/03 1,500 1,545,000 1.4
Coinmach Corp., Sr Nt,
11.75%, 11/15/05/2/ 1,055 1,062,913 0.9
Doane Products Co., Sr Nt,
10.625%, 3/1/06 500 507,500 0.4
Flagstar Corp., Sr. Nt,
10.875%, 12/1/02 875 796,250 0.7
Fleming Companies Inc., Sr Nt, 10.625%, 12/15/01 1,500 1,312,500 1.2
------------ ---
5,924,163 5.2
FOREST PRODUCTS -- 4.6%
APP International Finance, Gtd Sec Nt,
11.75%,10/1/05 1,250 1,200,000 1.1
Data Documents, Sr Sec Nt,
13.5%, 7/15/02 1,500 1,650,000 1.5
Repap Wisconsin Inc., Sr Nt,
9.25%, 2/1/02 1,000 957,500 0.8
United Stationer Supplies, Sr Nt, 12.75%, 5/1/05 1,250 1,409,375 1.2
------------ ---
5,216,875 4.6
HEALTH CARE -- 3.0%
Grancare Inc., Sr Sub Nt,
9.375%, 9/15/05 1,250 1,225,000 1.1
Ornda Healthcorp, Sr Sub Nt,
11.375%, 8/15/04 1,000 1,115,000 1.0
Regency Health Services, Sr Sub, 9.875%, 10/15/02 1,000 1,007,500 0.9
------------ ---
3,347,500 3.0
</TABLE>
3
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONTINUED)
MARCH 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
HOME FURNISHINGS -- 1.1%
Congoleum Corp., Sr Nt, 9.0%, 2/1/01 $ 1,250 $ 1,206,250 1.1%
------------ ---
HOTELS & CASINOS -- 2.3%
Courtyard by Marriott, Sr Nt,
10.75%, 2/1/08/2/ 500 490,000 0.4
HMH Properties Inc., Sr Nt,
9.5%, 5/15/05 1,000 972,500 0.8
Host Marriott Travel Plaza, Sr Nt,
9.5%, 5/15/05 1,250 1,209,375 1.1
------------ ---
2,671,875 2.3
INDUSTRIAL EQUIPMENT -- 2.0%
Agco Corp., Sr Sub Nt, 8.5%, 3/15/062 500 505,000 0.4
Specialty Equipment Inc., Sr Sub Deb, 11.375%,
12/1/03 1,750 1,820,000 1.6
------------ ---
2,325,000 2.0
INSURANCE -- 0.8%
Riverside Group Inc., Sub Nt,
13.0%, 9/30/99/4/ 1,000 900,000 0.8
------------ ---
LEISURE -- 7.0%
Alliance Entertainment, Sr Sub Nt,
11.25%, 7/15/05 1,000 1,000,000 0.9
Grand Casinos Inc., 1st Mtg,
10.125%, 12/1/03 1,000 1,055,000 0.9
Hines Horticulture, Sr Sub Nt,
11.75%, 10/15/05 750 791,250 0.7
Resorts International, Mtg Bond, 11.0%, 9/13/03 2,000 1,985,000 1.7
Showboat Marina, 1st Mtg,
13.5%, 3/15/03/2/ 500 510,000 0.5
The Selmer Company, Sr Sub Nt,
11.0%, 5/15/05 1,500 1,556,250 1.4
United Artists, Sr Nt, 11.5%, 5/1/02 1,000 1,067,500 0.9
------------ ---
7,965,000 7.0
NON-FERROUS METALS/
MINERALS -- 4.2%
Easco Corp., Sr Nt, 10.0%, 3/15/01 1,000 1,000,000 0.9
Great Lakes Carbon Corp., Sr Nt,
10.0%, 1/1/06 500 515,000 0.5
Magma Copper Co., Sr Sub Nt,
12.0%, 12/15/01 1,600 1,736,000 1.5
Renco Metals, Inc., Sr Nt,
12.0%, 7/15/00 1,400 1,512,000 1.3
------------ ---
4,763,000 4.2
</TABLE>
<TABLE>
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OIL & GAS -- 4.0%
Giant Industries Inc., Sr Sub Nt,
9.75%, 11/15/03 $ 1,000 $ 992,500 0.9%
KCS Energy Inc., Sr Nt,
11.0%, 1/15/03/2/ 780 793,650 0.7
Petro PSC Properties, Sr Nt,
12.5%, 6/1/02 1,500 1,432,500 1.2
Tesoro Petroleum Corp., Sub Deb,
13.0%, 12/1/00 500 507,500 0.4
United Refining Corp., Sr Nt w/warrant, 11.5%,
12/31/03/2/ 1,000 900,000 0.8
------------ ---
4,626,150 4.0
RETAILERS -- 0.9%
Herff Jones Inc., Sr Sub Nt,
11.0%, 8/15/05 1,000 1,060,000 0.9
------------ ---
STEEL -- 3.1%
Algoma Steel, 1st Mtg. Bond,
12.375%, 7/15/05 1,000 982,500 0.8
Gulf States Steel, 1st Mtg,
13.5%, 4/15/03 1,000 910,000 0.8
Haynes International Inc., Sr Sec Nt, Series B,
11.25%, 6/15/98 850 850,000 0.7
NS Group Inc., Sr Nt, 13.5%, 7/15/03 1,000 910,000 0.8
------------ ---
3,652,500 3.1
SURFACE TRANSPORT -- 3.9%
Moran Transport Co., 1st Mtg Nt, 11.75%, 7/15/04 2,000 1,945,000 1.7
Trism Inc., Sr Sub Nt,
10.75%, 12/15/00 1,250 1,193,750 1.1
Teekay Shipping, Sr Sec Nt,
9.625%, 7/15/03 1,250 1,281,250 1.1
------------ ---
4,420,000 3.9
TELECOMMUNICATIONS/CELLULAR COMMUNICATION -- 4.7%
A+Network Inc., Sr Sub,
11.875%, 11/1/05 750 765,000 0.7
Adams Outdoor Advertising, Sr Nt, 10.75%,
3/15/06/2/ 1,000 1,017,500 0.9
Brooks Fiber Properties, Sr Dis Nt, 0.0%,
3/1/06/2/ 500 290,000 0.2
Metrocall Inc., Sr Sub Nt,
10.375%, 10/1/07 750 742,500 0.7
Mobilemedia Corp., Sr Sub Nt, 9.375%, 11/1/07 1,000 978,750 0.8
Paging Network Inc., Sr Sub Nt, 10.125%, 8/1/07 1,500 1,567,500 1.4
------------ ---
5,361,250 4.7
</TABLE>
4
<PAGE>
USF&G PACHOLDER FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED)
MARCH 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/ PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITIES -- 1.4%
The Coastal Corporation, Deb,
11.75%, 6/15/06 $ 1,570 $ 1,640,650 1.4%
------------ ----
TOTAL CORPORATE DEBT SECURITIES
(amortized cost $108,923,373) 109,678,677 96.1
------------ ----
EQUITY INVESTMENTS -- 1.0%
Cablevision Systems Corp.,
Series L Pfd, 11.125%, 4/1/08/1/,/2/ 10,142 1,011,665 0.9
Data Documents, Warrants,
7/15/02/1/ 2,000 160,000 0.1
Sabreliner Corp., Warrants, 4/15/03/1/ 500 2,500 --
San Jacinto Holdings, Common Stock/1/ 2,246 8,984 --
Terex Corp., Stock Appreciation Rights, 7/1/97/1/ 4,905 -- --
U.S. Trails, Warrants,
6/30/99/1/ 33,081 -- --
------------ ----
TOTAL EQUITY INVESTMENTS
(cost $1,002,500) 1,183,149 1.0
COMMERCIAL PAPER -- 2.2%
Prudential Funding 5.35%, 4/5/96
(at amortized cost) 2,500 2,498,514 2.3
------------ ----
</TABLE>
<TABLE>
<CAPTION>
PERCENT
OF NET
DESCRIPTION VALUE ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL INVESTMENTS
(amortized cost $112,424,387) $113,360,340 99.4%
OTHER ASSETS IN EXCESS OF LIABILITIES................. 716,901 0.6
------------ -----
NET ASSETS............................................ $114,077,241 100.0%
LESS: OUTSTANDING PREFERRED STOCK..................... (33,000,000)
------------
NET ASSETS APPLICABLE TO
4,974,635 SHARES OF
COMMON STOCK OUTSTANDING............................. $ 81,077,241
============
NET ASSET VALUE PER COMMON SHARE
($81,077,241 / 4,974,635)............................ $16.30
======
- --------------------------------------------------------------------------------
</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 $10,935,728 or 9.6% of net assets.
/3/ Security is in default.
/4/ Board valued security. These securities amounted to $1,379,027 or 1.2% of
net assets.
- --------------------------------------------------------------------------------
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, Boston, 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.
- --------------------------------------------------------------------------------
5
