<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
DEAR STOCKHOLDERS:
- --------------------------------------------------------------------------------
Nineteen ninety-five was an eventful year for USF&G Pacholder Fund, Inc. Dur-
ing the first quarter, the Fund successfully completed its rights offering. The
offering was oversubscribed and received broad participation from stockholders,
raising approximately $22 million. The new shares were issued at an attractive
price of $15.65 per share, or a 10% discount to the net asset value of the Fund
at the time of pricing. The rights offering increased the number of common
shares outstanding to nearly 5 million. The Fund, by virtue of these additional
shares outstanding and favorable long-term performance, has attracted investor
interest. Average weekly trading volume in 1995 was 57,000 shares, an 84% in-
crease over 1994.
During the third quarter, the Fund closed a $33 million private placement of
6.95% Cumulative Preferred Stock with a mandatory redemption date of August 1,
2000. The issue is rated AAA by Standard & Poor's. This financing allowed the
Fund to call all of its remaining 8.60% Cumulative Preferred Stock, $8.05 mil-
lion liquidation value, which began amortizing in 1994. We believe that this
leverage is attractive to common stockholders because the Fund should be able
to earn more in the high-yield market than the 6.95% preferred dividend rate.
[These two transactions increased the Fund's net assets to over $112 million
from $67 million at the beginning of the year.]
1995 IN REVIEW
The yield on the ten-year U.S. Treasury Note fell by 226 basis points (2.26%)
during 1995 to 5.57% at the end of December. Benefiting from the rally in the
Treasury market, the high-yield market posted significant returns in 1995, re-
versing the negative returns of 1994. The CS First Boston High Yield Index(TM)
(the "Index") reported a 17.38% return in 1995 compared to -0.97% in 1994. How-
ever, the performance of the high-yield market was not able to keep up with the
Treasury market step for step. The yield difference between the Index and Trea-
suries increased by nearly 1% from 3.88% to 4.84%. In addition, the average
spread between B-rated and BB-rated issues widened by 60 basis points (.60%)
during 1995 to a three-year high of 224 basis points (2.24%). This can par-
tially be explained by the higher correlation of BB-rated bonds to the Treasury
market in a falling interest rate environment, and investor demand for greater
yield, as the year progressed, on more risky, lower-rated issues.
For the majority of the year, the Fund was underweighted in BB-rated securi-
ties relative to the market. In addition, a few of the Fund's investments expe-
rienced credit deterioration in the latter part of the year. Due to these fac-
tors, the Fund's total return of 10.68% for the year ended December 31, 1995
underperformed the Index.
We believe that increasing the credit quality and diversification of the
portfolio is the most prudent strategy to undertake at this point in the eco-
nomic cycle. This strategy was implemented in the third and fourth quarters and
resulted in the Fund increasing its allocation in BB-rated securities to 23% at
year-end, as compared to 7% at June 30, 1995. The Fund also increased its is-
suer diversification in order to lessen the impact of negative credit events as
we move forward in a slower growth economy. At December 31, 1995, the Fund held
securities of 97 companies in its portfolio, with the average investment ac-
counting for 1.0% of net assets, compared to 53 companies in the Fund's portfo-
lio at December 31, 1994, with the average investment accounting for 1.9% of
net assets.
OUTLOOK FOR 1996
We are cautiously optimistic about the prospects of the high-yield market in
1996 and continue to believe that it provides attractive long-term opportuni-
ties for our stockholders. The market is in strong technical shape as funds
continue to flow into open-end, high-yield mutual funds. In addition, the mar-
ket is attracting increased investments from pension funds, insurance companies
and traditional investment-grade funds, as historically low interest rates
force these institutions to look at the high-yield market for incremental in-
vestment returns.
We do believe, however, that it will be critical to be very selective in the
market this year. There are a number of companies in the high-yield market that
have been experiencing financial difficulty for a number of reasons, such as
weakness in certain business sectors, over-leverage and slower growth in our
economy. Therefore, fundamental credit analysis will be even more important in
1996. Our experience has shown that there are opportunities to make attractive
investments in the discount sector of the market. The Fund will continue to
make selective total return investments, while at the same time maintain a
solid core high-yield portfolio. The Fund has started 1996 on a positive note,
recording a total return of 2.83% in January compared to the Index return of
1.90%.
DIVIDEND OUTLOOK
Recent changes in the high-yield market, the continuous fall in Treasury
rates and the Fund's strategy of increasing the credit quality of the portfo-
lio, have had the effect of lowering the average yield and coupon of the port-
folio. The historically low interest rate environment that we are in today will
continue to have this effect on the high-yield market as issuers refinance high
coupon debt at lower levels. As a result of this, the Fund's income level is no
longer sufficient to sustain a regular quarterly distribution of $.475 per
share, a rate that the Fund began distributing fourteen quarters ago in the
third quarter of 1992. Given the current market conditions and the composition
of the Fund's portfolio, we anticipate that the Board of Directors will estab-
lish a regular quarterly distribution of $.425 per share in 1996.
We thank you for your continued confidence and support, and look forward to
serving your investment needs in 1996 and beyond.
Sincerely,
/s/ ANTHONY L. LONGI, JR.
Anthony L. Longi, Jr.
President
February 12, 1996
- --------------------------------------------------------------------------------
1
<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
<CAPTION>
PERCENT
PAR OF NET
DESCRIPTION (000) VALUE ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
- -------------------------------------------------------------------------------
2
<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
<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>
- -------------------------------------------------------------------------------
3
<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
------------ ---
<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, 2,000 1,885,000 1.7
11.75%, 7/15/04
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>
- -------------------------------------------------------------------------------
4
<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
---------- ---
</TABLE>
<TABLE>
<CAPTION>
PERCENT
OF NET
DESCRIPTION VALUE ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
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.
5
<PAGE>
USF&G PACHOLDER FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESMENT INCOME:
Interest......................................................... $11,076,858
EXPENSES:
Investment advisory fee (Note 5)................................. 391,534
Administrative fee (Note 5)...................................... 170,185
Custodian, tranfer 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
===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
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
============ ===========
</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>
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 ap-
plicable 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.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 com-
panies. 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 securi-
ties exchange are valued at the last sale price on that exchange. Securi-
ties for which over-the-counter market quotations are readily available
are valued at the latest bid price. Restricted securities and other secu-
rities for which market quotations are not readily available are valued at
fair value as determined under procedures established by the Board of Di-
rectors. 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 ma-
turities of 60 days or less at the date of purchase are stated at amor-
tized 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 pro-
vision 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 trans-
action and, in determining its net asset value, will reflect the value of
the security. No "when, as and if issued" purchase commitments were in-
cluded in the portfolio of investments as of December 31, 1995.
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 real-
ized 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 esti-
mates and assumptions that affect the reported amounts of assets and lia-
bilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and ex-
penses 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 Asso-
ciates, Inc. (an affiliate of the Advisor), for financial and advisory serv-
ices including advising the Fund regarding the structure of the rights offer-
ing and the materials utilized therewith, coordinating the distribution ar-
rangements 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 un-
paid dividends. The preferred stock is also subject to special mandatory re-
demptions, at a redemption price of $20 per share, plus
- -------------------------------------------------------------------------------
8
<PAGE>
USF&G PACHOLDER FUND, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- -------------------------------------------------------------------------------
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 to-
gether as a single class, except that the preferred stockholders, as a sepa-
rate 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 of-
fering 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 (ex-
cluding commercial paper and repurchase agreements) for the year ended De-
cember 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 depre-
ciated 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 Index(TM) 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 execu-tive 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 as-
sets 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 administra-
tive fees were $15,483.
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>
- -------------------------------------------------------------------------------
9
<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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights 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 De-
cember 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, 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 opera-
tions, 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
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------------
ISSUANCE OF PREFERRED STOCK
On August 15, 1995, the Fund issued 1,650,000 shares of 6.95% Cumulative Pre-
ferred Stock, par value $.01 share, with the liquidation preference of $20 per
share (the "Preferred Stock"), in a private placement. The net proceeds of the
issuance were invested in debt securities in accordance with the Fund's invest-
ment objective and policies. Standard & Poor's assigned a rating of "AAA" to
the Preferred Stock.
Under the Investment Company Act of 1940, (the "1940 Act"), the Fund is not
permitted to issue 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 permit-
ted to declare any cash dividend or other distribution on its common stock un-
less, at the time of such declaration, the net asset value of the Fund's port-
folio (determined after deducting the amount of such dividend or distribution)
is at least 200% of such liquidation value. At December 31, 1995, the asset
coverage of the Preferred Stock under the 1940 Act was 330%. The Fund may be
required to redeem shares of Preferred Stock from time to time to maintain the
asset coverage of at least 200% or to meet certain other tests and restrictions
required in connection with the issuance of the rating for the Preferred Stock.
The leveraging of the Fund's common stock through the issuance of the Pre-
ferred Stock involves certain risks to common stockholders. These include a
higher volatility of the net asset value of their shares and potentially more
volatility in 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 common stock-
holders 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 2.04% (net of expenses) in order to cover the annual dividend payments of
the Preferred Stock of 6.95%. The following table may assist shareholders in
understanding the effects of leverage by illustrating the effect leverage has
on the return to a common stockholder. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed Return
on Portfolio
(Net of Expenses)................... -10.00 -5.00% 0.00% 2.04% 5.00% 10.00%
- ------------------------------------------------------------------------------
Corresponding Return to
Common Stockholder.................. -17.03% -9.95% -2.88% 0.00% 4.19% 11.26%
- ------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
USF&G PACHOLDER FUND, INC.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED AND CONCLUDED)
- -------------------------------------------------------------------------------
To the extent that the net return on the Fund's investment portfolio on
the amount equal to the aggregate redemption price of the Preferred Stock
declines toward the dividend rate on the Preferred Stock, the benefit of
leverage to common stockholders will be reduced. If the current dividend
rate on the Preferred Stock were to exceed the net return on any such portion
of the Fund's portfolio, the Funds's leveraged capital structure would
result in a lower rate of return to common stockholders 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 investments will be borne entirely
by the common stock-holders, the effect of leverage in a declining market
would be a greater de-crease in net asset value to the common stockholders
than if the Fund were not leveraged, which would likely be reflected in
a greater decline in the market price for the common shares. In an extreme
case, if the Fund's current invest-ment income were not sufficient to meet
dividend requirements on 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 its 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 may adversely affect the
Fund's net asset value and yield.
DIVIDEND REINVESTMENT PLAN
The Fund's Dividend Reinvestment Plan (the "Plan") offers stockholders a
convenient way to invest their dividends and capital gains distributions in
additional shares of the Fund's common stock, thereby increasing their hold-
ings of Fund shares.
To participate in the Plan, stockholders must complete an Authorization Form
and return it to State Street Bank and Trust Company ("State Street"), the
Plan Agent. To start the Plan with a specific dividend, State Street must have
received an Authorization Form prior to the record date.
When a dividend is declared, non-participants will receive cash paid by
check. Plan participants will automatically receive shares of the Fund's com-
mon stock equivalent to the cash distribution. The number of shares will be
determined as follows:
(1) If the shares 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 the shares are trading at a discount from net asset value at the
time of valuation, State Street will receive the distribution in cash and
apply it to the purchase of shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts. If, before
State Street has completed its purchases, the market price exceeds the net
asset value per share, the average purchase price per share paid by State
Street may exceed the market price at the time of valuation, resulting in
the acquisition of fewer shares than if the distribution had been paid in
shares issued by the Fund. State Street will use all distributions received
in cash to purchase shares within 30 days of the payment date. Interest
will not be paid on any uninvested cash payments.
There is no charge to participants for reinvesting distributions. State
Street's fee for administering the Plan is paid by the Fund. There will be no
brokerage charges with respect to shares issued directly by the Fund as a re-
sult of distributions payable either in stock or cash. However, each partici-
pant will pay a pro rata share of brokerage commissions incurred with respect
to State Street's open-market purchases in connection with the Plan.
State Street maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions for tax records. Shares in the ac-
count of each Plan participant are held by State Street in non-certificated
form in the name of the participant, and each stockholder's proxy will include
shares received pursuant to the Plan. A participant will be issued a certifi-
cate for shares held in a Plan account only upon request.
A Participant may withdraw from the Plan by notifying State Street in writ-
ing. Upon termination, participants can either receive a certificate for the
whole shares credited to their account and a check for fractional shares or
have their shares sold by State Street.
The automatic reinvestment of distributions will not relieve Plan partici-
pants of any income taxes that may be payable (or required to be withheld) on
distributions.
The Fund reserves the right to amend or terminate the Plan and to include a
service charge payable by participants.
Additional information about the Plan and Authorization Forms may be ob-
tained by writing State Street Bank and Trust Company, P.O. Box 366, Boston,
Massachusetts 02101, or by calling State Street at (800) 426-5523.
---------------
This report is sent to the stockholders of USF&G Pacholder Fund, Inc. for
their information. It is not a prospectus, circular or representation intended
for use in the purchase or sale of shares of the Fund or any securities men-
tioned in this report.
- -------------------------------------------------------------------------------
11
<PAGE>
- -------------------------------------------------------------------------------
USF&G
PACHOLDER FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1995
- -------------------------------------------------------------------------------
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.
Director and Treasurer President and Assistant Treasurer
Daniel A. Grant James E. Gibson
Director Senior Vice President
George D. Woodard 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
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.
