<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Registration No. 333-17313
[X] Pre-Effective Amendment No. 1
[_] Post-Effective Amendment No.
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Registration No. 811-5639
[X] Amendment No. 14
PACHOLDER FUND, INC.
Exact Name of Registrant as Specified in Charter
Bank One Towers, East Tower, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(513) 985-3200
Registrant's Telephone Number, including Area Code
James P. Shanahan, Jr., Secretary
Bank One Towers, East Tower, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Alan C. Porter, Esq.
Piper & Marbury l.l.p.
1200 Nineteenth Street, N.W.
Washington, DC 20036
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT BEING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED UNIT(1) OFFERING PRICE FEE(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
and Rights to subscribe
therefor.................. 2,079,850 $15.68 $32,612,048 $9,883
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457 on the basis of $17.42 per share, the net asset value
per share on January 9, 1997.
(2) A registration fee of $11,325 was paid on December 5, 1996; accordingly,
no further payment is required in connection with this filing.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USF&G PACHOLDER FUND, INC.
----------------
CROSS REFERENCE SHEET
Part A--Prospectus
<TABLE>
<CAPTION>
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
<C> <C> <S>
1. Outside Front Cover.......................................... Outside Front Cover;
Inside Front and Outside
2. Inside Front and Outside Back Cover Page..................... Back Cover
3. Fee Table and Synopsis....................................... Summary of Fund
Expenses; Prospectus
Summary
4. Financial Highlights......................................... Financial Highlights;
Information Regarding
Senior Securities
5. Plan of Distribution......................................... Outside Front Cover;
Prospectus Summary; The
Offer; Distribution
Arrangements
6. Selling Shareholders......................................... Not Applicable
7. Use of Proceeds.............................................. Use of Proceeds
8. General Description of the Registrant........................ Outside Front Cover;
Prospectus Summary; The
Fund; Investment
Objective and Policies;
Risks of Leverage
9. Management................................................... Prospectus Summary;
Management of the Fund;
Custodian and Transfer
Agent
Description of Capital
10. Capital Stock, Long-Term Debt, and Other Securities.......... Stock
11. Defaults and Arrears on Senior Securities.................... Not Applicable
12. Legal Proceedings............................................ Not Applicable
13. Table of Contents of the Statement of Additional Information. Table of Contents of
Statement of Additional
Information
Part B--Statement of Additional Information
<CAPTION>
LOCATION IN STATEMENT OF
ITEMS IN PART B OF FORM N-2 ADDITIONAL INFORMATION
--------------------------- ------------------------
<C> <C> <S>
14. Cover Page................................................... Cover Page
15. Table of Contents............................................ Table of Contents
16. General Information and History.............................. Not Applicable
17. Investment Objective and Policies............................ Investment Policies and
Restrictions
18. Management................................................... Management of the Fund
19. Control Persons and Principal Holders of Securities.......... Management of the Fund;
Principal Shareholders
20. Investment Advisory and Other Services....................... Investment Advisory
Services; Experts
21. Brokerage Allocation and Other Practices..................... Portfolio Transactions
22. Tax Status................................................... Taxation
23. Financial Statements......................................... Financial Statements
</TABLE>
Part C--Other Information
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 17, 1997
PROSPECTUS
USF&G PACHOLDER FUND, INC.
1,663,880 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES OF COMMON STOCK
-----------
USF&G Pacholder Fund, Inc. is issuing to holders of its Common Stock of
record as of the close of business on January 24, 1997, non-transferable Rights
entitling them to subscribe for an aggregate of 1,663,880 shares of Common
Stock at the rate of one Share for each three Rights held. Shareholders who
fully exercise their Rights will have an Over-Subscription Privilege. The
Subscription Price will be equal to 90% of the net asset value of a share of
Common Stock on the Expiration Date of the Offer. See "The Offer."
The Fund announced its intention to make the Offer after the close of trading
on the American Stock Exchange on November 13, 1996. The net asset values per
share of Common Stock on November 7, 1996 (the Thursday preceding the day of
the announcement) and January 23, 1997 were $17.28 and $ , respectively, and
the last reported sale prices of a share of Common Stock on the Exchange on
November 7, 1996 and January 23, 1997 were $17.25 and $ , respectively. The
Fund's Common Stock is listed on the Exchange under the symbol "PHF."
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 20, 1997,
UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund is a closed-end diversified management investment company whose
investment objective is to provide a high level of total return through current
income and capital appreciation by investing primarily in high-yield, high risk
fixed-income securities of domestic companies. The Fund invests in a
diversified portfolio comprised primarily of publicly traded fixed-income
securities. The Fund's portfolio investments will generally not be rated or
will be rated below investment grade (i.e., BB or lower by Standard & Poor's
Ratings Group, or Ba or lower by Moody's Investors Service, Inc.).
INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES SPECIAL RISK
CONSIDERATIONS, INCLUDING THE RISKS ATTENDANT TO INVESTING IN HIGH-YIELD
SECURITIES. IN ADDITION, THE FUND'S COMMON STOCK IS FINANCIALLY LEVERAGED AND
IS THEREFORE SUBJECT TO CERTAIN ADDITIONAL RISK CONSIDERATIONS. SEE "INVESTMENT
OBJECTIVE AND POLICIES" AND "RISKS OF LEVERAGE."
Because the Subscription Price will be less than the current net asset value
per share of the Fund's Common Stock, the Offer will result in a dilution of
the net asset value per share for all shareholders; this dilution could be
substantial. In addition, upon completion of the Offer, shareholders who do not
fully exercise their Rights will own a smaller proportional interest in the
Fund than would be the case if the Offer had not been made. See "The Offer--
Dilution."
(Continued on the following page)
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
SUBSCRIPTION ESTIMATED PROCEEDS TO
PRICE(1) SALES LOAD(2) FUND(3)(4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
- --------------------------------------------------------------------------------
Total................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Footnotes on the following page)
-----------
The date of this Prospectus is January , 1997
<PAGE>
(Continued from the previous page)
Capitalized terms used but not defined above have the meanings given to them
in the body of this Prospectus.
This Prospectus sets forth concisely the information about the Fund that a
shareholder should know before investing, and it should be read and retained
for future reference. A Statement of Additional Information dated January ,
1997 containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. A copy of the Statement of Additional
Information, the table of contents of which appears on page 35 of this
Prospectus, may be obtained without charge by contacting the Information Agent
at (800) 733-8481, Ext. 351.
----------------
(Footnotes from the previous page)
(1) Estimated on the basis of 90% of the net asset value per share of Common
Stock on January 23, 1997. Pursuant to the Over-Subscription Privilege,
the Fund may at its discretion increase the number of Shares subject to
subscription by up to 25% of the Shares offered hereby. If the Fund
increases the number of Shares subject to subscription by 25%, the
Estimated Subscription Price, Estimated Sales Load and Estimated Proceeds
to the Fund will be $ , $ and $ , respectively.
(2) In connection with the Offer, broker-dealers soliciting the exercise of
Rights will receive soliciting fees equal to 2.0% of the Subscription
Price per Share issued upon exercise of the Rights. The Fund has also
agreed to pay Winton Associates, Inc. (the "Dealer Manager") a fee for
financial and marketing advisory services in connection with the Offer
equal to 0.90% of the Subscription Price per Share issued upon exercise of
the Rights.
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$ , including an aggregate of up to $50,000 to be paid to the Dealer
Manager as reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest bearing account (which interest will
accrue to the benefit of the Fund) pending proration and distribution of
Shares.
<PAGE>
SUMMARY OF FUND EXPENSES
The purpose of the following table is to help shareholders understand all
fees and expenses that they, as holders of the Fund's Common Stock, bear
directly or indirectly. See "Management of the Fund," "Distribution
Arrangements" and "Dividend Reinvestment Plan" for additional information.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)..................... 2.9%
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to Common
Stock)(2)
Management Fees(3).................................................... 1.29%
Administration Fees................................................... .14%
Other Expenses(4)..................................................... .29%
Total Annual Expenses............................................... 1.72%
</TABLE>
- --------
(1) Consists of Dealer Manager and soliciting fees.
(2) Management and administration fees are calculated on the basis of the
Fund's total net assets.
(3) Based on the 0.90% "fulcrum fee" applied to the net assets attributable to
Common Stock as required by Securities and Exchange Commission regulations.
The Fund pays an advisory fee which varies between 0.40% and 1.40% of the
Fund's average net assets based on the Fund's total return investment
performance for the prior twelve-month period relative to the percentage
change in the CS First Boston High Yield Index(TM) for the same period (the
"Index Return"). The advisory fee is structured so that it will be 0.90% if
the Fund's investment performance for the preceding twelve months (net of
fees and expenses, including the advisory fee) equals the Index Return. For
the fiscal year ended December 31, 1996 (unaudited), the Fund paid advisory
fees equal to 1.40% of its average net assets during the period.
(4) The other expenses shown in the table are based on estimated amounts for
the Fund's current fiscal year and assume that shareholders of the Fund
exercise their Rights to purchase all of the Shares.
EXAMPLE
The following example illustrates the expenses that an exercising Rights
holder would pay on a $1,000 investment in the Fund's Common Stock, assuming a
5% annual return throughout the periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$47 $83 $122 $232
</TABLE>
The example set forth above reflects payment of the 2.9% Sales Load and other
expenses of the Fund incurred in connection with the Offer and assumes that the
shareholders of the Fund exercise their Rights to purchase all of the Shares.
The example also assumes reinvestment of all dividends and distributions at net
asset value and an expense ratio of 1.72%. The assumption of a 5% annual return
is required by Securities and Exchange Commission regulations applicable to all
investment companies.
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES OR ANNUAL RATES OF RETURN, WHICH MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
Terms of the Offer......
USF&G Pacholder Fund, Inc. (the "Fund") is issuing to
holders of its Common Stock, par value $.01 per share
(the "Common Stock"), of record as of the close of
business on January 24, 1997 ("Record Date Sharehold-
ers") rights ("Rights") to subscribe for an aggregate
of 1,663,880 shares (the "Shares") of Common Stock
(the "Offer"). Each Record Date Shareholder is being
issued one Right for each full share of Common Stock
held on January 24, 1997 (the "Record Date"). The
Rights entitle shareholders to acquire at the Sub-
scription Price (as hereinafter defined) one Share
for each three Rights held. The expiration date of
the Offer (the "Expiration Date") will be February
20, 1997, unless extended. Rights may be exercised at
any time during the period (the "Subscription Peri-
od") that commences on January 27, 1997 and ends at
5:00 P.M., New York City time, on the Expiration
Date.
In addition, any shareholder who fully exercises all
Rights issued to him (other than those Rights that
cannot be exercised because they represent the right
to acquire less than one Share) is entitled to sub-
scribe, subject to certain limitations and to allot-
ment, for additional Shares (the "Over-Subscription
Privilege"). For purposes of determining the maximum
number of Shares a Record Date Shareholder may ac-
quire pursuant to the Offer, shareholders whose
shares are held of record by Cede & Co., Inc.
("Cede"), nominee for The Depository Trust Company,
or by any other depository or nominee will be deemed
to be the holders of the Rights issued to Cede or
such other depository or nominee on their behalf.
Pursuant to the Over-Subscription Privilege, the Fund
may at its discretion increase the number of Shares
subject to subscription by up to 25% of the Shares
offered hereby. Shares requested pursuant to the
Over-Subscription Privilege may be subject to allot-
ment, which is discussed more fully under "The Of-
fer--Over-Subscription Privilege."
The subscription price per Share (the "Subscription
Price") will be equal to 90% of the net asset value
of a share of Common Stock on the Expiration Date.
Rights holders who decide to acquire Shares will not
know the Subscription Price when they make their de-
cision. The Rights are non-transferable and therefore
may not be purchased or sold. Application has been
made to list the Shares on the American Stock Ex-
change, Inc. (the "Exchange"). See "The Offer."
<TABLE>
<CAPTION>
Important Dates to Remember.................. EVENT DATE
----- ----
<S> <C>
Record Date.................................. January 24, 1997
Subscription Period..........................January 27, 1997 to
Expiration Date.............................. February 20, 1997*
Confirmation to Participants................. March 4, 1997*
Final Settlement for Shares.................. March 14, 1997*
</TABLE>
- --------
* Unless extended as described herein.
4
<PAGE>
Information Agent....... The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
(800) 733-8481, Ext. 351
Shareholders may also contact their brokers or
nominees for information with respect to the Offer.
Distribution
Arrangements........... Winton Associates, Inc. (the "Dealer Manager") will
act as the dealer manager for the Offer. The Fund has
agreed to pay the Dealer Manager a fee for its finan-
cial and marketing advisory services equal to 0.90%
of the Subscription Price per Share issued upon exer-
cise of the Rights, and to pay broker-dealers fees
for their soliciting efforts equal to 2.0% of the
Subscription Price per Share issued upon exercise of
the Rights. See "Distribution Arrangements."
The Fund................
The Fund has been engaged in business as a closed-end
diversified management investment company since No-
vember 1988. The Fund's outstanding Common Stock is
listed and traded on the Exchange under the symbol
"PHF." The Fund has issued and outstanding 1,650,000
shares of 6.95% Cumulative Preferred Stock, par value
$.01 per share, with a liquidation preference of
$20.00 per share. Upon completion of the Offer, the
Fund expects to issue additional preferred stock. As
of January 23, 1997, the net assets of the Fund were
approximately $ million. See "The Fund," "Market
Price and Net Asset Value" and "Description of Capi-
tal Stock--Preferred Stock."
Investment Objective
and Policies...........
The Fund's investment objective is to provide a high
level of total return through current income and cap-
ital appreciation by investing primarily in high-
yield, high risk fixed-income securities of domestic
companies. The Fund invests in a diversified portfo-
lio comprised primarily of publicly traded bonds, de-
bentures, notes and preferred stocks. The Fund may
also invest in privately placed debt securities and
in hybrid securities, such as debt with warrants at-
tached, and other privately held obligations of, in
most cases, public companies. The Fund may invest up
to 25% of its assets in U.S. dollar denominated secu-
rities or other obligations of foreign companies is-
sued or trading in the United States. Equity securi-
ties will generally comprise no more than 10% of the
Fund's total assets. The Fund's portfolio investments
will generally not be rated or will be rated below
investment grade (i.e., BB or lower by Standard &
Poor's Ratings Group, or Ba or lower by Moody's In-
vestors Service, Inc.). Some of the Fund's portfolio
investments may not be current on payment of interest
or dividends or may be in default. No assurance can
be given that the Fund will be able to achieve its
investment objective. See "Investment Objective and
Policies."
Investment Advisory and
Other Services.........
Pacholder & Company, an Ohio general partnership (the
"Adviser"), has served as the Fund's investment ad-
viser since the Fund commenced
5
<PAGE>
operations. The partners of the Adviser are Pacholder
Associates, Inc. ("Pacholder"), an investment advi-
sory firm which specializes in high-yield fixed-in-
come securities, and USF&G Marketing Services Co., an
indirect wholly-owned subsidiary of USF&G Corpora-
tion. The Fund pays the Adviser an advisory fee which
varies between 0.40% and 1.40% of the Fund's average
net assets based on the total return investment per-
formance of the Fund relative to the percentage
change in the CS First Boston High Yield Index(TM)
for the same period (the "Index Return"). For the
fiscal year ended December 31, 1996 (unaudited), the
Adviser received an advisory fee equal to 1.40% of
the Fund's average net assets. The advisory fee paid
by the Fund has for certain periods exceeded, and may
in the future exceed, the advisory fees paid by most
other investment companies. In addition, the Adviser
may receive the maximum fee even if the Fund's abso-
lute performance is negative and may receive the min-
imum fee in instances where the Fund experiences sig-
nificant positive performance. Because the Adviser's
fee is based on the net assets of the Fund, the Ad-
viser will benefit from an increase in the Fund's as-
sets resulting from the Offer. See "Management of the
Fund--Investment Advisory Services" and "--Advisory
Fee" and "The Offer--Impact on Certain Fees."
The Fund's administrator is Kenwood Administrative
Management, Limited Partnership (the "Administra-
tor"), an affiliate of the Adviser. The Administrator
receives a monthly fee from the Fund at the annual
rate of 0.10% of the Fund's average net assets.
Pacholder provides accounting services to the Fund
and receives a monthly fee at the annual rate of
0.025% of the first $100 million of the Fund's aver-
age net assets and 0.015% of such net assets in ex-
cess of $100 million. See "Management of the Fund--
Administrative and Accounting Services."
Distributions and
Dividend Reinvestment
Plan...................
The Fund's policy is to pay quarterly dividends on
its Common Stock from net investment income remaining
after payment of dividends on its preferred stock. To
the extent capital gains are not required to satisfy
the dividend, redemption or liquidation preferences
of outstanding shares of preferred stock, they will
be distributed to holders of the Common Stock. Net
short-term capital gains, if any, may be included in
quarterly dividends or distributed on such other ba-
sis as may be determined from time to time by the
Board of Directors. Net long-term capital gains, if
any, will be distributed at least annually. It is ex-
pected that the first distribution payable on the
Shares offered hereby will be the regular dividend
for the second quarter, which will not be payable be-
fore June 1997. See "Dividends and Distributions" and
"Taxation."
Holders of the Common Stock may elect to have all
dividends and distributions automatically reinvested
in additional shares of Common Stock pursuant to the
Fund's Dividend Reinvestment Plan. See "Dividend Re-
investment Plan."
6
<PAGE>
Risk Factors and
Special
Considerations.........
Because the Subscription Price will be less than the
current net asset value per share of the Fund's Com-
mon Stock and because the number of shares outstand-
ing after completion of the Offer will increase in a
greater percentage than the increase in the size of
the Fund's assets, the Offer will result in a dilu-
tion of the net asset value per share for all share-
holders. Although it is not possible to state pre-
cisely the amount of the decrease at this time, the
dilution resulting from the Offer could be substan-
tial. In addition, upon completion of the Offer,
shareholders who do not fully exercise their Rights
will own a smaller proportional interest in the Fund
and experience a corresponding reduction in the vot-
ing power of their shares. The Fund has conducted
three previous rights offerings which resulted in di-
lution of the net asset per share of the Fund. See
"The Offer--Purposes of the Offer" and "--Dilution."
The leveraging of the Fund's Common Stock through the
issuance of preferred stock involves certain risks to
holders of the Common Stock. These risks include a
higher volatility of the net asset value and poten-
tially the market price of their shares. So long as
the Fund is able to realize a higher net return on
its investment portfolio than the dividend rate of
the preferred stock, the effect of leverage will be
to cause holders of the Common Stock to realize a
higher current rate of return than if the Fund were
not leveraged. However, if the net return on the
Fund's investment portfolio were to approach the div-
idend rate of the preferred stock, the benefit of
leverage to holders of the Common Stock would be re-
duced, and if the net return on the Fund's portfolio
were to be less than the dividend rate of the pre-
ferred stock, the Fund's leveraged capital structure
would result in a lower rate of return to holders of
the Common Stock. Similarly, since any decline in the
net asset value of the Fund's investment portfolio
would be borne entirely by holders of the Common
Stock, the effect of leverage in a declining market
will be to cause a greater decrease in the net asset
value of the Common Stock than if the Fund were not
leveraged, which would likely be reflected in a
greater decline in the market price of the Common
Stock. Upon completion of the Offer, the Fund intends
to add incremental leverage by issuing additional
preferred stock so that the percentage of the Fund's
assets representing leverage will be approximately
the same as it was prior to completion of the Offer.
See "Risks of Leverage" and "Description of Capital
Stock--Preferred Stock."
Holders of the Common Stock will receive quarterly
dividends from net income only after payment of cumu-
lative dividends on the preferred stock, and will re-
ceive distributions of net capital gains, if any,
only after the dividend, redemption and liquidation
preferences of the preferred stock have been satis-
fied. In addition, so long as any shares of preferred
stock are outstanding, distributions on the Common
Stock will be subject to certain restrictions. Upon
any liquidation of the Fund, holders of the preferred
stock will be entitled to receive liquidating distri-
butions before any distribution is made to holders of
the Common Stock. If at any time dividends on the
preferred stock were to be in arrears in an
7
<PAGE>
amount equal to two full years' dividends, holders of
all outstanding shares of preferred stock, voting as
a separate class, will be entitled to elect a major-
ity of the Fund's directors. See "Risks of Leverage,"
"Dividends and Distributions" and "Description of
Capital Stock--Preferred Stock."
Investment by the Fund in high-yield securities (com-
monly known as "junk bonds") is speculative and in-
volves a high degree of risk which can result in sub-
stantial or total losses to the Fund. These invest-
ments may take considerable time to appreciate in
value and, in some cases, may become less valuable or
worthless. The market value of high-yield securities
generally fluctuates in response to changes in inter-
est rates and economic conditions more than higher
rated securities. Also, with high-yield securities,
there is a greater possibility that an adverse change
in the financial condition of the issuer, particu-
larly a highly leveraged issuer, may affect its abil-
ity to make payments of income and principal and in-
crease the expenses of the Fund in seeking recovery
from the issuer. Further, with high-yield securities,
there is a greater possibility of a default or the
bankruptcy of the issuer. Since there may be no pub-
lic market or only inactive trading markets for some
of the securities in which the Fund invests, these
securities may be harder to value and more suscepti-
ble to adverse publicity concerning the issuer, and
consequently the Fund may be required to retain such
investments for indefinite periods or sell them at
substantial losses. Some of the Fund's portfolio se-
curities may be issued by companies involved, at the
time of acquisition or soon thereafter, in reorgani-
zations, capital restructurings or bankruptcy pro-
ceedings. Such proceedings are highly complex and may
have unpredictable results. In addition, the Fund may
invest in securities of foreign issuers which in-
volves risks not typically associated with investing
in U.S. companies. See "Investment Objective and Pol-
icies--Special Risk Considerations" and "--Additional
Investment Policies and Restrictions--Foreign Securi-
ties."
Holders of the Fund's Common Stock may dispose of
their shares on the Exchange or other markets on
which shares may trade, but since the Fund is a
closed-end investment company, shareholders do not
have the right to redeem their shares at net asset
value. The market price for shares of closed-end in-
vestment companies varies from their net asset value
and such shares frequently trade at a discount from
net asset value. Since the Fund commenced operations,
the Common Stock has traded in the market at, above
and below net asset value. See "Market Price and Net
Asset Value."
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides information about the financial history of the
Fund. The table expresses the information in terms of a single share
outstanding throughout the period. The data for the fiscal year ended December
31, 1995 has been derived from financial statements audited by Deloitte &
Touche LLP, independent accountants for the Fund. Their report on the
financial statements and financial highlights is included in the Statement of
Additional Information. The table should be read in conjunction with the
Fund's financial statements and the notes thereto, which may be obtained free
of charge from the Fund.
<TABLE>
<CAPTION>
NOVEMBER 11,
FOR THE SIX 1988*
MONTHS ENDED YEAR ENDED DECEMBER 31, THROUGH
JUNE 30, 1996 ----------------------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992 1991 1990 1989 1988
------------- --------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 16.02 $ 16.86 $ 19.23 $ 18.52 $ 17.37 $ 14.49 $ 16.58 $ 18.21 $ 18.60
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net investment income... 1.11 2.19 2.12 2.48 2.37 2.18 1.79 1.88 .16
Net realized and
unrealized gain/(loss)
on investments.......... .18 (.06) (1.64) 1.42 1.32 2.84 (2.08) (1.41) (.03)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
in net asset value
resulting from
operations.............. 1.29 2.13 .48 3.90 3.69 5.02 (.29) .47 .13
--------- --------- ------- ------- ------- ------- ------- ------- -------
Distributions To
Stockholders From:
Preferred dividends..... (.23) (.29) (.24) (.38) (.33) -- -- -- --
Common:
Net investment income
and short-term gains... (.85) (1.90) (1.92) (2.09) (2.08) (2.14) (1.80) (2.10) (.18)
Net realized long-term
gains.................. -- -- -- (.21) -- -- -- -- --
--------- --------- ------- ------- ------- ------- ------- ------- -------
Total distributions to
preferred and common
stockholders............ (1.08) (2.19) (2.16) (2.68) (2.41) (2.14) (1.80) (2.10) (.18)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Capital Change Resulting
from the Issuance of
Fund Shares:
Common Shares........... .04 (.67) (.69) (.51) -- -- -- -- (.34)
Preferred Shares........ -- (.11) -- -- (.13) -- -- -- --
--------- --------- ------- ------- ------- ------- ------- ------- -------
.04 (.78) (.69) (.51) (.13) -- -- -- (.34)
--------- --------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 16.27 $ 16.02 $ 16.86 $ 19.23 $ 18.52 $ 17.37 $ 14.49 $ 16.58 $ 18.21
========= ========= ======= ======= ======= ======= ======= ======= =======
Market value per share,
end of period........... $ 15.75 $ 17.38 $ 16.75 $ 21.25 $ 19.38 $ 17.25 $ 12.38 $ 15.50 $ 17.38
========= ========= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:(1)
Based on market value
per share............... (4.25%) 16.04% (11.12%) 22.41% 25.99% 56.78% (9.36%) (1.52%) (13.13%)
Based on net asset value
per share............... 6.91% 10.68% 0.72% 20.27% 18.78% 36.71% (0.87%) 3.72% (2.10%)
RATIOS TO AVERAGE NET
ASSETS:(2)
Expenses............... 1.52%*** 0.86% 1.64% 1.81% 1.90% 1.37% 2.34% 2.15% 2.10%***
Net investment income.. 9.66%*** 10.45% 10.17% 10.33% 10.32% 12.94% 10.91% 10.41% 8.20%***
SUPPLEMENTAL DATA:
Net assets at end of
period, net of preferred
stock (000)............. $ 81,047 $ 79,596 $58,925 $44,458 $34,001 $31,678 $26,432 $30,246 $33,771
Average net assets
during period, net of
preferred stock (000)... $ 81,609 $ 79,614 $59,002 $43,275 $34,950 $30,724 $29,819 $32,870 $34,260
Portfolio turnover rate. 46% 83% 102% 97% 121% 48% 33% 102% --%**
Number of preferred
shares outstanding at
end of period........... 1,650,000 1,650,000 8,600 9,400 10,000 -- -- -- --
Asset coverage per share
of preferred stock
outstanding at end of
period.................. $ 69 $ 66 $ 7,852 $ 5,730 $ 4,400 -- -- -- --
Liquidation and average
market value per share
of preferred stock...... $ 20 $ 20 $ 1,000 $ 1,000 $ 1,000 -- -- -- --
</TABLE>
- ----
*Commencement of operations.
**No sales for the period, therefore, no portfolio turnover.
***Annualized.
(1) Total investment return excludes the effects of commissions. Total
investment return for other than full year periods are not annualized.
(2) Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
9
<PAGE>
INFORMATION REGARDING SENIOR SECURITIES
The following table provides certain information as of the end of each
fiscal year of the Fund for each class of senior securities of the Fund. On
April 15, 1992, the Fund issued 10,000 shares of 8.60% Cumulative Preferred
Stock. In 1993, the Fund redeemed shares of such stock having an aggregate
liquidation value of $600,000, and in 1994 the Fund redeemed shares having an
aggregate liquidation value of $800,000. On August 15, 1995, the remaining
shares of 8.60% Cumulative Preferred Stock were called for redemption and the
Fund issued 1,650,000 shares of 6.95% Cumulative Preferred Stock. The Fund
expects to issue additional preferred stock upon completion of the Offer. See
"Risks of Leverage" and "Description of Capital Stock--Preferred Stock."
<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
TOTAL ASSET LIQUIDATION MARKET
AT AMOUNT COVERAGE PREFERENCE VALUE
DECEMBER 31 OUTSTANDING PER SHARE(1) PER SHARE PER SHARE(2)
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1992 10,000 $4,400 $1,000 --
1993 9,400 $5,730 $1,000 --
1994 8,600 $7,852 $1,000 --
1995 1,650,000 $66.00 $20.00 --
1996 1,650,000 $72.62(3) $20.00 --
</TABLE>
- --------
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amount
by the aggregate liquidation preference of the outstanding preferred
stock.
(2) All shares of preferred stock have been issued in private placements and
there have been no market transactions.
(3) Unaudited.
THE FUND
USF&G Pacholder Fund, Inc. (the "Fund") was incorporated under the laws of
the State of Maryland on August 17, 1988, and is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund commenced operations on November
11, 1988. The Fund's investment adviser is Pacholder & Company (the
"Adviser"). The principal office of the Fund is located at Bank One Towers,
East Tower, 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236, and its
telephone number is (513) 985-3200.
The Fund's name as specified in its charter is "Pacholder Fund, Inc." and
the trademark "USF&G" has been licensed to the Fund by USF&G Corporation. The
Fund has entered into an agreement with USF&G Corporation which requires the
Fund to cease using the trademark "USF&G" upon the occurrence of certain
events, including termination of the affiliation between the Fund or the
Adviser and USF&G Corporation, determination by USF&G Corporation that the
goodwill associated with the trademark "USF&G" is being adversely affected and
failure of at least one person who is an executive officer of USF&G
Corporation or one of its wholly-owned subsidiaries to serve as a director of
the Fund.
CAPITALIZATION AT JANUARY 17, 1997
<TABLE>
<CAPTION>
AMOUNT HELD
AMOUNT AMOUNT BY FUND FOR
TITLE OF CLASS AUTHORIZED OUTSTANDING ITS ACCOUNT
-------------- --------------- -------------- -----------
<S> <C> <C> <C>
6.95% Cumulative Preferred Stock,
$.01 par value..................... 1,650,000 shs. 1,650,000 shs. 0 shs.
Common Stock, $.01 par value........ 48,350,000 shs. 4,991,642 shs. 0 shs.
</TABLE>
10
<PAGE>
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to holders of its Common Stock, par value $.01 per share
(the "Common Stock"), of record as of the close of business on January 24,
1997 ("Record Date Shareholders") non-transferable rights ("Rights") to
subscribe for an aggregate of 1,663,880 shares (the "Shares") of Common Stock
(the "Offer"). Each Record Date Shareholder is being issued one Right for each
share of Common Stock held on January 24, 1997 (the "Record Date"). The Rights
entitle shareholders to acquire at the Subscription Price (as hereinafter
defined) one Share for each three Rights held. No Rights will be issued for
fractional shares. The expiration date of the Offer (the "Expiration Date")
will be February 20, 1997, unless extended. Rights may be exercised at any
time during the period (the "Subscription Period") that commences on January
27, 1997 and ends at 5:00 P.M., New York City time, on the Expiration Date.
The right to acquire during the Subscription Period at the Subscription Price
(as hereinafter defined) one Share for each three Rights held is hereinafter
referred to as the "Primary Subscription."
In addition, any shareholder who fully exercises all Rights issued to him
(other than those Rights that cannot be exercised because they represent the
right to acquire less than one Share) is entitled to subscribe for additional
Shares (the "Over-Subscription Privilege"). For purposes of determining the
maximum number of Shares a Record Date Shareholder may acquire pursuant to the
Offer, shareholders whose shares are held of record by Cede & Co., Inc.
("Cede"), nominee for The Depository Trust Company, or by any other depository
or nominee will be deemed to be the holders of the Rights issued to Cede or
such other depository or nominee on their behalf. Pursuant to the Over-
Subscription Privilege, the Fund may at its discretion increase the number of
Shares subject to subscription by up to 25% of the Shares offered hereby.
Shares acquired pursuant to the Over-Subscription Privilege may be subject to
allotment, which is discussed more fully under "Over-Subscription Privilege"
below.
The Rights are evidenced by Subscription Certificates ("Subscription
Certificates") which are being sent to Record Date Shareholders. The number of
Rights issued to each Record Date Shareholder is stated on the Subscription
Certificate. Since fractional Shares will not be issued, shareholders who
receive, or who are left with, fewer than three Rights will be unable to
exercise such Rights and will not be entitled to receive any cash in lieu of
fractional Shares. The method by which Rights may be exercised and Shares paid
for is set forth below under "Method of Exercise of Rights" and "Payment for
Shares."
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interest of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities. In approving the rights
offering, the Board of Directors considered, among other things, the
anticipated benefits and expense of the Offer, the benefits to shareholders
resulting from prior rights offerings by the Fund, the current yield to
shareholders, and the benefits and drawbacks of conducting a non-transferable
versus a transferable rights offering. Additionally, the Board of Directors
believes that increasing the size of the Fund would result in lowering the
Fund's expenses as a proportion of average net assets, to the extent that such
expenses are not calculated with reference to the assets of the Fund. The
Board of Directors also believes that a well-subscribed rights offering may
improve the liquidity of the trading market for the Fund's Common Stock and
increase the Fund's recognition and following among investors. Finally, the
Offer seeks to reward the Fund's shareholders by giving them the right to
purchase additional shares at a price that may be below the market value of
the shares without incurring any direct transaction costs.
11
<PAGE>
The Fund conducted rights offerings which commenced on January 5, 1993,
January 31, 1994 and January 27, 1995, respectively. In the 1993 offering, the
Fund issued non-transferable rights entitling holders
to subscribe for an aggregate of 459,088 shares of Common Stock, at the rate
of one share for each four rights held, and to subscribe for any shares not
subscribed for through the primary subscription. The subscription price per
share was $16.56, which represented a 15% discount from the net asset value
per share on the pricing date of the offering. In the 1994 offering, the Fund
issued non-transferable rights entitling holders to subscribe for an aggregate
of 1,160,115 shares of Common Stock, at the rate of one share for each three
rights held, and to subscribe for any shares not subscribed for through the
primary subscription. The subscription price per share was $17.71, which
represented a 10% discount from the net asset value per share on the pricing
date of the offering. In the 1995 offering, the Fund issued non-transferable
rights entitling holders to subscribe for an aggregate of 1,457,942 shares of
Common Stock, at the rate of one share for each three rights held, and to
subscribe for any shares not subscribed for through the primary subscription.
In addition, the Fund could increase such number of shares by up to 25% in
order to satisfy over-subscriptions. The subscription price per share was
$15.65, which represented 90% of the net asset value per share as of the
pricing date of the offering. All three offerings were significantly over-
subscribed, resulting in the issuance of the maximum number of shares. As a
result of the 1993, 1994 and 1995 offerings, the net asset value per share of
the Fund's Common Stock was reduced by $.64 (3.3%), $.70 (3.6%) and $.68
(3.9%), respectively. The Fund raised $7.4 million in the 1993 offering, $20.4
million in the 1994 offering and $22.0 million in the 1995 offering.
The Fund may, in the future and at its discretion, make additional rights
offerings from time to time for a number of shares and on terms which may or
may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for through the Primary Subscription will be offered,
by means of the Over-Subscription Privilege, to shareholders who have
exercised all Rights issued to them (other than those Rights that cannot be
exercised because they represent the right to acquire less than one Share) and
who wish to acquire more than the number of Shares for which the Rights issued
to them are exercisable. Record Date Shareholders should indicate on the
Subscription Certificate, which they submit with respect to the exercise of
Rights issued to them, how many Shares they are willing to acquire pursuant to
the Over-Subscription Privilege. Broker-dealers whose shares are held of
record by Cede, or any other depository or nominee, must complete the DTC
Participant Over-Subscription Exercise Form available from the Information
Agent. If sufficient Shares are available after the Shares subscribed for
through the Primary Subscription have been allocated, all over-subscriptions
will be honored in full. If sufficient Shares are not available to honor all
over-subscriptions, the Fund may, at its discretion, increase the number of
Shares subject to subscription pursuant to the Offer by up to 25% (up to an
additional 415,970 shares) in order to satisfy such over-subscriptions.
Regardless of whether the Fund issues such additional Shares, to the extent
Shares are not available to honor all over-subscriptions, the available Shares
will be allocated among those exercising Rights holders who over-subscribe
based on the number of Rights originally issued to them by the Fund so that
the number of Shares issued to exercising Rights holders pursuant to the Over-
Subscription Privilege will generally be in proportion to the number of shares
of Common Stock owned by them on the Record Date. The percentage of available
Shares each over-subscribing Rights holder may acquire will be rounded up or
down to result in delivery of whole Shares. The allocation process may involve
a series of allocations to ensure that the total number of Shares available
for over-subscriptions is distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed for
through the Primary Subscription or pursuant to the Over-Subscription
Privilege.
SUBSCRIPTION PRICE
The subscription price per Share (the "Subscription Price") for the Shares
to be issued pursuant to the Rights will be 90% of the net asset value of a
share of Common Stock on the Expiration Date. For example, if the net asset
value of a share of Common Stock on the Expiration Date is $ (the net asset
value on January 23, 1997), the Subscription Price will be $ . The manner in
which the net asset value per share of Common Stock is calculated is described
below under "Market Price and Net Asset Value--Net Asset Value."
12
<PAGE>
Rights holders who decide to acquire Shares through the Primary Subscription
or pursuant to the Over-Subscription Privilege will not know the Subscription
Price for such Shares when they make their decision. In addition, it is
expected that the first distribution payable on the Shares offered hereby will
be the regular dividend for the second quarter, which will not be payable
before June 1997. See "Dividends and Distributions."
The Fund announced its intention to make the Offer after the close of
trading on the American Stock Exchange, Inc. (the "Exchange") on November 13,
1996. The net asset values per share of Common Stock on November 7, 1996 (the
Thursday preceding the day of the announcement) and January 23, 1997 were
$17.28 and $ , respectively, and the last reported sale prices on the
Exchange on November 7, 1996 and January 23, 1997 were $17.25 and $ ,
respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and therefore may not be purchased or sold.
The Rights will not be admitted for trading on the Exchange. However,
application has been made to list the Shares on the Exchange.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 P.M., New York City time, on February 20,
1997, unless extended by the Fund. The Rights will expire on the Expiration
Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company, Two Heritage
Drive, North Quincy, Massachusetts 02171, which will receive, for its
administrative, processing, invoicing and other services as subscription
agent, a fee estimated to be $10,000, plus reimbursement for its out-of-pocket
expenses related to the Offer. SIGNED SUBSCRIPTION CERTIFICATES MUST BE SENT,
TOGETHER WITH PROPER PAYMENT OF THE ESTIMATED TOTAL PURCHASE PRICE FOR THE
SHARES ACQUIRED THROUGH THE PRIMARY SUBSCRIPTION OR PURSUANT TO THE OVER-
SUBSCRIPTION PRIVILEGE BASED ON THE ESTIMATED SUBSCRIPTION PRICE OF $ PER
SHARE, TO STATE STREET BANK AND TRUST COMPANY by one of the methods described
below. The Fund will accept only Subscription Certificates actually received
on a timely basis at any of the addresses listed below.
(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive,
MB-2
North Quincy, MA 02171
(3) BY HAND:
State Street Bank and Trust Company
225 Franklin Street--Concourse Level
Boston, MA 02110
or
Bank Boston
55 Broadway--Third Floor
New York, NY 10006
13
<PAGE>
(4) BY FACSIMILE:
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(617) 794-6333 with the original Subscription Certificate to be sent by
one of the three methods above. Confirm facsimile by telephone (617)
794-6388
DELIVERY TO AN ADDRESS OTHER THAN THOSE ABOVE DOES NOT CONSTITUTE GOOD
DELIVERY.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate and mailing it in the envelope provided, or otherwise delivering
the completed and signed Subscription Certificate to the Subscription Agent,
together with payment for the Shares as described below under "Payment for
Shares." Rights may also be exercised by contacting your broker, banker or
trust company, which can arrange, on your behalf, to guarantee delivery of
payment and of a properly completed and executed Subscription Certificate. A
fee may be charged by your broker, banker or trust company for this service.
Fractional Shares will not be issued, and shareholders who receive, or who
have remaining, fewer than three Rights will not be able to purchase any
Shares upon the exercise of such Rights. Completed Subscription Certificates
must be received by the Subscription Agent at the addresses set forth above.
Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Subscription
Certificate and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Shareholders whose shares are
held by a nominee such as a broker or trustee, must contact that nominee to
exercise their Rights. In that case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia). The Rights to which those Subscription Certificates relate will be
held by the Subscription Agent for such foreign Record Date Shareholders'
accounts until instructions are received to exercise the Rights. If no
instructions are received prior to the Expiration Date, such Rights will
expire.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares should be directed to Shareholder Communications
Corporation, the Information Agent for the Offer, at its address and telephone
number listed below:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
(800) 733-8481, Ext. 351
Shareholders may also contact their brokers or nominees for information with
respect to the Offer.
The Information Agent will receive a fee estimated to be $5,000 and
reimbursement for all out-of-pocket expenses related to the Offer.
14
<PAGE>
PAYMENT FOR SHARES
Exercising Rights holders who subscribe for Shares through the Primary
Subscription or pursuant to the Over-Subscription Privilege may choose between
the following methods of payment:
(1) Shares may be subscribed for by delivering to the Subscription Agent
the Subscription Certificate together with payment of the estimated total
purchase price for the Shares acquired through the Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege based on the estimated subscription price of $ per Share. The
subscription will be accepted when such payment, together with the properly
completed and executed Subscription Certificate, is received by the
Subscription Agent, provided that the Subscription Certificate and such
payment are received by the Subscription Agent no later than 5:00 P.M., New
York City time, on the Expiration Date. The Subscription Agent will deposit
all checks received by it for the purchase of Shares in a segregated
interest-bearing account (the interest from which will accrue to the
benefit of the Fund) pending proration and distribution of the Shares.
PAYMENTS PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
USF&G PACHOLDER FUND, INC., AND MUST ACCOMPANY A PROPERLY COMPLETED AND
EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION TO BE ACCEPTED. The
Subscription Agent will not accept cash as a means of payment for Shares.
(2) Alternatively, a subscription will be accepted if, prior to 5:00
P.M., New York City time, on the Expiration Date, the Subscription Agent
has received a properly completed and executed notice of guaranteed
delivery in the form accompanying this Prospectus ("Notice of Guaranteed
Delivery") by facsimile or otherwise from a financial institution that is a
member of the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion
Signature Program, guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for through the Primary
Subscription and any additional Shares subscribed for pursuant to the Over-
Subscription Privilege, and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed Subscription
Certificate, together with full payment, is received by the Subscription
Agent by the close of business on the third business day after the
Expiration Date.
Within eight business days following the Expiration Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to Record Date
Shareholders showing (i) the number of Shares acquired through the Primary
Subscription; (ii) the number of Shares, if any, acquired pursuant to the
Over-Subscription Privilege; (iii) the Subscription Price and the total
purchase price for such Shares; and (iv) any additional amount payable to the
Fund or any excess payment to be refunded by the Fund, in each case based on
the Subscription Price as determined on the Expiration Date. Any additional
amount payable to the Fund must be received by the Subscription Agent within
ten business days after the Confirmation Date, and any excess payment
refundable by the Fund will be sent by the Subscription Agent as soon as
practicable.
Whichever of the two methods of payment described above is used, issuance
and delivery of the Shares subscribed for are subject to collection of checks
or receipt of actual payment pursuant to a Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTIONS AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS PROVIDED
BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
If an exercising Rights holder does not make payment of any additional
amounts due by the tenth business day after the Confirmation Date, the Fund
reserves the right to take any or all of the following actions: (i) find other
purchasers for such subscribed and unpaid for Shares; (ii) apply any payment
actually
15
<PAGE>
received by it toward the purchase of the greatest whole number of Shares
subscribed for that could be acquired by such exercising Rights holder; or
(iii) exercise any and all other rights or remedies to which it may be
entitled, including, without limitation, the right to set-off against payments
actually received by it with respect to such subscribed Shares.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Securities and Exchange Commission ("SEC"),
undertaken to suspend the Offer until it amends this Prospectus if subsequent
to January , 1997, the effective date of the Fund's registration statement
relating to the Offer, the Fund's net asset value declines more than 10% from
its net asset value on that date. Accordingly, the Fund will notify
shareholders of any such decline and thereby permit them to cancel their
exercise of Rights.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and therefore may not be purchased or sold.
DELIVERY OF STOCK CERTIFICATES
Record Date Shareholders who participate in the Fund's Dividend Reinvestment
Plan will have all Shares acquired pursuant to the Offer issued in book-entry
form and added to the shares held in their account, unless stock certificates
are specifically requested. Stock certificates for all other Shares acquired
in the Offer will be mailed as soon as practicable after full payment for the
Shares subscribed for has cleared and the Shares have been allocated pursuant
to the Over-Subscription Privilege.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to holders of the Common Stock with
respect to the Offer will be as follows:
The distribution of Rights to Record Date Shareholders will not result in
taxable income to such shareholders, nor will such shareholders realize
taxable income as a result of the exercise of Rights.
The basis of a Right distributed to a shareholder will be zero unless the
shareholder elects (by filing a statement with his federal income tax return
for the year in which the Right is received) to allocate the basis of the
Common Stock with respect to which the Right is distributed between the Right
and the Common Stock, based on their respective fair market values on the date
of distribution. The holding period of a Right received by a shareholder
includes the holding period of the Common Stock with respect to which the
Right is distributed.
A Right issued to a Record Date Shareholder will be a capital asset in the
hands of such shareholder if the Common Stock with respect to which the Right
was issued was a capital asset in the hands of such shareholder. If a Right
expires unexercised, no loss will be realized.
If Rights are exercised for Shares, the basis of the Shares received will
include the basis allocated to the Rights (if any) and the amount paid upon
exercise of the Rights. The holding period for Shares acquired upon the
exercise of Rights begins on the date the Rights are exercised.
For back-up withholding purposes, the Fund may be required to withhold 31%
of reportable payments paid to certain non-corporate shareholders.
The foregoing is only a summary of applicable federal income tax
consequences and does not address any state or local tax consequences to
holders of Rights. Shareholders should consult their tax advisers concerning
the tax consequences in their particular circumstances. See "Taxation."
16
<PAGE>
DILUTION
Because the Subscription Price will be less than the current net asset value
per share of the Fund's Common Stock and because the number of shares
outstanding after completion of the Offer will increase in a greater
percentage than the increase in the size of the Fund's assets, the Offer will
result in a dilution of the net asset value per share for all shareholders.
Although it is not possible to state precisely the amount of the decrease in
net asset value per share because it is not known at this time what the net
asset value per share will be on the Expiration Date or how many Shares will
be subscribed for, the dilution resulting from the Offer could be substantial.
The amount of the dilution will depend upon the extent to which the Offer is
subscribed. For example, assuming that all Rights are exercised at the
estimated subscription price per Share of $ (90% of the Fund's net asset
value per share as of January 23, 1997), and that the number of Shares subject
to subscription pursuant to the Offer is increased by 25% to satisfy over-
subscriptions, then the Fund's net asset value per share would be reduced by
approximately $ . In addition, as a result of the terms of the Offer,
shareholders who do not fully exercise their Rights should also expect that
they will, upon completion of the Offer, own a smaller proportional interest
in the Fund and experience a corresponding reduction in the voting power of
their shares.
IMPACT ON CERTAIN FEES
The Adviser and the Administrator will benefit from an increase in the
Fund's assets resulting from the Offer because the Adviser's and
Administrator's fees are based on the net assets of the Fund. It is not
possible to determine the precise amount of additional compensation the
Adviser and Administrator will receive as a result of the Offer because it is
not known at this time how many Shares will be subscribed for and because the
proceeds of the Offer will be invested in additional portfolio securities that
will fluctuate in value and, in the case of the Adviser, because the rate of
its fee varies based on the Fund's investment performance. However, assuming
that all Rights are exercised at the estimated subscription price of $ , that
the number of Shares subject to subscription pursuant to the Offer is
increased by 25% to satisfy over-subscriptions and that the Fund's investment
performance for the preceding twelve months equals the percentage change in
the CS First Boston High Yield IndexTM for the same period, the additional
annual advisory fee received by the Adviser as a result of the Offer would be
approximately $ , and the additional annual administrative fee received by
the Administrator would be approximately $ . The advisory fee paid by the
Fund varies based on the Fund's investment performance relative to the CS
First Boston High Yield IndexTM. See "Management of the Fund--Advisory Fee."
Four of the Fund's seven directors are "interested persons" of the Fund within
the meaning of the 1940 Act. The other three directors are not "interested
persons" of the Fund. Three of the interested directors, Messrs. Pacholder,
Morgan and Shanahan, could benefit from the Offer because of their indirect
ownership interests in the Adviser. See "Management of the Fund" below and in
the Statement of Additional Information.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are sold
at the estimated subscription price of $ per Share, are estimated to be
approximately $ , after payment of the estimated offering expenses,
including the Dealer Manager and soliciting fees. Expenses related to the
issuance of the Shares will be borne by the Fund and will reduce the net asset
value of the Common Stock. If the Fund increases the number of Shares subject
to subscription pursuant to the Offer by 25% (415,970 shares), in order to
satisfy over-subscriptions, the additional net proceeds will be approximately
$ . The Fund will invest the net proceeds of the Offer in accordance with
its investment objective and policies. Depending upon market conditions and
the availability of appropriate securities, investment of the proceeds of the
Offer may take up to three months from their receipt by the Fund. See
"Investment Objective and Policies."
17
<PAGE>
RISKS OF LEVERAGE
The leveraging of the Fund's Common Stock through the issuance of preferred
stock involves certain risks to holders of the Common Stock. These risks
include a higher volatility of the net asset value and potentially the market
price of their shares. So long as the Fund is able to realize a higher net
return on its investment portfolio than the dividend rate of the preferred
stock, the effect of leverage will be to cause holders of the Common Stock to
realize higher current net investment income than if the Fund were not
leveraged. Currently, the Fund's portfolio must experience an annual return of
1.96% (net of expenses) in order to cover the annual dividend payments on the
outstanding 6.95% Cumulative Preferred Stock. Upon the completion of the
Offer, the Fund intends to add incremental leverage by issuing additional
preferred stock so that the percentage of the Fund's assets representing
leverage will be approximately the same as it was prior to completion of the
Offer. See "Description of Capital Stock--Preferred Stock."
The purpose of the following table is to assist shareholders in
understanding the effects of leverage. The returns set forth in the table are
hypothetical and actual returns may be greater or less than those assumed for
purposes of the table. The table does not take into consideration the effect
of the issuance of Shares pursuant to the Offer or the issuance of additional
preferred stock.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed Return on Portfolio (Net of
Expenses)............................ -10.00% -5.00% 0.00% 1.96% 5.00% 10.00%
Corresponding Return to Common
Stockholders......................... -16.50% -9.60% -2.70% 0.00% 4.20% 11.09%
</TABLE>
To the extent that the net return on the Fund's investment portfolio equal
to the aggregate redemption price of the preferred stock declines toward the
dividend rate of the preferred stock, the benefit of leverage to holders of
the Common Stock will be reduced. If the current dividend rate of the
preferred stock were to exceed the net return on any such portion of the
Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to holders of the Common Stock and in a lower net asset
value than if the Fund were not leveraged. Similarly, since any decline in the
net asset value of the Fund's investment portfolio would be borne entirely by
holders of the Common Stock, the effect of leverage in a declining market will
be a greater decrease in net asset value of the Common Stock than if the Fund
were not leveraged, which would likely be reflected in a greater decline in
the market price of the Common Stock. In an extreme case, if the Fund's
current investment income were not sufficient to meet dividend requirements of
the preferred stock or if the Fund failed to maintain the required asset
coverage, in order for the Fund to declare a cash dividend or other
distribution on the Common Stock it could be necessary for it to liquidate
certain portfolio investments at a time when it may be disadvantageous to do
so, thereby reducing the net asset value attributable to the Common Stock.
Such liquidations could adversely affect the Fund's net asset value and yield.
Under the 1940 Act, the Fund is not permitted to issue any shares of
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Stock unless, at the
time of such declaration, the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or distribution) is at
least 200% of such liquidation value. On January 23, 1997, the asset coverage
of the Fund's outstanding preferred stock under the 1940 Act was %. The Fund
may be required to redeem shares of preferred stock from time to time to
maintain the asset coverage of the preferred stock at 200% or more or to meet
certain other asset coverage tests and restrictions. See "Description of
Capital Stock--Preferred Stock--Redemption."
18
<PAGE>
MARKET PRICE AND NET ASSET VALUE
MARKET PRICE
The Fund's outstanding Common Stock is listed on the Exchange. Since the
Fund commenced operations, the Common Stock has traded in the market at, above
and below net asset value. The last sale price on the Exchange and the net
asset value of a share of Common Stock on January 23, 1997 were $ and $ ,
respectively.
The following table sets forth for the periods indicated the high and low
last sale prices of the Common Stock on the Exchange, the high and low net
asset values per share, and the high and low percentages by which the Common
Stock traded at a premium over or discount from net asset value.
<TABLE>
<CAPTION>
NET ASSET PREMIUM OR
VALUE MARKET PRICE (DISCOUNT)
------------- ------------- ------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
1996
4thQ................................ $17.64 $16.92 $18.00 $17.00 2.40% (0.17)%
3rdQ................................ 17.03 16.24 17.50 15.63 2.24 (4.37)
2ndQ................................ 16.58 16.17 16.38 15.63 0.15 (3.67)
1stQ................................ 16.83 16.19 17.88 16.38 7.30 (0.40)
1995
4thQ................................ $16.55 $16.02 $18.50 $17.38 11.80% 5.43 %
3rdQ................................ 17.20 16.45 18.13 17.25 7.70 2.00
2ndQ................................ 17.27 16.60 17.88 15.88 4.10 (3.96)
1stQ................................ 17.39 16.45 17.38 15.50 0.24 (9.25)
</TABLE>
Shares of closed-end investment companies, and particularly those of closed-
end stock funds, have tended to trade at prices that generally have been at a
discount from their net asset value. There can, of course, be no assurance
that shares of the Fund's Common Stock will not trade at a discount from net
asset value in the future. Net asset value generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater in the case of a fund having a leveraged capital
structure. Since the market price of shares of the Fund's Common Stock will be
determined by such factors as relative demand for and supply of such shares in
the market, general market and economic conditions, and other factors beyond
the control of the Fund, the Fund cannot predict whether shares of Common
Stock will trade at, below or above net asset value, or at, below or above the
Subscription Price. Accordingly, the Common Stock is designed primarily for
long-term investors, and investors in the Common Stock should not view the
Fund as a vehicle for trading purposes. See "Risks of Leverage" and "Share
Repurchases; Conversion to Open-End Company."
NET ASSET VALUE
The Fund calculates and makes available for publication the net asset value
per share of its Common Stock as of the close of business on the Exchange
(currently 4:00 P.M., New York City time) on each Thursday the Exchange is
open for trading. The net asset value per share is determined by dividing the
value of the Fund's assets (including interest and dividends accrued but not
collected), less its liabilities (including accrued expenses) and the
liquidation value of any outstanding shares of preferred stock, by the number
of outstanding shares of Common Stock. In valuing the Fund's assets,
securities listed on an exchange or traded over-the- counter are valued by an
independent pricing service approved by the Board of Directors based on market
quotations. Securities for which market quotations are not readily available
and other assets are valued at fair value as determined under procedures
established by the Board of Directors. Debt securities with remaining
maturities of 60 days or less when acquired are valued at amortized cost.
19
<PAGE>
Because it is expected that the Board of Directors of the Fund will set the
record date for the 1997 first quarter dividend so that the ex-dividend date
will occur after the Expiration Date, the net asset value of the Fund on the
Expiration Date is expected to include the amount of the distribution
liability for the first quarter dividend on the Common Stock. Nevertheless, it
is expected that the first distribution payable on the Shares offered hereby
will be the regular dividend for the second quarter, which will not be payable
before June 1997. See "Dividends and Distributions."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of total return
through current income and capital appreciation by investing primarily in
high-yield, high risk fixed-income securities of domestic companies. No
assurance can be given that the Fund will be able to achieve its investment
objective. The Fund's investment objective and non-fundamental investment
policies may be changed by the Board of Directors without shareholder
approval. Additional information regarding the investment policies of the Fund
and certain investment transactions in which it may engage is contained in the
Statement of Additional Information.
INVESTMENT PHILOSOPHY AND ANALYSIS
The Adviser seeks to identify and purchase for the Fund fixed-income
securities which have a higher relative value and more favorable risk return
characteristics than the market as a whole. As part of this strategy, the Fund
seeks to invest a material portion of its portfolio in securities which are
trading at a discount from their face value or principal amount. Such
discounts are generally attributable to one or more factors. First, many
investors are risk averse and are unwilling to purchase or hold securities
that are rated below investment grade or are unrated. Second, certain
institutional investors may be required by statute, regulation or
organizational documents to divest themselves of investments in such
securities. Third, considerable financial and legal analysis is required to
evaluate these securities. The difficulty of analysis, reduced investor
interest and less active trading combine to discourage many securities
analysts from following or recommending investment in such companies. In
addition, shortly after a company experiences financial or operating
difficulties, certain investors may sell its securities at prices that do not
necessarily reflect their intrinsic value. These factors may create
substantially more sellers than buyers and significant differences may then
develop between the current market prices of such securities and the Adviser's
estimate of their intrinsic value, thereby providing opportunities for capital
appreciation. A deeply discounted fixed-income security offers the potential
for significant capital appreciation if the issuer is able to pay the security
at maturity or to redeem the issue at face value, or if the credit quality of
the security improves. Conversely, these securities may take considerable time
to appreciate in value and, in some cases, may become less valuable or
worthless, particularly in the event of a default or the bankruptcy of the
issuer.
The Adviser believes that the risks associated with investing in securities
trading at a discount from their face value or principal amount can be managed
through credit, financial and legal analysis and research, and through
portfolio diversification. The Adviser also attempts to manage risk through
acquisition of securities generally at or near its estimate of their
liquidation values.
In analyzing prospective investments for the Fund, the Adviser generally
considers a number of factors including the following:
1. Financial Condition. The Adviser performs credit and financial analysis,
emphasizing cash flow, on all investments. Generally, the Fund will avoid
investment in a distressed situation if the Adviser believes accurate
financial and business information is not available.
2. Value of Assets. The Adviser generally estimates the liquidation value of
a company to measure the risk of loss in case the company is unable to
continue operations. If the investment is purchased at or below
20
<PAGE>
liquidation value, the ultimate risk of loss may be reduced. Additionally, in
certain cases, sale of the assets of a company may provide more value than its
continued operation.
3. Business Prospects. The Adviser generally considers the industry outlook
and competitive factors, including supplier and customer relationships,
strengths and weaknesses of products, viability of product lines and other
considerations in an effort to determine the company's business prospects. In
most cases a high level of total return will be realized through the value
inherent in the continued operation of the company's business.
4. Capital Structure. The Adviser reviews the terms of each debt instrument
in order to assess the priority of the Fund's investment relative to other
debt and equity holders. The Fund generally will seek a position in the
capital structure of a company which will enable it to preserve the value of
its investment in the case of a liquidation. In some cases, seniority in the
capital structure, particularly when coupled with secured status, provides the
opportunity for significant influence in the event of a bankruptcy or
restructuring.
5. Management. The Adviser considers the depth and capabilities of the
management team to assess its ability to lead a company through financial or
operating difficulties. The Adviser also considers management's ownership
interest in the company. When management has a substantial equity stake in the
company, the Adviser believes management will be motivated to enhance and
protect its interest in the company and to avoid liquidation, reorganization
or bankruptcy.
6. Capital Requirements. The Adviser considers a company's needs for
additional capital and the potential sources for such capital.
PORTFOLIO INVESTMENTS
The Fund invests in a diversified portfolio comprised primarily of publicly
traded bonds, debentures, notes and preferred stocks issued by domestic
companies which generally have market capitalizations (including debt) of at
least $100 million. These securities are generally traded in the over-the-
counter market, but may be listed on an exchange. The Fund is not restricted
as to the nature or type of debt or equity securities in which it may invest.
Debt securities in which the Fund invests may or may not bear fixed or
variable rates of interest, or carry equity features, such as conversion or
exchange rights, or warrants for the acquisition of shares of stock of the
same or a different company, and may or may not have been issued in connection
with a leveraged buy-out. The Fund may also invest in privately placed debt
securities and in hybrid securities, such as debt with warrants attached, and
other privately held obligations of, in most cases, public companies, such as
loans, credit paper and loan participations. The Fund may from time to time
invest in certain industrial development bonds, including pollution control
revenue bonds. Industrial development bonds are issued by governmental
entities but are payable solely by the companies which own and operate the
facilities financed by the bonds. The Fund will not invest in industrial
development bonds to obtain any tax benefits associated with such investments.
The Fund may invest up to 25% of its assets in U.S. dollar denominated
securities of foreign companies issued or trading in the United States. Equity
securities will generally comprise no more than 10% of the Fund's total
assets.
The Fund's investments will generally not be rated or will be rated below
investment grade by Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's") (i.e., BB or lower by S&P, or Ba or lower
by Moody's). Securities rated below investment grade are considered to be of
poor standing and are speculative with respect to the company's capacity to
pay interest and principal in accordance with the terms of the obligation. A
description of the rating policies of S&P and Moody's appears in Appendix A to
the Statement of Additional Information. Securities ratings are based largely
on an issuer's historical financial performance and the rating agencies'
investment analyses at the time of rating. The Adviser believes that the
rating assigned to a particular security is not necessarily indicative of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. For a discussion of the risks associated with investing
in securities rated below investment grade, see "Special Risk Considerations"
below.
21
<PAGE>
As of December 31, 1996, the percentage of the Fund's assets invested in
fixed-income securities within the various rating categories, determined on a
dollar-weighted average, were as follows:
<TABLE>
<CAPTION>
RATING CATEGORY PERCENTAGE*
--------------- -----------
<S> <C>
BB or Ba................................... 12.48%
B.......................................... 74.14
CCC or Caa................................. 7.61
CC or Ca................................... 0
C.......................................... 0
D.......................................... 0
Common Stock/Warrants.................... 1.46
Cash and cash equivalents................ 4.31
------
Total Investments...................... 100.00%
</TABLE>
--------
* Based on the S&P rating if the security is
rated by S&P, otherwise based on the Moody's
rating. Includes unrated fixed-income
securities deemed by the Adviser to be of
comparable quality.
The Adviser anticipates that most of the companies issuing securities
acquired by the Fund will not be involved, at the time of acquisition or
thereafter, in reorganization, restructuring or bankruptcy proceedings.
However, the Fund may from time to time become an active participant in those
activities. It is the policy of the Fund not to invest in the securities of an
issuer for the purpose of exercising control or management. The Adviser may,
however, intentionally seek an active role in reorganization, restructuring or
bankruptcy proceedings at the time of investment, or may decide to assume such
a role as a result of subsequent events. Active participation is often
necessary to monitor a non-accruing security and to avoid the divisive
techniques used by management and certain creditors to enhance their own
positions at the expense of other creditors. The Adviser's active
participation in reorganization, restructuring or bankruptcy proceedings,
whether as a member of creditors' or equity holders' committees or otherwise,
may restrict for some time the Fund's ability to sell the related portfolio
securities.
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
NON-ACCRUING SECURITIES. Some of the Fund's portfolio investments may not be
current on payment of interest or dividends or may be in default at the time
of acquisition ("non-accruing securities"). Non-accruing securities may
present the opportunity for significant capital appreciation based on the
Adviser's estimation of their liquidation or reorganization value. There can
be no assurance, however, that such capital appreciation will occur or that it
will occur within the time frame estimated by the Adviser. Non-accruing
securities may be less liquid and more volatile than other portfolio
securities. Consistent with the Fund's objective of obtaining high levels of
current income, non-accruing securities will generally comprise no more than
20% of the Fund's net assets. However, some portfolio securities may become
non-accruing securities after they are acquired by the Fund. Given the
unpredictability of performance by the issuers of the Fund's portfolio
investments, it is impossible to estimate the amount of the Fund's assets
which could become invested in non-accruing securities. Accordingly, there can
be no assurance that the level of non-accruing securities will not exceed 20%
of the Fund's net assets. The Adviser will not purchase additional non-
accruing securities for the Fund if, at the time of proposed acquisition, non-
accruing securities comprise 20% or more of the net assets of the Fund.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in U.S.
dollar denominated securities or other obligations of foreign companies issued
or trading in the United States. Investing in the securities of foreign
issuers involves special risks not typically associated with investing in U.S.
companies. These risks include differences in accounting, auditing and
financial reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S.
22
<PAGE>
investment in foreign countries, and potential restrictions on the flow of
international capital and currencies. Foreign issuers may also be subject to
less government regulation than U.S. companies. Moreover, the dividends and
interest payable on foreign securities may be subject to foreign withholding
taxes, thus reducing the net amount of income available for distribution to
shareholders of the Fund. Further, foreign securities often trade with less
frequency and volume than domestic securities and, therefore, may exhibit
greater price volatility.
EQUITY SECURITIES. Equity securities will generally comprise no more than
10% of the Fund's total assets. Equity securities are defined as common stocks
and preferred stocks without mandatory redemption features and do not include
bonds, debentures or other debt obligations that are convertible into equity
securities. The Adviser will not purchase additional equity securities for the
Fund if, at the time of proposed acquisition, equity securities comprise 10%
or more of the Fund's total assets. However, there can be no assurance that
the Fund's investments in equity securities will not exceed 10% of its total
assets, particularly if issuers of portfolio securities become involved in
restructuring or reorganization proceedings that result in the conversion of
debt obligations into equity securities or if there is an increase in the
value of the equity securities held by the Fund relative to the Fund's debt
obligations.
TEMPORARY INVESTMENTS. There may be times when securities satisfying the
Adviser's investment criteria are unavailable or when, in the Adviser's
judgment, conditions in the securities markets render investment in such
securities inconsistent with the Fund's investment strategy and the best
interests of shareholders. During these periods, or pending investment in such
securities, the Fund may invest in temporary investments. Temporary
investments are defined as (i) corporate debt obligations with a remaining
term to maturity in excess of one year, such as increasing rate notes,
variable or floating rate notes and certain preferred stock issues, and (ii)
debt obligations with a remaining term to maturity of one year or less, such
as commercial paper, bank certificates of deposit, bankers' acceptances,
short-term obligations of the U.S. government, its agencies or
instrumentalities, and repurchase agreements with respect to any of the
foregoing. Temporary investments with longer maturities generally will have
structural characteristics that are intended to reduce the risk of principal
loss from interest rate fluctuations but may also be rated in the lower rating
categories classified by S&P and Moody's or may not be rated. The yield on
these securities will, as a general matter, tend to be lower than the yield on
the Fund's other portfolio investments. All temporary investments will be
paying interest currently at the time of purchase. It is impossible to predict
when, for how long or to what extent temporary investments will be utilized.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment
restrictions. The principal investment restrictions of the Fund are summarized
below. A complete listing is contained in the Statement of Additional
Information. These restrictions are fundamental policies and may only be
changed with shareholder approval.
1. The Fund may not issue senior securities (as defined in the 1940 Act)
other than preferred stock or except to the extent such issuance might be
involved with respect to borrowing described under 2 below.
2. The Fund is authorized under its investment policies to borrow money
on a secured or unsecured basis in an amount up to 20% of the value of its
net assets at the time of borrowing. (Notwithstanding the foregoing, the
Fund's charter prohibits it from borrowing money at any time shares of
preferred stock are outstanding.)
3. The Fund may not invest more than 5% of its total assets in securities
of any one issuer, other than the U.S. government or its agencies or
instrumentalities, or acquire more than 10% of the outstanding voting
securities of any one issuer, except that up to 25% of the Fund's total
assets may be invested without regard to these limitations.
OTHER INVESTMENT POLICIES. The Fund may purchase securities on a when-
issued, delayed delivery or "when, as and if issued" basis and may invest in
private placements and repurchase agreements. Information concerning these
investments and the related risks is contained in the Statement of Additional
Information.
23
<PAGE>
SPECIAL RISK CONSIDERATIONS
Investment by the Fund in high-yield securities (commonly known as "junk
bonds") is speculative and involves a high degree of risk which can result in
substantial or total losses to the Fund. The Fund may invest in companies that
are incurring operating losses, have substantial capital needs, have negative
net worths, are insolvent or are involved in bankruptcy or reorganization
proceedings. These investments may take considerable time to appreciate in
value and, in some cases, may become less valuable or worthless. It is very
difficult to value financially distressed companies and to estimate the
prospects for their financial recovery. Once a company experiences financial
or operating problems, its condition can deteriorate rapidly. Despite the
Adviser's efforts to obtain current, accurate financial and business
information, available information may be of limited utility. The market
values of high-yield securities generally fluctuate in response to changes in
interest rates and economic conditions more than those of higher rated
securities. Also, with high-yield securities, there is a greater possibility
that an adverse change in the financial condition of the issuer, particularly
a highly leveraged issuer, may affect its ability to make payments of income
and principal and increase the expenses of the Fund in seeking recovery from
the issuer. Further, with high-yield securities, there is a greater
possibility of a default or the bankruptcy of the issuer. Since there may be
no public market or only inactive trading markets for some of the securities
in which the Fund invests, these securities may be harder to value and more
susceptible to adverse publicity concerning the issuer, and consequently the
Fund may be required to retain such investments for indefinite periods or sell
them at substantial losses. In addition, legislation may be enacted in the
future that could depress the value of high-yield securities.
In the event companies issuing securities held by the Fund become involved
in bankruptcy proceedings, additional risks will be present. Bankruptcy or
other insolvency proceedings are highly complex, can be very costly and may
result in unpredictable outcomes. The bankruptcy court has extensive powers
and under certain circumstances may alter contractual obligations of the
bankrupt company. When a company seeks relief under the Federal Bankruptcy
Code (or has a petition filed against it), an automatic stay prevents all
entities, including creditors, from foreclosing or taking other actions to
enforce claims, perfect liens or reach collateral securing such claims.
Creditors who have claims against the company prior to the date of the
bankruptcy filing must then petition the court to permit actions protecting
their claims, but may be prohibited from doing so if the court concludes that
the value of the property in which the creditor has an interest will be
adequately protected during the proceedings. If the court's assessment of
adequate protection is inaccurate, a creditor's collateral may be diminished
without the creditor being afforded the opportunity to preserve it. Thus, even
if the Fund holds a secured claim, it may be prevented from collecting the
liquidation value of the collateral securing its debt and may be forced to
permit use of the collateral although the use diminishes the value of the
collateral, unless relief from the automatic stay is granted by the court.
Security interests are closely scrutinized and frequently challenged in
bankruptcy proceedings and may be invalidated for a variety of reasons. For
example, security interests may be set aside because, as a technical matter,
they have not been perfected properly under local rules or the Uniform
Commercial Code. If a security interest is invalidated, the secured creditor
loses the value of the collateral, becomes unsecured, and almost certainly
will experience a significant loss of investment. While the Fund intends to
scrutinize any security interests that secure the debt obligations it
purchases, there can be no assurance that such security interests will not be
challenged vigorously and found defective in some respect, or that the Fund
will be able to prevail against challenges.
Debt may be disallowed or subordinated to the claims of other creditors if
the creditor is found to have engaged in certain inequitable conduct resulting
in harm to other parties with respect to the affairs of a company filing for
protection from creditors under the Bankruptcy Code. Creditors' claims may be
treated as equity if they are deemed to be exerting undue control or influence
over the business affairs of the company prior to filing under the Bankruptcy
Code. If a creditor is found to have interfered with the company's affairs to
the detriment of other creditors or stockholders, the creditor may be held
liable for damages to injured parties. While the Fund will attempt to avoid
taking the types of action that would lead to equitable subordination or
creditor liability, there can be no assurance that such claims will not be
asserted or that the Fund will be able to defend against them successfully.
24
<PAGE>
MANAGEMENT OF THE FUND
Management of the Fund, including general supervision of the activities
performed by the Fund's investment adviser, is the responsibility of the Board
of Directors of the Fund. For certain information regarding the directors and
officers of the Fund, see "Management of the Fund--Directors and Officers" in
the Statement of Additional Information.
INVESTMENT ADVISORY SERVICES
Pacholder & Company, Bank One Towers, East Tower, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236, has served as the Fund's investment adviser
since the Fund commenced operations in November 1988. The Adviser was
organized in 1988 as an Ohio general partnership between Pacholder Associates,
Inc. ("Pacholder") and USF&G Marketing Services Co. ("Marketing Services"),
which each have a fifty-percent partnership interest in the Adviser. Pacholder
is an investment advisory firm formed in December 1983 which specializes in
high-yield, fixed-income securities. Pacholder currently manages in excess of
approximately $600 million for institutional clients and provides research and
consulting services to those clients and others. Approximately $260 million of
the accounts currently managed by Pacholder are dedicated to investing in
securities similar to those eligible for purchase by the Fund. Marketing
Services is an indirect wholly-owned subsidiary of USF&G Corporation. USF&G
Corporation is composed of property/casualty and life insurance subsidiaries.
Its primary subsidiary is United States Fidelity and Guaranty Company. United
States Fidelity and Guaranty Company holds a $600,000 15% Promissory Note due
November 1997 of Pacholder and owns twenty percent of Pacholder's outstanding
securities. Asher O. Pacholder, William J. Morgan and James P. Shanahan, Jr.,
officers and directors of the Fund, are shareholders, officers or directors of
Pacholder. John C. Sweeney, a director of the Fund, is an officer of USF&G
Corporation.
PORTFOLIO MANAGEMENT
The overall portfolio management strategy for the Fund is determined by the
Adviser under the general supervision and direction of Asher O. Pacholder,
CFA. Dr. Pacholder has been Chairman and Chief Executive Officer of Pacholder
since its founding in 1983. Prior to that time he was Vice President and Chief
Investment Officer of Union Central Life Insurance Company in Cincinnati,
Ohio. In that capacity he was responsible for investments aggregating $1.6
billion in fixed-income securities, equities and real estate. After graduating
with an M.S. and Ph.D. from Yale University, Dr. Pacholder began his
investment career at T. Rowe Price Associates and subsequently served as a
trust officer at Republic Bank of Dallas. He is a chartered financial analyst
("CFA"). Anthony L. Longi has been responsible for the day-to-day management
of the Fund's portfolio since November 1994. Mr. Longi is an Executive Vice
President of Pacholder where he has worked as an investment grade and high-
yield bond investment analyst and trader, portfolio manager and special
situations analyst for more than nine years.
ADVISORY FEE
As full compensation for the services provided, facilities furnished and
expenses paid by the Adviser under its investment advisory agreement with the
Fund, the Adviser receives an annual investment advisory fee which increases
or decreases from a "fulcrum fee" of 0.90% of the Fund's average net assets
based on the total return investment performance of the Fund for the prior
twelve-month period relative to the percentage change in the CS First Boston
High Yield Index(TM) (the "Index") for the same period (the "Index Return"). A
general description of the Index, and the Index Return and total return
investment performance of the Fund for the twelve-month periods ended December
31, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996 are set forth in
Appendix B to the Statement of Additional Information.
The advisory fee is paid quarterly at an annual rate which varies between
0.40% and 1.40% of the Fund's average net assets. The advisory fee is
structured so that it will be 0.90% of the Fund's average net assets if
25
<PAGE>
the Fund's investment performance for the preceding twelve months (net of all
fees and expenses, including the advisory fee) equals the Index Return. The
advisory fee increases or decreases from the "fulcrum fee" of 0.90% by ten
percent of the difference between the Fund's investment performance during the
preceding twelve months and the Index Return during that period, up to the
maximum fee of 1.40% or down to the minimum fee of 0.40%. The following table
shows examples of the advisory fees which would be applicable at the stated
levels of the Fund's performance relative to the Index Return for a particular
twelve-month period.
<TABLE>
<CAPTION>
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
NET OF FEES AND EXPENSES)( WEEKLY NET ASSETS)*
- -------------------------- -------------------
<S> <C>
Index Return + 5%....................................... 1.40%
Index Return + 4........................................ 1.30
Index Return + 3........................................ 1.20
Index Return + 2........................................ 1.10
Index Return + 1........................................ 1.00
Index Return............................................ 0.90
Index Return - 1........................................ 0.80
Index Return - 2........................................ 0.70
Index Return - 3........................................ 0.60
Index Return - 4........................................ 0.50
Index Return - 5........................................ 0.40
</TABLE>
--------
* The advisory fee increases or decreases from a "fulcrum fee" of 0.90%.
For the fiscal years ended December 31, 1994, 1995 and 1996 (unaudited), the
Adviser received advisory fees totaling $726,317, $391,534 and $1,625,042,
respectively, which represent 1.07%, 0.40% and 1.40%, respectively, of the
Fund's average net assets during such periods. The advisory fee paid by the
Fund has for certain periods exceeded, and may in the future exceed, the
advisory fees paid by most other investment companies. In addition, the
"fulcrum fee" of 0.90% is higher than the fees paid by most other investment
companies and, accordingly, the fee paid by the Fund may exceed the advisory
fees paid by most other investment companies, even if the investment
performance of the Fund is less than the Index Return. Also, the Adviser may
receive the maximum fee even if the Fund's absolute performance is negative
and may receive the minimum fee in instances where the Fund experiences
significant positive performance.
ADMINISTRATIVE AND ACCOUNTING SERVICES
Kenwood Administrative Management, Limited Partnership (the "Administrator")
serves as administrator of the Fund. The Administrator is an Ohio limited
partnership whose general and limited partners are wholly-owned subsidiaries
of Pacholder, a general partner of the Adviser. The Administrator monitors the
Fund's compliance with various regulatory requirements, coordinates and
monitors the activities of the Fund's other service providers, handles various
public and shareholder relations matters, and assists in the preparation of
financial and other reports. For the services rendered to the Fund and related
expenses borne by the Administrator under its administration agreement with
the Fund, the Fund pays the Administrator a fee, calculated and paid monthly,
at the annual rate of 0.10% the Fund's average net assets.
Pursuant to an accounting services agreement with the Fund, Pacholder, a
general partner of the Adviser, is responsible for (i) accounting relating to
the Fund and its investment transactions, (ii) determining the net asset value
per share of the Fund, (iii) maintaining the Fund's books of account, and (iv)
monitoring, in conjunction with the Fund's custodian, all corporate actions,
including dividends and distributions and stock splits, taken in respect of
securities held by the Fund. For these services the Fund pays Pacholder a
monthly fee at the annual rate of 0.025% of the first $100 million of the
Fund's average net assets and 0.015% of such assets in excess of $100 million,
and reimburses it for out-of-pocket expenses.
26
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's policy, which may be changed by the Board of Directors, to
pay quarterly dividends on the Common Stock from net investment income
remaining after payment of dividends on the preferred stock. To the extent
capital gains are not required to satisfy the dividend, redemption or
liquidation preferences of outstanding shares of preferred stock, they will be
distributed to holders of the Common Stock. Net short-term capital gains, if
any, may be included in quarterly dividends or distributed on such other basis
as may be determined from time to time by the Board of Directors. Net long-
term capital gains, if any, will be distributed at least annually.
Because it is expected that the record date for the 1997 first quarter
dividend, as fixed by the Board of Directors of the Fund, will be prior to the
date on which the Shares offered hereby will be issued, it is expected that
the first distribution payable on the Shares will be the regular dividend for
the second quarter, which will not be payable before June 1997.
The Fund seeks to pay a stable quarterly dividend on the Common Stock.
However, due to the nature of the Fund's investments, the Fund's investment
income and the amount available for distribution with respect to any
particular quarter may be subject to fluctuation. Accordingly, to maintain a
more stable quarterly distribution, the Fund may distribute less than the
entire amount of net investment income earned in a particular quarter. Such
undistributed net investment income will be available to supplement future
distributions which might otherwise have been reduced by a decrease in the
Fund's net income due to fluctuations in investment income or expenses. As a
result, the dividends paid by the Fund for any particular quarter may be more
or less than the amount of net investment income actually earned by the Fund
during the period. Any undistributed net investment income will be reflected
in the Fund's net asset value. No assurance can be given that the Fund will be
able to maintain a stable quarterly dividend on the Common Stock. See "Risks
of Leverage" and "Investment Objective and Policies--Special Risk
Considerations."
For tax purposes, the Fund is currently required to allocate net income and
net capital gains, if any, between the Common Stock and preferred stock in
proportion to the total dividends paid to each class with respect to the
taxable year. See "Taxation."
While any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Stock unless at
the time of such declaration (i) all accrued dividends on the preferred stock
have been paid and (ii) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value to the outstanding preferred stock.
This latter limitation on the Fund's ability to make distributions on its
Common Stock under certain circumstances could impair the ability of the Fund
to maintain its qualification for taxation as a regulated investment company.
See "Taxation."
DIVIDEND REINVESTMENT PLAN
Each registered holder of Common Stock may elect to have all dividends and
capital gains distributions, or both, automatically reinvested by Fifth Third
Bank, as agent for shareholders (the "Plan Agent"), in additional full and
fractional (computed to three decimal places) shares of Common Stock under the
Fund's Dividend Reinvestment Plan (the "Plan"). Shareholders who do not elect
to participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or, if the shares are held
in street or other nominee name, then to the nominee) by Fifth Third Bank, as
the Fund's dividend disbursing agent.
The number of shares equivalent to the cash distribution will be determined
as follows:
(1) If shares of Common Stock are trading at net asset value or at a
premium above net asset value at the time of valuation, the Fund will issue
new shares at the greater of net asset value or 95% of the then current
market price; or
27
<PAGE>
(2) If shares of Common Stock are trading at a discount from net asset
value at the time of valuation, the Plan Agent will receive the
distribution in cash and apply it to the purchase of shares of Common Stock
in the open market, on the Exchange or elsewhere, for the participants'
accounts. The Plan Agent will use all distributions received in cash to
purchase shares of Common Stock in the open market within thirty days of
the dividend payment date. Interest will not be paid on any uninvested cash
payments. If the Plan Agent is unable to invest the full amount of the
distribution in open-market purchases because the market discount has
shifted to a market premium or otherwise, the Fund will issue new shares
with respect to the uninvested portion of the distribution.
In the case of shareholders such as banks, brokers or nominees which hold
shares of Common Stock for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares certified
from time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve participants of
any income taxes that may be payable (or required to be withheld) on
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants. All questions and correspondence concerning the Plan should
be directed to Fifth Third Bank, 38 Fountain Square Plaza MD-1090D2,
Cincinnati, Ohio 45263; telephone toll-free at (800) 837-7755. For a more
complete description of the Plan, see "Dividend Reinvestment Plan" in the
Statement of Additional Information.
TAXATION
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). So
long as the Fund qualifies for this tax treatment, it will be relieved of
federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that constitute "exempt interest dividends"
or that are treated as a return of capital) regardless of whether such
distributions are paid in cash or reinvested in additional shares.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirement of the 1940 Act, the Fund will be
required to suspend distributions on the Common Stock until the asset coverage
is restored. See "Description of Capital Stock--Preferred Stock--Dividends."
This may jeopardize the Fund's qualification for taxation as a regulated
investment company. Upon any failure to meet the asset coverage requirement of
the 1940 Act, the Fund may, in its sole discretion, redeem shares of preferred
stock in order to maintain or restore the requisite asset coverage and avoid
the adverse consequences to the Fund and its shareholders of failing to
qualify as a regulated investment company. There can be no assurance, however,
that any such action would achieve such objectives.
The Internal Revenue Service (the "IRS") currently requires a regulated
investment company that has two or more classes of stock to allocate its
income for the year to each class of stock based upon the percentage of total
dividends distributed to each class for the taxable year. So long as the IRS
maintains this position, the Fund intends to allocate net income, net capital
gain and other taxable income, if any, between the Common
28
<PAGE>
Stock and preferred stock in proportion to the total dividends paid to each
class with respect to the taxable year.
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
shares so received, and will have a cost basis in the shares of the same
amount.
For backup withholding purposes, the Fund may be required to withhold 31% of
reportable payments (which may include dividends, capital gain distributions,
and redemptions) to certain non-corporate shareholders. A shareholder,
however, may avoid becoming subject to this requirement by filing an
appropriate form certifying under penalty of perjury that such shareholder's
taxpayer identification number set forth on the form is correct and that he is
not subject to backup withholding, or is exempt from backup withholding.
The Fund will send written notices to shareholders annually regarding the
tax status of the distributions made by the Fund.
Shareholders are urged to consult their tax advisors concerning their own
tax situation, including the application of federal, state and local income
taxes to an investment in the Fund. A more detailed discussion of federal tax
matters is contained in the Statement of Additional Information.
SHARE REPURCHASES; CONVERSION TO OPEN-END COMPANY
The Fund is a closed-end investment company and as such its shareholders do
not have the right to present their shares for redemption by the Fund.
Instead, shares of the Fund's Common Stock trade in the open market at a price
that will be a function of several factors, including net asset value and
yield. In the event that the Fund's Common Stock trades at a significant
discount from net asset value, the Board of Directors is authorized to take
action intended to reduce or eliminate the discount, which may include the
repurchase of shares of Common Stock in the open market or in private
transactions, or the making of a tender offer for such shares. There can be no
assurance, however, that the Board of Directors will decide to take any of
these actions, or that share repurchases or tender offers, if undertaken, will
reduce market discount. In addition, at any time when shares of the Fund's
preferred stock are outstanding, the Fund may not purchase, redeem or
otherwise acquire any shares of its Common Stock unless (i) all accrued
dividends on the preferred stock have been paid and (ii) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's
portfolio (determined after deducting the acquisition price of the Common
Stock) is at least 200% of the liquidation value of the outstanding preferred
stock. The staff of the SEC currently requires that any tender offer made by a
closed-end investment company for shares of its stock must be at a price equal
to the net asset value of such stock on the close of business on the last day
of the tender offer. Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment and other limitations, the Fund may borrow to
finance the repurchase of shares or to make a tender offer. Interest on any
amounts borrowed to finance share repurchase transactions will increase the
Fund's expenses and such interest, or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders, will reduce the Fund's net
income. Any share repurchase or tender offer that might be approved by the
Board of Directors would have to comply with the Securities Exchange Act of
1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a significant discount
from net asset value will be made by the Board of Directors at the time it
considers the matter, it is the Board's present policy, which may be changed
by the Board, not to authorize repurchases of shares of Common Stock or a
tender offer for such shares if (i) such transactions, if consummated, would
(a) result in the delisting of the Common Stock from the Exchange, or (b)
impair the Fund's status as a regulated investment company under the Code
(which
29
<PAGE>
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company
under the 1940 Act; (ii) the Fund would not be able to liquidate portfolio
securities in an orderly manner and consistent with the Fund's investment
objective and policies in order to repurchase shares; or (iii) there is, in
the Board's judgment, any (a) material legal action or proceeding instituted
or threatened challenging such transactions or otherwise materially adversely
affecting the Fund, (b) general suspension of or limitation on prices for
trading securities on the Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
New York State banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition that would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Directors may in the
future modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below net asset value
would result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders would reduce or eliminate a market discount from net asset value.
Nevertheless, the fact that the Fund's shares may be the subject of repurchase
or tender offers from time to time may reduce any spread between market price
and net asset value that might otherwise exist. A purchase by the Fund of
shares of its Common Stock will decrease the Fund's total assets which would
likely have the effect of increasing the Fund's expense ratio. Any purchase by
the Fund of Common Stock at a time when shares of preferred stock are
outstanding will increase the leverage applicable to the outstanding shares of
Common Stock then remaining. See "Risks of Leverage." Under Maryland law,
shares acquired by the Fund constitute authorized but unissued shares.
If the Fund's Common Stock is trading at a significant discount from net
asset value, the Board may also consider submission to shareholders of a
proposal to convert the Fund to an open-end investment company. In general,
conversion to an open-end company would require the approval of a majority of
the outstanding shares of preferred stock and a majority of the outstanding
shares of Common Stock, each voting as a separate class, and would have to be
declared advisable by the Board of Directors. For this purpose, a "majority of
the outstanding shares" means, for each class, the vote, at the annual or a
special meeting of shareholders, (i) of 67% or more of the shares present at
such meeting, if the holders of more than 50% of the outstanding shares are
present or represented by proxy; or (ii) of more than 50% of the outstanding
shares, whichever is the less. See "Description of Capital Stock--Special
Voting Requirements" for a discussion of the special voting provisions
applicable to mergers or similar fundamental corporate transactions. If the
Fund converted to an open-end company, it would be required to redeem all
shares of preferred stock then outstanding, and the Fund's Common Stock would
no longer be listed on the Exchange. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of redemption. In order to avoid maintaining large cash positions or
liquidating favorable investments to meet redemptions, open-end companies
typically engage in a continuous offering of their shares. Open-end companies
are thus subject to periodic asset in-flows and out-flows which can complicate
portfolio management. Open-end companies are also prohibited from investing
more than 15% of their assets in illiquid securities, and if the Fund
converted to an open-end company, the Fund's investments in restricted and
other illiquid securities would be subject to this limitation.
Before deciding whether to take any action in response to a discount from
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a significant discount, the Board of Directors may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
30
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The total number of shares of stock of all classes that the Fund has
authority to issue is 50,000,000 shares of capital stock, par value $.01 per
share, of which 48,350,000 have been classified as Common Stock and 1,650,000
have been classified as 6.95% Cumulative Preferred Stock (the "6.95% Preferred
Stock"). The Board of Directors has the authority to reclassify any authorized
but unissued shares of capital stock into one or more additional or other
classes or series of stock.
Upon completion of the Offer, it is expected that the Board of Directors
will adopt articles supplementary amending the charter of the Fund to classify
additional shares of preferred stock in two series. The newly-classified
preferred shares would be issued, in a private placement, in exchange for all
outstanding shares of 6.95% Preferred Stock and for new capital, in an amount
such that the percentage of the Fund's assets representing leverage will be
approximately the same as it was prior to completion of the Offer. Except for
the annual dividend rates of the series and the mandatory redemption date of
the class, the terms of the newly-classified preferred stock are expected to
be the same in all material respects as the 6.95% Preferred Stock. The Board
of Directors is expected to set the annual dividend rate of the series to be
issued to the holders of 6.95% Preferred Stock at 7.15%, and to set the annual
dividend rate of the series to be issued for new capital at a spread of 95
basis points over the yield on five-year U.S. Treasury securities as of the
fourth day prior to issuance. The mandatory redemption date of the new
preferred stock is expected to be March 1, 2002. After completing the
repurchase of all outstanding shares of 6.95% Preferred Stock, the Board of
Directors would adopt articles supplementary amending the charter of the Fund
to reclassify the 1,650,000 authorized shares of 6.95% Preferred Stock as
authorized shares of Common Stock.
COMMON STOCK
All shares of Common Stock have equal rights in all respects as to
dividends, assets and voting privileges and have no redemption or preemptive
rights. In the event of liquidation, each share is entitled to its proportion
of the Fund's assets after payment of debts and expenses and the liquidation
preference of any outstanding preferred stock. The outstanding shares of
Common Stock are, and when issued the Shares offered hereby will be, fully
paid and non-assessable. Holders of the Common Stock are entitled to one vote
per share and do not have cumulative voting rights.
The Fund's Common Stock is listed on the Exchange under the symbol "PHF."
The Fund may from time to time sell additional shares of Common Stock,
although it has no present intention of offering additional shares other than
pursuant to the Offer or under the Plan. See "Dividend Reinvestment Plan."
Other offerings, if made, would require the approval of the Fund's Board of
Directors. Any additional offering will be subject to the requirements of the
1940 Act that shares may not be sold at a price below net asset value
(exclusive of underwriting discounts and commissions) except in connection
with an offering to one or more classes of the Fund's capital stock or with
the consent of a majority of the outstanding shares of Common Stock.
PREFERRED STOCK
The outstanding shares of 6.95% Preferred Stock are fully paid and non-
assessable; are not convertible into shares of Common Stock (or any other
capital stock of the Fund); and have no preemptive rights. The terms of the
6.95% Preferred Stock, as fixed by the Fund's Articles Supplementary Creating
and Fixing the Rights of 6.95% Cumulative Preferred Stock dated August 15,
1995 (the "Articles Supplementary") are summarized below. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the Articles Supplementary, which have been filed with the SEC as
an exhibit to the registration statement of which this Prospectus forms a
part. See "Additional Information."
31
<PAGE>
Dividends. Holders of the 6.95% Preferred Stock are entitled to receive
cumulative cash dividends payable quarterly at the annual rate of 6.95% of the
liquidation preference ($20 per share) of the 6.95% Preferred Stock. A
quarterly dividend may not be declared or paid on the 6.95% Preferred Stock
unless full cumulative dividends have been or contemporaneously are declared
and paid on all outstanding shares of 6.95% Preferred Stock through the most
recent quarterly dividend payment dates therefor. If full cumulative dividends
have not been paid, any dividends on the 6.95% Preferred Stock are required to
be paid pro rata on all outstanding shares.
Under the 1940 Act and the Articles Supplementary, the Fund may not declare
or pay any dividend or distribution on the Common Stock, or repurchase any
shares of Common Stock, unless full cumulative dividends on all shares of
6.95% Preferred Stock have been declared and paid and unless immediately
thereafter the 6.95% Preferred Stock has an "asset coverage" (as defined in
the 1940 Act) of at least 200% after deducting the amount of such dividend,
distribution or purchase price, as the case may be. See "Asset Coverage and
Other Financial Tests" below.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary,
holders of the 6.95% Preferred Stock will be entitled to receive a
preferential liquidating distribution in the amount of $20 per share, plus an
amount equal to all accrued and unpaid dividends to the date of distribution,
before any distribution or payment is made in respect of the Common Stock. If
the assets of the Fund are insufficient to pay holders of the 6.95% Preferred
Stock the liquidating distribution to which they are entitled, then holders of
the 6.95% Preferred Stock will share ratably in any assets available for
distribution. Unless and until the liquidation preference of the 6.95%
Preferred Stock has been paid in full, the Fund may not pay any dividends or
distributions on the Common Stock.
Redemption. On August 1, 2000, the Fund is required to redeem all of the
then outstanding shares of 6.95% Preferred Stock at a price equal to $20 per
share plus accumulated and unpaid dividends through the date of redemption. In
addition, if the financial restrictions described below under "Asset Coverage
and Other Financial Tests" are not met as of the evaluation dates prescribed
in the Articles Supplementary, then the Fund may be required to redeem such
number of shares of 6.95% Preferred Stock at the liquidation value thereof
that, after giving effect to such redemption, the restrictions would be met.
The Fund may also redeem the 6.95% Preferred Stock, in whole or in part, at
any time at a redemption price equal to $20 per share, plus accumulated and
unpaid dividends through the date of redemption and a make-whole premium equal
to the discounted value of the remaining scheduled payments with respect to
the redeemed shares over the amount of the liquidation preferences of such
shares.
Voting Rights. Except as described below, holders of the 6.95% Preferred
Stock have equal voting rights with holders of the Common Stock of one vote
per share, and holders of the 6.95% Preferred Stock and the Common Stock vote
together as a single class. Under the Articles Supplementary, holders of the
6.95% Preferred Stock, as a class, are entitled to elect two directors;
holders of the Common Stock, as a class, are entitled to elect two directors;
and holders of the Common Stock and the 6.95% Preferred Stock, voting together
as a single class, are entitled to elect the remaining directors of the Fund.
In addition, if at any time dividends on the 6.95% Preferred Stock shall be
unpaid in an amount equal to two full years' dividends, or if the Fund shall
have failed to redeem any shares of 6.95% Preferred Stock as required, then
holders of the outstanding shares of 6.95% Preferred Stock will be entitled to
elect a majority of the Fund's directors.
As long as any shares of 6.95% Preferred Stock are outstanding: (1) the Fund
may not (a) petition the courts to file the Fund into bankruptcy, dissolve the
Fund or liquidate the Fund's assets, or consent to a petition seeking
liquidation, reorganization or other relief under applicable laws of any
jurisdiction relating to bankruptcy, insolvency or reorganization, (b) merge
or consolidate with any corporation, (c) convert to open-end status, or (d)
sell all or substantially all of its assets, without approval of a majority of
the outstanding shares of 6.95% Preferred Stock and Common Stock, each voting
as a separate class; (2) the adoption of any plan of reorganization adversely
affecting either the 6.95% Preferred Stock or the Common Stock requires the
separate approval of a majority of the outstanding shares of such class; (3)
any action requiring a vote of
32
<PAGE>
security holders under Section 13(a) of the 1940 Act requires the approval of
a majority of the outstanding shares of 6.95% Preferred Stock and Common
Stock, each voting as a separate class; (4) the Fund may not (a) amend, alter
or repeal any of the preferences, rights or powers of the 6.95% Preferred
Stock; (b) increase or decrease the number of shares of 6.59% Preferred Stock
authorized to be issued; (c) create, authorize or issue any class or series of
stock ranking at parity with or senior to the 6.95% Preferred Stock with
respect to the payment of dividends or the distribution of assets in
liquidation, dissolution or the winding up of the affairs of the Fund; (d)
create, authorize, assume or suffer to exist any indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness or create,
incur or suffer to exist or agree to the creation, incurrence or existence of
any lien, mortgage, pledge, charge or security upon any of the assets of the
Fund without the approval of a majority of the outstanding shares of 6.95%
Preferred Stock, voting separately as a class; (5) holders of the 6.95%
Preferred Stock and the Common Stock vote as separate classes in connection
with the election of directors as described above; and (6) the Common Stock
and the 6.95% Preferred Stock vote as separate classes to the extent otherwise
required under Maryland law or the 1940 Act. For purposes of the foregoing, a
"majority of the outstanding shares" means the vote, at the annual or a
special meeting of shareholders, (i) of 67% or more of the shares present at
such meeting, if the holders of more than 50% of the outstanding shares are
present or represented by proxy; or (ii) of more than 50% of the outstanding
shares, whichever is the less. In addition, the Fund's charter contains an
election to be governed by certain provisions of the Maryland General
Corporation Law which require a "super-majority" vote with respect to any
merger or similar fundamental transaction. See "Special Voting Requirements"
below.
Asset Coverage and Other Financial Tests. The Articles Supplementary require
the Fund to determine periodically that certain asset coverage and other
financial tests have been met and that the Fund has complied with certain
other restrictions. In the event that, on any date of determination, the Fund
does not comply with an applicable asset coverage test or restriction, then
the Fund will be required to cure such violation within a stated cure period
or, if such violation cannot be cured, to redeem the 6.95% Preferred Stock.
For so long as any shares of 6.95% Preferred Stock are outstanding, the Fund
is required (i) to make bi-weekly determinations that the amount of certain
eligible portfolio property (as defined in the Articles Supplementary) equals
or exceeds the basic maintenance amount (as defined in the Articles
Supplementary); (ii) to determine (a) weekly and (b) immediately preceding the
declaration date of each dividend on the Common Stock, or any repurchase of
shares of Common Stock, that the ratio of the value of the Fund's total
assets, less all liabilities and indebtedness not representing senior
securities (as defined in the 1940 Act), to the aggregate amount of senior
securities representing indebtedness of the Fund, plus the aggregate
liquidation value of all outstanding shares of 6.95% Preferred Stock and the
amount of all unpaid dividends accrued to and including the date of
determination on all outstanding shares of 6.95% Preferred Stock is at least
300%. The Articles Supplementary provide that the Fund shall not, without
prior written confirmation that such action will not have an adverse effect on
the rating of the 6.95% Preferred Stock, (i) lend securities, (ii) issue any
class of stock ranking prior to or on a parity with the 6.95% Preferred Stock
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Fund; (iii) engage in short
sales; (iv) sell or purchase futures or options; (v) merge or consolidate with
any other corporation; (vi) authorize, assume or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness; or (vii) engage in reverse repurchase obligations.
SPECIAL VOTING REQUIREMENTS
The Fund's Articles of Incorporation contain an election to be governed by
Sections 3-601 through 3-603 of the Maryland General Corporation Law, which
require, among other things, a "super-majority" vote with respect to "business
combinations" (defined as any merger or similar fundamental transaction
subject to a statutory vote and certain transactions involving a transfer of
assets or securities to interested stockholders and their affiliates) between
Maryland corporations and "interested stockholders" (defined as beneficial
owners of more than 10% of the outstanding voting stock of such corporations).
Unless certain value and other standards are met (in the case of merger-type
transactions) or an exemption is available, business combinations with
interested stockholders may not be consummated unless recommended by the Board
of Directors of the
33
<PAGE>
Fund and approved by the affirmative vote of at least 80% of the votes
entitled to be cast by the shareholders and two-thirds of the votes entitled
to be cast by the shareholders other than the interested stockholders.
The foregoing provisions will make it difficult to change the Fund's
management and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The Board of Directors, however, has
considered these anti-takeover provisions and believes that they are in the
shareholders' best interest and benefit shareholders by providing the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
continuity of the Fund's management.
DISTRIBUTION ARRANGEMENTS
Winton Associates, Inc. (the "Dealer Manager"), Bank One Towers, East Tower,
8044 Montgomery Road, Cincinnati, Ohio 45236, is managing the Offer on behalf
of the Fund on a best efforts basis. Under the terms and subject to the
conditions contained in the Dealer Manager Agreement dated the date of this
Prospectus, the Dealer Manager has agreed to provide financial and marketing
advisory assistance and to engage and organize on behalf of the Fund the
activities of the broker-dealers who will solicit the exercise of the Rights.
Financial and marketing advisory assistance provided to the Fund by the Dealer
Manager includes advising the Fund regarding the structure of the Offer and
the materials utilized in connection therewith, coordinating the distribution
arrangements for the Offer, and providing information and support services, as
requested, to soliciting dealers. The Dealer Manager will not be engaged
directly in the solicitation from shareholders of the exercise of any Rights.
The Fund has agreed to pay the Dealer Manager a fee for its services in
connection with the Offer equal to 0.90% of the Subscription Price multiplied
by the number of Shares sold in the Offer. In addition, the Dealer Manager
Agreement contains covenants of indemnity and contribution among the Fund, the
Adviser and the Dealer Manager against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act").
In connection with the Offer, a broker-dealer that has signed a Soliciting
Dealer Agreement with the Fund will receive a soliciting fee (the "Soliciting
Dealer Fee") equal to 2.0% of the Subscription Price multiplied by (i) the
aggregate number of Shares purchased pursuant to Subscription Certificates on
which the soliciting broker-dealer is designated by name as having solicited
the exercise of such Rights plus (ii) Shares purchased pursuant to the Offer
through the soliciting broker-dealer by beneficial owners of the Fund's Common
Stock on whose behalf the soliciting broker-dealer acts as nominee. The
Soliciting Dealer Fee will be paid directly to the soliciting broker-dealer by
the Fund. If more than one broker-dealer is identified as having solicited the
exercise of identical Rights, the Soliciting Dealer Fee relating thereto will
be shared equally by all such designated broker-dealers. All questions as to
the form, validity and eligibility for Soliciting Dealer Fees will be
determined by the Fund, in its sole discretion, which determination shall be
final and binding.
The Dealer Manager is a wholly-owned subsidiary of Pacholder Associates,
Inc., one of the partners of the Adviser. See "Management of the Fund--
Investment Advisory Services." Asher O. Pacholder, William J. Morgan and James
P. Shanahan, Jr., officers and directors of the Fund, are officers and
directors of the Dealer Manager.
CUSTODIAN AND TRANSFER AGENT
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is the custodian
of the assets of the Fund and paying agent for the 6.95% Preferred Stock.
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, is the
transfer agent, dividend disbursing agent and registrar for the Common Stock.
34
<PAGE>
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
registration statement filed with the SEC under the Securities Act and the
1940 Act with respect to the Shares offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference. The
registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C., and copies of all or
any part thereof may be obtained upon the payment of certain fees prescribed
by the SEC. In addition, the SEC maintains a World Wide Web site on the
Internet at http.//www.sec.gov. that contains the Prospectus, material
incorporated by reference, including the Statement of Additional Information,
and other information regarding registrants, including the Fund, that file
electronically with the SEC.
TABLE OF CONTENTS OF [/R]
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 2
Management of the Fund..................................................... 6
Portfolio Transactions..................................................... 11
Dividend Reinvestment Plan................................................. 12
Taxation................................................................... 13
Principal Shareholders..................................................... 17
Legal Matters.............................................................. 17
Experts.................................................................... 17
Financial Statements....................................................... F-1
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Investment Performance of the Fund............................. B-1
</TABLE>
35
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE ADVISER OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER IN SUCH JURISDICTION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Fund Expenses................................................... 3
Prospectus Summary......................................................... 4
Financial Highlights....................................................... 9
Information Regarding Senior Securities.................................... 10
The Fund................................................................... 10
Capitalization at January 17, 1997......................................... 10
The Offer.................................................................. 11
Use of Proceeds............................................................ 17
Risks of Leverage.......................................................... 18
Market Price and Net Asset Value........................................... 19
Investment Objective and Policies.......................................... 20
Management of the Fund..................................................... 25
Dividends and Distributions................................................ 27
Dividend Reinvestment Plan................................................. 27
Taxation................................................................... 28
Share Repurchases; Conversion to Open-End Company.......................... 29
Description of Capital Stock............................................... 31
Distribution Arrangements.................................................. 34
Custodian and Transfer Agent............................................... 34
Additional Information..................................................... 35
Table of Contents of Statement of Additional Information................... 35
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
USF&G PACHOLDER FUND, INC.
1,663,880 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES OF COMMON STOCK
----------------
PROSPECTUS
----------------
JANUARY , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USF&G PACHOLDER FUND, INC.
--------------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus of the Fund dated January __,
1997 (the "Prospectus"). This Statement of Aditional Information does not
include all information that a shareholder should consider before purchasing
Shares, and shareholders should obtain and read the Prospectus prior to
purchasing Shares. A copy of the Prospectus may be obtained without charge by
calling (800) 733-8481, Ext. 351, and from outside the United States by calling
(212) 805-7000. This Statement of Additional Information incorporates by
reference the entire Prospectus. Capitalized terms used but not defined in this
Statement of Additional Information have the meanings given to them in the
Prospectus.
-----------------------
TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS...................................... 2
MANAGEMENT OF THE FUND.................................................... 6
PORTFOLIO TRANSACTIONS.................................................... 11
DIVIDEND REINVESTMENT PLAN................................................ 12
TAXATION.................................................................. 13
PRINCIPAL SHAREHOLDERS.................................................... 17
LEGAL MATTERS............................................................. 17
EXPERTS................................................................... 17
FINANCIAL STATEMENTS...................................................... F-1
APPENDIX A -- RATINGS OF INVESTMENTS...................................... A-1
APPENDIX B -- INVESTMENT PERFORMANCE OF THE FUND.......................... B-1
-----------------------
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the registration statement filed with
the Securities and Exchange Commission, Washington, D.C. The registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed, or inspected at the Securities and Exchange
Commission's office at no charge.
-----------------------
This Statement of Additional Information is dated
January , 1997
-----
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The following policies and restrictions supplement those set forth in
the Prospectus. Unless designated as fundamental policies, they may be changed
by the Board of Directors without shareholder approval.
When-Issued and Delayed Delivery Securities
- -------------------------------------------
The Fund may purchase securities on a when-issued or delayed delivery
basis. When-issued and delayed delivery transactions arise when securities are
purchased and sold with delivery and payment beyond the regular settlement date.
The settlement of when-issued transactions can take place a month or more after
the date of the transaction. The prices of the securities so purchased are
subject to market fluctuation during this period and no interest accrues to the
purchaser prior to the date of settlement. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value of the security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. An increase
in the percentage of the Fund's assets committed to the purchase of securities
on a when-issued or delayed delivery basis will have the effect of leverage and
may increase the volatility of the Fund's net asset value. In addition, since
the Fund is dependent on the party issuing the when-issued or delayed delivery
security to complete the transaction, failure by the other party to deliver the
securities as arranged would result in the Fund's loss of an investment
opportunity.
When, As and If Issued Securities
- ---------------------------------
The Fund may purchase securities on a "when, as and if issued" basis
under which the issuance of the security depends upon the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in the portfolio of the Fund until the Adviser determines that
issuance of the security is probable. At that time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security. An increase in the percentage of the Fund's assets committed to
the purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value.
Repurchase Agreements
- ---------------------
When cash may be available for only a few days, it may be invested by
the Fund in repurchase agreements until such time as it may otherwise be
invested or used for payments of obligations of the Fund. These agreements,
which are considered to be loans under the 1940 Act, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying securities ("collateral"), which are held by the Fund's custodian
bank, at a specified price and at a fixed time in the future, usually not more
than seven days from the date of purchase. The Fund will receive interest from
the institution until the date when the repurchase is to occur. Repurchase
agreements involve certain risks not associated with direct investments in debt
securities and the Fund will follow procedures designed to minimize these risks.
The procedures include effecting repurchase transactions only with larger, well-
capitalized and well-established financial institutions, whose financial
condition will be continually monitored. In addition, the Adviser will attempt
to ensure that the value of the collateral underlying the repurchase agreement
is always at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
selling financial institution, the Fund will seek to liquidate the collateral.
Exercise of the Fund's right to liquidate the collateral, however, could involve
certain costs or delays, and, to the extent that proceeds
-2-
<PAGE>
from any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. In addition, to the extent the
Fund's security interest in the collateral may not be properly perfected, the
Fund could suffer a loss of up to the entire amount of the collateral.
Borrowing
- ---------
The Fund is authorized under its investment policies to borrow money on
a secured or unsecured basis in an amount up to 20% of the value of its net
assets at the time of borrowing. However, notwithstanding the foregoing, the
Fund's charter prohibits it from borrowing money at any time shares of preferred
stock are outstanding. The Fund's investment policies allow the Fund to use
borrowing as a temporary source of liquidity to permit the purchase of new
investments consistent with the Fund's investment objective without the
necessity of liquidating existing investments under circumstances where
liquidation would not be prudent. Borrowing also may be used to provide
flexibility in connection with dividend distributions or repurchases of the Fund
shares. See "Taxation" below and "Share Repurchases; Conversion to Open-End
Company" in the Prospectus.
Although borrowing creates an opportunity for greater total return, it
increases exposure to capital risk. In addition, borrowed funds are subject to
interest costs that may offset or exceed the return earned on assets purchased
with the borrowed funds. If the investment performance of the securities
purchased with borrowed funds fails to equal at least their cost to the Fund
(including any interest paid on the money borrowed), then the net income per
share and the net asset value per share of the Fund will be less than would
otherwise be the case. Since the Fund's ability to borrow is limited, under
adverse market conditions the Fund might have to sell securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales.
Private Placements
- ------------------
The Fund may invest up to 25% of its total assets in securities that
are subject to restrictions on resale because they have not been registered
under the Securities Act. The Fund may purchase restricted securities
that, although privately placed, may be offered and sold to "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act. The Fund's
Board of Directors may determine, when appropriate, that specific Rule 144A
securities are liquid and such securities will not be subject to the 25%
limitation. Should the Board of Directors make this determination, it will
carefully monitor the Rule 144A security (focusing on such factors, among
others, as trading activity and availability of information) to determine that
it continues to be liquid. It is not possible to predict with assurance exactly
how the market for restricted securities offered and sold under Rule 144A will
develop. Investment in Rule 144A securities could have the effect of increasing
the level of illiquidity of the Fund's portfolio to the extent that qualified
institutional buyers are for a time uninterested in purchasing Rule 144A
securities held by the Fund.
Portfolio Management and Turnover Rate
- --------------------------------------
Portfolio trading may be undertaken to accomplish the investment
objective of the Fund. In addition, a security or obligation may be sold and
another of comparable quality purchased at approximately the same time to take
advantage of what the Adviser believes to be a temporary disparity in the normal
yield relationship between the two securities. The Fund also may engage to a
limited extent in short-term trading consistent with its investment objective.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
-3-
<PAGE>
Subject to the foregoing, the Fund will attempt to achieve its
investment objective by thorough research and analysis and prudent selection of
portfolio securities with a view to holding them for investment. The Fund's
annual portfolio turnover rate (the lesser of the value of securities purchased
or sold, divided by the average value of securities owned during the year) will
not be a limiting factor when the Fund deems it desirable to sell or purchase
securities.
Investment Restrictions
- -----------------------
The investment restrictions listed below have been adopted by the Fund
as fundamental policies. Under the 1940 Act, a fundamental policy may not be
changed without the vote (i) of 67% or more of the shares present at the annual
or a special meeting of shareholders, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) of
more than 50% of the outstanding shares of the Fund, whichever is the less.
The Fund may not:
(1) Issue senior securities, as defined in the 1940 Act, other
than preferred stock or except to the extent such issuance might
be involved with respect to borrowings described under
"Borrowing" above;
(2) Make short sales of securities or purchase securities or
evidences of interests therein on margin (except it may make
covered short sales of securities and obtain short-term credit
necessary for the clearance of transactions), or write or
purchase put or call options (except to the extent that a
purchase of a stand-by commitment may be considered the purchase
of a put);
(3) Borrow money, except in amounts not exceeding 20% of the
Fund's assets as described under "Borrowing" above;
(4) Underwrite any issue of securities, except to the extent
that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under the
federal securities laws;
(5) Purchase or sell real estate, including limited
partnership interests therein (except securities which are
secured by real estate and securities of companies, such as real
estate investment trusts, that deal in real estate or interests
therein), or oil, gas or other mineral leases, commodities or
commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of
owning other securities, though securities will not be purchased
in order to acquire any of these interests;
(6) Make loans, except as described above and under
"Investment Objective and Policies" in the Prospectus or by
entering into repurchase agreements;
(7) Purchase or sell municipal obligations, including debt
obligations issued by states, cities, local authorities and
possessions and territories of the United States except for
certain industrial development bonds as described under
"Investment Objective and Policies" in the Prospectus;
-4-
<PAGE>
(8) Purchase or retain the securities of any company if, to
the knowledge of the Fund, those officers and directors of the
Fund or members of the Executive Committee of the Adviser who
each own beneficially more than 0.5% of the securities of that
company, together own more than 5% of the securities of the
company;
(9) Purchase or retain the securities of any company
controlled by an affiliate of the Fund or the Adviser or
purchase or sell any security from or to any account controlled
by the Adviser or its affiliates; and
(10) Invest more than 5% of its total assets (valued at the
time of investment) in securities of any one issuer, except that
this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities, or acquire more than 10% of the outstanding
voting securities of any one issuer (at the time of
acquisition); except that up to 25% of the Fund's total assets
(at the time of investment) may be invested without regard to
the limitations set forth in this paragraph 10.
A majority of the members of the Board of Directors of the
Fund who are not "interested persons" of the Fund (as defined in the 1940 Act)
must approve any investment which, at the time of acquisition, would result in
more than 5% of the outstanding voting equity securities of a company being held
by the Fund.
All percentage limitations on investments will apply at the
time of the making of an investment and are not considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
The Fund's portfolio investments are also subject to certain
asset coverage and other financial tests and restrictions adopted in connection
with the issuance of the Preferred Stock. These tests and restrictions will
remain in effect so long as any shares of Preferred Stock are outstanding. In
general, under the asset coverage tests, the Fund is required to maintain
sufficient eligible assets such that, when discounted by applicable factors and
reduced by certain accrued and projected liabilities of the Fund, the required
asset coverage will be met. To the extent that any portfolio investment held by
the Fund does not qualify as an eligible asset, its value will not be included
for purposes of calculating the required asset coverage. The asset coverage
tests do not impose any limitation on the amount of Fund assets which may be
invested in non-eligible assets, and the amount of such holdings may vary from
time to time based upon the nature of the Fund's other investments. The Fund is
also required, under the asset coverage tests, to maintain cash or certain
liquid assets in an amount at least equal to its current dividend and redemption
obligations in respect of the Preferred Stock. Finally, the Fund is required to
comply with certain investment restrictions, which are in addition to and more
limiting than the investment restrictions set forth above, relating to (i) the
diversification of its portfolio, (ii) the amount invested in any one issue of
securities or in securities other than publicly traded domestic fixed-income
securities, and (iii) the incurrence of debt. The asset coverage and other
financial tests and restrictions adopted in connection with the issuance of the
Preferred Stock are not expected to have a material adverse effect on holders of
the Fund's Common Stock or on the Fund's ability to achieve its investment
objective. See "Description of Capital Stock--Preferred Stock--Asset Coverage
and Other Financial Tests" in the Prospectus.
-5-
<PAGE>
MANAGEMENT OF THE FUND
Management of the Fund, including general supervision of the activities
performed by the Fund's investment adviser, is the responsibility of the Board
of Directors of the Fund. The names and business addresses of the directors and
officers of the Fund, and their principal occupations during the past five
years, are set forth below. There are seven directors of the Fund, three of whom
are not "interested persons" of the Fund (as defined in the 1940 Act) and four
of whom are "interested persons." The directors who are "interested persons" of
the Fund are indicated by an asterisk.
-6-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position(s) with the Firm During Past Five Years
--------------------- ------------------------- ----------------------
<S> <C> <C>
Asher O. Pacholder* Chairman of the Board Chairman and Chief Executive Officer,
Bank One Towers Pacholder Associates, Inc.; Chairman and
8044 Montgomery Road Chief Financial Officer, ICO, Inc. (since
Cincinnati, OH 45236. 1995).
Age 59.
William J. Morgan* Executive Vice President, President and Secretary, Pacholder
Bank One Towers Treasurer and Director Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 42.
James P. Shanahan, Jr.* Secretary and Director Executive Vice President and General
Bank One Towers Counsel, Pacholder Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 35.
Daniel A. Grant Director President, Utility Management Services
1440 Greenfield Crossing Court (since 1991); Vice President and
Ballwin, MO 63021. Assistant Treasurer, Community Federal
Age 52. Savings and Loan Association for more
than five years prior thereto.
John C. Sweeney* Director Senior Vice President and Chief Investment
100 Light Street Officer, USF&G Investment Management Group,
Baltimore, MD 21202. Inc. (since 1992); Principal and Practice
Age 58. Director, Towers Perrin Asset Consulting
Services (1985 to 1992).
John F. Williamson Director President and Chief Executive Officer, Williamson
2109 S.W. Cedar Hill Lane Associates, Inc. (Investment Advisor) (since January 1997);
Lee's Summit, MO 64081 Executive Vice President and Chief Financial Officer of Asset
Age 58. Allocation Concepts, Inc. (1995 to 1996); Vice President and
Senior Portfolio Manager, American Life & Casualty Insurance
Co. (1993 to 1994); Financial Consultant (1991 to 1992);
Senior Vice President and Treasurer, Community Federal Savings
and Loan Association for more than five years prior thereto.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position(s) with the Firm During Past Five Years
--------------------- ------------------------- ----------------------
<S> <C> <C>
George D. Woodard Director Principal, George D. Woodard, C.P.A.
13440 N. 13th Street (since October 1995); Vice President,
Phoenix, AZ 85022. Rider Kenley & Associates (accounting and
Age 50. tax services) 1994 to 1995; Principal,
George D. Woodard, C.P.A. for more than
five years prior thereto.
Anthony L. Longi, Jr. President and Assistant Executive Vice President, Pacholder
Bank One Towers Treasurer Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 31
James E. Gibson Senior Vice President Senior Vice President, Pacholder
Bank One Towers Associates, Inc.
8044 Montgomery Road
Cincinnati, OH 45236.
Age 32
Mark H. Prenger Assistant Treasurer Assistant Vice President, Pacholder
Bank One Towers Associates, Inc. (since June 1994);
8044 Montgomery Road full-time university student prior thereto.
Cincinnati, OH 45236.
Age 26
</TABLE>
Under the Fund's charter, holders of the outstanding shares of
preferred stock, voting as a separate class, are entitled to elect two
directors; holders of the outstanding shares of Common Stock, voting as a
separate class, are entitled to elect two directors; and holders of the
outstanding shares of Preferred Stock and Common Stock, voting together as a
single class, are entitled to elect the remaining directors of the Fund. Messrs.
Shanahan and Woodard have been elected by holders of the Preferred Stock and
Messrs. Morgan and Pacholder by holders of the Common Stock. Holders of the
Preferred Stock are entitled to elect a majority of the Fund's directors under
certain circumstances. See Description of Capital Stock--Preferred Stock--Voting
Rights" in the Prospectus.
Directors and officers of the Fund who are employed by the Adviser or a
corporate affiliate of the Adviser, or are retired from such employment, serve
without compensation from the Fund. The Fund pays each director who is not an
employee of the Adviser or any corporate affiliate of the Adviser an annual fee
of $10,000 plus $1,000 for each meeting of the Board of Directors attended, and
reimburses directors for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings.
The following table provides compensation information for the fiscal
year ended December 31, 1996 (unaudited) for all of the Fund's directors and
the highest-paid executive officers who received compensation from the Fund in
excess of $60,000.
-8-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Total Compensation
Aggregate Accrued as Estimated from Fund and Fund
Compensation from part of Fund Annual Benefits Complex Paid to
Name of Person, Position Fund Expenses upon Retirement Directors
------------------------ ---- -------- --------------- ---------
<S> <C> <C> <C> <C>
Asher O. Pacholder,
Chairman of the Board 0 0 0 0
James P. Shanahan, Jr.
Secretary and Director 0 0 0 0
William J. Morgan,
Executive Vice President,
Treasurer and Director 0 0 0 0
Daniel A. Grant,
Director $ 15,000 0 0 $ 15,000
John C. Sweeney,
Director 0 0 0 0
John F. Williamson,
Director $ 15,000 0 0 $ 15,000
George D. Woodard,
Director $ 15,000 0 0 $ 15,000
</TABLE>
For the fiscal year ended December 31, 1996 (unaudited), the directors
of the Fund as a group received aggregate remuneration from the Fund of
45,000.
The Board of Directors has an Audit Committee which makes
recommendations to the Board of Directors with respect to the engagement of the
Fund's independent accountants and reviews with the independent accountants the
scope and results of the audit engagement and matters having a material effect
upon the financial operations of the Fund. The members of the Audit Committee
are Daniel A. Grant, John F. Williamson and George D. Woodard. The Board of
Directors does not have a Nominating Committee.
The Articles of Incorporation of the Fund provide that the Fund will
indemnify its directors and officers to the full extent provided by the general
laws of the State of Maryland now or hereafter in force, including the advance
of expenses under the procedures provided by such laws. Under Maryland law, a
corporation may indemnify any director or officer made a party to any proceeding
by reason of service in that capacity unless it is proved that (i) the act or
omission of the director or officer was material to the cause of action
adjudicated in the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the conduct was unlawful. The Articles of
Incorporation
-9-
<PAGE>
further provide that directors and officers of the Fund will not be liable to
the Fund or its shareholders for money damages, except where the conduct
described in the foregoing clauses (i) or (ii) is proved. Nothing in the
Articles of Incorporation of the Fund, however, indemnifies directors, officers,
employees or agents against, or limits their liability (including any monetary
liability to which they would otherwise be subject) for, willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office. No insurance obtained by the Fund may protect or
purport to protect officers or directors of the Fund against any liability to
the Fund or its shareholders to which they would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
their obligations and duties.
Investment Advisory Services
- ----------------------------
The Adviser serves pursuant to an Investment Advisory Agreement dated
November 16, 1988, as amended (the "Agreement"). Under the Agreement, the
Adviser, subject to the supervision of the Fund's Board of Directors and in
accordance with the Fund's investment objective, policies and restrictions,
identifies securities suitable for investment by the Fund, makes investment
decisions, and places purchase and sale orders. The Agreement provides that the
Adviser will obtain and evaluate such information and advice relating to the
economy, securities markets and specific securities as it considers necessary or
useful to make investment decisions on behalf of the Fund and will manage
continuously the assets of the Fund in a manner consistent with its investment
objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Adviser maintains certain of the Fund's records and furnishes,
at its own expense, such office space, facilities, equipment, clerical help and
bookkeeping as the Fund may reasonably require in the conduct of its business.
In addition, the Adviser pays the salaries of all personnel, including officers
of the Fund, who are employees of the Adviser.
Expenses not expressly assumed by the Adviser under the Agreement are
paid by the Fund. The expenses borne by the Fund include, but are not limited
to, the following: investment advisory fees; fees and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; expenses of registration of the Fund and its shares under federal and
state securities laws; all expenses of shareholders' and directors' meetings and
of preparing, printing and mailing prospectuses, proxy statements and reports to
shareholders; directors' fees and expenses; expenses incident to any dividend
reinvestment program; charges and expenses of any outside service used for
pricing of the Fund's portfolio securities; fees and expenses of legal counsel
and independent accountants; membership dues of industry associations; interest
on borrowings; fees and expenses incident to the listing of the Fund's shares on
any stock exchange; insurance premiums; and extraordinary expenses (including,
but not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto).
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder the
Adviser is not liable to the Fund or its shareholders for any act or omission by
the Adviser or for any losses sustained by the Fund or its shareholders. The
Agreement in no way restricts the Adviser from acting as investment manager or
adviser to others, including entities that may have investment objectives
similar or identical to those of the Fund.
Advisory Fee
- ------------
In the event the Index is no longer published or available or becomes
an inappropriate measure of the Fund's performance, the Board of Directors will
meet to approve another appropriate index or will negotiate a fixed advisory fee
with the Adviser, in which event the advisory fee payable for the immediately
preceding 180-day period will be the lesser of the fee payable under the
Agreement or the fee payable under the new advisory agreement.
-10-
<PAGE>
Unless sooner terminated in accordance with its terms, the Agreement
will continue in effect until May 31, 1994, and may be continued from year to
year thereafter, provided that such continuance is approved at least annually by
vote of the holders of a "majority of the outstanding voting securities" of the
Fund (as defined in the 1940 Act), or by the Board of Directors of the Fund, and
in either event by vote of a majority of the directors of the Fund who are not
parties to the Agreement or "interested persons" (as defined in the 1940 Act) of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
The Agreement will automatically terminate if assigned and may be
terminated without penalty at any time (i) by majority vote of the entire Board
of Directors of the Fund or by majority vote of the Fund's outstanding shares on
30 days' written notice to the Adviser, or (ii) by the Adviser on 180 days'
written notice to the Fund.
Administrative Services
- -----------------------
The Administrator serves as administrator of the Fund pursuant to an
Administration Agreement dated June 5, 1996. James E. Gibson, William J. Morgan,
James P. Shanahan, Jr. and Mark H. Prenger, officers and/or directors of the
Fund, are also officers of the corporate general partner of the Administrator.
For the fiscal year ended December 31, 1996 (unaudited), the
Administrator received administrative fees totaling $67,300, which represent
0.10% of the Fund's average net assets during such period. The Administration
Agreement may be terminated at any time, without payment of any penalty, by the
Fund or by the Administrator on 60 days' written notice.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors
of the Fund, the Adviser is responsible for decisions to buy and sell securities
for the Fund, the selection of brokers and dealers to effect the transactions,
and the negotiation of brokerage commissions, if any. The Fund expects that the
primary market for the securities in which it invests will generally be the
over-the-counter market or one or more national securities exchanges. Securities
are generally traded in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without charging a stated
commission, although the price of the security usually includes a profit to the
dealer. Securities transactions on national securities exchanges are effected by
brokers who charge a commission for their services. The Adviser may
-11-
<PAGE>
at times purchase securities for the Fund in underwritten offerings, where the
price includes a fixed amount of compensation, generally referred to as the
underwriters' concession or discount. On occasion, the Fund may also purchase
certain loan participations and other obligations directly from a company or
creditor, in which case no commission or discount will generally be paid.
The policy of the Fund regarding purchases and sales of securities for
its portfolio is to obtain the most favorable prices and efficient execution of
transactions. In seeking to implement this policy, the Adviser will place orders
in such manner as, in its opinion, will offer the most favorable price and
efficient execution of each transaction. In effecting portfolio transactions for
the Fund, the Adviser may select broker-dealers that also furnish research
services to the Adviser, even if the Fund pays a higher commission than the
commission another broker-dealer would have charged for effecting the
transaction. The adviser will place brokerage transactions with broker-dealers
furnishing brokerage and research services only if it believes that the amount
of commission is reasonable in relation to the value of the brokerage and
research services provided, viewed in terms of either the particular transaction
or the Adviser's overall responsibilities with respect to the accounts as to
which it exercises investment discretion. Research services furnished to the
Adviser may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investments; wire
services; and appraisals or evaluations of portfolio securities. These services
are supplemental to the Adviser's own research efforts. The Adviser cannot
readily determine the extent to which commission rates or net prices charged by
broker-dealers reflect the value of their research services. Research services
furnished by broker-dealers may be useful to the Adviser in servicing its other
clients.
The Adviser may advise other investment accounts which have investment
objectives similar to those of the Fund. Subject to applicable laws and
regulations, the Adviser will attempt to allocate portfolio transactions
equitably among the Fund and its other clients whenever simultaneous decisions
are made to purchase or sell the same securities on behalf of the Fund and one
or more other clients. In making allocations, the main factors considered will
be the respective investment objectives of the Fund and the other clients, the
relative sizes of portfolio holdings of the same or comparable securities, the
availability of cash for investment by the Fund and the other clients, the size
of investment commitments generally held by the Fund and the other clients, and
the opinions of the persons responsible for recommending the investments to the
Fund and the other clients. While from time to time this procedure could have a
detrimental effect on the price or amount of securities available to the Fund,
it is the opinion of the Fund's Board of Directors that the benefits available
from the Adviser's organization will outweigh any disadvantage that may arise
from simultaneous transactions.
Under the 1940 Act, an investment adviser may effect portfolio
transactions on a principal basis with accounts managed by its investment
adviser or its affiliates, provided that such transactions are effected in
compliance with regulations promulgated by the SEC. Notwithstanding the
availability of these regulations, the Fund will not purchase or sell any
security from or to any account managed by the Adviser or its affiliates.
During the fiscal year ended December 31, 1994, the Fund incurred
brokerage commissions of $3,103. The Fund did not incur any brokerage
commissions during the fiscal years ended December 31, 1995 and 1996.
-12-
<PAGE>
DIVIDEND REINVESTMENT PLAN
Participants in the Plan may withdraw from the Plan upon written notice
to the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan, certificates for whole shares credited to his account
under the Plan will be issued and a cash payment will be made for any fraction
of a share credited to such account; or if the participant desires, the Plan
Agent will sell his shares in the Plan and send the proceeds to the participant,
less brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Shares of Common Stock in
the account of each Plan participant will be held by the Plan Agent in non-
certificated form in the name of the participant, and each shareholder's proxy
will include shares received pursuant to the Plan.
-13-
<PAGE>
TAXATION
The Fund has qualified, and intends to qualify, each year as a
regulated investment company under Subchapter M of the Code. In order to so
qualify the Fund must, among other things, (i) derive at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, gains from the sale or other disposition of stock or securities, or other
income derived with respect to the Fund's business of investing in stocks or
securities; (ii) derive less than 30% of its annual gross income from the sale
or other disposition of stock or securities or certain other types of investment
contracts held for less than three months; and (iii) diversify its holdings so
that, at the end of each quarter, (a) at least 50% of the value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies and other securities, with
those other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (b) not more than 25%
of the market value of the Fund's total assets is invested in the securities
(other than U.S. government securities or securities of other regulated
investment companies) of any one issuer or of any two or more issuers that the
Fund controls and that are determined to be engaged in the same business or
similar or related businesses. In meeting the requirements of Subchapter M of
the Code, the Fund may be restricted in selling securities held for less than
three months and in utilizing certain of the investment techniques described
under "Investment Policies and Restrictions" above and "Investment Objective and
Policies" in the Prospectus. Legislation has been proposed which would repeal
the requirement that a regulated investment company must derive less than 30% of
its gross income from the sale or other disposition of assets held for less than
three months; however, it is currently uncertain whether this legislation will
become law.
As a regulated investment company, the Fund will not be subject to
federal income tax on the portion of its taxable income for any taxable year
that it distributes to its shareholders, provided that its ordinary dividend
distributions are not less than 90% of its investment company taxable income for
the taxable year (determined before giving effect to any such distributions).
Investment company taxable income includes dividends, interest and net short-
term capital gains in excess of net long-term capital losses, but does not
include net long-term capital gains in excess of net short-term capital losses
("net capital gain"). If it meets the 90% distribution requirement, the Fund
will nonetheless be subject to tax on any investment company taxable income that
remains in the Fund after giving effect to the ordinary dividend distributions.
If the Fund fails to satisfy the 90% distribution requirement or otherwise fails
to qualify as a regulated investment company in any taxable year, it will be
subject to tax in such year on all of its taxable income, whether or not the
Fund makes any distributions to its shareholders.
The Fund intends to acquire a significant number of securities at a
market discount. In the case of securities issued after July 18, 1984, although
market discount is not includable in income currently, it is treated as accruing
ratably (or, if the taxpayer elects, on an economic accrual basis) over the
remaining term of the bond. Any gain realized on the sale of the bond or upon
its maturity would be treated as ordinary income to the extent of accrued market
discount.
The Fund may acquire certain securities issued with original issue
discount (including zero-coupon securities). Current federal tax law requires
that a holder (such as the Fund) of such a security must include in taxable
income a portion of the original issue discount that accrues during the tax year
on such security even if no payment in cash is received on the security during
the year. Accordingly, in order to pay out at least 90% of its investment
company taxable income each year, the Fund may be required to pay out as an
income distribution each year an amount which is greater than the total amount
of cash interest the Fund actually received. If necessary, the Fund may borrow
or liquidate portfolio securities to make such distributions. If a distribution
of cash necessitates the liquidation of portfolio investments, the Adviser will
select which securities to sell and the Fund may realize a gain or loss. In the
event the Fund
-14-
<PAGE>
realizes capital gains from these transactions, shareholders may receive a
larger distribution of net capital gain, if any, than they would in the absence
of such transactions.
As a regulated investment company, the Fund also will not be subject to
federal income tax on any net capital gain (as reduced by any capital loss
carryovers from the prior eight years) that it distributes to its shareholders
in the form of a capital gain dividend. If the Fund retains for reinvestment or
otherwise any amount of net capital gain, it will be subject to a tax of up to
35% of the amount retained and it will have the power to require shareholders to
include some portion or all of such undistributed gain in income as net capital
gain. The Board of Directors of the Fund will determine at least once a year
whether to distribute any net capital gain in excess capital loss carryovers
from prior years. The Fund expects to designate any amounts retained as
undistributed capital gains in a notice to its shareholders who, if subject to
federal income taxation on net capital gain, (i) will be required to include in
income for federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, and (ii) will be entitled to
credit against their federal income tax liabilities their proportionate shares
of the tax paid by the Fund on the undistributed amount and to claim refunds to
the extent that their credits exceed their liabilities. For federal income tax
purposes, the basis of shares owned by a shareholder of the Fund will be
increased by an amount equal to 65% of the amount of undistributed capital gains
included in the shareholder's income.
Under the Code, the Fund may be subject to a 4% excise tax on a portion
of its undistributed income. To avoid the tax, the Fund must distribute annually
at least 98% of its ordinary income (not taking into account any capital gains
or losses) for the calendar year and at least 98% of its capital gain net income
for the twelve-month period ending, as a general rule, on October 31 of the
calendar year. For this purpose, any income or gain retained by the Fund that is
subject to corporate income tax will be treated as having been distributed at
year end. In addition, the minimum amounts that must be distributed in any year
to avoid the excise tax will be increased or decreased to reflect any under-
distribution or over-distribution, as the case may be, in the previous year. For
a distribution to qualify under the foregoing test, it generally must be
declared and paid during the year. Any dividend declared by the Fund in October,
November or December of any year payable to shareholders of record on a date in
such a month will be deemed to have been received by each shareholder on
December 31 of that year and to have been paid by the Fund not later than
December 31 of that year, provided that the dividend is actually paid by the
Fund no later than January 31 of the following year.
-15-
<PAGE>
Dividend distributions of investment company taxable income are taxable
to a shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in shares. Since the
Fund will generally not invest in the stock of corporations, it is not likely
that the corporate shareholders of the Fund will be entitled to treat any amount
of dividends received from the Fund as eligible for the 70% deduction of
dividends received by corporations. The Fund may from time to time acquire tax-
exempt industrial development bonds, including pollution control revenue bonds;
however, since the Fund does not expect that 50% or more of its assets will be
invested in such bonds, the Fund will not be qualified to pay exempt-interest
dividends to shareholders. Accordingly, any dividends attributable to such bonds
will be taxable to shareholders. Distributions of net capital gain by the Fund
will be taxable to its shareholders as long-term capital gains, whether paid in
cash or in shares and regardless of how long the shareholder has held the Fund's
shares. Such distributions of net long-term capital gains are not eligible for
the dividends-received deduction. A distribution may be taxable even though it
reduces the net asset value of Fund shares below a shareholder's cost and, in
effect, represents a return of invested capital. Investors should carefully
consider the tax implications of buying shares of Common Stock just prior to a
dividend, since the price of the shares purchased may reflect the amount of the
forthcoming distribution which will, except in unusual circumstances, be taxable
when received.
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss depending upon the amount realized and the shareholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands, and will be long-
term if the shareholder's holding period for the shares is more than twelve
months and otherwise will be short-term. Any loss realized on a sale or exchange
will be disallowed to the extent that the shares disposed of are replaced
(including replacement though the reinvesting of dividends and capital gains
distributions in the Fund) within a period of sixty-one days beginning thirty
days before and ending thirty days after the disposition of the shares. In such
a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of Fund shares
held by the shareholder for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such shares.
An amount received by a shareholder from the Fund in exchange for
shares of the Fund (pursuant to a repurchase of shares or a tender offer or
otherwise) generally will be treated as a payment in exchange for the shares
tendered, which may result in taxable gain or loss as described above. However,
if the amount received by a shareholder exceeds the fair market value of the
shares tendered, or if a shareholder does not tender all of the shares of the
Fund owned or deemed to be owned by the shareholder, all or a portion of the
amount received may be treated as a dividend taxable as ordinary income or as a
return of capital. In addition, if a tender offer is made, any shareholders who
do not tender their shares could be deemed, under certain circumstances, to have
received a taxable distribution of shares of the Fund as a result of their
increased proportionate interest in the Fund.
-16-
<PAGE>
Marginal tax rates on ordinary income for taxpayers filing
joint returns are currently 36% of taxable income in excess of $147,700
($121,300 for taxpayers filing individual returns) and 39.6% of taxable income
in excess of $263,750 for taxpayers filing either individual or joint returns.
Different taxable income thresholds apply in the cases of married persons filing
separately, heads of household and trusts. The maximum rate at which net capital
gains of noncorporate taxpayers is taxed is currently 28%. Noncorporate
taxpayers who are subject to the alternative minimum tax compute that tax at a
maximum rate of 28%. The maximum marginal corporate income tax rate is currently
35% of taxable income (including net capital gains) in excess of $10,000,000.
Corporations that are subject to the alternative minimum tax compute that tax at
a maximum rate of 20%.
The information under "Taxation" in the Prospectus and the
foregoing is a general, abbreviated summary of the provisions of the Code and
regulations thereunder presently in effect as they directly govern the taxation
of the Fund and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. This summary does not take into account the
effect of state and local taxes on shareholders of the Fund.
PRINCIPAL SHAREHOLDERS
To the knowledge of the Fund, there are no persons who "control" the
Fund within the meaning of Section 2(a)(9) of the 1940 Act. As of December 31,
1996, Cede & Co., nominee for The Depository Trust Company, 55 Water Street, New
York, New York 10046, held of record (and not beneficially) 91.5% of the Fund's
outstanding Common Stock. According to information available to the Fund, on
December 31, 1996, USF&G Corporation, 100 Light Street, Baltimore, Maryland
21202, and its affiliates (including their employee benefit plans) were the
beneficial owners of 5.4% of the Fund's outstanding Common Stock. As of
December 31, 1996, Principal Mutual Life Insurance Company, 711 High Street, Des
Moines, Iowa, owned of record all of the Fund's outstanding 6.95% Preferred
Stock. The Fund expects that Principal Mutual Life Insurance Company will own
all of the preferred stock to be issued following completion of the
Offer.
As of December 31, 1996, the directors and officers of the Fund as a
group owned less than one percent of the shares of the Fund.
LEGAL MATTERS
Certain legal matters in connection with the Shares issued
pursuant to the Offer will be passed upon for the Fund by Piper & Marbury
L.L.P., Washington, D.C., and for the Dealer Manager by James P. Shanahan, Jr.,
Executive Vice President and General Counsel of the Dealer Manager.
EXPERTS
The Statement of Net Assets of the Fund at December 31, 1995,
and the related Statement of Operations for the year then ended, the Statements
of Changes in Net Assets for each of the two years in the period then ended, and
the Financial Highlights for each of the seven years in the period then ended
and the period November 11, 1988 (commencement of operations) to December 31,
1988, included in this Statement of Additional Information, have been audited by
Deloitte & Touche LLP, independent auditors, as indicated in their report with
respect thereto, and are included in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing.
-17-
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Unaudited Financial Statements For the Six Months Ended June 30, 1996
Statement of Net Assets at June 30, 1996 (Unaudited)............................................. F-2
Statement of Operations For the Six Months Ended June 30, 1996 (Unaudited)....................... F-10
Statement of Changes in Net Assets For the Six Months Ended June 30, 1996 (Unaudited)
and For the Year Ended December 31, 1995................................................... F-11
Financial Highlights (Unaudited as to June 30, 1996)............................................. F-12
Notes to Unaudited Financial Statements.......................................................... F-13
Financial Statements For the Year Ended December 31, 1995
Statement of Net Assets at December 31, 1995..................................................... F-16
Statement of Operations For the Year Ended December 31, 1995..................................... F-23
Statement of Changes in Net Assets For the Years Ended December 31, 1995 and 1994................ F-24
Financial Highlights............................................................................. F-25
Notes to Unaudited Financial Statements.......................................................... F-26
Independent Auditors' Report..................................................................... F-29
</TABLE>
The unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. All such adjustments are of a normal
recurring nature.
F-1
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES- 96.8%
AEROSPACE & DEFENSE--2.0%
BE Aerospace, Sr Sub Nt,
9.875%, 2/1/06 $ 500 $ 491,875 0.4%
Greenwich Air, Sr Nt,
10.5%, 6/1/06 750 744,375 0.7
Howmet Inc., Sr Sub Nt,
10%, 12/1/03/2/ 500 526,250 0.5
Sabreliner Corp., Sr Nt,
12.5%, 4/15/03/2/ 500 417,500 0.4
--------- ----
2,180,000 2.0
AUTO PARTS & EQUIPMENT--2.6%
APS Inc., Sr Sub Nt,
11.875%, 1/15/06/2/ 500 520,000 0.4
Collins & Aikman, Sr Sub,
11.5%, 4/15/06 1,100 1,116,500 1.0
JPS Automotive Products Corp., Sr Nt,
11.125%, 6/15/01 1,350 1,380,375 1.2
--------- ----
3,016,875 2.6
BEVERAGE & TOBACCO--.8%
Cott Corp., Sr Nt,
9.375%, 7/1/05 1,000 957,500 0.8
--------- ----
BROADCAST RADIO & TV--3.6%
Argyle Television, Sr Sub Nt,
9.75%, 11/1/05 750 703,125 0.6
Granite Broadcasting Corp., Sr Sub Nt,
10.375%, 5/15/05 1,100 1,064,250 0.9
Sinclair Broadcast Group, Sr Sub Nt,
10%, 9/30/05 1,500 1,455,000 1.3
Young Broadcasting, Sr Sub Nt,
9%, 1/15/06 1,000 890,000 0.8
--------- ----
4,112,375 3.6
BUILDING--2.6%
Harrow Industries Inc., Sr Sub Deb,
12.375%, 4/15/02 2,000 1,960,000 1.7
Triangle Pacific Corp., Sr Nt,
10.5%, 8/1/03 1,000 1,025,000 0.9
--------- ----
2,985,000 2.6
</TABLE>
F-2
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
BUSINESS SERVICES &
EQUIPMENT -- 7.3%
Data Documents, Sr Sec Nt,
13.5%, 7/15/02 $ 1,500 $ 1,635,000 1.4%
Day International Group Inc., Sr Sub Nt,
11.125%, 6/1/05 1,000 1,020,000 0.9
Knoll Inc., Sr Sub Nt,
10.875%, 3/15/0622 1,000 1,007,500 0.9
National Fiberstock, Sr Nt,
11.625%, 6/15/0222 500 498,750 0.4
San Jacinto Holdings, Sr Sub Nt,
12%, 12/31/02 2,823 2,173,402 1.9
United Stationer Supplies, Sr Nt,
12.75%, 5/1/05 1,250 1,340,625 1.2
Vis Capital Corp., Sr Sub Deb,
12.375%, 7/1/98 633 633,000 0.6
---------- ---
8,308,277 7.3
CABLE TELEVISION -- 6.2%
CAI Wireless Systems Inc., Sr Nt,
12.25%, 9/15/02 1,000 1,045,000 0.9
Cablevision Systems Corp., Sr Sub Nt,
9.25%, 11/1/05 500 465,000 0.4
Cablevision Systems Corp., Sr Sub Nt,
10.5%, 5/15/16 1,000 970,000 0.9
Comcast Corporation, Sr Sub Nt,
9.125%, 10/15/06 1,500 1,417,500 1.2
Fundy Cable Ltd., Sr Nt,
11%, 11/15/05 1,000 1,012,500 0.9
Jones Intercable, Sr Sub Nt,
11.5%, 7/15/04 1,000 1,095,000 1.0
Rifkin Acq. Partners LP, Sr Sub Nt,
11.125%, 1/15/06 1,000 985,000 0.9
---------- ---
6,990,000 6.2
CHEMICALS/PLASTIC -- 7.0%
Applied Extrustion Technologies Inc.,
Sr Unsecd Nt, 11.5%, 4/1/02 1,500 1,515,000 1.3
Berry Plastics Corp., Sr Sub Nt,
12.25%, 4/15/04 1,400 1,505,000 1.3
Calmar Inc., Deb,
11.5%, 8/1/05 1,500 1,462,500 1.3
Envirodyne Industries, Sr Nt,
12%, 6/15/00 1,000 1,032,500 0.9
Plastic Specialties & Technologies
Inc., Sr Nt, 11.25%, 12/1/03 1,250 1,237,500 1.1
Portola Packaging Inc., Sr Nt,
10.75%, 10/1/05 1,250 1,256,250 1.1
--------- ---
8,008,750 7.0
</TABLE>
F-3
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CLOTHING & TEXTILE -- 3.7%
Ithaca Industries, Sr Sub Nt,
11.125, 12/15/02 /1,3/ $ 300 $ 137,250 0.1%
PT Polysindo, Co Guarantee,
11.375%, 6/15/06 1,000 1,020,000 0.9
Synthetic Industries Inc., Deb,
12.75%, 12/1/02 1,500 1,586,250 1.4
Tultex Corp, Sr Nt,
10.625%, 3/15/05 1,000 1,020,000 0.9
US Leather Inc., Sr Nt,
10.25%, 7/31/03 500 420,000 0.4
--------- ------
4,183,500 3.7
CONGLOMERATE -- 1.7%
Interlake Corp., Sr Sub Deb,
12.125%, 3/1/02 1,500 1,494,375 1.3
Siebe Inc., Sr Sec Nt,
11.22%, 1/29/01 /4/ 435 434,682 0.4
--------- ------
1,929,057 1.7
COSMETICS/TOILETRIES -- 2.6%
Chattem Inc., Sr Sub Nt,
12.75%, 6/15/04 1,200 1,218,000 1.0
JB Williams Holdings Inc., Sr Nt,
12%, 3/1/04 1,000 982,500 0.9
Remington Products, Sr Sub Nt,
11%, 5/15/06 750 742,500 0.7
--------- ------
2,943,000 2.6
DRUGS -- .7%
Twin Labs, Sr Sub,
10.26%, 5/15/06 760 759,375 0.7
--------- ------
ECOLOGICAL SERVICES &
EQUIPMENT -- 2.0%
ICF Kaiser International Inc.,
Sr Sub Nt w/warrant,
13%, 12/31/03 1,500 1,432,500 1.3
Norcal Waste, Sr Nt
12.5%, 11/15/05 /2/ 750 791,250 0.7
--------- ------
2,223,750 2.0
ELECTRONICS/ELECTRIC -- .9%
Communications & Power Industries,
Sr Sub Nt, 12%, 8/1/05 1,000 1,057,500 0.9
--------- ------
</TABLE>
F-4
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
EQUIPMENT LEASING -- 1.1%
Coinmach Corp., Sr Nt,
11.75%, 11/15/05 $ 1,250 $ 1,300,000 1.1%
---------- -----
FARMING & AGRICULTURE -- 1.7%
Darling International Inc., Sr Sub Nt,
11%, 7/15/00 2,000 1,945,000 1.7
----------- -----
FOOD/DRUG RETAILERS -- 4.4%
Bruno's Inc., Sr Sub Nt,
10.5%, 8/1/05 1,500 1,481,250 1.3
Jitney Jungle Stores, Sr Nt,
12%, 3/1/06 900 918,000 0.8
P&C Food Markets Inc., Deb,
11.5%, 10/15/01 1,000 952,500 0.8
Ralph's Grocery Co., Sr Nt,
10.45%, 6/15/04 750 718,125 0.6
Smith's Food/Drug, Sr Sub,
11.25%, 5/15/07 1,000 1,012,500 0.9
----------- -----
5,082,375 4.4
FOOD SERVICE -- 4.2%
Beatrice Foods Inc., Sr Sub Nt,
12%, 12/1/01 /1,3/ 2,500 750,000 0.7
Carrols Corp., Sr Nt,
11.5%, 8/15/03 1,500 1,522,500 1.3
Fleming Companies Inc., Sr Nt,
10.625%, 12/15/01 1,500 1,372,500 1.2
Host Marriott Travel Plaza, Sr Nt,
9.5%, 5/15/05 1,250 1,193,750 1.0
----------- -----
4,838,750 4.2
FOREST PRODUCTS -- 4.2%
APP International Finance, Gtd Sec Nt,
11.75%, 10/1/05 1,250 1,278,125 1.1
Florida Coast Paper, 1st Mtg,
12.75%, 6/1/03 /2/ 1,000 1,042,500 0.9
Repap Wisconsin Inc., Sr Nt,
9.25%, 2/1/02 1,000 942,500 0.8
Stone Container Corp., 1st Mtg Bond,
10.75%, 10/1/02 1,500 1,503,750 1.4
--------- ---
6,737,500 4.2
</TABLE>
F-5
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
HEALTH CARE -- 3.5%
Dade International Inc., Sr Sub,
11.125%, 5/1/06/2/ $ 750 $ 776,250 0.7%
Grancare Inc., Sr Sub Nt,
9.375%, 9/15/05 1,250 1,200,000 1.0
Ornda Healthcorp, Sr Sub Nt,
11.375%, 8/15/04 1,000 1,100,000 1.0
Regency Health Services, Sr Sub,
9.875%, 10/15/02 1,000 957,500 0.8
--------- -----
4,033,750 3.5
HOTEL & CASINOS -- 6.9%
Alliance Gaming, Sr Secd Nt,
12.875%, 6/30/03 900 897,750 0.8
Argosy Gaming, 1st Mtg,
13.25%, 6/1/04/2/ 500 507,500 0.4
Courtyard by Marriott, Sr Nt,
10.75%, 2/1/08 1,000 975,000 0.9
GNF Corp (Bally Grand), 1st Mtg,
10.625%, 4/1/03 1,500 1,638,750 1.5
HMH Properties Inc., Sr Nt,
9.5%, 5/15/05 1,000 950,000 0.8
Harvey's Casino, Sr Sub Nt,
10.625%, 6/1/06 500 500,000 0.4
Majestic Star Casino, Sr Nt,
12.75%, 5/15/03 500 540,000 0.5
Showboat Marina, 1st Mtg,
13.5%, 3/15/03/2/ 500 537,500 0.5
Trump Atlantic City, 1st Mtg,
11.25%, 5/1/06 1,250 1,256,250 1.1
--------- -----
7,802,750 6.9
INDUSTRIAL EQUIPMENT -- 2.0%
Clark-Schwebel, Sr Nt,
10.5%, 4/15/06/2/ 500 510,000 0.4
Specialty Equipment Inc., Sr Sub Deb,
11.375%, 12/1/03 1,750 1,820,000 1.6
--------- -----
2,330,000 2.0
INSURANCE -- .8%
Riverside Group Inc., Sub Nt,
13%, 9/30/99/4/ 1,000 900,000 0.8
--------- -----
</TABLE>
F-6
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
LEISURE -- 5.4%
Alliance Entertainment, Sr Sub Nt,
11.25%, 7/15/05 $ 1,000 $ 940,000 0.8%
Doane Products Co., Sr Nt,
10.625%, 3/1/06 1,000 1,000,000 0.9
Guitar Center, Sr Nt,
11%, 7/1/06/2/ 500 507,500 0.4
Hines Horticulture, Sr Sub Nt,
11.75%, 10/15/05 750 776,250 0.7
Selmer Company, Sr Sub Nt,
11%, 5/15/05 1,500 1,597,500 1.4
United Artists, Sr Nt,
11.5%, 5/1/02 1,250 1,312,500 1.2
--------- -----
6,133,750 5.4
NON-FERROUS METALS -- 3.5%
Easco Corp., Sr Nt,
10%, 3/15/01 1,000 1,005,000 0.9
Haynes International Inc.,
Sr Sec Nt, Ser B,
11.25%, 6/15/98 850 879,750 0.8
Magma Copper Co., Sr Sub Nt,
12%, 12/15/01 1,000 1,083,360 0.9
Renco Metals Inc., Sr Nt,
11.5%, 7/1/03 1,000 1,000,000 0.9
--------- -----
3,968,110 3.5
OIL & GAS -- 4.0%
Giant Industries Inc., Sr Sub Nt,
9.75%, 11/15/03 1,000 977,500 0.9
KCS Energy Inc., Sr Nt,
11%, 1/15/03 500 527,500 0.5
Petro PSC Properties, Sr Nt,
12.5%, 6/1/02 1,500 1,447,500 1.3
Transamerica Refining, 1st Mtg,
16.5%, 2/15/02 650 588,250 0.5
United Refining Corp., Sr Nt w/warrant,
11.5%, 12/31/03 1,000 880,000 0.8
--------- -----
4,420,750 4.0
PUBLISHING -- .4%
Adams Outdoor Advertising, Sr Nt,
10.75%, 3/15/06/2/ 500 513,125 0.4
--------- -----
</TABLE>
F-7
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
RETAILERS -- 1.2%
Herff Jones Inc., Sr Sub Nt,
11%, 8/15/05 $ 1,000 $ 1,040,000 0.9%
Musicland Stores, Sr Sub Nt,
9%, 6/15/03 500 340,000 0.3
----------- -----
1,380,000 1.2
STEEL -- 2.5%
Algoma Steel, 1st Mtg,
12.375%, 7/15/05 1,000 975,000 0.9
Gulf States Steel, 1st Mtg,
13.5%, 4/15/03 1,000 890,000 0.8
NS Group Inc., Sr Nt,
13.5%, 7/15/03 1,000 968,750 0.8
----------- -----
2,833,750 2.5
TRANSPORTATION -- 3.4%
Moran Transport Co., 1st Mtg Nt,
11.75%, 7/15/04 1,500 1,492,500 1.3
Trism Inc., Sr Sub Nt,
10.75%, 12/15/00 1,250 1,171,875 1.0
Teekay Shipping, Sr Sec Nt,
9.625%, 7/15/03 1,250 1,250,000 1.1
3,914,375 3.4
TELECOMMUNICATIONS/CELLULAR
COMMUNICATION -- 3.9%
Brooks Fiber Properties, Sr Dis Nt,
0%, 3/1/06/2/ 500 266,250 0.2
Metrocall Inc., Sr Sub Nt,
10.375%, 10/1/07 1,000 935,000 0.8
Mobilemedia Corp., Sr Sub Nt,
9.375%, 11/1/07 1,000 895,000 0.8
Nextlink Communications, Sr Nt,
12.5%, 4/15/06/2/ 1,000 995,000 0.9
Pronet Inc., Sr Sub Nt,
10.875%, 9/15/06 500 478,750 0.4
Teleport Communications, Sr Nt,
9.875%, 7/1/06 500 500,000 0.4
Vanguard Cellular, Deb,
9.375%, 4/15/06 500 485,000 0.4
----------- -----
4,555,000 3.9
----------- -----
Total Corporate Debt Securities
(cost $110,819,208) 110,373,319 96.8
----------- -----
</TABLE>
F-8
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (concluded)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Shares/ Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
EQUITY INVESTMENTS -- .2%
Data Documents, Warrants,
7/15/02/1/ 2,000 $224,000 0.2%
Sabreliner Corp., Warrants, 4/15/03/1/ 500 2,500 0.0
San Jacinto Holdings, Common Stock/1/ 2,246 8,984 0.0
Terex Corp., Stock Appreciation Rights,
7/31/96/1/ 4,905 -- --
US Trails Inc., Warrants, 6/30/99/1/ 33,081 -- --
------------ -------
Total Equity Investments
(cost $2,500) 235,484 0.2
------------ -------
COMMERCIAL PAPER -- 3.6%
American General Finance,
5.33%, 7/9/96 $ 700 699,171 0.6
Ford Motor Credit, 5.37%, 7/9/96 1,000 998,807 0.9
General Electric Capital Corp.,
5.37%, 7/2/96 1,000 999,851 0.9
General Electric Capital Corp.,
5.33%, 7/9/96 700 699,171 0.6
Householde Finance Corp.,
5.34%, 7/9/96 700 699,169 0.6
------------ -------
Total Commercial Paper
(at amortized cost) 4,096,169 3.6
------------ -------
TOTAL INVESTMENTS
(cost $114,917,877) $114,704,972 100.6
Liabilities in Excess of Other Assets (658,066) (0.6)
------------- -------
Net Assets $114,046,906 100.0%
Less: 1,650,000 shares of Preferred Stock
Outstanding (33,000,000)
------------
Net Assets Applicable to 4,980,145 Shares of
Common Stock Outstanding $81,046,906
============
Net Asset Value Per Common Share
($81,046,906 divided by 4,980,145) $16.27
============
</TABLE>
/1/Non-income producing security.
/2/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. These securities
amounted to $10,176,250 or 8.9% of net assets.
/3/Security is in default.
/4/Board valued security. These securities amounted to $1,334,682 or 1.2% of net
assets.
See accompanying Notes to Financial Statements.
F-9
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Operations
For the Six Months Ended June 30, 1996
(Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $6,410,256
EXPENSES:
Investment advisory fee (Note 5)............................ 617,814
Administrative fee (Note 5)................................. 87,327
Custodian, transfer agent and accounting fees............... 39,919
Directors' fees............................................. 28,158
Printing and postage........................................ 35,280
Audit fee................................................... 19,970
Legal fees.................................................. 38,735
Miscellaneous............................................... 6,626
----------
Total expenses............................................ 873,829
----------
Net investment income..................................... 5,536,427
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 114,246
Net unrealized appreciation of investments.................. 984,304
----------
Net realized and unrealized gain on investments........... 1,098,550
----------
Net increase in net assets resulting from operations.......... 6,634,977
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS....................... (1,140,379)
----------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON
STOCKHOLDERS RESULTING FROM OPERATIONS AND
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS..................... $5,494,598
==========
</TABLE>
See accompanying Notes to Financial Statements.
F-10
<PAGE>
USF&G PACHOLDER FUND, INC.
Statements of Changes In Net Assets For the Six Months Ended June 30, 1996
(Unaudited) and the Year Ended December 31, 1995
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
June 30, 1996 December
(Unaudited) 31, 1995
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income.................... $ 5,536,427 $ 10,237,987
Net realized gain/(loss) on
investments............................ 114,246 (2,728,589)
Net unrealized appreciation of
investments............................ 984,304 1,562,889
------------ ------------
Net increase in net assets resulting
from operations........................ 6,634,977 9,072,287
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS
FROM:
Preferred dividends ($0.69 and $2.20
per share, respectively)............... (1,140,379) (1,374,239)
Common dividends:
Net investment income and short-
term gains of $0.85 and $1.90
per share, respectively.............. (4,230,704) (8,733,897)
------------ ------------
Total decrease in net assets from
distributions to stockholders............ (5,371,083) (10,108,136)
------------ ------------
FUND SHARE TRANSACTION
(NOTES 2 AND 3):
Net proceeds from issuance of preferred
stock.................................. -- 32,752,380
Redemption of preferred stock............ -- (8,922,804)
Value of 11,507 and 15,088 shares
issued in reinvestment of dividends,
respectively........................... 186,785 254,686
Net proceeds from common stock issued
(1,457,942 shares) in rights offering
(after deducting $793,832 of offering -- 22,022,960
expenses).............................. ------------ ------------
Total increase in net assets derived from
fund share transactions.................. 186,785 46,107,222
------------ ------------
Total net increase in net assets........... 1,450,679 45,071,373
NET ASSETS:
Beginning of year........................ 112,596,227 67,524,854
------------ ------------
End of year.............................. $114,046,906 $112,596,227
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-11
<PAGE>
USF&G PACHOLDER FUND, INC.
Financial Highlights
(Contained below is per share operating performance data for a share of common
stock outstanding, total return performance, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1996
(Unaudited) Year Ended December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $16.02 $16.86 $19.23 $18.52 $17.37 $14.49
---------- -------- --------- -------- ------- ------
Net investment income........................................... 1.11 2.19 2.12 2.48 2.37 2.18
Net realized and unrealized gain/(loss) on investments.......... 0.18 (0.06) (1.64) 1.42 1.32 2.84
---------- -------- --------- -------- ------- ------
Net increase in net asset value resulting from operations....... 1.29 2.13 0.48 3.90 3.69 5.02
---------- -------- --------- -------- ------- ------
Distributions to Stockholders from:
Preferred dividends............................................. (0.23) (0.29) (0.24) (0.38) (0.33) --
Common:
Net investment income and short-term gains................... (0.85) (1.90) (1.92) (2.09) (2.08) (2.14)
Net realized long-term gains................................. -- -- -- (0.21) -- --
---------- -------- --------- -------- ------- ------
Total distributions to preferred and common stockholders........ (1.08) (2.19) (2.16) (2.68) (2.41) (2.14)
---------- -------- --------- -------- ------- ------
Capital Change Resulting from the Issuance of Fund Shares:
Common Shares................................................... 0.04 (0.67) (0.69) (0.51) -- --
Preferred Shares................................................ -- (0.11) -- -- (0.13) --
---------- -------- --------- -------- ------- ------
0.04 (0.78) (0.69) (0.51) (0.13) --
---------- -------- --------- -------- ------- ------
Net asset value, end of period.................................. $16.27 $16.02 $16.86 $19.23 $18.52 $17.37
========== ======== ========= ======== ======= ======
Market value per share, end of period........................... $15.75 $17.38 $16.75 $21.25 $19.38 $17.25
========== ======== ========= ======== ======= ======
TOTAL INVESTMENT RETURN:/1/
Based on market value per share................................. (4.25)% 16.04% (11.12)% 22.41% 25.99 56.78%
Based on net asset value per share.............................. 6.91% 10.68% 0.72% 20.27% 18.78 36.71%
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses..................................................... 1.52%* 0.86% 1.64% 1.81% 1.90 1.37%
Net investment income........................................ 9.66%* 10.45% 10.17% 10.33% 10.32 12.94%
SUPPLEMENTAL DATA:
Net assets at end of period, net of preferred stock (000)....... $81,047 $79,596 $58,925 $44,458 $34,001 $31,678
Average net assets during period, net of preferred stock (000).. $81,609 $79,614 $59,002 $43,275 $34,950 $30,724
Portfolio turnover rate......................................... 46% 83% 102% 97% 121% 48%
Number of preferred shares outstanding at end of period......... 1,650,000 1,650,000 8,600 9,400 10,000 --
Asset coverage per share of preferred stock outstanding at end
of period..................................................... $69 $66 $7,852 $5,730 $4,400 --
Liquidation and average market value per share of preferred
stock......................................................... $20 $20 $1,000 $1,000 $1,000 --
</TABLE>
- ------------------
*Annualized.
/1/Total investment return excludes the effects of commissions. Total investment
returns for other than full periods are not annualized.
/2/Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
See accompanying Notes to Financial Statements.
F-12
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials
1. SIGNIFICANT ACCOUNTING POLICIES--USF&G Pacholder Fund, Inc. (the "Fund") is
a closed-end, diversified management investment company, registered under the
Investment Company Act of 1940. The Fund seeks a high level of total return
through current income and capital appreciation by investing primarily in
high yield, high risk fixed-income securities of domestic companies. The Fund
was incorporated under the laws of the State of Maryland in August 1988.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
A. SECURITY VALUATIONS--Portfolio securities traded primarily on an exchange
are valued at the closing sale price or, if there have been no sales, at
the last reported bid price on the valuation date. Securities traded
primarily in the over-the-counter market are valued at prices provided by
an independent pricing service. Restricted securities and other securities
for which market quotations are not readily available are valued at fair
value as determined under procedures established by the Board of
Directors. There were Board valued securities of $1,334,682 or 1.2% of net
assets as of June 30, 1996. Short-term obligations with remaining
maturities of 60 days or less at the date of purchase are valued at
amortized cost.
B. FEDERAL TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute to its shareholders all of its net investment income and
realized gains on securities transactions. Therefore, no federal tax
provision is required.
C. SECURITIES TRANSACTIONS--Securities transactions are accounted for on the
date the securities are purchased or sold (trade date). Realized gains and
losses on securities transactions are determined on an identified cost
basis. Interest income is recorded on an accrual basis. The Fund amortizes
discounts or premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. The Fund has
elected to defer the accretion of market discount until disposition of the
security.
D. WHEN, AS AND IF ISSUED SECURITIES--The Fund may engage in "when-issued" or
"delayed delivery" transactions. The Fund records when-issued securities
on the trade date and maintains security positions such that sufficient
liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market weekly and begin earning interest on the settlement
date. No when "when-issued" or "delayed delivery" purchase commitments
were included in the portfolio of investments as of June 30, 1996.
E. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and
estimated expenses are accrued daily. Dividends to common stockholders are
paid from net investment income quarterly, and distributions of net
realized capital gains are to be paid at least annually.
F. ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. COMMON STOCK--At June 30, 1996, there were 48,350,000 shares of common stock
with a $.01 par value authorized and 4,980,145 shares outstanding. During
1996, 11,507 shares of common stock were issued in connection with the Fund's
dividend reinvestment plan.
On March 16, 1995, 1,457,942 shares of common stock were issued at $15.65 per
share as part of a rights offering for the common stockholders of the Fund.
Expenses related to the rights offering totaling $793,832 were recorded as a
reduction to the proceeds from the offering. These expenses included $205,351
paid to Winton Associates, Inc., a wholly-owned subsidiary of Pacholder
Associates, Inc. (an affiliate of the Fund's Investment Advisor), for
F-13
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials (continued)
financial and advisory services including advising the Fund regarding the
structure of the rights offering and the materials utilized therewith,
coordinating the distribution arrangements for the rights offering and
providing information and support services to soliciting broker-dealers.
3. PREFERRED STOCK--On August 15, 1995, the Fund issued 1,650,000 shares of
6.95% Cumulative Preferred Stock in a private sale at an offering price of
$20 per share. Dividends on these shares are payable quarterly at an annual
rate of 6.95%. The Fund is required to maintain certain asset coverage, other
financial tests and restrictions as set forth in the Fund's Articles
Supplementary Creating and Fixing the Rights of 6.95% Cumulative Preferred
Stock. The preferred stock is subject to mandatory redemption on August 1,
2000, at a redemption price equal to $20 per share, plus accumulated and
unpaid dividends. The preferred stock is also subject to special mandatory
redemptions at a redemption price of $20 per share, plus accumulated and
unpaid dividends and a premium, as defined, if the Fund is not in compliance
with the required coverages, tests and restrictions. In general, the holders
of the preferred stock and the common stock vote together as a single class,
except that the preferred stockholders, as a separate class, vote to elect
two members of the Board of Directors, and separate votes are required on
certain matters that affect the respective interests of the preferred stock
and common stock. The preferred stock has a liquidation preference of $20 per
share, plus accumulated and unpaid dividends. The offering expenses of the
preferred stock were $247,620 which were recorded as a reduction in paid-in
capital for common stockholders. These expenses included $123,750 paid to
Winton Associates, Inc. for financial and advisory services including
advising the Fund regarding the structure of the preferred stock offering and
the materials utilized therewith, and the coordinating of the arrangements of
the preferred stock.
On September 14, 1995, the Fund redeemed the 8,050 outstanding shares of the
8.60% Cumulative Preferred Stock at a redemption price of $1,000 per share plus
accumulated and unpaid dividends and a premium. The redemption was made in
accordance with the Fund's Purchase Agreement and Articles Supplementary. The
premium relating to the redemption was $322,804, which was recorded as a
reduction of paid-in capital for common stockholders.
4. PURCHASES AND SALES OF SECURITIES--Purchases and sales of securities
(excluding commercial paper and repurchase agreements) for the six months
ended June 30, 1996 aggregated $53,153,499 and $52,035,042, respectively.
At June 30, 1996, the federal income tax basis of securities was
$110,821,708; unrealized depreciation aggregated $212,905, of which
$3,048,533 related to appreciated securities and $3,261,438 related to
depreciated securities.
5. TRANSACTIONS WITH INVESTMENT ADVISOR, ADMINISTRATOR AND ACCOUNTING SERVICES
AGENT--The Fund has an agreement with Pacholder & Company (the "Advisor") to
serve as the Fund's Investment advisor. The Fund pays the Advisor a fee that
will increase or decrease based on the total return investment performance of
the Fund for the prior twelve-month period relative to the percentage change
in the CS First Boston High Yield Index.(TM) The fee ranges from a maximum of
1.4% to a minimum of .40% (on an annualized basis) of the average weekly net
assets. For the six months ended June 30, 1996, the Fund's total return was
6.91%. For the same period, the total return of the CS First Boston High
Yield Index(TM) was 3.77%. The 1996 advisory fee is calculated based on 1.21%
of average weekly net assets. Certain officers and directors of the Fund are
also executive committee members of the Advisor. At June 30, 1996, accrued
advisory fees were $216,442.
During 1996 the Fund received shareholder approval to enter into a new
administrative services agreement changing from Investment Company Capital Corp.
to Kenwood Administrative Management, L.P. ("KAM") (an affiliate of the Advisor)
to render certain administrative services to the Fund. KAM receives from the
Fund a fee, calculated and paid monthly, at the rate of .10% of the average
weekly net assets. At June 30, 1996, accrued administrative fees were $8,254.
The Fund has an agreement with Pacholder Associates, Inc. (an affiliate of
the Advisor) to provide accounting services. Pacholder Associates, Inc.
receives from the Fund a fee, calculated and paid monthly, at the annual rate
of .025% of the first $100 million of the Fund's average weekly net assets
and .015% of such assets in excess of $100 million.
F-14
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (Concluded)
6. NET ASSETS CONSIST OF:
<TABLE>
<CAPTION>
June 30,
--------
1996 December 31,
---- ------------
(Unaudited) 1995
----------- ----
<S> <C> <C>
Common Stock
($.01 par value)........................... $ 49,801 $ 49,686
Preferred Stock................................ 33,000,000 33,000,000
Paid-in capital................................ 83,726,191 83,539,521
Undistributed net investment income............ 337,593 172,249
Accumulated net realized loss on investments... (2,853,774) (2,968,020)
Unrealized depreciation on investments......... (212,905) (1,197,209)
------------- -------------
$ 114,046,906 $ 112,596,227
============= =============
</TABLE>
F-15
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- 96.1%
AEROSPACE & DEFENSE -- 0.9%
Coltec Industries Inc., Sr Nt,
9.75%, 11/1/99 $ 500 $ 516,250 0.4%
Howmet Inc., Sr Sub Nt,
10.0%, 12/1/03/2/ 500 520,000 0.5
------------ ------
1,036,250 0.9
AUTO PARTS & EQUIPMENT -- 1.7%
JPS Automotive Products Corp.,
Sr Nt, 11.125%, 6/15/01 2,000 1,920,000 1.7
------------ ------
BROADCAST RADIO & TV -- 2.9%
Argyle Television, Sr Sub Nt,
9.75%, 11/1/05 750 744,375 0.6
Granite Broadcasting Corp., Sr Sub Nt,
10.375%, 5/15/05 1,000 1,025,000 0.9
Sinclair Broadcast Group, Sr Sub Nt,
10.0%, 9/30/05 1,500 1,533,750 1.4
------------ ------
3,303,125 2.9
BUILDING -- 4.5%
Harrow Industries Inc., Sr Sub Deb,
12.375%, 4/15/02 2,000 1,860,000 1.7
Southdown Inc., Sr Sub Nt,
14.0%, 10/15/01 2,000 2,185,000 1.9
Triangle Pacific Corp., Sr Nt,
10.5%, 8/1/03 1,000 1,050,000 0.9
------------ ------
5,095,000 4.5
BUSINESS SERVICES & EQUIPMENT -- 1.3%
AM International Inc., Trade Claim,
5.0%, 9/30/98/2,3/ 579 466,416 0.4
Day International Group Inc., Sr Sub Nt,
11.125%, 6/1/05 1,000 1,000,000 0.9
------------ ------
1,466,416 1.3
CABLE TELEVISION -- 5.1%
CAI Wireless Systems Inc., Sr Nt,
12.25%, 9/15/02 1,000 1,070,000 1.0
Cablevision Systems Corp., Sr Sub Nt,
9.25%, 11/1/05 1,000 1,032,500 0.9
Comcast Corporation, Sr Sub,
9.125%, 10/15/06 1,500 1,560,000 1.4
Continental Cablevision, Sr Nt,
8.3%, 5/15/06 500 501,250 0.5
Fundy Cable Ltd., Sr Nt,
11.0%, 11/15/05 1,000 1,040,000 0.9
Lenfest Communications, Sr Nt,
8.375%, 11/1/05 500 500,000 0.4
------------ ------
5,703,750 5.1
</TABLE>
F-16
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
Percent
Par of Net
Description (000) Value Assets
CHEMICALS/PLASTICS -- 7.2%
Applied Extrusion Technologies Inc., Sr
Unsecd Nt, 11.5%, 4/1/02 $1,500 $ 1,605,000 1.4%
Berry Plastics Corp., Sr Sub Nt,
12.25%, 4/15/04 1,400 1,484,000 1.3
Buckeye Cellulose Corp., Sr Sub Nt,
8.5%, 12/15/05 500 509,375 0.5
Envirodyne Industries, Sr Nt,
12.0%, 6/15/00 500 482,500 0.4
Plastic Specialties and Technologies,
Inc., Sr Nt, 11.25%, 12/1/03 2,000 1,800,000 1.6
Portola Packaging Inc., Sr Nt,
10.75%, 10/1/05 1,250 1,287,500 1.2
Uniroyal Technology Corp., Sr Nt
w/warrant, 11.75%, 6/1/03 1,000 935,000 0.8
------------ ------
8,103,375 7.2
CLOTHING & TEXTILE -- 2.8%
Fieldcrest Cannon Inc., Sr Sub Deb,
11.25%, 6/15/04 500 462,500 0.4
Reeves Industries Inc., Sub Deb,
13.75%, 5/1/01 1,489 1,191,200 1.1
Synthetic Industries Inc., Deb,
12.75%, 12/1/02 1,500 1,470,000 1.3
------------ ------
3,123,700 2.8
CONGLOMERATE -- 1.9%
Interlake Corp., Sr Sub Deb,
12.125%, 3/1/02 1,500 1,415,625 1.3
Siebe Inc., Sr Sec Nt, 11.22%,
1/29/01/2.4/ 479 479,027 0.4
Valcor Inc., Sr Nt, 9.625%, 11/1/03 250 230,000 0.2
------------ ------
2,124,652 1.9
CONTAINERS -- 2.7%
Calmar Inc., Deb, 11.5%, 8/1/05/2/ 1,500 1,522,500 1.3
Stone Container Corp., 1st Mtg Bond,
10.75%, 10/1/02 1,500 1,537,500 1.4
------------ ------
3,060,000 2.7
COSMETICS/TOILETRIES -- 1.6%
Chattem Inc., Sr Sub Nt, 12.75%,
6/15/04 873 809,708 0.7
JB Williams Holdings Inc., Sr Nt,
12.0%, 3/1/04 1,000 995,000 0.9
------------ ------
1,804,708 1.6
F-17
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
ECOLOGICAL SERVICES &
EQUIPMENT -- 2.7%
Clean Harbors Inc., Sr Nt,
12.5%, 5/15/01 $1,400 $ 490,000 0.4%
ICF Kaiser International Inc.:
Sr Sub Nt w/warrant,
12.0%, 12/31/03 1,500 1,357,500 1.2
Sr Sub Nt, 12.0%, 12/31/03 500 450,000 0.4
Norcal Waste, Sr Nt, 12.5%, 11/15/05/2/ 750 748,125 0.7
------------ ------
3,045,625 2.7
ELECTRONICS/ELECTRIC -- 0.9%
Communications & Power Industries, Sr
Sub Nt, 12.0%, 8/1/05/2/ 1,000 1,010,000 0.9
------------ ------
EQUIPMENT LEASING -- 4.1%
Genicom Corp., Sr Sub Nt,
12.5%, 2/15/97 2,000 2,000,000 1.8
San Jacinto Holdings, Sr Sub Nt w/Sub
Int, 8.0%, 12/31/00 2,382 1,857,960 1.7
Vis Capital Corp., Sr Sub Deb,
12.375%, 7/1/98 633 633,000 0.6
------------ ------
4,490,960 4.1
FARMING & AGRICULTURE -- 1.8%
Darling International Inc., Sr Sub Nt,
11.0%, 7/15/00 2,000 2,000,000 1.8
------------ ------
FINANCIAL INTERMEDIARIES -- 3.0%
GNF Corp. (Bally Grand), 1st Mtg,
10.625%, 4/1/03 1,500 1,387,500 1.2
Trump Plaza Funding, 1st Mtg. Nt,
10.875%, 6/15/01 1,000 1,035,000 0.9
Trump Taj Mahal Funding Inc., Deb,
Series A, 11.35%, 11/15/99 1,030 978,144 0.9
------------ ------
3,400,644 3.0
FOOD/DRUG RETAILERS -- 3.9%
Bruno's Inc., Sr Sub Nt, 10.5%, 8/1/05 1,500 1,477,500 1.3
P&C Food Markets Inc., Deb,
11.5%, 10/15/01 1,000 970,000 0.9
Ralph's Grocery Co., Sr Nt,
10.45%, 6/15/04 1,000 1,010,000 0.9
Smitty's Super Value Inc., Sr Sub Nt,
12.75%, 6/15/04 1,000 960,000 0.8
------------ ------
4,417,500 3.9
</TABLE>
F-18
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
FOOD SERVICE -- 5.3%
ARA Group Inc., Sub Deb,
13.0%, 1/15/97 $ 250 $ 250,313 0.2%
Beatrice Foods Inc., Sr Sub Nt,
12.0%, 12/1/01/5/ 2,000 590,000 0.5
Carrols Corp., Sr Nt, 11.5%, 8/15/03 1,500 1,492,500 1.3
Coinmach Corp., Sr Nt,
11.75%, 11/15/05/2/ 1,055 1,065,550 1.0
Cott Corp., Sr Nt, 9.375%, 7/1/05 1,000 995,000 0.9
Flagstar Corp., Sr. Nt,
10.875%, 12/1/02 1,750 1,583,750 1.4
---------- ------
5,977,113 5.3
FOREST PRODUCTS -- 4.9%
APP International Finance, Gtd Sec Nt,
11.75%,10/1/05 1,250 1,206,250 1.1
Data Documents, Sr Sec Nt,
7/15/02 1,502 1,635,000 1.5
Repap Wisconsin Inc., Sr Nt,
9.25%, 2/1/02 1,000 942,500 0.8
United Stationer Supplies, Sr Nt,
12.75%, 5/1/05 1,250 1,362,500 1.2
Wickes Lumber Co., Sr Sub Nt,
11.625%, 12/15/03 550 371,250 0.3
---------- ------
5,517,500 4.9
HEALTH CARE -- 3.0%
Grancare Inc., Sr Sub Nt,
9.375%, 9/15/05 1,250 1,265,625 1.1
Ornda Healthcorp, Sr Sub Nt,
11.375%, 8/15/04 1,000 1,117,500 1.0
Regency Health Services, Sr Sub,
9.875%, 10/15/02 1,000 990,000 0.9
---------- ------
3,373,125 3.0
HOME FURNISHINGS -- 1.1%
Congoleum Corp., Sr Nt, 9.0%, 2/1/01 1,250 1,203,125 1.1
---------- ------
HOTELS & CASINOS -- 4.9%
Grand Casinos Inc., 1st Mtg.,
10.125%, 12/1/03 1,000 1,042,500 0.9
HMH Properties Inc., Sr Nt,
9.5%, 5/15/05 1,000 1,020,000 0.9
Hollywood Casino Corp., Sr Nt,
12.75%, 11/1/03 500 450,000 0.4
Host Marriott Travel Plaza, Sr Nt,
9.5%, 5/15/05 1,250 1,234,375 1.1
Resorts International, Mtg Bond,
11.0%, 9/15/03 2,000 1,840,000 1.6
---------- ------
5,586,875 4.9
</TABLE>
F-19
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
INDUSTRIAL EQUIPMENT -- 1.6%
Specialty Equipment Inc., Sr Sub Deb,
11.375%, 12/1/03 $1,750 $ 1,776,250 1.6%
----------- -------
INSURANCE -- 0.8%
Riverside Group Inc., Sub Nt,
13.05, 9/30/99/2.4/ 1,000 900,000 0.8
----------- -------
LEISURE -- 3.9%
Alliance Entertainment, Sr Sub Nt,
11.25%, 7/15/05 1,000 1,002,500 0.9
Hines Horticulture, Sr Sub Nt,
11.75%, 10/15/05 750 780,000 0.7
The Selmer Company, Sr Sub Nt,
11.0%, 5/15/05 1,500 1,485,000 1.3
United Artists, Sr Nt, 11.5%, 5/1/02 1,000 1,070,000 1.0
----------- -------
4,377,500 3.9
NON-FERROUS METALS/
MINERALS -- 4.3%
Easco Corp., Sr Nt, 10.0%, 3/15/01 1,000 990,000 0.9
Great Lakes Carbon Corp., Sr Nt,
10.0%, 1/1/06 500 512,500 0.5
Magma Copper Co., Sr Sub Nt,
12.0%, 12/15/01 1,600 1,792,000 1.6
Renco Metals, Inc., Sr Nt, 12.0%,
7/15/00 1,400 1,512,000 1.3
----------- -------
4,806,500 4.3
OIL & GAS -- 5.0%
Giant Industries Inc., Sr Sub Nt,
9.75%, 11/15/03 1,000 1,010,000 0.9
Petro PSC Properties, Sr Nt,
12.5%, 6/1/02 1,500 1,395,000 1.2
Petroleum Heat & Power Co. Inc., Sub
Deb, 12.25%, 2/1/05 750 828,750 0.7
Tesoro Petroleum Corp., Sub Deb,
13.0%, 12/1/00 1,500 1,522,500 1.4
United Refining Corp., Sr Nt w/warrant,
11.5%, 12/31/03/2/ 1,000 925,000 0.8
----------- -------
5,681,250 5.0
RETAILERS -- 0.9%
Herff Jones Inc., Sr Sub Nt,
11.0%, 8/15/05 1,000 1,055,000 0.9
----------- -------
</TABLE>
F-20
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (continued)
December 31, 1995
<TABLE>
<CAPTION>
Shares/ Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
STEEL -- 2.4%
Algoma Steel, 1st Mtg. Bond,
12.375%, 7/15/05 $1,000 $ 900,000 0.8%
Gulf States Steel, 13.5%, 4/15/03 1,000 880,000 0.8
NS Group Inc., Sr Nt, 13.5%, 7/15/03 1,000 870,000 0.8
----------- -------
2,650,000 2.4
SURFACE TRANSPORT -- 3.9%
Moran Transport Co., 1st Mtg Nt,
11.75%, 7/15/04 2,000 1,885,000 1.7
Trism Inc., Sr Sub Nt,
10.75%, 12/15/00 1,250 1,212,500 1.1
Viking Star Shipping Inc., 1st Pfd Mtg
Nt, 9.625%, 7/15/03 1,250 1,287,500 1.1
----------- -------
4,385,000 3.9
TELECOMMUNICATIONS/CELLULAR
COMMUNICATION -- 3.7%
A+Network Inc., Sr Sub,
11.875%, 11/1/05 750 755,625 0.7
Metrocall Inc., Sr Sub Nt,
10.375%, 10/1/07 750 792,188 0.7
Mobilemedia Corp., Sr Sub Nt,
9.375%, 11/1/07 1,000 1,025,000 0.9
Paging Network Inc., Sr Sub Nt,
10.125%, 8/1/07 1,500 1,633,125 1.4
----------- -------
4,205,938 3.7
UTILITIES -- 1.4%
The Coastal Corporation, Deb,
11.75%, 6/15/06 1,500 1,586,250 1.4
----------- -------
Total Corporate Debt Securities
(amortized cost $109,504,340) 108,147,131 96.1
----------- -------
EQUITY INVESTMENTS -- 0.1%
Data Documents, Warrants,
7/15/02/1/ 2,000 160,000 0.1
Terex Corp., Stock Appreciation Rights,
7/01/97/1/ 4,905 -- --
U.S. Trails, Inc., Warrants,
6/30/99/1/ 33,081
----------- -------
Total Equity Investments
(cost $0) 160,000 0.1
</TABLE>
F-21
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Net Assets (concluded)
December 31, 1995
<TABLE>
<CAPTION>
Percent
Par of Net
Description (000) Value Assets
<S> <C> <C> <C>
COMMERCIAL PAPER -- 3.5% Cargill Inc.:
5.95%, 1/4/96 $ 1,500 $1,499,504 1.3%
General Electric Capital Corp.:
5.79%, 1/5/96 2,500 2,498,392 2.2
---------- --------
Total Commercial Paper
(at amortized cost) 3,997,896 3.5
---------- --------
Percent
of Net
Description Value Assets
TOTAL INVESTMENTS
(amortized cost $113,502,236) $112,305,027 99.7%
Other Assets in Excess of Liabilities........ 291,200 0.3
------------ --------
Net Assets................................... $112,596,227 100.0%
Less: Outstanding Preferred Stock............ (33,000,000)
------------
Net Assets Applicable to
4,968,638 Shares of
Common Stock Outstanding................... $ 79,596,227
============
Net Asset Value Per Common Share
($79,596,227 / 4,968,638).................. $16.02
============
</TABLE>
- -------------------
/1/Non-income producing security.
/2/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. These securities
amounted to $7,636,718 or 6.8% of net assets.
/3/A Director of the Fund also serves as a Director of this company.
/4/Board valued security. These securities amounted to $1,379,027 or 1.2% of net
assets.
/5/Security is in default.
See accompanying Notes to Financial Statements.
F-22
<PAGE>
USF&G PACHOLDER FUND, INC.
Statement of Operations
For the Year Ended December 31, 1995
INVESTMENT INCOME:
Interest........................................... $11,076,858
EXPENSES:
Investment advisory fee (Note 5)................... 391,534
Administrative fee (Note 5)........................ 170,185
Custodian, transfer agent and accounting fees...... 84,929
Directors' fees.................................... 64,301
Printing and postage............................... 55,335
Audit fee.......................................... 40,550
Legal fees......................................... 24,442
Miscellaneous...................................... 7,595
-----------
Total expenses................................... 838,871
-----------
Net investment income............................ 10,237,987
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS:
Net realized loss on investments................... (2,728,589)
Net unrealized appreciation of investments......... 1,562,889
-----------
Net realized and unrealized loss on investments.. (1,165,700)
-----------
Net increase in net assets resulting from operations. 9,072,287
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS.............. (1,374,239)
-----------
NET INCREASE IN NET ASSETS APPLICABLE TO
COMMON STOCKHOLDERS RESULTING FROM
OPERATIONS AND DISTRIBUTIONS TO
PREFERRED
STOCKHOLDERS....................................... $ 7,698,048
============
See accompanying Notes to Financial Statements.
F-23
<PAGE>
USF&G PACHOLDER FUND, INC.
Statements of Changes In Net Assets
For the Year Ended
------------------
December 31,
------------
1995 1994
INCREASE IN NET ASSETS:
Operations:
Net investment income.................. $10,237,987 $ 6,928,038
Net realized loss on investments....... (2,728,589) (240,392)
Net unrealized
appreciation/(depreciation) of
investments.......................... 1,562,889 (6,181,006)
------------------ ------------
Net increase in net assets resulting
from operations...................... 9,072,287 506,640
------------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS
FROM:
Preferred dividends ($2.20 and $86.00
per share, respectively)............. (1,374,239) (782,600)
Common dividends:
Net investment income and short-
term gains of $1.90 and $1.92 per
share, respectively................ (8,733,897) (6,125,564)
------------------
Total decrease in net assets from
distributions to stockholders.......... (10,108,136) (6,908,164)
------------------ ------------
FUND SHARE TRANSACTIONS
(NOTES 2 AND 3):
Net proceeds from issuance of
preferred stock...................... 32,752,380 --
Redemption of preferred stock.......... (8,922,804) (800,000)
Value of 15,088 and 24,020 shares
issued in reinvestment of dividends,
respectively......................... 254,686 446,843
Net proceeds from common stock issued
(1,457,942 and 1,160,115 shares,
respectively) in rights offering
(after deducting $793,832 and $123,847
of offering expenses, respectively).. 22,022,960 20,421,789
------------------ ------------
Total increase in net assets derived from
fund share transactions................ 46,107,222 20,068,632
------------------ ------------
Total net increase in net assets......... 45,071,373 13,667,108
NET ASSETS:
Beginning of year...................... 67,524,854 53,857,746
------------------ ------------
End of year............................ $112,596,227 $67,524,854
================== ============
See accompanying Notes to Financial Statements.
F-24
<PAGE>
USF&G PACHOLDER FUND, INC.
Financial Highlights
(Contained below is per share operating performance data for a share of common
stock outstanding, total return performance, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................. $16.86 $19.23 $18.52 $17.37 $14.49
-------- -------- -------- -------- --------
Net investment income.......................................... 2.19 2.12 2.48 2.37 2.18
Net realized and unrealized gain/(loss) on investments......... (.06) (1.64) 1.42 1.32 2.84
-------- -------- -------- -------- --------
Net increase in net asset value resulting from operations...... 2.13 .48 3.90 3.69 5.02
-------- -------- -------- -------- --------
Distributions to Stockholders from:
Preferred dividends............................................ (.29) (.24) (.38) (.33) --
Common:
Net investment income and short-term gains.................. (1.90) (1.92) (2.09) (2.08) (2.14)
Net realized long-term gains................................ -- -- (.21) -- --
-------- -------- -------- -------- --------
Total distributions to preferred and common stockholders....... (2.19) (2.16) (2.68) (2.41) (2.14)
-------- -------- -------- -------- --------
Capital Change Resulting from the Issuance of Fund Shares:
Common Shares.................................................. (.67) (.69) (.51) -- --
Preferred Shares............................................... (.11) -- -- (.13) --
-------- -------- -------- -------- --------
(.78) (.69) (.51) (.13) --
-------- -------- -------- -------- --------
Net asset value, end of year................................... $16.02 $16.86 $19.23 $18.52 $17.37
======== ======== ======== ======== ========
Market value per share, end of year............................ $17.38 $16.75 $21.25 $19.38 $17.25
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(1)
Based on market value per share................................ 16.04% (11.12%) 22.41% 25.99% 56.78%
Based on net asset value per share............................. 10.68% 0.72% 20.27% 18.78% 36.71%
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses.................................................... .86% 1.64% 1.81% 1.90% 1.37%
Net investment income....................................... 10.45% 10.17% 10.33% 10.32% 12.94%
SUPPLEMENTAL DATA:
Net assets at end of year, net of preferred stock (000)........ $79,596 $ 58,925 $ 44.458 $ 34,001 $ 31,678
Average net assets during year, net of preferred stock (000)... $79,614 $ 59,002 $ 43,275 $ 34,950 $ 30,724
Portfolio turnover rate........................................ 83% 102% 97% 121% 48%
Number of preferred shares outstanding at end of year.......... 1,650,000 8,600 9,400 10,000 --
Asset coverage per share of preferred stock outstanding at end
of year........................................................ $66 $7,852 $5,730 $4,400 --
Liquidation and average market value per share of preferred
stock.......................................................... $20 $1,000 $1,000 $1,000 --
</TABLE>
(1) Total investment return excludes the effects of commissions.
(2) Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the average
net assets of both the common and preferred shareholders.
See accompanying Notes to Financial Statements.
F-25
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financials
1. SIGNIFICANT ACCOUNTING POLICIES -- USF&G Pacholder Fund, Inc. (the "Fund") is
a closed-end, diversified management investment company, registered under the
Investment Company Act of 1940, as amended. The Fund seeks a high level of
total return through current income and capital appreciation by investing
primarily in high yield, high risk fixed-income securities of domestic
companies. The Fund was incorporated under the laws of the State of Maryland
in August 1988.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
A.SECURITY VALUATIONS -- Portfolio securities listed on a national securities
exchange are valued at the last sale price on that exchange. Securities for
which over-the-counter market quotations are readily available are valued
at the latest bid price. Restricted securities and other securities for
which market quotations are not readily available are valued at fair value
as determined under procedures established by the Board of Directors. There
were Board valued securities of $1,379,027 or 1.2% of net assets as of
December 31, 1995. Short-term obligations with remaining maturities of 60
days or less at the date of purchase are stated at amortized cost which is
equivalent to value.
B.FEDERAL TAXES -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its net investment income and
realized gains on securities transactions. Therefore, no federal tax
provision is required.
C.SECURITIES TRANSACTIONS -- Securities transactions are accounted for on the
date the securities are purchased or sold (trade date). Realized gains and
losses on securities transactions are determined on an identified cost
basis. Interest income is recorded on an accrual basis. The Fund amortizes
discounts or premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. The Fund has elected
to defer the accretion of market discount until disposition of the
security.
D.WHEN, AS AND IF ISSUED SECURITIES -- The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security
depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization or debt restructuring. The commitment for
the purchase of any such security will not be recognized in the portfolio
of the Fund until the Fund's investment advisor determines that issuance of
the security is probable. At that time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value
of the security. No "when, as and if issued" purchase commitments were
included in the portfolio of investments as of December 31, 1995.
E.INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
estimated expenses are accrued daily. Dividends to common stockholders are
paid from net investment income quarterly, and distributions of net
realized capital gains are to be paid at least annually.
F.ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. COMMON STOCK -- At December 31, 1995, there were 48,340,000 shares of Common
Stock with a $.01 par value authorized and 4,968,638 shares outstanding.
During 1995, 15,088 shares of common stock were issued in connection with the
Fund's dividend reinvestment plan.
On March 16, 1995, 1,457,942 shares of common stock were issued at $15.65 per
share as part of a rights offering for the common stockholders of the Fund.
Expenses related to the rights offering totaling $793,832 were recorded as a
reduction to the proceeds from the offering. These expenses included $205,351
paid to Winton Associates, Inc., a wholly-owned subsidiary of Pacholder
Associates, Inc. (an affiliate of the Advisor), for financial and advisory
services including advising the Fund regarding the structure of the rights
offering and the materials utilized
F-26
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (continued)
therewith, coordinating the distribution arrangements for the rights offering
and providing information and support services to soliciting broker-dealers.
3. PREFERRED STOCK -- On August 15, 1995, the Fund issued 1,650,000 shares of
6.95% Cumulative Preferred Stock in a private sale at an offering price of $20
per share. Dividends on these shares are payable quarterly at an annual rate of
6.95%. The Fund is required to maintain certain asset coverage, other financial
tests and restrictions as set forth in the Fund's Articles Supplementary
Creating and Fixing the Rights of 6.95% Cumulative Preferred Stock. The
preferred stock is subject to mandatory redemption, on August 1, 2000, at a
redemption price equal to $20 per share, plus accumulated and unpaid dividends.
The preferred stock is also subject to special mandatory redemptions, at a
redemption price of $20 per share, plus accumulated and unpaid dividends and a
premium, as defined, if the Fund is not in compliance with the required
coverages, tests and restrictions. In general, the holders of the preferred
stock and the common stock vote together as a single class, except that the
preferred stockholders, as a separate class, vote to elect two members of the
Board of Directors, and separate votes are required on certain matters that
affect the respective interests of the preferred stock and common stock. The
preferred stock has a liquidation preference of $20 per share, plus accumulated
and unpaid dividends. The offering expenses of the preferred stock were $247,620
which were recorded as a reduction in paid-in capital for common stockholders.
These expenses included $123,750 paid to Winton Associates, Inc. for financial
and advisory services including advising the Fund regarding the structure of the
preferred stock offering and the materials utilized therewith, and the
coordinating of the arrangements of the preferred stock.
On September 14, 1995, the Fund redeemed the 8,050 outstanding shares of the
8.60% Cumulative Preferred Stock at a redemption price of $1,000 per share plus
accumulated and unpaid dividends and a premium. The redemption was made in
accordance with the Fund's Purchase Agreement and Articles Supplementary. The
premium relating to the redemption was $322,804, which was recorded as a
reduction of paid-in capital for common stockholders.
4. PURCHASES AND SALES OF SECURITIES -- Purchases and sales of securities
(excluding commercial paper and repurchase agreements) for the year ended
December 31, 1995 aggregated $118,792,110 and $71,209,431, respectively.
At December 31, 1995, the federal income tax basis of securities was
$109,504,340; unrealized depreciation aggregated $1,197,209, of which
$2,939,965 related to appreciated securities and $4,137,174 related to
depreciated securities.
At December 31, 1995, the Fund had available a capital loss carryforward of
$2,968,020, of which $239,431 expires in 2002 and the remainder expires in
2003, to offset any future net capital gains.
5. TRANSACTIONS WITH INVESTMENT ADVISOR, ADMINISTRATOR AND ACCOUNTING
SERVICES AGENT -- The Fund has an agreement with Pacholder & Company (the
"Advisor") to serve as the Fund's investment advisor. The Fund pays the Advisor
a fee that will increase or decrease based on the total return investment
performance of the Fund for the prior twelve-month period relative to the
percentage change in the CS First Boston High Yield Index.TM The fee ranges from
a maximum of 1.4% to a minimum of .40% (on an annualized basis) of the average
weekly net assets. For the year ended December 31, 1995, the Fund's total return
was 10.68%. For the same period, the total return of the CS First Boston High
Yield IndexTM was 17.38%. The 1995 advisory fee is calculated based on .40% of
average weekly net assets. Certain officers and directors of the Fund are also
executive committee members of the Advisor. At December 31, 1995, accrued
advisory fees were $59,924.
The Fund has an agreement with Investment Company Capital Corp. ("ICC") to
render certain administrative services to the Fund. ICC receives from the
Fund a fee, calculated and paid monthly, at the annual rate of .20% of the
first $50 million of the Fund's average weekly net assets, .15% of such
assets in excess of $50 million, but less than $100 million and .10% of such
assets in excess of $100 million. At December 31, 1995, accrued
administrative fees were $15,483.
F-27
<PAGE>
USF&G PACHOLDER FUND, INC.
Notes to Financial Statements (concluded)
The Fund has an agreement with Pacholder Associates, Inc. (an affiliate of
the Advisor) to provide accounting services for $1,500 per month.
6. NET ASSETS CONSIST OF:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Common Stock
($.01 par value).............................. $49,686 $34,956
Preferred Stock.................................. 33,000,000 8,600,000
Paid-in capital.................................. 83,539,521 61,847,038
Undistributed net investment income.............. 172,249 42,389
Accumulated net realized loss on investments..... (2,968,020) (239,431)
Unrealized depreciation on investments........... (1,197,209) (2,760,098)
------------ -----------
$112,596,227 $67,524,854
============ ===========
</TABLE>
F-28
<PAGE>
USF&G PACHOLDER FUND, INC.
Independent Auditors' Report
To the Stockholders and Directors
USF&G Pacholder Fund, Inc.
We have audited the accompanying statement of net assets of USF&G Pacholder
Fund, Inc. as of December 31, 1995, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
USF&G Pacholder Fund, Inc. at December 31, 1995, and the results of its
operations, changes in its net assets and financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
February 13, 1996
F-29
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors
Service, Inc. ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
Aaa: Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuations of protective
elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat
larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa: Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or maintenance of other terms of the contract over
any long period of time may be small.
Caa: Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
A-1
<PAGE>
Con(...) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. The parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Those bonds within the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest credit attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Standard & Poor's Corporation
A brief description of the applicable Standard & Poor's Corporation
("S&P") rating symbols and their meanings (as published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
Investment Grade
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
A-2
<PAGE>
A: Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB--" rating.
B: Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB--" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B--"
rating.
CC: The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C: The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC--"
debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating "CI" is reserved for income bonds on which no
interest is being paid.
D: Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
A-3
<PAGE>
Plus(+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative
standing within the major rating categories.
L: The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is federally insured by the
Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.* and interest is adequately collateralized. In
the case of certificates of deposit, the letter "L" indicates
that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured institution
or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of
an executed copy of the escrow agreement or closing
documentation confirming investments and cash flow.
N.R.: Indicates no rating has been reported, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter
of policy.
A-4
<PAGE>
APPENDIX B
INVESTMENT PERFORMANCE OF THE FUND
Historical Performance
The following chart compares the historical total return
investment performance of the Fund for the twelve-month periods indicated
relative to the percentage changes in the CS First Boston High Yield Index(TM)
(the "Index") for the same periods (the "Index Returns"). The total return
investment performance of the Fund means the sum of (i) the change in the net
asset value per share of the Fund's Common Stock during the period, (ii) the
value of the cash distributions per share of Common Stock accumulated to the end
of the period, and (iii) the value of capital gains taxes per share paid or
payable on undistributed realized long-term capital gains accumulated to the end
of the period. For this purpose, the value of distributions per share of
realized capital gains, of dividends per share paid from investment income and
of capital gains taxes paid or payable on undistributed realized long-term
capital gains will be treated as reinvested in shares of the Fund's Common Stock
at the net asset value per share in effect at the close of business on the
record date for the payment of such dividends and distributions and the date on
which provision is made for such taxes, after giving effect to such dividends,
distributions, and taxes. The calculation of the Index Returns reflects cash
distributions having an ex-dividend date occurring within the period made by the
companies whose securities comprise the Index. While neither the Index nor the
net asset value per share of the Fund reflects the reinvestment of dividends and
distributions, management of the Fund believes the Index provides a reasonable
comparison for measuring the Fund's performance. It is important to remember
that past performance is no guarantee of future results.
<TABLE>
<CAPTION>
Total Return (%) for the 12-Month Period Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Fund 20.40 10.68 0.72 20.27 18.78 36.71 -0.87 3.72
The Index 12.42 17.38 -0.97 18.91 16.66 43.75 -6.38 0.38
</TABLE>
The Index is an index of high-yield corporate debt securities,
which at December 31, 1996 included 852 issues with an aggregate par value
of $174.4 billion and an aggregate market value of $164.3 billion. The
securities comprising the Index are selected primarily on the basis of size,
liquidity and diversification. The factors considered with regard to
diversification are industry, rating, yield and duration. With regard to size,
an issue is added to the Index if it is larger than $75 million at the end of
the issue month. Securities issued as investment grade securities but which
subsequently are reduced to a rating below investment grade may be included in
the Index subject to the same criteria, except that market value is used instead
of par value and a three-month period is required prior to addition. A security
that goes into default after inclusion in the Index whose market value declines
below $20 million for six consecutive months is deleted from the Index.
Likewise, non-defaulted issues whose market value falls below $50 million for
six consecutive months are deleted from the Index. On December 31, 1996, of the
852 issues comprising the Index, 732 (83.89% of market value) were
cash paying issues not in default, 93 issues (14.96% of market value) were
zero coupon or deferred interest issues not in default, and 27 issues (1.15%
of market value) were in default. The Index is calculated daily and published
monthly by CS First Boston Corporation High Yield Research Group. CS First
Boston Corporation High Yield Research Group may rebalance or reweight the Index
every year to match the industry and rating breakdown of the universe of the
high-yield public debt market.
Morningstar Ranking
The Fund has received a four-star rating from Morningstar,
Inc., an independent publisher of financial information and investment company
ratings. The Fund's four-star rating is based
B-1
<PAGE>
upon its weighted average performance over the five-year period ended December
31, 1996. The Fund received a four-star rating for the 60-month period ended
December 31, 1996 and an average historical rating of four stars over the
preceding 36 months. Morningstar ratings involve comparisons of funds with
similar investment objectives and represent a proprietary measure of risk-
adjusted performance relative to three-month U.S. Treasury bill returns. A five-
star rating is characterized as "Highest" and is limited to the top 10% of
scores in a rating group; a four-star rating is characterized as "Above Average"
and is limited to the next 22.5% of scores in the rating group. The Fund is
included among 100 closed-end funds in Morningstar's "Taxable Bond" category.
Morningstar ratings may change every four weeks and do not take into account
brokerage commissions, sales loads or other charges that may be payable in
connection with the purchase of shares. Morningstar ratings are based on
historical performance and are not predictive of future results.
B-2
<PAGE>
PART C--OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS:
Included in Part A:
Financial Highlights (Unaudited as to June 30, 1996)
Included in Part B:
Statement of Net Assets at June 30, 1996 (Unaudited)
Statement of Operations For the Six Months Ended June 30, 1996
(Unaudited)
Statements of Changes in Net Assets For the Six Months Ended June 30,
1996 (Unaudited) and For the Year Ended December 31, 1995
Financial Highlights (Unaudited as to June 30, 1996)
Notes to Unaudited Financial Statements
Statement of Net Assets at December 31, 1995
Statement of Operations For the Year Ended December 31, 1995
Statements of Changes in Net Assets For the Years Ended December 31,
1995 and 1994
Financial Highlights
Notes to Financial Statements
Independent Auditors' Report
Included in Part C:
Independent Auditors' Consent
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing do not
exist.
2. EXHIBITS:
a. (i) Articles of Incorporation. Incorporated herein by reference to
Amendment No. 5 to the Registration Statement on Form N-2 (File No.
811-5639) (the "Registration Statement") filed on November 16, 1988.
(ii) Articles of Amendment. Incorporated herein by reference to Amendment
No. 6 to the Registration Statement filed on March 19, 1992.
(iii) Articles Supplementary Creating and Fixing the Rights of 8.60%
Cumulative Preferred Stock. Incorporated herein by reference to
Amendment No. 7 to the Registration Statement filed on October 21,
1992.
(iv) Articles Supplementary Creating and Fixing the Rights of 6.95%
Cumulative Preferred Stock.
b. Amended and Restated By-Laws.
c. Not applicable.
d. (i) Specimen certificate for Common Stock. Incorporated herein by reference
to Amendment No. 3 to the Registration Statement filed on November 10,
1988.
(ii) Specimen certificate for 8.60% Cumulative Preferred Stock. Incorporated
herein by reference to Amendment No. 7 to the Registration Statement
filed on October 21, 1992.
(iii) Specimen certificate for 6.95% Cumulative Preferred Stock.
(iv) Subscription Certificate for subscribing for shares of Common Stock
pursuant to the Offer.
(v) Notice of Guaranteed Delivery for subscribing for shares of Common
Stock pursuant to the Offer.
C-1
<PAGE>
e.
Amended Dividend Reinvestment Plan.
f. Not applicable.
g. Investment Advisory Agreement dated November 16, 1988 is incorporated
herein by reference to Amendment No. 3 to the Registration Statement
filed on November 10, 1988. Amendment No. 1 to the Investment Advisory
Agreement is incorporated herein by reference to Amendment No. 1 to the
Registration Statement filed on January 20, 1995.
h. (i) Dealer Manager Agreement.
(ii) Soliciting Dealer Agreement.
i. Not applicable.
j. Custody Agreement dated May 1, 1996.
k. (i) Transfer Agency and Service Agreement dated September 23, 1996.
(ii) Administration Agreement dated June 5, 1996.
(iii) Accounting Services Agreement is incorporated herein by reference to
Amendment No. 7 to the Registration Statement filed on October 21,
1992. Amended fee schedule to the Accounting Services Agreement.
(iv) Agreement Regarding Use of Trademark. Incorporated herein by reference
to Amendment No. 3 to the Registration Statement filed on November 10,
1988.
l. Opinion and Consent of Piper & Marbury L.L.P.
m. Not applicable.
n. Consent of Deloitte & Touche LLP.
o. Not applicable.
p. Subscription Agreement. Incorporated herein by reference to Amendment
No. 3 to the Registration Statement filed on November 10, 1988.
q. Not applicable.
r. Not applicable.
s. Power of Attorney.*
- --------
* Previously filed.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit h(i).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the Offer, all of which are being borne by
the Registrant, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees......................... $ 11,325
American Stock Exchange Listing Fees............................ $ 17,500
NASD filing fees................................................ $ 3,839
Blue Sky Filing Fees and Expenses............................... $ 1,400
Subscription Agent Fee.......................................... $ 20,000
Information Agent fee and Expenses.............................. $ 15,000
Dealer Manager Expenses......................................... $ 10,000
Accounting Expenses............................................. $ 3,500
Legal Fees...................................................... $ 80,000
Printing and Engraving Expenses................................. $ 15,000
Miscellaneous Expenses.......................................... $ 7,436
----------
Total......................................................... $185,000
==========
</TABLE>
- --------
* To be completed by amendment.
C-2
<PAGE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below are the number of record holders as of January 16, 1997, of
each class of securities of the Registrant:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Stock, par value $.01 per share............. 441
6.95% Cumulative Preferred Stock, par value $.01
per share......................................... 2
</TABLE>
ITEM 29. INDEMNIFICATION
Article NINTH, Section 5 of the Registrant's Articles of Incorporation
provides as follows:
"(5) The Corporation shall indemnify (a) its directors to the full extent
provided by the general laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures provided by
such laws; (b) its officers to the same extent it shall indemnify its
directors; and (c) its officers who are not directors to such further
extent as shall be authorized by the Board of Directors and be consistent
with law; provided, however, that nothing herein shall be construed to
protect any director or officer of the Corporation against any liability to
which such director or officer would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his or her office. The foregoing
shall not limit the authority of the Corporation to indemnify other
employees and agents consistent with law."
Officers and directors of the Registrant are covered by an insurance policy
against liabilities and expenses of claims of wrongful acts arising out of
their position with the Registrant, except for matters which involve willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the Registrant
against the cost of indemnification payments to officers and directors under
certain circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions described
in this Item 29, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Pacholder & Company is engaged primarily in the business of providing
investment advisory services. A description of the general partners of
Pacholder & Company and other required information is included in the Form ADV
and schedules thereto of Pacholder & Company on file with the Securities and
Exchange Commission (File No. 801-32589) and is incorporated herein by
reference.
C-3
<PAGE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder
at its principal office located at Bank One Towers, 8044 Montgomery Road,
Suite 382, Cincinnati, Ohio 45236. Certain records, including records relating
to the Registrant's shareholders, may be maintained pursuant to Rule 31a-3 at
the offices of the Registrant's transfer agent and registrar, Fifth Third Bank
Corporate Trust Services, located at 38 Fountain Square Plaza MD-1090D2,
Cincinnati, Ohio 45263. Certain records relating to the physical possession of
the Registrant's securities may be maintained at the offices of the
Registrant's custodian, Star Bank, N.A., located at 425 Walnut Street,
Cincinnati, Ohio 45202.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend offering of shares until the
prospectus is amended if (i) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent
from its net asset value as of the effective date of this Registration
Statement or (ii) the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to 497(h) under the
Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. Not applicable.
C-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CINCINNATI, AND STATE OF
OHIO, ON THE 17TH DAY OF JANUARY, 1997.
USF&G Pacholder Fund, Inc.
/s/ Anthony L. Longi, Jr.
By: __________________________________
ANTHONY L. LONGI, JR., PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
ASHER O. PACHOLDER* Chairman of the
Board (principal
executive officer)
WILLIAM J. MORGAN* Executive Vice
President,
Treasurer
(principal
financial and
accounting
officer) and
Director
JAMES P. SHANAHAN, JR.* Secretary and
Director
DANIEL A. GRANT*
Director
JOHN C. SWEENEY* Director
JOHN F. WILLIAMSON*
Director
GEORGE D. WOODARD* Director
/s/ Anthony L. Longi, Jr.
*By: __________________________________ January 17, 1997
ANTHONY L. LONGI, JR. ATTORNEY-IN-FACT
Original powers of attorney authorizing Anthony L. Longi, Jr., James P.
Shanahan, Jr., and Alan C. Porter, and each of them, to execute this
Registration Statement, and amendments hereto, for each of the officers and
directors of Registrant on whose behalf this Registration Statement is filed,
have been executed and filed with the Securities and Exchange Commission.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
LETTER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
a.(iv) Articles Supplementary Creating and Fixing the Rights of
6.95% Cumulative Preferred Stock.......................
b. Amended and Restated By-Laws............................
d.(iii) Specimen certificate for 6.95% Cumulative Preferred
Stock..................................................
d.(iv) Subscription Certificate for subscribing for shares of
Common Stock pursuant to the Offer.....................
d.(v) Notice of Guaranteed Delivery for subscribing for shares
of Common Stock........................................
e. Amended Dividend Reinvestment Plan......................
h.(i) Dealer Manager Agreement................................
h.(ii) Soliciting Dealer Agreement.............................
j. Custody Agreement.......................................
k.(i) Transfer Agency and Service Agreement...................
k.(ii) Administration Agreement................................
k.(iii) Amended Fee Schedule to Accounting Services Agreement...
l. Opinion and Consent of Piper & Marbury L.L.P............
n. Consent of Deloitte & Touche LLP........................
s. Power of Attorney*
</TABLE>
- --------
* Previously filed
<PAGE>
================================================================================
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
8/15/95 at 1007 a.m.
Pacholder Fund, Inc.
Articles Supplementary
Creating and Fixing the Rights of
6.95% Cumulative Preferred Stock
================================================================================
<PAGE>
Section Heading Page
Article I Preferred Stock............................................. 1
Section 1. Dividends................................................. 1
Section 2. Liquidation Rights........................................ 3
Section 3. Redemption................................................ 4
Section 4. Voting Rights............................................. 8
Section 5. Coverage and Other Financial Tests....................... 11
Section 6. Prohibited Actions....................................... 14
Article II Amendments; Class Voting................................... 15
Article III Definitions................................................ 15
Attachments to preferred Stock Purchase Agreement
Schedule I -- Discount Factors Supplied by Moody's
Schedule II -- Discount Factors Supplied by Standard & Poor's
Schedule III -- Industry Categories
Exhibit A -- Form of Certificate of Asset Coverage
Exhibit B -- Form of Certificate of Eligible Portfolio Coverage
-i-
<PAGE>
Articles Supplementary
Creating and Fixing the Rights of
6.95% Cumulative Preferred Stock of
Pacholder Fund, Inc.
Pacholder Fund, Inc., a Maryland corporation having its principal office in
Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
First: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by Article Sixth of the charter of the
Corporation, the Board of Directors has duly reclassified 1,650,000
authorized and unissued shares of the Common Stock (par value $.0l per
share) of the Corporation into a class of preferred stock designated as the
"6.95% Cumulative Preferred Stock" (the "Preferred Stock") and has provided
for the issuance of shares of such class.
Second: The preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the Preferred Stock of the Corporation as set
by the Board of Directors are as hereinafter set forth:
Article I
Preferred Stock
Section 1. Dividends; Additional Dividends.
(a)(i) Holders of shares of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cumulative cash dividends on each share of Preferred Stock
at the rate of 6.95% per annum (computed on the basis of a 360-day year
consisting of twelve 30-day months) of the Liquidation Preference thereof and no
more, payable quarterly on the first day of each February, May, August and
November in each year commencing November 1, 1995 (or, if any such day is not a
Business Day, then on the next succeeding Business Day) to holders of record of
Preferred Stock as they appear on the stock register of the Corporation at the
close of business on the fifteenth day of the month immediately preceding such
Dividend Payment Date (or, if any such day is not a Business Day, then on the
next succeeding Business Day) in preference to dividends on shares of Common
Stock and any other capital stock of the Corporation ranking junior to the
Preferred Stock in payment of dividends. Dividends on shares of Preferred Stock
shall accumulate from the date on which such shares are originally issued ("Date
of Original Issue"). Each period beginning on and including a Dividend Payment
Date (or the Date of Original Issue, in the case of the first dividend period
after issuance of such shares) and ending on but excluding the next succeeding
Dividend Payment Date is referred to herein as a "Dividend Period". Dividends on
account of arrears for any past Dividend Period may be declared and paid at any
time, without reference to any Dividend
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 1. Dividends
Payment Date, to holders of record on such date, not exceeding 30 days preceding
the payment date thereof, as shall be fixed by the Board of Directors.
(ii) Holders of shares of Preferred Stock shall also be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, additional cash dividends ("Additional Dividends")
on each share of Preferred Stock at the rate of 8.95% per annum (computed on the
basis of a 360-day year consisting of twelve 30-day months) of the amount of (x)
any dividend on such share of Preferred Stock that is not paid when due pursuant
to Section 1 and (y) the Liquidation Preference of such share of Preferred Stock
that is not redeemed on the redemption date relating thereto pursuant to Section
3(a), (b) or (c), plus any Make-Whole Premium, in each case from and including
the date on which such dividend or Liquidation Preference was otherwise payable,
to but not including the payment date thereof, payable to holders of record of
Preferred Stock as they appear on the stock register of the Corporation at the
close of business on any Business Day not exceeding 30 days preceding the
payment date thereof in preference to dividends on shares of Common Stock and
any other capital stock of the Corporation ranking junior to the Preferred Stock
in payment of dividends.
(b)(i) Any dividends on the shares of Preferred Stock (including,
without limitation, any Additional Dividends) shall be paid pro rata on all
outstanding shares of Preferred Stock. No holders of shares of Preferred Stock
shall be entitled to any dividends, whether payable in cash, property or stock,
in excess of full cumulative dividends as provided in Section 1(a) on shares of
Preferred Stock.
(ii) For so long as shares of Preferred Stock are outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock ranking junior to the Preferred Stock as to dividends and upon
liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Preferred Stock as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of Common Stock or any other stock of the Corporation
ranking junior to the Preferred Stock as to dividends or upon liquidation
(except by conversion into or exchange for stock of the Corporation ranking
junior to the Preferred Stock as to dividends and upon liquidation), unless, in
each case, (A) immediately thereafter, the Asset Coverage and the Eligible
Portfolio Coverage would be met, (B) full cumulative dividends on all shares of
Preferred Stock due on or prior to the date of the transaction (including,
without limitation, any Additional Dividends) have been declared and paid (or
sufficient Deposit Securities have been set apart for their payment) and (C) the
Corporation has redeemed the full number of shares of Preferred Stock required
to be redeemed by any provision contained herein for mandatory redemption.
(iii) Any dividend payment made on the shares of Preferred Stock
shall first be credited against the dividends (including, without limitation,
any Additional Dividends) accumulated with respect to the earliest Dividend
Period for which dividends have not been paid.
-2-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 1. Dividends
(c) Not later than the 10th Business Day next preceding each Dividend
Payment Date, the Corporation shall deposit with the Paying Agent Deposit
Securities having a combined value sufficient to pay the dividends that are
payable on such Dividend Payment Date and maturing on or prior to such Dividend
Payment Date. The Corporation may direct the Paying Agent with respect to the
investment of any such Deposit Securities, provided that such investment
consists exclusively of Deposit Securities and provided further that the
proceeds of any such investment will be available at the opening of business on
such Dividend Payment Date.
Section 2. Liquidation Rights.
(a) In the event of any involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of shares of Preferred
Stock shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, after claims of creditors but before
any distribution or payment shall be made in respect of the Common Stock or any
other stock of the Corporation ranking junior to the Preferred Stock as to
liquidation payments, a liquidation distribution in the amount of $20 per share
(the "Liquidation Preference"), plus an amount equal to all unpaid dividends
(including, without limitation, any Additional Dividends) accrued to and
including the date fixed for such distribution or payment, whether or not
declared by the Corporation, plus the Make-Whole Premium, but such holders shall
be entitled to no further participation in any distribution or payment in
connection with any such liquidation, dissolution or winding up.
(b) In the event of any voluntary liquidation, dissolution or winding
up of the affairs of the Corporation, the holders of shares of Preferred Stock
shall be entitled to receive out of the assets of the Corporation available for
distribution to stockholders, after claims of creditors but before any
distribution or payment shall be made in respect of the Common Stock or any
other stock of the Corporation ranking junior to the Preferred Stock as to
liquidation payments, the Liquidation Preference, plus an amount equal to all
unpaid dividends (including, without limitation, any Additional Dividends)
accrued to and including the date fixed for such distribution or payment,
whether or not declared by the Corporation, plus the Make-Whole Premium, but
such holders shall be entitled to no further participation in any distribution
or payment in connection with any such liquidation, dissolution or winding up.
(c) If, upon any liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of Preferred Stock shall be insufficient to permit the payment in full to
such holders of the Liquidation Preference, plus an amount equal to all unpaid
dividends (including, without limitation, any Additional Dividends) accrued to
and including the date of such liquidation, dissolution or winding up, whether
or not declared by the Corporation, plus the Make-Whole Premium (the "Total
Liquidation Preference"), then such available assets shall be distributed among
the holders of shares of Preferred Stock ratably in any such distribution of
assets according to the respective amounts that would be payable on all such
shares if the Total Liquidation Preference were paid in full. Unless and until
the Total Liquidation Preference has been
-3-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
paid in full to the holders of shares of Preferred Stock, no dividends or
distributions shall be made to holders of the Common Stock or any other stock of
the Corporation ranking junior to the Preferred Stock as to liquidation.
Section 3. Redemption.
Shares of Preferred Stock shall be redeemed by the Corporation as provided
below:
(a) Scheduled Mandatory Redemption. On August 1, 2000 the
Corporation shall redeem, out of funds legally available therefor, all of the
then outstanding shares of Preferred Stock at a price equal to $20 per share
plus accumulated and unpaid dividends (including, without limitation, any
Additional Dividends and whether or not declared by the Corporation) through
the date of redemption (the "Redemption Price") upon Notice of Redemption.
(b) Special Mandatory Redemptions. (i) If on any Asset Coverage
Cure Date the Corporation is required to redeem any shares of Preferred Stock
pursuant to Section 5(d) hereof, then the Corporation shall, by the close of
business on such Asset Coverage Cure Date, give a Notice of Redemption (which
shall specify a redemption date that is not fewer than 30 days nor more than
45 days after the date of such notice) with respect to the redemption of such
shares of Preferred Stock on such redemption date and, on the date fixed for
redemption in such Notice of Redemption, shall redeem, out of funds legally
available therefor, the number of shares of Preferred Stock equal to the
minimum number of shares (but in no event fewer than 50,000 shares) the
redemption of which, if such redemption had occurred immediately prior to the
opening of business on such Asset Coverage Cure Date, would have resulted in
the Asset Coverage having been met on such Asset Coverage Cure Date or, if
the Asset Coverage cannot be restored, all outstanding shares of Preferred
Stock, at the Redemption Price plus the Make-Whole Premium.
(ii) If on any Eligible Portfolio Cure Date the Corporation is
required to redeem any shares of Preferred Stock pursuant to Section 5(e)
hereof, then the Corporation shall, by the close of business on such Eligible
Portfolio Cure Date, give a Notice of Redemption (which shall specify a
redemption date that is not fewer than 30 days nor more than 45 days after
the date of such notice) with respect to the redemption of such shares of
Preferred Stock on such redemption date and, on the date fixed for redemption
in such Notice of Redemption, shall redeem, out of funds legally available
therefor, the number of shares of Preferred Stock equal to the minimum number
of shares (but in no event fewer than 50,000 shares) the redemption of which,
if such redemption had occurred immediately prior to the opening of business
on such Eligible Portfolio Cure Date, would have resulted in the Eligible
Portfolio Coverage having been met on such Eligible Portfolio Cure Date or,
if the Eligible Portfolio Coverage cannot be restored, all outstanding shares
of Preferred Stock, at the Redemption Price plus the Make-Whole Premium.
(iii) If the Corporation shall
-4-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
(A) fail to pay full dividends on the Preferred Stock on any Dividend
Payment Date;
(B) fail to make any mandatory redemption of the Preferred Stock as
and when, and in the full amount required by, any of the provisions of
Sections 3(a) or 3(b) hereof;
(C) incur or be liable in respect of any indebtedness for borrowed
money or issue senior securities (as defined in the 1940 Act as in effect on
August 1, 1995) other than the shares of Preferred Stock (for this purpose
any guaranty of indebtedness of another Person and any reimbursement
obligation in connection with any standby letter of credit shall be deemed to
be indebtedness for borrowed money);
(D) overdraw any bank account (except as may be necessary for the
clearance of security transactions);
(E) cease to employ as its sole investment adviser, as that term is
defined in the 1940 Act as in effect on August 1, 1995, either the Advisor or
another Person in which Pacholder Associates, Inc., has at least a 50% equity
interest (both in net income and control), except with the prior written
consent of the holders of the outstanding shares of Preferred Stock;
(F) fail to qualify as a regulated investment company as defined in
Subchapter M of the Internal Revenue Code of 1986, as amended;
(G) create, incur or suffer to exist, or agree to create incur or
suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or
existence of any lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt, or other encumbrance of any
kind in respect of any of its property;
(H) cease to be a registered closed-end investment company under the
1940 Act or take any action to liquidate the Corporation; or
(I) sell or otherwise transfer all or substantially all of the assets
of the Corporation in a single transaction or group of related transactions;
then and in any such event the Corporation shall, (1) in the case of an event
specified in (A), (C), (D) or (F) above, if such event shall remain uncured on
the close of business on the fifth Business Day after such event shall occur and
shall not have been cured, or (2) in the case of an event specified in (B), (E),
(G), (H) or (I) above, by the close of business on the date any such event shall
occur, give a Notice of Redemption (which shall specify a redemption date that
is not fewer than 30 days nor more than 45 days after the date of such notice)
with respect to the redemption of all
-5-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
outstanding shares of Preferred Stock on such redemption date and, on the date
fixed for redemption in such Notice of Redemption, shall redeem, out of funds
legally available therefor, such shares, at the Redemption Price plus the Make-
Whole Premium.
(iv) If the Corporation shall have been advised by any Rating Agency
that its rating on the Preferred Stock shall be reduced below "AAA" (or the
equivalent rating of any successor Rating Agency), then the Corporation shall,
by the close of business on such date, give a Notice of Redemption (which shall
specify a redemption date that is not fewer than 30 days nor more than 45 days
after the date of such notice) with respect to the redemption of all outstanding
shares of Preferred Stock on such redemption date and, on the date fixed for
redemption in such Notice of Redemption, shall redeem, out of funds legally
available therefor, such shares, at the Redemption Price plus the Make-Whole
Premium.
(v) If any representation or warranty made by the Corporation or the
Advisor in that certain Preferred Stock Purchase Agreement dated as of August 1,
1995, or made by the Corporation or the Advisor in any statement or certificate
furnished by the Corporation or the Advisor in connection with the consummation
of the issuance and delivery of the Preferred Stock, is untrue in any material
respect as of the date of the issuance or making thereof, then the Corporation
shall, by the close of business on the date the Corporation first obtains
knowledge of such misrepresentation, give a Notice of Redemption (which shall
specify a redemption date that is not fewer than 30 days nor more than 45 days
after the date of such notice) with respect to the redemption of all outstanding
shares of Preferred Stock on such redemption date and, on the date fixed for
redemption in such Notice of Redemption, shall redeem, out of funds legally
available therefor, such shares, at the Redemption Price plus the Make-Whole
Premium.
(vi) If any statement, certificate or other written information
furnished by the Corporation or the Advisor to the holders of the Preferred
Stock at any time subsequent to the issuance and delivery of the Preferred Stock
pursuant to the requirements of that certain Preferred Stock Purchase Agreement
dated as of August 1, 1995 or these Articles Supplementary is incorrect as at
the date of the delivery thereof, and such error could reasonably be expected to
materially affect adversely the Preferred Stock, then the Corporation shall, by
the close of business the fifth Business Day after the date the Corporation
first obtains knowledge of such misrepresentation, give a Notice of Redemption
(which shall specify a redemption date that is not fewer than 30 days nor more
than 45 days after the date of such notice) with respect to the redemption of
all outstanding shares of Preferred Stock on such redemption date and, on the
date fixed for redemption in such Notice of Redemption, shall redeem, out of
funds legally available therefor, such shares, at the Redemption Price plus the
Make-Whole Premium.
(c) Optional Redemptions. The Corporation may at any time upon the
prior delivery of a Notice of Redemption (which shall specify a redemption date
of not
-6-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
fewer than 30 days nor more than 45 days after the date of such notice) redeem
the Preferred Stock, in whole or in part, at the Redemption Price plus the Make-
Whole Premium.
(d) Procedures for Redemption. (i) If the Corporation shall be
required to redeem shares of Preferred Stock pursuant to this Section 3, it
shall send a notice (a "Notice of Redemption") with respect to such redemption
by overnight air courier or by facsimile communication to each holder of the
shares to be redeemed at such holder's address as the same appears on the stock
books of the Corporation. Each such Notice of Redemption shall state: (A) the
redemption date; (B) the number of shares of Preferred Stock to be redeemed from
such holder; (C) the CUSIP number(s) of such shares; (D) the Redemption Price;
(E) the place or places where the certificate(s) for such shares (properly
endorsed or assigned for transfer, if the Board of Directors shall so require
and the Notice of Redemption shall so state) are to be surrendered for payment
in respect of such redemption; (F) that dividends on the shares to be redeemed
will cease to accrue on such redemption date; (G) the provisions of this Section
3 under which such redemption is made; and (H) the estimate of the Make-Whole
Premium, if any, payable in connection with such redemption, including a
reasonably detailed calculation thereof.
(ii) If the Corporation shall give a Notice of Redemption, then
concurrently with the giving of such Notice of Redemption, the Corporation shall
(A) deposit in trust with the Paying Agent Deposit Securities having a combined
value sufficient to effect the redemption of the shares of Preferred Stock to be
redeemed and maturing on or prior to such redemption date and (B) give the
Paying Agent irrevocable instructions and authority to pay the Redemption Price
and any Make-Whole Premium to the holders of the shares of Preferred Stock
called for redemption on the redemption date. The Corporation may direct the
Paying Agent with respect to the investment of any Deposit Securities so
deposited, provided that such investment consists exclusively of Deposit
Securities and provided further that the proceeds of any such investment will be
available at the opening of business on such redemption date. Upon the date of
such deposit (unless the Corporation shall default in making payment of the
Redemption Price and the Make-Whole Premium, if any), all rights of the holders
of the shares of Preferred Stock so called for redemption shall cease and
terminate except the right of the holders thereof to receive the Redemption
Price thereof and the Make-Whole Premium, if any, and such shares shall no
longer be deemed outstanding for any purpose. The Corporation shall be entitled
to receive, promptly after the date fixed for redemption, any Deposit Securities
in excess of the aggregate Redemption Price and any Make-Whole Premium of the
shares of Preferred Stock called for redemption on such date. Any Deposit
Securities so deposited in respect of the Redemption Price and any Make-Whole
Premium for the redemption of shares of Preferred Stock that are unclaimed at
the end of two years from such redemption date shall, to the extent permitted by
law, be repaid to the Corporation, after which the holders of the shares of
Preferred Stock so called for redemption shall look only to the Corporation for
payment thereof. The Corporation shall be entitled
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
to receive, from time to time after the date fixed for redemption, any
interest on the Deposit Securities so deposited.
(iii) On or after any redemption date, each holder of shares of
Preferred Stock that are subject to redemption on such redemption date shall
surrender the certificate or certificates evidencing such shares to the
Corporation at the place designated in the Notice of Redemption and shall
then be entitled to receive the Redemption Price and any Make-Whole Premium,
without interest.
(iv) In the case of any redemption of less than all of the shares of
Preferred Stock pursuant to these Articles Supplementary, such redemption
shall be made pro rata from each holder of shares of Preferred Stock in
accordance with the respective number of shares held by each such holder on
the date fixed for such redemption.
(v) Notwithstanding the other provisions of this Section 3, the
Corporation shall not redeem shares of Preferred Stock unless all accumulated
and unpaid dividends on all outstanding shares of Preferred Stock for all
applicable past Dividend Periods (including, without limitation, any
Additional Dividends) shall have been or are contemporaneously paid or
declared and Deposit Securities for the payment of such dividends shall have
been deposited with the Paying Agent as set forth in Section 1(c) hereof.
(vi) If the Corporation shall not have funds legally available for
the redemption of, or is otherwise unable to redeem, all the shares of
Preferred Stock to be redeemed on any redemption date, the Corporation shall
redeem on such redemption date the number of shares of Preferred Stock as it
shall have legally available funds, or is otherwise able, to redeem ratably
from each holder whose shares are to be redeemed and the remainder of the
shares of Preferred Stock required to be redeemed shall be redeemed on the
earliest practicable date on which the Corporation shall have funds legally
available for the redemption of, or is otherwise able to redeem, such shares
upon Notice of Redemption.
Section 4. Voting Rights.
(a) General. Except as otherwise provided by law or as specified in
these Articles Supplementary, the Preferred Stock shall have equal voting rights
with every other outstanding voting stock of the Corporation and each holder of
the Preferred Stock shall be entitled to one vote for each share held on each
matter on which the holders of the Preferred Stock are entitled to vote. Except
as otherwise provided in these Articles Supplementary or by law, the holders of
the Preferred Stock and the Common Stock shall vote together as one class on all
matters submitted to the stockholders of the Corporation; provided, however,
that at any meeting of the stockholders of the Corporation held for the election
of directors, (i) the holders of the Preferred Stock shall be entitled as a
class, to the exclusion of the holders of the Common Stock, to elect two
directors of the Corporation, the identities of the nominees for which
directorships may be fixed by the Board of Directors, (ii) the holders of the
Common Stock shall be entitled as a class, to the exclusion of the holders of
the
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 4. Voting Rights
Preferred Stock, to elect two directors of the Corporation, the identities
of the nominees for which directorships may be fixed by the Board of Directors,
and (iii) subject to Section 4(b) hereof, the holders of a majority of the
shares of Common Stock and Preferred Stock voting together as a single class
shall be entitled to elect the remaining directors of the Corporation.
(b) Right to Elect Majority of Board of Directors. (i) If at any time
(A) dividends on the Preferred Stock shall be unpaid in an amount equal to two
full years' dividends on the Preferred Stock or (B) the Corporation shall have
failed to redeem any shares of Preferred Stock pursuant to Section 3(a) or 3(b)
hereof when required (a "Voting Period"), then the number of directors
constituting the entire Board of Directors shall be automatically increased by
the smallest number of additional directors that, when added to the number of
directors then constituting the Board of Directors, shall (together with the two
directors elected by the holders of Preferred Stock pursuant to Section 4(a)
hereof) constitute a majority of such increased number, and the holders of
Preferred Stock shall be entitled, voting as a single class on a one-vote-per-
share basis (to the exclusion of the holders of all other securities and classes
of capital stock of the Corporation), to elect the smallest number of such
additional directors that shall constitute a majority of the total number of
directors of the Corporation so increased.
(ii) The Voting Period and the voting rights so created upon the
occurrence of the conditions set forth in this Section 4(b) shall continue
unless and until (A) all dividends in arrears on the Preferred Stock shall have
been paid or declared (including, without limitation, any Additional Dividends)
and sufficient Deposit Securities for the payment of such dividends deposited in
trust with the Paying Agent as set forth in Section 1(c) hereof and (B) all
shares of Preferred Stock required to be redeemed pursuant to Section 3(a) or
3(b) hereof have been redeemed or sufficient Deposit Securities to pay the full
Redemption Price, any Make-Whole Premium and any Additional Dividends for such
shares shall have been deposited in trust with the Paying Agent as set forth in
Section 3(d)(ii) hereof and the requisite Notice of Redemption shall have been
given. Upon the termination of a Voting Period, the voting rights described in
this Section 4(b) shall cease, subject always, however, to the revesting of such
voting rights in the holders of Preferred Stock upon the further occurrence of
any of the events described in this Section 4(b).
(c) Voting Procedures. (i) As soon as practicable after the accrual
of any right of the holders of the Preferred Stock to elect directors pursuant
to Section 4(b) hereof, the Corporation shall call a special meeting of the
holders of the Preferred Stock, by notice duly given to such holders by the
proper officers of the Corporation, which meeting shall be held not less than 10
nor more than 60 days after the date of mailing of such notice. If the
Corporation does not give notice of such special meeting, the meeting may be
called by any holder of the Preferred Stock on like notice, with a copy to the
Corporation. The record date for determining the holders of the Preferred Stock
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
given. At any such special meeting and at each meeting held during a Voting
Period at which directors are elected, the holders of the Preferred Stock,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be entitled
to elect the number of directors prescribed
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 4. Voting Rights
in Section 4(b) hereof on a one-vote-per-share basis. In the absence of a quorum
(as set forth in the Maryland General Corporation Law), a majority of the
holders of the shares of Preferred Stock present in person or by proxy at any
such meeting shall have the power to adjourn the meeting without notice, other
than an announcement at the meeting, until a quorum is present. Any action
required or permitted to be taken at a meeting of the holders of the Preferred
Stock may be taken without a meeting if there is filed with the records of
stockholders meetings a unanimous written consent which sets forth the action
and is signed by each holder of the Preferred Stock entitled to vote on the
matter and a written waiver of any right to dissent signed by each stockholder
entitled to notice of the meeting but not entitled to vote at it.
(ii) For purposes of determining any rights of the holders of the
Preferred Stock to vote on any matter, whether such right is created by these
Articles Supplementary, by statute or otherwise, no holder of the Preferred
Stock shall be entitled to vote and no share of Preferred Stock shall be deemed
to be outstanding for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with the time of
determination of shares of Preferred Stock entitled to vote or shares of
Preferred Stock deemed outstanding for quorum purposes, as the case may be,
sufficient Deposit Securities for the redemption of such shares have been
deposited in trust with the Paying Agent for that purpose and the requisite
Notice of Redemption with respect to such shares shall have been given as
provided in Section 3(d) hereof.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of the Preferred Stock
to elect directors pursuant to Section 4(b) hereof shall continue,
notwithstanding the election at such meeting by the holders of the Preferred
Stock of the number of directors that they are entitled to elect, and the
persons so elected by the holders of the Preferred Stock, together with the
incumbent directors, shall constitute the duly elected directors of the
Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the
terms of office of the directors elected by the holders of the Preferred Stock
pursuant to Section 4(b) hereof shall terminate and the two directors elected by
the holders of the Common Stock voting as a separate class, the two directors
elected by the holders of the Preferred Stock voting as a separate class and the
remaining directors elected by the holders of the Common Stock and the Preferred
Stock voting together as a single class pursuant to Section 4(a) hereof and who
are incumbent shall constitute the directors of the Corporation and the voting
rights of the holders of the Preferred Stock to elect directors pursuant to
Section 4(b) hereof shall cease, subject to reinstatement as provided in Section
4(b) hereof.
(v) The directors elected by the holders of the Preferred Stock
pursuant to Section 4(a)(i) or 4(b) hereof shall (subject to the provisions of
any applicable law) be subject to removal only by the vote of the holders of the
Preferred Stock. Any vacancy on the Board of Directors occurring by reason of
such removal or otherwise (in the case of directors subject to election by the
holders of the Preferred Stock) may be filled only by vote of the holders of the
Preferred Stock, and if not so filled such vacancy shall (subject to the
provisions of any applicable law) be filled by a majority of the remaining
directors (or
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 4. Voting Rights
the remaining director) who were elected by the holders of Preferred Stock. Any
other vacancy on the Board of Directors during a Voting Period shall be filled
as provided in the Corporation's By-Laws.
Section 5. Coverage and Other Financial Tests.
(a) Determination of Compliance. For so long as any shares of
Preferred Stock are outstanding, the Corporation shall make the following
determinations:
(i) Asset Coverage. As of each Asset Coverage Evaluation Date,
whether the Asset Coverage is met. The calculation of the Asset Coverage on
such date and whether the Asset Coverage is met shall be set forth in a
Certificate (a "Certificate of Asset Coverage") in the form attached hereto
as Exhibit A and dated as of such Asset Coverage Evaluation Date.
(ii) Eligible Portfolio Coverage. As of each Eligible Portfolio
Evaluation Date, the Eligible Portfolio Coverage Amount and whether the
Eligible Portfolio Coverage is met. The calculation of the Eligible
Portfolio Coverage Amount and whether the Eligible Portfolio Coverage is
met shall be set forth in a Certificate (a "Certificate of Eligible
Portfolio Coverage") in the form attached hereto as Exhibit B and dated as
of such Eligible Portfolio Evaluation Date.
(b) Certificates as to Compliance. (i) If, on any Asset Coverage
Evaluation Date the Asset Coverage is not met, the Corporation shall on such
date (each, an "Asset Coverage Non-Compliance Date") telephonically notify each
holder of such non-compliance and within two Business Days following such Asset
Coverage Non-Compliance Date deliver to each holder by overnight courier or by
facsimile communications (to be simultaneously confirmed by overnight delivery)
a Certificate of Asset Coverage. If the Asset Coverage is met on any Asset
Coverage Evaluation Date during any fiscal quarter of the Corporation, the
Corporation shall cause the Certificate of Asset Coverage with respect to such
Asset Coverage Evaluation Date, together with each other Certificate of Asset
Coverage prepared by the Corporation in such fiscal quarter of the Corporation,
to be delivered to the Paying Agent and to each holder of Preferred Stock not
later than the close of business on the fifth Business Day after the Asset
Coverage Evaluation Date that is the last Business Day of such fiscal quarter of
the Corporation.
(ii) If, on any Eligible Portfolio Evaluation Date the Eligible Portfolio
Coverage is not met, the Corporation shall on such date (each, an "Eligible
Portfolio Coverage Non-Compliance Date") telephonically notify each holder of
such non-compliance and within two Business Days following such Eligible
Portfolio Coverage Non-Compliance Date deliver to each holder by overnight
courier or by facsimile communications (to be simultaneously confirmed by
overnight delivery) a Certificate of Eligible Portfolio Coverage. If the
Eligible Portfolio Coverage is met on any Eligible Portfolio Evaluation Date
during any fiscal quarter of the Corporation, the Corporation shall cause the
Certificate of Eligible Portfolio Coverage with respect to such Eligible
Portfolio Evaluation Date, together with each other Certificate of Eligible
Portfolio Coverage prepared by the Corporation in such
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 5. Coverage and Other Financial Tests
fiscal quarter of the Corporation, to be delivered to the Paying Agent and to
each holder of Preferred Stock not later than the close of business on the fifth
Business Day after the Eligible Portfolio Evaluation Date that is the last
Business Day of such fiscal quarter of the Corporation.
(iii) In the event that a Certificate is not delivered to the Paying
Agent when required, the Asset Coverage or the Eligible Portfolio Coverage, as
the case may be, will be deemed not to have been met as of the date required.
(c) Accountants' Certificates. With respect to (i) the Certificate of
Asset Coverage relating to any Asset Coverage Evaluation Date that is the last
Business Day of any fiscal quarter of the Corporation and relating to any Asset
Coverage Cure Date and (ii) the Certificate of Eligible Portfolio Coverage
relating to (x) the Date of Original Issue (to be provided pursuant to Section 6
hereunder), (y) any Eligible Portfolio Evaluation Date that is the last Business
Day of any fiscal quarter of the Corporation and (z) any Eligible Portfolio Cure
Date, the Corporation shall obtain from the Independent Accountants a written
communication (each such written communication being referred to herein as an
"Accountants' Certificate") confirming that:
(A) with respect to the Asset Coverage, (1) the calculations set
forth in the related Certificate of Asset Coverage are mathematically
accurate and (2) the Independent Accountants have traced the prices
used by the Corporation in determining the value of the Corporation's
assets in accordance with the 1940 Act (as in effect on August 1,
1995) to the prices provided to the Corporation by the Pricing Agent
for such purpose and verified that such information agrees; and
(B) with respect to the Eligible Portfolio Coverage, (1) the
calculations set forth in the related Certificate of Eligible
Portfolio Coverage are mathematically accurate, (2) the method used by
the Corporation in determining whether the Eligible Portfolio Coverage
is met is in accordance with the applicable requirements of these
Articles Supplementary, (3) the Independent Accountants have traced
the prices used by the Corporation in the determination of Discounted
Value of Eligible Portfolio Property to the prices provided to the
Corporation by the Pricing Agent for purposes of such determination
and verified that such information agrees, (4) the assets listed as
Eligible Portfolio Property in the related Certificate conform to the
descriptions of Eligible Portfolio Property set forth in these
Articles Supplementary and (5) the Independent Accountants have
verified the calculations in a Certificate of Eligible Portfolio
Coverage randomly selected by the Independent Accountants, which was
completed by the Corporation during the fiscal quarter of the
Corporation to which such Accountants' Certificate relates.
The Corporation shall cause each Accountants' Certificate, together
with the related Certificate of Asset Coverage, to be delivered to the Paying
Agent by the close of business on any related Asset Coverage Cure Date and on
the fifth Business Day after any related Asset Coverage Evaluation Date that is
the last Business Day of any fiscal quarter of the Corporation. The Corporation
shall cause each Accountants' Certificate, together with the
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 5. Coverage and Other Financial Tests
related Certificate of Eligible Portfolio Coverage, to be delivered to the
Paying Agent not later than the close of business on any related Eligible
Portfolio Cure Date and on the fifth Business Day following any related Eligible
Portfolio Evaluation Date that is the last Business Day of any fiscal quarter of
the Corporation. The Corporation shall also cause each Accountants' Certificate,
together with the related Certificate, to be contemporaneously delivered to each
holder of the Preferred Stock. In the event of any difference between the
Corporation's calculations as shown on a Certificate and the Independent
Accountants' calculations as shown on an Accountants' Certificate, such
calculations of the Independent Accountants shall control.
(d) Failure to Meet Asset Coverage. If the Asset Coverage is not met
as of any Asset Coverage Evaluation Date as shown in a Certificate of Asset
Coverage or if an Accountants' Certificate confirming a Certificate of Asset
Coverage is not timely delivered as contemplated by Section 5(c) hereof, then
the Corporation shall, by the close of business on the related Asset Coverage
Cure Date, deliver to the Paying Agent and to each holder of the Preferred Stock
a Certificate of Asset Coverage together with an Accountants' Certificate
showing that the Asset Coverage (i) is met or (ii) would have been met as of the
date of such Certificate after giving effect to a redemption of shares of
Preferred Stock (as if such redemption had occurred immediately prior to the
opening of business on the date of such Certificate). If clause (ii) of this
Section 5(d) is applicable, the Corporation shall by the close of business on
the related Asset Coverage Cure Date give a Notice of Redemption as described in
Section 3(b)(i) hereof with respect to the redemption of a sufficient number of
shares of Preferred Stock to enable it to meet the requirements of this Section
5(d) (but in no event fewer than 50,000 shares), and deposit in trust with the
Paying Agent Deposit Securities having a combined value sufficient to effect the
redemption of the shares of Preferred Stock to be redeemed, as contemplated by
Section 3(d)(ii) hereof.
(e) Failure to Meet Eligible Portfolio Coverage. If the Eligible
Portfolio Coverage is not met as of any Eligible Portfolio Evaluation Date as
shown in a Certificate of Eligible Portfolio Coverage or if an Accountants'
Certificate confirming a Certificate of Eligible Portfolio Coverage is not
timely delivered as contemplated by Section 5(c), then the Corporation shall, by
the close of business on the related Eligible Portfolio Cure Date, deliver to
the Paying Agent and to each holder of Preferred Stock a Certificate of Eligible
Portfolio Coverage together with an Accountants' Certificate showing that the
Eligible Portfolio Coverage (i) is met or (ii) would have been met as of the
date of such Certificate after giving effect to a redemption of shares of
Preferred Stock (as if such redemption had occurred immediately prior to the
opening of business on the date of such Certificate). If clause (ii) of this
Section 5(e) is applicable, the Corporation shall by the close of business on
the related Eligible Portfolio Cure Date give a Notice of Redemption as
described in Section 3(b)(ii) hereof with respect to the redemption of a
sufficient number of shares of Preferred Stock to enable it to meet the
requirements of this Section 5(e) (but in no event fewer than 50,000 shares),
and deposit in trust with the Paying Agent Deposit Securities having a combined
value sufficient to effect the redemption of the shares of Preferred Stock to be
redeemed, as contemplated by Section 3(d)(ii) hereof.
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Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 5. Coverage and Other Financial Tests
(f) Status of Shares Called for Redemption. For purposes of
determining whether the Asset Coverage and the Eligible Portfolio Coverage are
met, (i) no share of the Preferred Stock shall be deemed to be outstanding for
purposes of any computation if, prior to or concurrently with such
determination, sufficient Deposit Securities to pay the full Redemption Price,
any Make-Whole Premium and any Additional Dividends for such share shall have
been deposited in trust with the Paying Agent and the requisite Notice of
Redemption shall have been given, and (ii) such Deposit Securities deposited
with the Paying Agent shall not be included in determining whether the Asset
Coverage or the Eligible Portfolio Coverage are met.
Section 6. Prohibited Actions; Additional Reporting Requirements.
(a) The Corporation shall not, without the prior written confirmation
of the Rating Agency that such action will not have an adverse effect on the
rating of the Preferred Stock required to be maintained by the Corporation by
Section 3(b)(iv) hereof, (i) lend securities; (ii) issue any class of stock
ranking prior to or on parity with the Preferred Stock with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Corporation; (iii) engage in any short sales; (iv) sell or
purchase futures or options; (v) merge or consolidate with any other
corporation; (vi) authorize, assume, or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness,
provided that the Corporation may borrow money to clear securities transactions
if the Asset Coverage is met after giving effect to such borrowing; or (vii)
engage in reverse repurchase obligations.
(b) The Corporation shall provide the Rating Agency with a Certificate
of Eligible Portfolio Coverage:
(i) on the Date of Original Issue;
(ii) on the third Business Day following any Eligible Portfolio
Evaluation Date that is the last Business Day of any fiscal quarter of the
Corporation;
(iii) when (x) the Eligible Portfolio Coverage Amount is less
than or equal to 125% or (y) the Eligible Portfolio Coverage is not met on any
Eligible Portfolio Evaluation Date;
(iv) on any Eligible Portfolio Cure Date; and
(v) upon the request of any Rating Agency at any time market
conditions warrant.
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Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
Article II
Amendments; Class Voting
As long as any shares of Preferred Stock are outstanding (1) the
Corporation may not (a) petition the courts to file the Corporation into
bankruptcy, dissolve the Corporation or liquidate the Corporation's assets, or
consent to a petition seeking liquidation, reorganization or other relief under
applicable laws of any jurisdiction relating to bankruptcy, insolvency, or
reorganization, (b) merge or consolidate with any corporation, (c) convert to
open-end status, or (d) sell all or substantially all of its assets, without the
approval of a Majority of the Outstanding Shares of Preferred Stock and a
Majority of the Outstanding Shares of Common Stock, each voting as a separate
class; (2) the adoption of any plan of reorganization adversely affecting either
the Preferred Stock or the Common Stock shall require the separate approval of a
Majority of the Outstanding Shares of such class; (3) any action requiring a
vote of security holders under Section 13(a) of the 1940 Act shall require the
approval of a Majority of the Outstanding Shares of Preferred Stock and a
Majority of the Outstanding Shares of Common Stock, each voting as a separate
class; (4) the Corporation may not (a) amend, alter or repeal any of the
preferences, rights or powers of the Preferred Stock, (b) increase or decrease
the number of shares of Preferred Stock authorized to be issued, (c) create,
authorize, or issue any class or series of stock ranking on parity with or
senior to the Preferred Stock with respect to the payment of dividends or the
distribution of assets in liquidation, dissolution, or the winding up of the
affairs of the Corporation, (d) create, authorize, assume, or suffer to exist
any indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, provided that this shall not prevent the Corporation from clearing
securities transactions in the ordinary course of business or (e) create, incur,
or suffer to exist or agree to the creation, incurrence, or existence of any
lien, mortgage, pledge, charge, or security upon any of the assets of the
Corporation, without the approval of a Majority of the Outstanding Shares of
Preferred Stock, voting separately as a class; (5) the holders of the Preferred
Stock and the Common Stock shall vote as separate classes in connection with the
election of directors as provided in Section 4 of Article I hereof; and (6) the
Common Stock and the Preferred Stock shall vote as separate classes to the
extent otherwise required under Maryland law or the 1940 Act.
Article III
Definitions
Unless the context or use indicates a different meaning, the following
terms when used in these Articles Supplementary shall have the meanings set
forth below, whether such terms are used in the singular or plural and
regardless of their tense:
"Accountants' Certificate" shall have the meaning set forth in Section 5(c)
of Article I hereof.
"Additional Dividends" shall have the meaning set forth in Section 1(a)(ii)
of Article I hereof.
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Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Advisor" means Pacholder & Company, an Ohio general partnership.
"Asset Coverage" and "Asset Coverage is met" means, as of any date of
determination, that the ratio of (i) the value of the Corporation's total assets
in accordance with the 1940 Act (as in effect on August 1, 1995), less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act as in effect on August 1, 1995), to (ii) the sum of (x) the
aggregate amount of senior securities representing indebtedness of the
Corporation, (y) the aggregate Liquidation Preference of all outstanding shares
of Preferred Stock and (z) the amount of all unpaid dividends (including without
limitation, any Additional Dividends) accrued to and including the date of
determination, whether or not declared by the Corporation, on all outstanding
shares of Preferred Stock, is at least 300% (or such greater asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of declaring dividends on its common stock).
"Asset Coverage Cure Date" means the fifth Business Day following any
related Asset Coverage Evaluation Date.
"Asset Coverage Evaluation Date" means (1) the Business Day immediately
preceding (a) each dividend declaration date for the Common Stock and (b) the
date on which any Common Stock is to be purchased by the Corporation, (2) the
last Business Day of each fiscal quarter of the Corporation; and (3) unless
Asset Coverage has been determined in such week on a day specified in clause (1)
or clause (2) of this paragraph, each Thursday following the Date of Original
Issue or, if any such day is not a Business Day, then the immediately preceding
Business Day.
"Asset Coverage Non-Compliance Date" shall have the meaning set forth in
Section 5(b)(i) of Article I hereof.
"Basic Maintenance Amount" means, as of any date of determination, (x) the
dollar amount equal to (A) the sum of (a) the aggregate Liquidation Preference
of all shares of Preferred Stock then outstanding, plus an amount equal to the
Make-Whole Premium which would be payable if all outstanding shares of Preferred
Stock were redeemed on such date; (b) an amount equal to accrued but unpaid
dividends (including without limitation, any Additional Dividends) on each share
of Preferred Stock then outstanding from the most recent Dividend Payment Date
to which full dividends have been paid or duly provided for (or, in the event
the Basic Maintenance Amount is calculated on a date prior to the initial
Dividend Payment Date, then from the Date of Original Issue) through the next
succeeding Eligible Portfolio Evaluation Date plus all dividends to accrue
during the 73 days following such Eligible Portfolio Evaluation Date; (c) the
principal amount of any then outstanding indebtedness of the Corporation for
money borrowed; and (d) the greater of (i) $200,000 or (ii) the Corporation's
liabilities (including interest on indebtedness referred to in clause (c) above)
due and payable as of such date of determination and such liabilities projected
to become due and payable by the Corporation during the 90 days following such
date of determination, in each case to the extent not otherwise reflected in any
of clauses (a) through
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Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
(c) above; less (B) the combined value of any Deposit Securities irrevocably
deposited by the Corporation for the payment of dividends on or redemptions of
the Preferred Stock.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and that is neither a Saturday, Sunday nor any other day on which banks
in the City of New York are generally closed.
"Cash" means such coin or currency of the United States as at the time
shall be legal tender for payment of public and private debts.
"Certificate" means the Certificate of Eligible Portfolio Coverage or the
Certificate of Asset Coverage, as the case may be, each of which shall be
executed by the principal accounting officer of the Corporation, which officer
was elected by the Board of Directors pursuant to Section 32(b) of the 1940 Act,
or a duly elected assistant treasurer of the Corporation acting under the
supervision and direction of such principal accounting officer.
"Certificate of Asset Coverage" shall have the meaning set forth in Section
5(a)(i) of Article I hereof.
"Certificate of Eligible Portfolio Coverage" shall have the meaning set
forth in Section 5(a)(ii) of Article I hereof.
"Common Stock" means the Common Stock (par value $. 01 per share) of the
Corporation.
"Corporate Bonds" means corporate debt obligations (other than Short-Term
Money Market Instruments, U.S. Government obligations or commercial paper with a
maturity of less than 30 days) rated from "CCC"/"B3 (senior)" and "Caa
(unsecured subordinated)" to "AAA"/"Aaa" by the Rating Agencies (or rated as
provided below in the case of commercial paper), which corporate debt
obligations (a) provide for the periodic payment of interest thereon in cash,
(b) do not provide for conversion or exchange into equity capital at any time
over their respective lives, (c) have been registered under the Securities Act,
(except that such requirement shall not apply with respect to commercial paper),
(d) have not had notice given in respect thereof that any such corporate debt
obligations are the subject of an offer by the issuer thereof of exchange or
tender for cash, securities or any other type of consideration (except that
corporate debt obligations in an amount not exceeding 10% of the aggregate value
of the Corporation's assets at any time shall not be subject to the provisions
of this clause (d)) and (e) are not in default. In addition, so long as the
Preferred Stock may be rated by either of the Rating Agencies, no corporate debt
obligation held by the Corporation shall be deemed a Corporate Bond (i) if it
fails to meet the criteria in column (1) below or (ii) to the extent (and only
to the proportionate extent) the acquisition or holding thereof by the
Corporation causes the Corporation to exceed any applicable limitation set forth
in column (2) or (3) below as of any relevant date of determination (provided
that in the event that the Corporation shall exceed any such limitation or any
other
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
percentage limitation set forth in this definition of Corporate Bonds the
Corporation shall designate, in its sole discretion, the particular Corporate
Bond(s) and/or portions thereof which shall be deemed to have caused the
Corporation to exceed such limitations):
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
Maximum Percent Maximum Percent of
of Market Value Market Value of Eligible
Minimum Original of Eligible Portfolio Portfolio Property,
Issue Size of Each Property, Invested in any Invested in any One
Rating Agencies' Ratings/1/ Issue ($ in Millions) One Issuer/2/ Industry Category/2/
<S> <C> <C> <C>
"AAA"/"Aaa"...................... $100 10.0% 50.0%
"AA"/"Aa"........................ 100 10.0 33.3
"A"/"A".......................... 100 10.0 33.3
"BBB"/"Baa"...................... 100 5.0 20.0
"BB"/"Ba"........................ 100 /3/ 4.0 12.0
"B"/"B1", "B2" and "B3
(subordinated)"................ 100 /3/ 3.0 8.0
"CCC"/"B3 (senior)" and "Caa
(unsecured
subordinated)"/4/............. 100 /3/ 2.0 5.0
</TABLE>
- -------------------------------------
/1/ References to ratings by the Rating Agencies in this definition and
throughout these Arti cles Supplementary will indicate the Standard &
Poor's rating followed by the Moody's rating in the format shown. Rating
designations include (+) and (-) modifiers to the Standard & Poor's rating
where appropriate except that corporate debt obligations rated "CCC-" do
not constitute Corporate Bonds. In the event that a Corporate Bond has
received a different rating from Standard & Poor's than from Moody's, the
restrictions relating to the lower rating will apply.
/2/ The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that the
calculations with respect to commercial paper investments constituting
Corporate Bonds shall be made separately and independently of but on the
same basis as the cumulative total guidelines applicable to other types of
Corporate Bonds.
/3/ 20% of the aggregate Market Value of all Corporate Bonds in these rating
categories may be from issues with an original issue size of greater than
or equal to $50 million and less than $100 million.
/4/ Corporate debt obligations in this rating category must be subordinated
debt of the issuer with an implied senior rating by Standard & Poor's of
"B-" or higher to constitute Corporate Bonds. The aggregate Market Value of
corporate debt obligations in this rating category in excess of 20% of the
aggregate Market Value of the Fund's assets will not be included in the
calculation of the Basic Maintenance Amount
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Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
Maximum Percent Maximum Percent of
of Market Value Market Value of Eligible
Minimum Original of Eligible Portfolio Portfolio Property,
Issue Size of Each Property, Invested in any Invested in any One
Rating Agencies' Ratings/1/ Issue ($ in millions) One Issuer/2/ Industry Category/2/
<S> <C> <C> <C>
"A-1+"/"P-1" /5/................ N/A 10.0 N/A
"A-1"/"P-1" /5/................. N/A 10.0 33.3
"A-2"/"P-2" /5/................. N/A 5.0 20.0
</TABLE>
In addition, the term "Corporate Bonds" shall include debt obligations
satisfying such other criteria established by the Rating Agencies in their sole
discretion and designated in writing to the Corporation.
"Corporation" means Pacholder Fund, Inc., a Maryland corporation.
"Date of Original Issue" shall have the meaning set forth in Section l(a)
of Article I hereof.
"Deposit Securities" means Cash, U.S. Government Obligations and Short-Term
Money Market Instruments. Except for purposes of determining the Basic
Maintenance Amount, each Deposit Security shall be deemed to have a value equal
to its principal or face amount payable at maturity plus any interest payable
thereon after delivery of such Deposit Security but only if payable at least one
day prior to the applicable payment date in advance of which the relevant
deposit is made.
"Discount Factor Supplied by Moody's" means, for any asset held by the
Corporation, (i) the number set forth opposite such type of asset in Schedule I
or (ii) such other number established by Moody's in its sole discretion and
designated in writing to the Corporation (it being understood that any asset
held by the Corporation and not listed in Schedule I shall have a Discounted
Value of zero).
"Discount Factor Supplied by Standard & Poor's" means, for any asset held
by the Corporation, (i) the number set forth opposite such type of asset in
Schedule II or (ii) such other number established by Standard & Poor's in its
sole discretion and designated in writing to the Corporation (it being
understood that any asset held by the Corporation and not listed in Schedule II
shall have a Discounted Value of zero).
"Discounted Value," with respect to any asset held by the Corporation as of
any date, means the quotient of the Market Value of such asset divided by the
applicable Discount Factor Supplied by Standard & Poor's or the applicable
Discount Factor Supplied by Moody's, as the case may be, provided that in no
event shall the Discounted Value of any asset constituting Eligible Portfolio
Property for the purpose of determining the Basic
- ------------------------------
5 Represents commercial paper investments.
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Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
Maintenance Amount as of any date exceed the unpaid principal balance or face
amount of such asset as of that date. With respect to the calculation of the
aggregate Discounted Value of any Corporate Bond included in the Corporation's
Eligible Portfolio Property, such calculation shall be made using the criteria
set forth in the definitions of Corporate Bonds and Market Value. With respect
to the calculation of the aggregate Discounted Value of the Corporation's
Eligible Portfolio Property for the purpose of determining the Basic Maintenance
Amount, such aggregate Discounted Value shall be the aggregate Discounted Value
calculated using the Discount Factors Supplied by Standard & Poor's or the
aggregate Discounted Value calculated using the Discount Factors Supplied by
Moody's, whichever aggregate Discounted Value is lower. Notwithstanding any
other provisions of these Articles Supplementary, any Type V, VI, VII or VIII
Corporate Bond that has a remaining term to maturity of more than 30 years, and
any asset to which a Discount Factor is not assigned in Schedule I or II, shall
have a Discounted Value of zero.
"Dividend Payment Date" with respect to the Preferred Stock means any date
on which dividends are payable pursuant to the provisions of Section l(a) of
Article I hereof.
"Dividend Period" shall have the meaning set forth in Section l(a) of
Article I hereof.
"Eligible Portfolio Coverage Amount" as of any date of determination means
(1) the aggregate Discounted Value of all Eligible Portfolio Property expressed
as a percentage of (2) the Basic Maintenance Amount.
"Eligible Portfolio Coverage" and "Eligible Portfolio Coverage is met"
means, as of any date of determination, that the Eligible Portfolio Coverage
Amount as of such date is at least 100%.
"Eligible Portfolio Coverage Non-Compliance Date" shall have the meaning
set forth in Section 5(b)(ii) of Article I hereof.
"Eligible Portfolio Cure Date" means the eighth Business Day after a
related Eligible Portfolio Evaluation Date.
"Eligible Portfolio Evaluation Date" means (a) every other Thursday
following the Date of Original Issue or, if any such day is not a Business Day,
then the immediately preceding Business Day and (b) the last Business Day of
each fiscal quarter of the Corporation.
"Eligible Portfolio Property" shall include (i) Corporate Bonds (including,
without limitation, commercial paper with a maturity of at least 30 days rated
at the time of the Corporation's investment therein at least "A-2"/"P-2" by the
Rating Agencies; provided that commercial paper holdings rated "A-1"/"P-1" by
the Rating Agencies, when combined with commercial paper holdings rated "A-
2"/"P-2" by the Rating Agencies, shall not constitute more than 20% of the
Market Value of the assets of the Corporation; provided further that holdings of
"A-1"/"P-1" commercial paper must be divided equally among at least three
issuers and that holdings of "A-2"/"P-2" commercial paper must be divided
equally among at
-20-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
least five issuers), Cash, U.S. Government Obligations, and Short-Term Money
Market Instruments and (ii) other assets which may be established by the Rating
Agencies in their sole discretion and designated in writing to the Corporation;
provided that, any securities of the Corporation's portfolio subject to call
option obligations shall not constitute Eligible Portfolio Property.
"FHLMC" means the Federal Home Loan Mortgage Corporation created by Title
III of the Emergency Home Finance Act of 1970, and includes any successor
thereto.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-rate, variable-rate or adjustable-rate (level pay), fully
amortizing mortgage loans secured by first-priority mortgages on one- to four-
family residences.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-rate, variable-rate or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on single-
family residences.
"GNMA" means the Government National Mortgage Association, and includes any
successor thereto.
"GNMA Certificate" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-rate, variable-rate or
adjustable-rate, fully amortizing mortgage loans secured by first-priority
mortgages on single-family residences.
"Independent Accountants" means a nationally recognized firm of accountants
that is, with respect to the Corporation, a firm of independent public
accountants under the Securities Act.
"Industry Category" means, as to Corporate Bonds, any of the industry
categories set forth in Schedule III.
"Liquidation Preference" shall have the meaning set forth in Section 2(a)
of Article I hereof.
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Majority of the Outstanding Shares" as to any approval of stockholders
means the affirmative vote, at the annual or a special meeting of the
stockholders of the Corporation duly called, (1) of 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting securities of the Corporation are present or represented by
proxy; or (2) of more than 50% of the outstanding voting securities of the
Corporation, whichever is less. To the extent stockholders of the Corporation
are required to vote as a separate class or classes with respect to any matter,
such requirements shall apply on a class-by-class basis.
"Make-Whole Premium" means, with respect to any share of Preferred Stock,
an amount equal to the excess, if any, of the Discounted Value of the Remaining
Scheduled Payments with respect to such share of Preferred Stock over the amount
of the Liquidation Preference of such share of Preferred Stock, provided that
the Make-Whole Premium may in no event be less than zero. For the purposes of
determining the Make-Whole Premium, the following terms have the following
meanings:
"Discounted Value" means, with respect to any share of Preferred Stock,
the amount obtained by discounting all Remaining Scheduled Payments with
respect to such share of Preferred Stock from their respective scheduled
payment or mandatory redemption dates to the Settlement Date with respect
to such share of Preferred Stock, in accordance with accepted financial
practice and at a discount factor (applied on the same periodic basis as
that on which dividends on the Preferred Stock are payable) equal to the
Reinvestment Yield with respect to such share of Preferred Stock.
"Reinvestment Yield" means, with respect to any share of Preferred
Stock, .50% over the yield to maturity implied by (i) the yields reported,
as of 10:00 A.M. (New York City time) on the second Business Day preceding
the Settlement Date with respect to such share of Preferred Stock, on the
display designated as "Page 678" on the Telerate Access Service (or such
other display as may replace Page 678 on Telerate Access Service) for
actively traded U.S. Treasury securities having a maturity equal to the
Remaining Average Life of such share of Preferred Stock as of such
Settlement Date, or (ii) if such yields are not reported as of such time or
the yields reported as of such time are not ascertainable, the Treasury
Constant Maturity Series Yields reported, for the latest day for which such
yields have been so reported as of the second Business Day preceding the
Settlement Date with respect to such share of Preferred Stock, in Federal
Reserve Statistical Release H. 15 (519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a constant
maturity equal to the Remaining Average Life of such share of Preferred
Stock as of such Settlement Date. Such implied yield will be determined, if
necessary, by (a) converting U.S. Treasury bill quotations to bond-
equivalent yields in accordance with accepted financial practice and (b)
interpolating linearly between (1) the actively traded U.S. Treasury
security with the duration closest to and greater than the Remaining
Average Life and (2) the actively traded U.S. Treasury security with the
duration closest to and less than the Remaining Average Life.
-22-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Remaining Average Life" means, with respect to any share of Preferred
Stock, the number of years (calculated to the nearest one-twelfth year)
that will elapse between the Settlement Date with respect to such share of
Preferred Stock and the scheduled mandatory redemption date of such share
of Preferred Stock.
"Remaining Scheduled Payments" means, with respect to any share of
Preferred Stock, all scheduled mandatory redemptions of such share of
Preferred Stock and all dividends thereon that would otherwise be due after
the Settlement Date with respect to such share of Preferred Stock if no
redemption of such share of Preferred Stock were made.
"Settlement Date" means, with respect to any share of Preferred Stock,
the date on which such share of Preferred Stock is to be redeemed pursuant
to Section 2, 3(b) or 3(c) of Article I hereof.
"Market Value" means the amount determined with respect to specific assets
of the Corporation (i) in the manner set forth below or (ii) such other manner
as is established by the Rating Agencies in their sole discretion and designated
in writing to the Corporation:
(a) as to any Corporate Bond, (i) the product of (A) the unpaid
principal balance of such Corporate Bond as of the applicable Reporting
Date, and (B) the lower of two bid prices for such Corporate Bond provided
by two nationally recognized securities dealers (who must be members of the
National Association of Securities Dealers Inc.) with a minimum
capitalization of $25 million or by one such securities dealer and any
other source (provided that the utilization of such source would not
adversely affect any rating assigned to the Preferred Stock by the Rating
Agencies) to the Pricing Agent, at least one of which shall be provided in
writing or by telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar means, and in turn
provided to the Corporation by any such means by the Pricing Agent
(provided that evidence of the bid quotes furnished by the Pricing Agent
shall be maintained with the records of the Corporation and available for
inspection by the holders of the Preferred Stock), plus (ii) accrued
interest on such Corporate Bond (unless such accrued interest is payable to
the holder of such Corporate Bond prior to the next Eligible Portfolio
Evaluation Date), or if two bid prices cannot be obtained, such item of
Eligible Portfolio Property shall have a Market Value of zero;
(b) as to U.S. Government Obligations and Short Term Money Market
Instruments (other than demand deposits, federal funds, bankers'
acceptances and next Business Day's repurchase agreement), the product of
(i) the face amount or aggregate principal amount of such U.S. Government
Obligations or Short Term Money Market Instruments, as the case may be, and
(ii) the lower of the bid prices for the same kind of securities or
instruments, as the case may be, having, as nearly as practicable,
comparable interest rates and maturities provided by two nationally
recognized securities dealers (who must be members of the National
Association of Securities Dealers Inc.) with a minimum capitalization of
$25 million or by one such
-23-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
securities dealer and any other source (provided that the utilization of
such source would not adversely affect any rating assigned to the Preferred
Stock by the Rating Agencies) to the Pricing Agent, at least one of which
shall be provided in writing or by telecopy, telex, other electronic
transcription, computer obtained quotation reducible to written form or
similar means, and in turn provided to the Corporation by any such means by
the Pricing Agent (provided that evidence of the bid quotes furnished by
the Pricing Agent shall be maintained with the records of the Corporation
and available for inspection by the holders of the Preferred Stock), or, if
two bid prices cannot be obtained, such item of Eligible Portfolio Property
will have a Market Value of zero;
(c) as to Cash, demand deposits, federal funds, bankers' acceptances
and next Business Day's repurchase agreements included in Short Term Money
Market Instruments, the face value thereof; and
(d) as to any other asset of the Corporation, such value as the Rating
Agencies may establish in their sole discretion and designate in writing to
the Corporation.
Upon any failure to obtain two bid prices as described in paragraphs (a)
and (b) above with respect to any item of Eligible Portfolio Property as of any
Eligible Portfolio Evaluation Date, the Corporation shall notify the Rating
Agencies in writing. As used in the definition of Market Value, "in writing"
includes telecopies, telexes or other electronic transcription, or a computer-
obtained quotation reducible to written form.
"Moody's" means Moody's Investors Service, Inc. and includes any successor
thereto.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time, except as otherwise herein provided.
"Notice of Redemption" shall have the meaning set forth in Section 3(d)(i)
of Article I hereof.
"Paying Agent" means The Provident Bank and its successors or any other
paying agent appointed by the Corporation.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" means the 6.95% Cumulative Preferred Stock (par value
$.0l per share) of the Corporation.
"Pricing Agent" means Pacholder Associates, Inc. or, with the prior written
consent of the holders of the outstanding shares of Preferred Stock, any other
Person responsible for determining the net asset value of the Corporation.
-24-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
The term "principal" of a debt security means the principal of the security
plus, when applicable, the premium, if any, on the security.
"Rating Agencies" or "Rating Agency" means, collectively, Standard & Poor's
and Moody's and, individually, Standard & Poor's or Moody's, as the case may be.
"Redemption Price" shall have the meaning set forth in Section 3(a) of
Article I hereof.
"Reporting Date," with respect to any price referred to in the definition
of the Market Value of an item of Eligible Portfolio Property, means the date as
of which the Market Value of such item of Eligible Portfolio Property is to be
determined pursuant to these Articles Supplementary or, if no such price is
available as provided above for such date, the next closest prior date as of
which such price is so available; provided, that no such price shall be deemed
to be available as of a Reporting Date if such price is not available as of a
date within five Business Days next preceding the date as of which the
determination of such Market Value is to be made.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Short-Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition of such instrument
by the Corporation, the remaining term to maturity thereof is not more than 30
days;
(a) demand deposits in, certificates of deposit of, bankers' acceptance
issued by, or federal funds sold to, any depository institution, the
deposits of which are insured by the Federal Deposit Insurance Corporation,
provided that, at the time of the Corporation's investment therein, the
commercial paper or other unsecured short-term debt obligations of such
depository institution are rated at least "A-l" by Standard & Poor's and
"P-1" by Moody's; and provided further that, Short-Term Money Market
Instruments invested in a depository institution rated "A-1"/"P-1" by the
Rating Agencies shall not constitute more than 20% of the Market Value of
the assets of the Corporation/6/;
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered
into with a depository institution, the deposits of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation and the commercial paper or other unsecured short-
term debt obligations of which are rated at least "A-1" by Standard &
Poor's and "P-1" by Moody's, which must be
- --------------------------
/6/ Eurodollar deposits are eligible securities issued by such depository
institution through its head office or any branch in a country whose
sovereign rating is the same or higher than that of the issuing bank. In
addition, such depository institution's Eurodollar deposits may be
deposited through a Cayman Island branch operating under a 'B operating
license,' which must be verified by such depository institution.
-25-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
repurchased within one Business Day from the date such repurchase
obligation was entered into;
(c) commercial paper rated at the time of the Corporation's investment
therein at least "A-l" by Standard & Poor's and "P-1" by Moody's; provided
that commercial paper holdings rated "A-1"/"P-1" by the Rating Agencies,
when combined with commercial paper holdings rated "A-2"/"P-2" by the
Rating Agencies, shall not constitute more than 20% of the Market Value of
the assets of the Corporation; provided further that holdings of "A-1"/"P-
1" commercial paper must be divided equally among at least three issuers;
and
(d) United States Treasury Bills.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
The McGraw Hill Companies, Inc. and includes any successor thereto.
"Total Liquidation Preference" shall have the meaning set forth in Section
2(c) of Article I hereof.
"Type I Corporate Bonds" means Corporate Bonds whose present rating is
"AAA"/"Aaa" by the Rating Agencies.
"Type II Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "AA+"/"Aa1" and not less than "AA-"/"Aa3" by the Rating Agencies.
"Type III Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "A+"/"A1" and not less than "A-"/"A3" by the Rating Agencies.
"Type IV Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "BBB+"/"Baal" and not less than "BBB-"/"Baa3" by the Rating
Agencies.
"Type V Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "BBa+"/"Ba1" and not less than "BB-"/"Ba3" by the Rating Agencies.
"Type VI Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "B+"/"Bl" and not less than "B"/"B3 (subordinated)" by the Rating
Agencies.
"Type VII Corporate Bonds" means Corporate Bonds whose present rating is
"B-" by Standard & Poor's.
"Type VIII Corporate Bonds" means Corporate Bonds whose present rating is
"CCC+ (subordinated)" by Standard & Poor's with an implied senior rating of "B-"
or greater and rated at least "Caa (subordinated)" by Moody's.
-26-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Type IX Corporate Bonds" means Corporate Bonds whose present rating is
"CCC" by Standard & Poor's with an implied senior rating of "B-" or greater or
rated at least "Caa (unsecured subordinated)" by Moody's.
"United States" means the United States of America.
"U.S. Government Obligations" means direct obligations of the United States
(not including, however, Treasury interest only STRIPS and Treasury principal
only STRIPS); provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills, provide for the periodic payment of interest and
the full payment of principal at maturity or call for redemption.
"Voting Period" shall have the meaning set forth in Section 4(b)(i) of
Article I hereof.
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<PAGE>
Pacholder Fund, Inc.
Articles Supplementary
In Witness Whereof, Pacholder Fund, Inc. has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Secretary on August 15, 1995.
Pacholder Fund, Inc.
Witness:
/s/ James P. Shanahan, Jr. By /s/ Anthony L. Longi, Jr.
- ------------------------------ ------------------------------
James P. Shanahan, Jr. Anthony L. Longi, Jr.
Secretary President
THE UNDERSIGNED, President of Pacholder Fund, Inc., who executed on behalf
of the Corporation the foregoing Articles Supplementary of which this
Certificate is made a part, hereby acknowledges in the name and on behalf of
said Corporation the foregoing Articles Supplementary to be the corporate act of
the Corporation and hereby certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
/s/ Anthony L. Longi, Jr.
---------------------------------
Anthony L. Longi, Jr.
President
<PAGE>
DISCOUNT FACTORS SUPPLIED BY MOODY'S
Discount Factor
---------------
Type I Corporate Bonds having a remaining term to maturity
of one year or less: 1.13
Type I Corporate Bonds having a remaining term to maturity
of more than one year but not more than two years: 1.20
Type I Corporate Bonds having a remaining term to maturity
of more than two years but nor more than three years: 1.25
Type I Corporate Bonds having a remaining term to maturity
of more than three years but not more than four years: 1.32
Type I Corporate Bonds having a remaining term to maturity
of more than four years but not more than five years: 1.37
Type I Corporate Bonds having a remaining term to maturity
of more than five years but not more than seven years: 1.47
Type I Corporate Bonds having a remaining term to maturity
of more than seven years but not more than 10 years: 1.55
Type I Corporate Bonds having a remaining term to maturity
of more than 10 years but not more than 15 years: 1.61
Type I Corporate Bonds having a remaining term to maturity
of more than 15 years but not more than 20 years: 1.68
Type I Corporate Bonds having a remaining term to maturity
of more than 20 years but not more than 30 years: 1.70
Type II Corporate Bonds having a remaining term to maturity
of one year or less: 1.19
Type II Corporate Bonds having a remaining term to maturity
of more than one year but not more than two years: 1.26
Type II Corporate Bonds having a remaining term to maturity
of more than two years but not more than three years: 1.31
Type II Corporate Bonds having a remaining term to maturity
of more than three years but not more than four years: 1.38
Type II Corporate Bonds having a remaining term to maturity
of more than four years but not more than five years: 1.44
Type II Corporate Bonds having a remaining term to maturity
of more than five years but not more than seven years: 1.54
Type II Corporate Bonds having a remaining term to maturity
of more than seven years but not more than 10 years: 1.62
Type II Corporate Bonds having a remaining term to maturity
of more than 10 years but not more than 15 years: 1.69
Type II Corporate Bonds having a remaining term to maturity
of more than 15 years but not more than 20 years: 1.76
Type II Corporate Bonds having a remaining term to maturity
of more than 2 years but not more than 30 years: 1.78
Type III Corporate Bonds having a remaining term to maturity
of one year or less: 1.24
Schedule I
(to Articles Supplementary)
<PAGE>
Type III Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.32
Type III Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.37
Type III Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.44
Type III Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.50
Type III Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.61
Type III Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.69
Type III Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.76
Type III Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.84
Type III Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.86
Type IV Corporate Bonds having a remaining term to maturity of
one year or less: 1.30
Type IV Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.38
Type IV Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.43
Type IV Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.50
Type IV Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.57
Type IV Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.68
Type IV Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.77
Type IV Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.84
Type IV Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.92
Type IV Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.94
Type V Corporate Bonds having a remaining term to maturity of
one year or less: 1.40
Type V Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.49
Type V Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.55
Type V Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.63
I-2
<PAGE>
Type V Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.70
Type V Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.82
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years 1.91
Type V Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.99
Type V Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.09
Type V Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.10
Type VI Corporate Bonds having a remaining term to maturity of
one year or less: 1.51
Type VI Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.60
Type VI Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.67
Type VI Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.76
Type VI Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.83
Type VI Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.95
Type VI Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.06
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.15
Type VI Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.25
Type VI Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.26
Type VIII Corporate Bonds having a remaining term to maturity of
not more than 30 years: 2.60
Type IX Corporate Bonds having a remaining term to maturity of
not more than 30 years: 2.60
U.S. Government Obligations having a remaining term to maturity of
90 days or less: 1.08
U.S. Government Obligations having a remaining term to maturity of
more than 90 days but not more than five years: 1.31
U.S. Government Obligations having a remaining term to maturity of
more than five years but not more than 10 years: 1.47
U.S. Government Obligations having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.53
I-3
<PAGE>
U.S. Government Obligations having a remaining term to maturity of
more than 15 years but not more than 30 years: 1.62
Cash and Short-Term Money Market Instruments: 1.00
I-4
<PAGE>
DISCOUNT FACTORS SUPPLIED BY STANDARD & POOR'S
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
U.S. Government Obligations having a remaining term to maturity of
90 days or less: 1.064
U.S. Government Obligations having a remaining term to maturity of
more than 90 days but not more than five years: 1.239
U.S. Government Obligations having a remaining term to maturity of
more than five years but not more than 10 years: 1.341
U.S. Government Obligations having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.422
U.S. Government Obligations having a remaining term to maturity of
more than 15 years but not more than 30 years: 1.422
Cash and demand deposits in institutions rated "A-1+": 1.00
Commercial paper having a rating of "A-1+" with maturities not
greater than 30 days and held in lieu of cash until Maturity: 1.00
Short-Term Money Market Instruments:
having a maturity of 2 to 30 days 1.064
having a maturity of 1 day and repurchase obligations 1.00
Commercial paper having a rating of at least "A-1" from Standard &
Poor's or "P-1" from Moody's at the time of the Corporation's
investment therein: 1.064
Commercial paper having a rating of at least "A-2" but lower than
"A-1" from Standard & Poor's or "P-2" from Moody's at the time
of the Corporation's investment therein: 1.65
Schedule II
(to Articles Supplementary)
<PAGE>
<TABLE>
<CAPTION>
INDUSTRY CATEGORIES
<S> <C>
Aerospace and defense Food Service
Aircraft manufacturer/components Food service/restaurant
Arms and ammunition Vending
Air transport Foreign corporations
Automotive Foreign governments or provinces
Manufacturers Forest products
Parts and equipment Building materials
Tire and rubber Paper products and containers
Beverage and tobacco Healthcare
Broadcast radio and television Medical equipment/supply
Brokerages/securities dealers/investment Hospital management
houses
Building and Development Home furnishings
Builders Appliances
Land development/real estate Furniture/fixtures
Mobile homes Housewares
Real Estate Investment Trusts Hotels/motels/inns and casinos
Business equipment and services Industrial equipment
Graphic arts Machinery
Office equipment/computers Manufacturing/industrial
Data processing service bureaus Specialty instruments
Computer software Insurance
Cable television Leisure
Chemical/plastics Leisure goods
Coatings/paints/varnishes Leisure activities/motion pictures
Clothing/Textiles Nonferrous metals/minerals
Conglomerates Aluminum producers
Containers and glass products Other metal/mineral producers
Cosmetics/toiletries Mining (including coal)
Drugs Oil and gas
Ecological services and equipment Producers/refiners
Waste disposal services and equipment Gas pipelines
Electronics/electric Publishing
Equipment Rail industries
Components Railroads
Equipment leasing Rail equipment
Auto leasing/rentals Retailers (other than food/drug)
Equipment leasing Steel
Data processing equipment service/leasing Supranational agencies
Farming/agriculture Surface transport
Agricultural products and equipment Shipping/shipbuilding
Fertilizers Trucking
Financial intermediaries Telecommunications/cellular communications
Banking Utilities
Finance companies Electric
Food/drug retailers Local gas
Water
</TABLE>
Schedule III
(to Articles Supplementary)
<PAGE>
FORM OF CERTIFICATE OF ASSET COVERAGE
USF&G-PACHOLDER FUND, INC.
6.95% CUMULATIVE PREFERRED STOCK
TOTAL ASSET COVERAGE TEST
- -------------------------------------------------------------------------------
Total Assets less Liabilities (A)
Involuntary Liquidation Preference (B)
Asset Coverage Test (A/B)
(Minimum Requirement greater than 3)
-------------------------------------------------------
USF&G-Pacholder Fund, Inc.
By James P. Shanahan, Jr., William J. Morgan,
Anthony L. Longi, Jr., or designated accounting officer
Exhibit A
(to Articles Supplementary)
<PAGE>
USF&G PACHOLDER FUND, INC.
6.95% CUMULATIVE PREFERRED STOCK
ASSET COVERAGE TEST Page 1
<TABLE>
<CAPTION>
Cusip Issuer Par Value Price Market Value Market + Accrued Int.
- --------- ------------------ ----------- ------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
-------------- ----------------
Total
Asset Coverage Test Plus Total Cash & Cash Equivalents
(1)/(2) is greater than 3 Less Liabilities
----------------
Total Assets Less Liabilities (1)
================
Outstanding Preferred 33000000.00
Accrued Dividends
----------------
Involuntary Liquidation Preference (2)
================
</TABLE>
A-2
<PAGE>
FORM OF CERTIFICATE OF ELIGIBLE PORTFOLIO COVERAGE
USF&G-PACHOLDER FUND, INC.
6.95% CUMULATIVE PREFERRED STOCK
CERTIFICATE OF ELIGIBLE PORTFOLIO COVERAGE
(Moody's Test)
- -------------------------------------------------------------------------------
Total Eligible Assets
Total Outstanding Preferred
plus Other Liabilities
Eligible Asset Coverage
(Minimum Requirement 1:1 Coverage)
------------------------------------------------------
USF&G-Pacholder Fund, Inc.
By James P. Shanahan, Jr., William J. Morgan,
Anthony L. Longi, Jr., or designated accounting officer
Exhibit B
(to Articles Supplementary)
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
USF&G PACHOLDER FUND: MOODY'S RATING COVERAGE COMPLIANCE TEST Page 1
AS OF:
Original Pub/ Moody's
Cusip Issuer Coupon Issue Size Pvt Rating Industry Par Value Price
- --------- -------------------------------- ------ ---------- ---- ------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unadjusted Unadjusted Market Adjustment
Cusip Issuer Market Value Plus Accrued Int less than 50MM Issue
- --------- -------------------------------- ------------- ----------------- --------------------
<S> <C> <C> <C> <C>
<CAPTION>
Adjustment Adjustment
Cusip Issuer less than 50 grester than 100MM Issue Caa Rated
- --------- -------------------------------- ------------------------------------- ----------
<S> <C> <C> <C>
</TABLE>
B-2
<PAGE>
- -------------------------------------------------------------------------------
Page
<TABLE>
<CAPTION>
Adjustment Adjustment Total Eligible Eligible Asset Adjustment
Issuer Not Rated Private Asset Adjustments Market Value Industry Exposure
- ------------------------------ ---------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
---------------- ----------------- ----------------- ----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------------
Cash Discounted Cash Factor
Cash & Short-Term Money Market 1.0 O/S Preferred
Commercial Paper Rated A-1+ 1.0 Next Pfd Div.
Commercial Paper Rated A-1 1.0 Accrued Liab.
A/P Securities Purchased Make-Whole Prem.
Total Preferred ------------
Pfd Div & Liab
<CAPTION>
Adjustment Eligible Asset Discount Discounted
Issuer Exposure Adjusted Value Factor Market Value
- ---------------- ----------------- ------------- -----------------
<S> <C> <C> <C>
- ---------------- ----------------- -----------------
- -------------------------------------------------
Discounted Cash & Equivalents
-----------------
Total Eligible Assets
Total O/S Preferred, Accrued
Pfd. Div. & Accrued Liabilities
Eligible Asset Coverage
(Required to Maintain at least 1:1 Coverage)
</TABLE>
B-3
<PAGE>
USF&G-PACHOLDER FUND, INC.
6.95% CUMULATIVE PREFERRED STOCK
CERTIFICATE OF ELIGIBLE PORTFOLIO COVERAGE
(Standard & Poor's Test)
- --------------------------------------------------------------------------------
Total Eligible Assets
Total Outstanding Preferred
plus Other Liabilities
Eligible Asset Coverage
(Minimum Requirement 1:1 coverage)
------------------------------
USF&G-Pacholder Fund, Inc.
By James P. Shanahan, Jr.,
William J. Morgan,
Anthony L. Longi, Jr. or
designated accounting officer
B-4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SF&G PACHOLDER FUND: S&P RATING COVERAGE COMPLIANCE TEST Page 1
AS OF:
Original Pub/ S&P Unadjusted Unadjusted Market
Cusip Issuer Coupon Issue Size Pvt Rating Industry Par Value Price Market Value Plus Accrued Int
- ------ ---------------- ------ ---------- --- ------ -------- --------- ----- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
Adjustment Adjustment Adjustment
Cusip Issuer Coupon less than 50MM Issue greater than 50 mm less than 100 MM Issue CCC-Rated
- ------ ---------------- ------ -------------------- ----------------------------------------- ----------
<S> <C> <C> <C> <C> <C>
</TABLE>
B-5
<PAGE>
- -------------------------------------------------------------------------------
Page
<TABLE>
<CAPTION>
Adjustment Adjustment Total Eligible Eligible Asset Adjustment
Issuer Not Rated Private Asset Adjustments Market Value Industry Exposure
- ------------------------------ ---------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
---------------- ----------------- ----------------- ----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------------
Cash Discounted Cash Factor
Cash & Short-Term Money Market O/S Preferred
Commercial Paper Rated A-1+ Next Pfd Div.
Commercial Paper Rated A-1 Accrued Liab.
A/P Securities Purchased Make-Whole Prem.
Total Preferred
Pfd Div & Liab
<CAPTION>
Adjustment Eligible Asset Discount Discounted
Issuer Exposure Adjusted Value Factor Market Value
- ---------------- ----------------- ------------- -----------------
<S> <C> <C> <C>
- ---------------- ----------------- -----------------
- -------------------------------------------------
Discounted Cash & Equivalents
-----------------
Total Eligible Assets
Total O/S Preferred, Accrued
Pfd. Div. & Accrued Liabilities
Eligible Asset Coverage
(Required to Maintain at least 1:1 Coverage)
</TABLE>
B-6
<PAGE>
USF&G PACHOLDER FUND, INC.
BY-LAWS
Amended and Restated
as of September 16, 1996
ARTICLE I
STOCKHOLDERS
------------
1.01. Annual Meeting. The Corporation is not required to hold an
--------------
annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940. If the Corporation is required to hold an annual meeting to elect
directors, the meeting shall be held at a date and time set by the Board of
Directors no later than 120 days after the occurrence of the event requiring the
meeting. Any meeting of stockholders held in accordance with the preceding
sentence shall be designated as the annual meeting of stockholders for that
year. Except as the Charter or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the meeting having been
specified in the notice. Failure to hold an annual meeting does not invalidate
the Corporation's existence or affect any otherwise valid corporate acts.
1.02. Special Meetings. At any time in the interval between annual
----------------
meetings, a special meeting of the stockholders may be called by the Chairman of
the Board or the President or by a majority of the Board of Directors by vote at
a meeting or in writing (addressed to the Secretary of the Corporation) with or
without a meeting. Special meetings of the stockholders shall be called by the
Secretary at the request of the stockholders on the written request of
stockholders entitled to cast at least a majority of all the votes entitled to
be cast at the meeting and then only as may be required by law. A request for a
special meeting shall state the purpose of the meeting and the matters proposed
to be acted on at it. The Secretary shall inform the stockholders who make the
request of the reasonably estimated costs of preparing and mailing a notice of
the meeting and, on payment of these costs to the Corporation, notify each
stockholder entitled to notice of the meeting. Unless requested by stockholders
entitled to cast a majority of all the votes entitled to be cast at the meeting,
a special meeting need not be called to consider any matter which is
substantially the same as a matter voted on at any special meeting of
stockholders held in the preceding twelve months.
1.03. Place of Meetings. Meetings of stockholders shall be held at
-----------------
such place in the United States as is set from time to time by the Board of
Directors.
<PAGE>
1.04. Notice of Meetings; Waiver of Notice. Not less than ten nor
------------------------------------
more than 90 days before each stockholders' meeting, the Secretary shall give
written notice of the meeting to each stockholder entitled to vote at the
meeting and each other stockholder entitled to notice of the meeting. The
notice shall state the time and place of the meeting and, if the meeting is a
special meeting or notice of the purpose is required by statute, the purpose of
the meeting. Notice is given to a stockholder when it is personally delivered
to him, left at his residence or usual place of business, or mailed to him at
his address as it appears on the records of the Corporation. Notwithstanding
the foregoing provisions, each person who is entitled to notice waives notice if
he before or after the meeting signs a waiver of the notice which is filed with
the records of stockholders' meetings, or is present at the meeting in person or
by proxy.
1.05. Quorum; Voting. Unless statute or the Charter provides
--------------
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting constitutes a quorum, and a majority of all the votes cast at a
meeting at which a quorum is present is sufficient to approve any matter which
properly comes before the meeting, except that a plurality of all the votes cast
at a meeting at which a quorum is present is sufficient to elect a director.
1.06. Adjournments. Whether or not a quorum is present, a meeting of
------------
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice by a majority vote the stockholders present
in person or by proxy to a date not more than 120 days after the original record
date. Any business which might have been transacted at the meeting as
originally notified may be deferred and transacted at any such adjourned meeting
at which a quorum shall be present.
1.07. General Right to Vote; Proxies. Unless the Charter provides
------------------------------
for a greater or lesser number of votes per share or limits or denies voting
rights, each outstanding share of stock, regardless of class, is entitled to one
vote on each matter submitted to a vote at a meeting of stockholders. In all
elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock he owns of
record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another
person to act as proxy by transmitting, or authorizing the transmission of, a
telegram, cablegram, datagram, or other means of electronic transmission to the
person authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a stockholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The
-2-
<PAGE>
interest with which a proxy may be coupled includes an interest in the stock to
be voted under the proxy or another general interest in the Corporation or its
assets or liabilities.
1.08. List of Stockholders. At each meeting of stockholders, a full,
--------------------
true and complete list of all stockholders entitled to vote at such meeting,
showing the number and class of shares held by each and certified by the
transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
1.09. Conduct of Business and Voting. At all meetings of
------------------------------
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these By-Laws,
the Charter or law, shall be decided or determined by the chairman of the
meeting. If demanded by stockholders, present in person or by proxy, entitled
to cast 10% in number of votes entitled to be cast, or if ordered by the
chairman, the vote upon any election or question shall be taken by ballot and,
upon like demand or order, the voting shall be conducted by two inspectors, in
which event the proxies and ballots shall be received, and all questions
touching the qualification of voters and the validity of proxies and the
acceptance or rejection of votes shall be decided, by such inspectors. Unless
so demanded or ordered, no vote need be by ballot and voting need not be
conducted by inspectors. The stockholders at any meeting may choose an
inspector or inspectors to act at such meeting, and in default of such election
the chairman of the meeting may appoint an inspector or inspectors. No
candidate for election as a director at a meeting shall serve as an inspector
thereat.
1.10. Action by Written Consent. Any action required or permitted to
-------------------------
be taken at a meeting of stockholders may be taken without a meeting if there is
filed with the records of stockholders' meetings an unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote at it.
1.11. Meeting by Conference Telephone. Stockholders may participate
-------------------------------
in a meeting by means of a conference telephone or similar communications
equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means constitutes presence in
person at a meeting.
ARTICLE II
BOARD OF DIRECTORS
------------------
2.01. Function of Directors. The business and affairs of the
---------------------
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be
-3-
<PAGE>
exercised by or under authority of the Board of Directors, except as conferred
on or reserved to the stockholders by statute or by the Charter or By-Laws. The
Board may delegate the duty of management of the assets and the administration
of the day-to-day operations of the Corporation to one or more entities or
individuals pursuant to a written contract or contracts which have obtained the
approvals, including the approval of renewals thereof, required by the
Investment Company Act of 1940.
2.02. Number of Directors. The Corporation shall have at least three
-------------------
directors; provided that, if there is no stock outstanding, the number of
directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are fewer than three stockholders, unless
provided otherwise by the Charter, the number of directors may be less than
three but not less than the number of stockholders. The Corporation shall have
the number of directors provided in its Charter until changed as herein
provided. A majority of the entire Board of Directors may alter the number of
directors set by the Charter to a number not exceeding 25 nor less than the
minimum number then permitted herein, but the action may not affect the tenure
of office of any director.
2.03. Election and Tenure of Directors. At each annual meeting, the
--------------------------------
stockholders shall elect directors to hold office until the next annual meeting
and until their successors are elected and qualify.
2.04. Removal of Directors. Subject to the rights of the holders of
--------------------
any class separately entitled to elect one or more directors, any director, or
the entire Board of Directors, may be removed from office at any time, with or
without cause, by the affirmative vote of at least a majority of the combined
voting power of all classes of shares of capital stock entitled to vote in the
election for directors.
2.05. Vacancy on Board. Subject to the rights of the holders of any
----------------
class separately entitled to elect one or more directors, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall be filled
by a majority vote of the stockholders or, unless otherwise provided by statute,
the directors then in office. A director so chosen by the stockholders shall
hold office for the balance of the term then remaining. A director so chosen by
the remaining directors shall hold office until the next annual meeting of
stockholders.
2.06. Regular Meetings. After each meeting of stockholders at which
----------------
directors shall have been elected, the Board of Directors shall meet as soon as
practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by the Board,
the President or Chairman with notice in accordance with Section 2.08, the Board
of Directors shall meet immediately following the close of, and at the place of,
such stockholders' meeting. Any other regular meeting of the Board of Directors
shall
-4-
<PAGE>
be held on such date and at any place as may be designated from time to time by
the Board of Directors.
2.07. Special Meetings. Special meetings of the Board of Directors
----------------
may be called at any time by the Chairman of the Board or the President or by a
majority of the Board of Directors by vote at a meeting, or in writing with or
without a meeting. A special meeting of the Board of Directors shall be held on
such date and at any place as may be designated from time to time by the Board
of Directors. In the absence of designation such meeting shall be held at such
place as may be designated in the call.
2.08. Notice of Meeting. Except as provided in 2.06, the Secretary
-----------------
shall give notice to each director of each regular and special meeting of the
Board of Directors. The notice shall state the time and place of the meeting.
Notice is given to a director when it is delivered personally to him, left at
his residence or usual place of business, or sent by telegraph, facsimile
transmission or telephone, at least 24 hours before the time of the meeting or,
in the alternative, by mail to his address as it shall appear on the records of
the Corporation, at least 72 hours before the time of the meeting. Unless
statute, the By-Laws or a resolution of the Board of Directors provides
otherwise, the notice need not state the business to be transacted at or the
purposes of any regular or special meeting of the Board of Directors. No notice
of any meeting of the Board of Directors need be given to any director who
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened, or to any
director who, in a writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice. Any meeting of
the Board of Directors, regular or special, may adjourn from time to time to
reconvene at the same or some other place, and no notice need be given of any
such adjourned meeting other than by announcement.
2.09. Action by Directors. Unless statute or the Charter or By-Laws
-------------------
requires a greater proportion, the action of a majority of the directors present
at a meeting at which a quorum is present is action of the Board of Directors.
A majority of the entire Board of Directors shall constitute a quorum for the
transaction of business. In the absence of a quorum, the directors present by
majority vote and without notice other than by announcement may adjourn the
meeting from time to time until a quorum shall attend. At any such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the meeting as originally notified. Unless
otherwise provided by statute or regulation, any action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting,
if an unanimous written consent which sets forth the action is signed by each
member of the Board and filed with the minutes of proceedings of the Board.
2.10. Meeting by Conference Telephone. Members of the Board of
-------------------------------
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time.
-5-
<PAGE>
Unless otherwise provided by statute or regulation, participation in a meeting
by these means constitutes presence in person at the meeting.
2.11. Compensation. By resolution of the Board of Directors a fixed
------------
sum and expenses, if any, for attendance at each regular or special meeting of
the Board of Directors or of committees thereof, and other compensation for
their services as such or on committees of the Board of Directors, may be paid
to directors. A director who serves the Corporation in any other capacity also
may receive compensation for such other services, pursuant to a resolution of
the Board of Directors.
2.12. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the principal office of the Corporation
addressed to the Chairman of the Board or the President. Unless otherwise
specified such resignation shall take effect upon receipt thereof by the
Chairman of the Board or the President.
ARTICLE III
COMMITTEES
----------
3.01. Committees. The Board of Directors may appoint from among its
----------
members an Executive Committee, an Audit Committee and other committees composed
of one or more directors and delegate to these committees any of the powers of
the Board of Directors, except the power to authorize dividends on stock, elect
directors, issue stock other than as provided in the next sentence, recommend to
the stockholders any action which requires stockholder approval, amend the By-
Laws, or approve any merger or share exchange which does not require stockholder
approval. If the Board of Directors has given general authorization for the
issuance of stock providing for or establishing a method or procedure for
determining the maximum number of shares to be issued, a committee of the Board,
in accordance with that general authorization or any stock option or other plan
or program adopted by the Board of Directors, may authorize or fix the terms of
stock subject to classification or reclassification and the terms on which any
stock may be issued, including all terms and conditions required or permitted to
be established or authorized by the Board of Directors.
3.02. Committee Procedure. Each committee may fix rules of procedure
-------------------
for its business. A majority of the members of a committee shall constitute a
quorum for the transaction of business and the act of a majority of those
present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the committee and filed with
the minutes of the committee. The members of a
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<PAGE>
committee may conduct any meeting thereof by telephone in accordance with the
provisions of 2.10.
3.03. Emergency. In the event of a state of disaster of sufficient
---------
severity to prevent the conduct and management of the affairs and business of
the Corporation by its directors and officers as contemplated by the Charter and
these By-Laws, any two or more available members of the then incumbent Executive
Committee shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Corporation in accordance with the
provisions of Section 3.01. In the event of the unavailability, at such time,
of a minimum of two members of the then incumbent Executive Committee, the
available directors shall elect an Executive Committee consisting of any two
members of the Board of Directors, whether or not they be officers of the
Corporation, which two members shall constitute the Executive Committee for the
full conduct and management of the affairs of the Corporation in accordance with
the foregoing provisions of this Section. This Section shall be subject to
implementation by resolution of the Board of Directors passed from time to time
for that purpose, and any provisions of the By-Laws (other than this Section)
and any resolutions which are contrary to the provisions of this Section or to
the provisions of any such implementing resolutions shall be suspended until it
shall be determined by any interim Executive Committee acting under this Section
that it shall be to the advantage of the Corporation to resume the conduct and
management of its affairs and business under all the other provisions of these
By-Laws.
ARTICLE IV
OFFICERS
--------
4.01. Executive and Other Officers. The Corporation shall have a
----------------------------
President, a Secretary, and a Treasurer. It may also have a Chairman of the
Board. The Board of Directors may designate a chief executive officer, who
shall have general supervision of the business and affairs of the Corporation,
and a chief operating officer, who shall have supervision of the operations of
the Corporation. In the absence of any designation, the Chairman of the Board,
if there be one, shall serve as chief executive officer and the President shall
serve as chief operating officer. In the absence of the Chairman of the Board,
or if there be none, the President shall be the chief executive officer. The
same person may hold both offices. The Corporation may also have one or more
Vice-Presidents, assistant officers, and subordinate officers as may be
established by the Board of Directors. A person may hold more than one office
in the Corporation except that no person may serve concurrently as both
President and Vice-President of the Corporation. The Chairman of the Board
shall be a director; the other officers may be directors.
4.02. Chairman of the Board. The Chairman of the Board, if one be
---------------------
elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall
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<PAGE>
be present. Unless otherwise specified by the Board of Directors, he shall be
the chief executive officer of the Corporation. In general, he shall perform
such duties as are customarily performed by a chief executive officer of a
corporation and may perform any duties of the President and shall perform such
duties and have such other powers as are from time to time assigned to him by
the Board of Directors.
4.03. President. Unless otherwise provided by resolution of the
---------
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. Unless otherwise specified by the Board of
Directors, the President shall be the chief operating officer of the Corporation
and perform the duties customarily performed by chief operating officers. He
may execute, in the name of the Corporation, all authorized deeds, mortgages,
bonds, contracts or other instruments, except in cases in which the execution
thereof shall have been expressly delegated to some other officer or agent of
the Corporation. In general, he shall perform such other duties as are
customarily performed by a president of a corporation and shall perform such
other duties and have such other powers as are from time to time assigned to him
by the Board of Directors or the chief executive officer of the Corporation.
4.04. Vice-Presidents. The Vice-President or Vice-Presidents, at the
---------------
request of the chief executive officer or the President, or in the President's
absence or during his inability to act, shall perform the duties and exercise
the functions of the President, and when so acting shall have the powers of the
President. If there be more than one Vice-President, the Board of Directors may
determine which one or more of the Vice-Presidents shall perform any of such
duties or exercise any of such functions, or if such determination is not made
by the Board of Directors, the chief executive officer or the President may make
such determination; otherwise any of the Vice-Presidents may perform any of such
duties or exercise any of such functions. Each Vice-President shall perform
such other duties and have such other powers, and have such additional
descriptive designations in his title (if any), as are from time to time
assigned to him by the Board of Directors, the chief executive officer, or the
President.
4.05. Secretary. The Secretary shall keep the minutes of the
---------
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for that purpose; he shall see that all notices are duly given
in accordance with the provisions of these By-Laws or as required by law; he
shall be custodian of the records of the Corporation; he may witness any
document on behalf of the Corporation, the execution of which is duly
authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same. In general, he shall perform such other duties as are customarily
performed by a secretary of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him by the Board
of Directors, the chief executive officer, or the President.
4.06. Treasurer. The Treasurer shall have charge of and be
---------
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be
-8-
<PAGE>
deposited, in the name of the Corporation, all moneys or other valuable effects
in such banks, trust companies or other depositories as shall, from time to
time, be selected by the Board of Directors; he shall render to the President
and to the Board of Directors, whenever requested, an account of the financial
condition of the Corporation. In general, he shall perform such other duties as
are customarily performed by a treasurer of a corporation, and shall perform
such other duties and have such other powers as are from time to time assigned
to him by the Board of Directors, the chief executive officer, or the President.
4.07. Assistant and Subordinate Officers. The assistant and
----------------------------------
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors, the chief executive officer, or the President.
4.08. Election, Tenure and Removal of Officers. The Board of
----------------------------------------
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not itself create contract rights. All officers shall be elected or
appointed to hold their respective offices during the pleasure of the Board. The
Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his contract rights. The
Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office for the unexpired portion of the term.
4.09. Compensation. The Board of Directors shall have power to fix
------------
the salaries and other compensation and remuneration, of whatever kind, of all
officers of the Corporation. The Board of Directors may authorize any committee
or officer, upon whom the power of appointing assistant and subordinate officers
may have been conferred, to fix the salaries, compensation and remuneration of
such assistant and subordinate officers.
ARTICLE V
INDEMNIFICATION
---------------
5.01. Indemnification of Directors and Officers. The Corporation
-----------------------------------------
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than a
proceeding by or in the right of the Corporation in which such person shall have
been adjudged to be liable to the Corporation), by reason of being or having
been a director or officer of the Corporation, or serving or having served at
the request of the Corporation as a director, officer, partner, trustee,
employee or agent of another entity in which the Corporation has an interest as
a shareholder, creditor or otherwise (a "Covered Person"),
-9-
<PAGE>
against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
reasonable expenses (including attorney's fees) actually incurred by the Covered
Person in connection with such action, suit or proceeding, except (i) liability
in connection with any proceeding in which it is determined that (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty, or (B) the Covered Person actually received an improper
personal benefit in money, property or services, or (C) in the case of any
criminal proceeding, the Covered Person had reasonable cause to believe that the
act or omission was unlawful, and (ii) liability to the Corporation or its
security holders to which the Covered Person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office (any or all of the conduct
referred to in clauses (i) and (ii) being hereinafter referred to as "Disabling
Conduct").
5.02. Procedure. Any indemnification under Section 5.01 shall
---------
(unless ordered by a court) be made by the Corporation only as authorized for a
specific proceeding by (i) a final decision on the merits by a court or other
body before whom the proceeding was brought that the Covered Person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of the
proceeding against the Covered Person for insufficiency of evidence of any
Disabling Conduct, or (iii) a reasonable determination, based upon a review of
the facts, by a majority of a quorum of the directors who are neither
"interested persons" of the Corporation as defined in the Investment Company Act
of 1940 nor parties to the proceeding ("Disinterested, Non-Party Directors"), or
an independent legal counsel in a written opinion, that the Covered Person was
not liable by reason of Disabling Conduct. The termination of any proceeding by
judgment, order or settlement shall not create a presumption that the Covered
Person did not meet the required standard of conduct; the termination of any
proceeding by conviction, or a plea of nolo contendere or its equivalent, or an
entry of an order of probation prior to judgment, shall create a rebuttable
presumption that the Covered Person did not meet the required standard of
conduct. Any determination pursuant to this Section 5.02 shall not prevent
recovery from any Covered Person of any amount paid to him in accordance with
this By-Law as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction to be liable by reason of
Disabling Conduct.
5.03. Advance Payment of Expenses. Reasonable expenses (including
---------------------------
attorney's fees) incurred by a Covered Person may be paid or reimbursed by the
Corporation in advance of the final disposition of an action, suit or proceeding
upon receipt by the Corporation of (i) a written affirmation by the Covered
Person of his good faith belief that the standard of conduct necessary for
indemnification under this By-Law has been met and (ii) a written undertaking by
or on behalf of the Covered Person to repay the amount if it is ultimately
determined that such standard of conduct has not been met, so long as either (A)
the Covered Person has provided a security for his undertaking, (B) the
Corporation is insured against losses arising by reason of any lawful advances,
or (C) a majority of a quorum of the Disinterested, Non-Party Directors, or an
independent legal counsel in a written opinion, has determined, based
-10-
<PAGE>
on a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the Covered Person ultimately
will be found entitled to indemnification.
5.04. Exclusivity, Etc. The indemnification and advance of expenses
-----------------
provided by the Charter and this By-Law shall not be deemed exclusive of any
other rights to which a Covered Person seeking indemnification or advance of
expenses may be entitled under any law (common or statutory), or any agreement,
vote of stockholders or disinterested directors, or other provision that is
consistent with law, both as to action in his official capacity and as to action
in another capacity while holding office or while employed by or acting as agent
for the Corporation, shall continue in respect of all events occurring while the
Covered Person was a director or officer after such Covered Person has ceased to
be a director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such Covered Person. The Corporation shall not
be liable for any payment under this By-Law in connection with a claim made by a
director or officer to the extent such director or officer has otherwise
actually received payment under an insurance policy, agreement, vote or
otherwise, of the amounts otherwise indemnifiable hereunder. All rights to
indemnification and advance of expenses under the Charter and hereunder shall be
deemed to be a contract between the Corporation and each director or officer of
the Corporation who serves or served in such capacity at any time while this By-
Law is in effect. Nothing herein shall prevent the amendment of this By-Law,
provided that no such amendment shall diminish the rights of any Covered Person
hereunder with respect to events occurring or claims made before its adoption or
as to claims made after its adoption in respect of events occurring before its
adoption. Any repeal or modification of this By-Law shall not in any way
diminish any rights to indemnification or advance of expenses of a Covered
Person or the obligations of the Corporation arising hereunder with respect to
events occurring, or claims made, while this By-Law or any provision hereof is
in force.
5.05. Insurance. The Corporation may purchase and maintain insurance
---------
on behalf of any Covered Person against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such;
provided, however, that the Corporation shall not purchase insurance to
indemnify any Covered Person against liability for Disabling Conduct.
5.06. Severability: Definitions. The invalidity or unenforceability
--------------------------
of any provision of this Article V shall not affect the validity or
enforceability of any other provision hereof. The phrase "this By-Law" in this
Article V means this Article V in its entirety.
ARTICLE VI
STOCK
-----
6.01. Certificates for Stock. The Board of Directors may determine
----------------------
to issue certificated or uncertificated shares of capital stock and other
securities of the Corporation. For
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<PAGE>
certificated stock, each stockholder is entitled to certificates which represent
and certify the shares of stock he holds in the Corporation. Each stock
certificate shall include on its face the name of the Corporation, the name of
the stockholder or other person to whom it is issued, and the class of stock and
number of shares it represents. It shall also include a statement which provides
in substance that: the Corporation will furnish to any stockholder on request
and without charge a full statement of the designations and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption of the stock
of each class which the Corporation is authorized to issue, of the differences
in the relative rights and preferences between the shares of each series of a
preferred or special class in series which the Corporation is authorized to
issue, to the extent they have been set, and of the authority of the Board of
Directors to set the relative rights and preferences of subsequent series of a
preferred or special class of stock and any restrictions on transferability.
Such request may be made to the Secretary or to its transfer agent. Upon the
issuance of uncertificated shares of capital stock, the Corporation shall send
the stockholder a written statement of the same information required on the
certificate. It shall be in such form, not inconsistent with law or with the
Charter, as shall be approved by the Board of Directors or any officer or
officers designated for such purpose by resolution of the Board of Directors.
Each stock certificate shall be signed by the Chairman of the Board, the
President, or a Vice-President, and countersigned by the Secretary, an Assistant
Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be
sealed with the actual corporate seal or a facsimile of it or in any other form
and the signatures may be either manual or facsimile signatures. A certificate
is valid and may be issued whether or not an officer who signed it is still an
officer when it is issued.
6.02. Transfers. The Board of Directors shall have power and
---------
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of shares of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
6.03. Record Dates or Closing of Transfer Books. The Board of
-----------------------------------------
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day
the record date is fixed nor, subject to Section 1.06, more than 90 days before
the date on which the action requiring the determination will be taken; the
transfer books may not be closed for a period longer than 20 days; and, in the
case of a meeting of stockholders, the record date or the closing of the
transfer books shall be at least ten days before the date of the meeting.
6.04. Stock Ledger. The Corporation shall maintain a stock ledger
------------
which contains the name and address of each stockholder and the number of shares
of stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The
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<PAGE>
original or a duplicate of the stock ledger shall be kept at the offices of the
transfer agent for a particular class of stock, or, if none, at the principal
office in the State of Maryland or the principal executive office of the
Corporation.
6.05. Certification of Beneficial Owners. The Board of Directors may
----------------------------------
adopt by resolution a procedure by which a stockholder of the Corporation may
certify in writing to the Corporation that any shares of stock registered in the
name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify, the purpose for which the certification may be made, the form
of certification and the information to be contained in it, if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation, and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
6.06. Lost Stock Certificates. The Board of Directors of the
-----------------------
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may refuse to issue such new certificate save upon the order of some
court having jurisdiction in the premises.
ARTICLE VII
FINANCE
-------
7.01. Checks, Drafts, Etc. All checks, drafts and orders for the
-------------------
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the President, a Vice-President or an Assistant Vice-
President and countersigned by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary.
7.02. Annual Statement of Affairs. The President or chief accounting
---------------------------
officer shall prepare annually a full and correct statement of the affairs of
the Corporation, to include a statement of net assets and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
placed on file at the Corporation's principal office within 120 days after the
end of the fiscal year.
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7.03. Fiscal Year. The fiscal year of the Corporation shall be the
-----------
twelve-calendar-months period ending December 31 in each year, unless otherwise
provided by the Board of Directors.
7.04. Dividends. If declared by the Board of Directors at any
---------
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter of the
Corporation.
7.05. Net Asset Value. The current net asset value per share of the
---------------
common stock of the Corporation shall be determined at least once each week, as
of such day and time as the Board of Directors shall determine. For purposes of
determining of the current net asset value per share of the common stock,
securities for which market quotations are readily available shall be valued at
prices which, in the opinion of the Board of Directors or the person designated
by the Board of Directors to make such determination, most nearly represent the
current market value of such securities, and other securities and assets shall
be valued at fair value as determined in good faith by or under the direction of
the Board of Directors. Portfolio securities may be valued on the basis of
prices furnished by one or more independent pricing services approved by the
Board of Directors.
7.06. Custodian. The Corporation shall place and maintain its
---------
securities and similar investments in the custody of one or more custodians
meeting the requirements of the Investment Company Act of 1940, or may serve as
its own custodian in accordance with such rules and regulations or orders as the
Securities and Exchange Commission may from time to time prescribe for the
protection of investors. Securities held by a custodian may be registered in
the name of the Corporation or any such custodian, or the nominee of either of
them. Subject to such rules, regulations, and orders as the Commission may
adopt as necessary or appropriate for the protection of investors, the
Corporation or any custodian, with the consent of the Corporation, may deposit
all or any part of the securities owned by the Corporation in a system for the
central handling of securities, pursuant to which system all securities of a
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities.
ARTICLE VIII
SUNDRY PROVISIONS
-----------------
8.01. Books and Records. The Corporation shall keep correct and
-----------------
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors.
The books and records of the Corporation may be in written form or in any other
form which can be converted within a reasonable time into written
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<PAGE>
form for visual inspection. Minutes shall be recorded in written form but may be
maintained in the form of a reproduction. The original or a certified copy of
the By-Laws shall be kept at the principal office of the Corporation.
8.02. Corporate Seal. The Board of Directors shall provide a
--------------
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule or regulation relating to a corporate seal to place the word
"Seal" adjacent to the signature of the person authorized to sign the document
on behalf of the Corporation.
8.03. Bonds. The Board of Directors may require any officer, agent
-----
or employee of the Corporation to give a bond to the Corporation, conditioned
upon the faithful discharge of his duties, with one or more sureties and in such
amount as may be satisfactory to the Board of Directors.
8.04. Voting Shares in Other Corporations. Stock of other
-----------------------------------
corporations or associations, registered in the name of the Corporation, may be
voted by the President, a Vice-President, or a proxy appointed by either of
them. The Board of Directors, however, may by resolution appoint some other
person to vote such shares, in which case such person shall be entitled to vote
such shares upon the production of a certified copy of such resolution.
8.05. Mail. Any notice or other document which is required by these
----
By-Laws to be mailed shall be deposited in the United States mails, postage
prepaid.
8.06. Execution of Documents. A person who holds more than one
----------------------
office in the Corporation may not act in more than one capacity to execute,
acknowledge or verify an instrument required by law to be executed, acknowledged
or verified by more than one officer.
8.07. Amendments. Subject to the special provisions of Sections 2.02
----------
and 5.04, (a) any and all provisions of these By-Laws may be altered or repealed
and new by-laws may be adopted at any annual meeting of the stockholders, or at
any special meeting called for that purpose, and (b) the Board of Directors
shall have the power, at any regular or special meeting thereof, to make and
adopt new by-laws, or to amend, alter or repeal any of the By-Laws of the
Corporation.
# # #
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<PAGE>
CERTIFICATE
Certificate Number ___ Number of Shares ________
PACHOLDER FUND, INC.
(a Maryland Corporation)
6.95% Cumulative Preferred Stock
$.01 Par Value
This certifies that ______________________________ is the registered
holder of _______________ (_________) shares of 6.95% Cumulative Preferred
Stock, par value $.01 per share, of Pacholder Fund, Inc., a Maryland corporation
(the "Corporation"), fully paid and non-assessable, transferable only on the
books of the Corporation by the holder hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares represented hereby are issued and shall be subject to all of the
provisions of the Charter and By-Laws of the Corporation, each as from time to
time amended, to all of which the holder by acceptance hereof assents. The
Corporation will furnish to any stockholder on request and without charge a full
statement of the designations, and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class authorized to be
issued, the differences in the relative rights and preferences between shares of
any series of any authorized preferred or special class to the extent they have
been set, and the authority of the Board of Directors to classify unissued
shares and to set the relative rights and preferences thereof and of any
subsequent series of such preferred or special classes.
WITNESS the seal of the Corporation and the signatures of the duly
authorized officers of the Corporation.
DATED: August ___, 1995
______________________________ _____________________________________
James P. Shanahan, Jr. Anthony L. Longi, Jr.
Secretary President
[SEAL]
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY BE OFFERED, SOLD OR
TRANSFERRED ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF SUCH LAWS OR IF AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
<PAGE>
VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT BEFORE 5:00 P.M.
NEW YORK CITY TIME ON FEBRUARY 20, 1997 (UNLESS OFFERING IS EXTENDED)
CONTROL NO. ________ SHARES AVAILABLE FOR SUBSCRIPTION _____________
USF&G PACHOLDER FUND, INC.
SUBSCRIPTION RIGHTS FOR COMMON STOCK
Dear Stockholder,
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST COMPLETE BOTH SIDES OF THIS TEAR OFF
CARD.
As the registered owner of this Subscription Certificate, you are entitled to
subscribe for shares of Common Stock of USF&G Pacholder Fund, Inc. shown above,
pursuant to the Primary Subscription right and upon terms and conditions and at
the Subscription Price for each share of Common Stock specified in the
Prospectus relating thereto. The Rights represented hereby include the Over-
Subscription Privilege for Record Date Shareholders only, as described in the
Prospectus. Under the Over-Subscription Privilege, any number of additional
Shares may be purchased by Record Date Shareholders if such Shares are
available and your Primary Subscription rights with respect to the Rights
initially issued to you have been fully exercised to the extent possible.
Stock certificates for the Shares subscribed to pursuant to the Primary
Subscription right and Over-Subscription Privilege will be delivered as soon as
practicable after the Expiration Date. Any refund in connection with your
subscription will be delivered as soon as practicable after the expiration of
the offering.
- --------------------------------------------------------------------------------
HOW TO CALCULATE THE FULL PRIMARY SUBSCRIPTION ENTITLEMENT
No. of shares owned ___________ / 3 = ________________ new shares
(Ignore fractions)
- --------------------------------------------------------------------------------
THIS SUBSCRIPTION RIGHT IS NON-TRANSFERABLE
FULL PAYMENT FOR BOTH PRIMARY AND OVER-SUBSCRIPTION SHARES MUST ACCOMPANY THE
EXERCISE FORM AND MUST BE MADE PAYABLE IN UNITED STATES DOLLARS BY MONEY ORDER
OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES PAYABLE TO USF&G
PACHOLDER FUND, INC. ALTERNATIVELY, A NOTICE OF GUARANTEED DELIVERY MUST
ACCOMPANY THE EXERCISE FORM.
NOTE: $ IS AN ESTIMATED PRICE ONLY. THE FINAL PRICE TO BE DETERMINED ON THE
EXPIRATION DATE COULD BE HIGHER OR LOWER DEPENDING ON THE MOVEMENT IN THE NET
ASSET VALUE AND SHARE PRICE.
- --------------------------------------------------------------------------------
USF&G PACHOLDER FUND, INC.
SECTION 1: DETAILS OF SUBSCRIPTION--PLEASE PRINT ALL INFORMATION CLEARLY
AND LEGIBLY
- --------------------------------------------------------------------------------
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A: I APPLY FOR ALL OF MY ENTITLEMENT OF NEW
SHARES ___________________ X $ = $_________________
(NO. OF NEW SHARES)
B: I APPLY FOR THE OVER-SUBSCRIPTION
PRIVILEGE*_______________________________ X $ = $ _________________
(NO. OF ADDITIONAL SHARES)
AMOUNT ENCLOSED $ ________________
*YOU CAN ONLY OVER-SUBSCRIBE IF YOU HAVE FULLY EXERCISED YOUR PRIMARY
SUBSCRIPTION RIGHTS.
- --------------------------------------------------------------------------------
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
C: I APPLY FOR ___________________ X $ = $_______________________
(NO. OF NEW SHARES) (AMOUNT ENCLOSED)
- --------------------------------------------------------------------------------
Control No. ________________________
Account No. ________________________
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 2: TO SUBSCRIBE: I acknowledge that I have received the
Prospectus for this Rights Offering, and I hereby irrevocably
subscribe for the number of new shares indicated on the front of
this card on the terms and conditions set out in the Prospectus. I
understand and agree that I will be obligated to pay any
additional amount to the Fund if the Subscription Price, as
determined on the Expiration Date, is in excess of $ , the
estimated Subscription Price.
I hereby agree that if I fail to pay in full for the shares for
which I have subscribed, the Fund may exercise any of the remedies
provided for in the Prospectus.
Signature of Subscriber(s) _________________________________________
_________________________________________
Please give your telephone # ( ) _________________________________
- --------------------------------------------------------------------------------
If you wish to have your shares and refund check (if any)
delivered to an address other than listed on this card you must
have your signature guaranteed by a Member of one of the three
Medallion Programs described on Page 15 of the Prospectus. Please
provide the delivery address below and note if it is a permanent
change.
- --------------------------------------------------------------------------------
___________________________________________________________________
___________________________________________________________________
_____________________________________________________________________
SECTION 3: DESIGNATION OF BROKER-DEALER
The following Broker-Dealer is hereby designated as having been
instrumental in the exercise of the Subscription Rights:
FIRM: _____________________________________________________________
REPRESENTATIVE NAME: ______________________________________________
REPRESENTATIVE NUMBER: ____________________________________________
- --------------------------------------------------------------------------------
<PAGE>
NOTICE OF GUARANTEED DELIVERY
For Shares of Common Stock of
USF&G PACHOLDER FUND, INC.
Subscribed for under Primary Subscription
and the Over-Subscription Privilege
As set forth in the Prospectus, this form or one substantially equivalent
hereto may be used as a means of effecting subscription and payment for all
shares of the Fund's Common Stock (the "Shares") subscribed for under the
Primary Subscription and the Over-Subscription Privilege. Such form may be
delivered by hand or sent by facsimile transmission, overnight courier or
first class mail to the Subscription Agent.
The Subscription Agent is:
STATE STREET BANK AND TRUST COMPANY
Attention: CST-Corporate Reorganization Department
By Mail: By Facsimile: Confirm by telephone to:
P.O. Box 9061 (617) 794-6333 (617) 794-6388
Boston, Massachusetts
02205-8686
By Overnight Courier: By Hand:
c/o Boston Financial State Street Bank Bank Boston
Data Services, Inc. and Trust Company 55 Broadway
Two Heritage Drive, MB2 225 Franklin Street or Third Floor
North Quincy, Concourse Level New York, New York
Massachusetts 02171 Boston, MA 02110 10006
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA
A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT
CONSTITUTE A VALID DELIVERY.
The financial institution which completes this form must be a member of the
Securities Transfer Agents Medallion Program, The Stock Exchange Medallion
Program or the New York Stock Exchange Medallion Signature Program, and must
communicate this guarantee and the number of Shares subscribed for in
connection with this guarantee (separately disclosed as to the Primary
Subscription and the Over-Subscription Privilege) to the Subscription Agent.
The financial institution must deliver this Notice of Guaranteed Delivery of
Payment, guaranteeing delivery of (a) payment in full for all subscribed
Shares and (b) a properly completed and signed copy of the Subscription
Certificate to the Subscription Agent prior to 5:00 pm, New York Time, on the
Expiration Date, unless extended. The Subscription Certificate and full
payment must then be received by the Subscription Agent by no later than the
close of business on the third business day after the Expiration Date, unless
extended. Failure to do so will result in a forfeiture of the Rights.
GUARANTEE
The undersigned, a member of one of the three Medallion Programs referenced
above, guarantees delivery to the Subscription Agent by no later than 5:00 pm,
New York Time, on the third business day (February 25, 1997) of (a) a properly
completed and executed Subscription Certificate, and (b) payment of the full
Subscription Price for Shares subscribed for on Primary Subscription and for
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege, as subscription for such Shares is indicated herein or in the
Subscription Certificate.
(continued on other side)
<PAGE>
Broker Assigned Control #__________
USF&G PACHOLDER FUND, INC.
1. Primary Number of Rights Number of Primary Payment to be
Subscription to be exercised Shares requested for made in
which you are connection with
guaranteeing delivery Primary Shares
of Rights and Payment
_________ Rights _________ Shares $ _____________
(Rights / by 3)
2. Over-Subscription Number of Over-Subscription Payment to be
Shares requested for which made in
you are guaranteeing connection with
payment Over-
Subscription
Shares
_________ Shares $ _____________
3. Totals Total Number of
Rights to be
Delivered _________ Rights $ _____________
Total Payment
Method of delivery (circle one)
A. Through DTC
B. Direct to State Street Bank and Trust Company, as Subscription Agent.
Please reference below the registration of the rights to be delivered.
-----------------------------
-----------------------------
-----------------------------
<PAGE>
USF&G PACHOLDER FUND, INC
RIGHTS OFFERING
BENEFICIAL OWNER CERTIFICATION
The undersigned, a bank, broker or other nominee of Rights to purchase
shares of common stock of USF&G Pacholder Fund, Inc. pursuant to the Rights
offering (the "Offer") described and provided for in the Fund's Prospectus,
dated January , 1997 (the "Prospectus"), hereby certifies to USF&G Pacholder
Fund, Inc. and to State Street Bank and Trust Company, as Subscription Agent
for the Offer, that for each numbered line filled in below the undersigned has
purchased, on behalf of the beneficial owner thereof (which may be the
undersigned), the number of shares specified on such line pursuant to the
Primary Subscription (as defined in the Prospectus) and such beneficial owner
wishes to subscribe for the purchase of additional shares of common stock
pursuant to the Over-Subscription Privilege (as defined in the Prospectus), in
the amount set forth in the third column of such line:
- ------------------------------------------------------------------------------
I II III
- ------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF HARES
PURCHASED PURSUANT TO REQUESTED PURSUANT TO
RECORD DATE SHARES PRIMARY SUBSCRIPTION OVER-SUBSCRIPTION PRIVILEGE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Total = Total = Total =
.......................................................................
Number of Nominee Holder
By: .......................................................................
Name:
Title:
Dated:................., 1997
Provide the following information if applicable.
.......................................................................
DTC Participant Number
.......................................................................
DTC Basic Subscription Confirmation Number
Contact Number:................................................................
Phone Number:..................................................................
3
<PAGE>
USF&G PACHOLDER FUND, INC.
DIVIDEND REINVESTMENT PLAN
The USF&G Pacholder Fund, Inc. (the "Fund") Dividend Reinvestment Plan (the
"Plan") offers you a convenient way to invest your income dividends and capital
gains distributions in additional shares of the Fund's common stock thereby
increasing your holdings of the Fund's shares.
The Plan is designed to allow all common shareholders an opportunity to
participate. Some of the Plan features are:
1. Dividend reinvestment automatically increases the number of shares you own.
2. Dividends and distributions are paid in additional shares at the lower of
net asset value or market price, as described herein.
3. Shares purchased through the Plan are recorded in your account providing
protection against theft or destruction of share certificates.
4. You may terminate your Plan account at any time.
HOW DO I ENROLL IN THE PLAN?
To participate in the Plan, please complete the attached Authorization Form
and return it in the envelope provided.
To start the Plan with a specific dividend, please forward the Form to
Fifth Third Bank (the Plan Administrator) prior to the record date for that
dividend.
HOW DOES THE PLAN WORK?
When a dividend is declared, non-participants in the Plan will receive
cash. Plan participants will receive the equivalent in shares of the Fund valued
at the lower of market price or net asset value as described below.
i. If the shares are trading at net asset value or at a premium above net
asset value on the payment date, the Fund will issue new shares at the
greater of net asset value or 95% of the then current market price.
1
<PAGE>
ii. If the shares are trading at a discount from net asset value on the
payment date, Fifth Third Bank will receive the dividend or
distribution in cash and apply it to the purchase of the Fund's shares
in the open market, on the American Stock Exchange or elsewhere, for
the participants' accounts. If, before Fifth Third Bank has completed
its purchases, the market price exceeds the net asset value per share,
the average purchase price per share paid by Fifth Third Bank may
exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had
been paid in shares issued by the Fund. If the purchases have not been
made prior to 30 days after the payment date, Fifth Third Bank may
receive the uninvested portion in newly-issued shares.
WILL THE ENTIRE AMOUNT OF MY DISTRIBUTION BE REINVESTED?
As a Plan participant, the entire amount of your distribution will be
reinvested. For any balance that is insufficient to purchase a whole share, the
amount will be credited to your account in fractional shares.
WILL STOCK CERTIFICATES BE ISSUED FOR TRANSACTIONS IN THE PLAN?
A participant will be issued a stock certificate for full shares upon
request to Fifth Third Bank.
IS THERE ANY CHARGE TO PARTICIPATE IN THE PLAN?
There is no charge to participants for reinvesting dividends or
distributions. Fifth Third Bank's fee for handling the reinvestment of dividends
and distributions will be paid by the Fund. There will be no brokerage charge to
shareholders for shares issued directly by the Fund as a result of dividends or
distributions payable either in stock or cash. Each participant, however, will
pay a pro rata share of brokerage commissions incurred with respect to Fifth
Third Bank's open-market purchases in connection with the reinvestment of
dividends or distributions.
HOW CAN I DISCONTINUE MY PARTICIPATION IN THE PLAN?
A shareholder may terminate his/her account under the Plan by notifying
Fifth Third Bank in writing. Upon termination, you can either receive a
certificate for the number of full shares held in the Plan and a check for
fractional shares or have shares sold by Fifth Third Bank and the proceeds sent
to you, less brokerage commissions and a $2.50 service fee.
WHERE CAN I DIRECT MY QUESTIONS AND CORRESPONDENCE?
Questions and correspondence concerning the Plan should be directed to:
Fifth Third Bank
Shareholder Investment Plan
P.O. Box 478
Cincinnati, Ohio 45273-9611
1-800-837-2755
2
<PAGE>
TERMS AND CONDITIONS
1. You, Fifth Third Bank, will act as agent for me, and will open an account
for me under the Dividend Reinvestment Plan in the same name as my present
shares are registered, and put the Plan into effect for me as of the first
record date for a dividend or capital gains distribution after you receive
the Authorization Form duly executed by me.
2. Whenever USF&G Pacholder Fund, Inc. (the "Fund") declares a distribution
from the capital gains or an income dividend payable either in cash or in
shares of Common Stock, par value $.01 per share ("Shares"), of the Fund
and the market price per Share on the valuation date equals or exceeds the
net asset value per Share, I hereby elect to take such dividend or
distribution entirely in Shares, and you shall automatically receive such
Shares, including fractions, for my account. The number of additional
Shares to be credited to my account shall be determined by dividing the
equivalent dollar amount of the distribution or dividend payable to me by
the net asset value per Share of the Fund's on the valuation date;
provided, that if the premium over the then current market price per Share
exceeds 5% of the net asset value per Share, the Shares will be issued at
95% of the market price. The valuation date will be the payment date for
such distribution or dividend.
3. Whenever the Fund declares a distribution from capital gains or an income
dividend payable either in cash or in Shares and the net asset value per
Share exceeds the market price per Share on the valuation date, I hereby
elect to take such dividend in cash and you shall apply the amount of such
dividend or distribution payable to me (less my pro rata share of brokerage
commissions incurred with respect to open-market purchases in connection
with the reinvestment of such dividend or distribution) to the purchase on
the open-market of Shares for my account. Such purchases will be made on or
shortly after the payable date for such dividend or distribution, and in no
event more than 30 days after such date except where temporary curtailment
or suspension of purchase is necessary to comply with applicable provisions
of federal securities law. If you are unable to invest the full amount of
the dividend or distribution in open-market purchases because the market
discount has shifted to a market premium or otherwise, you are authorized
to receive the uninvested portion of the dividend in newly-issued Shares.
4. For all purposes of the Plan: (a) the market price of the Fund's Shares on
a particular date shall be the last sale price on the American Stock
Exchange on that date, or if there is no sale on such Exchange on that
date, then the mean between the closing bid and asked quotations for such
Shares on such Exchange on such date, and (b) net asset value per share of
the Fund's Shares on a particular date shall be as determined by or on
behalf of the Fund.
5. Open-market purchases provided for above may be made on any securities
exchange where the Fund's Shares are traded, in the over-the-counter market
or in negotiated transactions and may be on such terms as to price,
delivery and otherwise as you shall determine. It is understood that, in
any event, you shall have no liability in connection with any inability to
purchase Shares within 30 days after the payable date for a dividend or
distribution as herein provided, or with the timing of any purchases
effected. You shall
3
<PAGE>
have no responsibility as to the value of the Shares of the Fund acquired
for my account. For the purposes of purchases in the open-market, you may
aggregate my purchases with those of other shareholders of the Fund for
whom you similarly act as Agent, and the average price (including brokerage
commissions) of all Shares purchased by you as Agent shall be the price per
Share allocable to me in connection therewith.
6. You may hold my Shares acquired pursuant to my authorization, together with
the Shares of other shareholders of the Fund acquired pursuant to similar
authorizations, in noncertificated form in your name or that of your
nominee. You will forward to me any proxy solicitation material and will
vote any Shares so held for me only in accordance with the proxy returned
by me to the Fund. Upon my written request, you will deliver to me, without
charge, a certificate or certificates for the full Shares.
7. You will confirm to me each acquisition made for my account as soon as
practicable but not less than 60 days after the date thereof. Although I
may from time to time have an undivided fractional interest (computed to
four decimal places) in a Share of the Fund, no certificates for a
fractional Share will be issued. However, dividends and distributions on
fractional Shares will be credited to my account. In the event of
termination of my account under the Plan, you will adjust for any such
undivided fractional interest in cash at the market value of the Fund's
Shares at the time of termination less the pro rata expense of any sale
required to make such adjustment.
8. Any stock dividends or split Shares distributed by the Fund on Shares held
by you for me will be credited to my account. In the event that the Fund
makes available to its shareholders rights to purchase additional Shares or
other securities, the Shares held for me under the Plan will be added to
other Shares held by me in calculating the number of rights to be issued to
me.
9. Your service fee for administering the Plan will be paid by the Fund. I
will be charged a pro rata share of brokerage commissions on all open-
market purchases.
10. I may terminate my account under the Plan by notifying you in writing.
Such termination will be effective immediately if my notice is received by
you not less than ten days prior to any dividend or distribution record
date; otherwise, such termination will be effective on the first trading
day after the payment date for such dividend or distribution with respect
to any subsequent dividend or distribution. The Plan may be terminated by
you or the Fund upon notice in writing mailed to me at least 90 days prior
to any record date for the payment of any dividend or distribution by the
Fund. Upon any termination you will cause a certificate or certificates
for the full Shares held for me under the Plan and cash adjustment for any
fraction to be delivered to me without charge. If I elect by notice to you
in writing in advance of such termination to have you sell part or all of
my Shares and remit the proceeds to me, you are authorized to deduct a
$2.50 fee plus brokerage commission for this transaction from the
proceeds.
4
<PAGE>
11. These terms and conditions may be amended or supplemented by you or the
Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to
me appropriate written notice at least 90 days prior to the effective date
thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date thereof, you receive written notice of
the termination of my account under the Plan. Any such amendment may
include an appointment by you in your place and stead of a successor agent
under these terms and conditions, with full power and authority to perform
all or any of the acts to be performed by you, as agent, under these terms
and conditions. Upon any such appointment of any successor agent for the
purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor agent, for my account, all dividends
and distributions payable on Shares of the Fund held in my name or under
the Plan for retention or application by such successor agent as provided
in these terms and conditions.
12. You shall at all times act in good faith and agree to use your best
efforts within reasonable limits to insure the accuracy of all services
performed under this agreement and to comply with applicable law, but
assume no responsibility and shall not be liable for loss or damage due to
errors unless such error is caused by your negligence, bad faith or
willful misconduct or that of your employees.
13. These terms and conditions shall be governed by the laws of the State of
Ohio.
- --------------------------------------------------------------------------------
AUTHORIZATION FORM
I elect to participate in the USF&G Pacholder Fund, Inc. Dividend
Reinvestment Plan and to have my income dividends and capital gains
distributions reinvested as provided for by the Plan.
Name: Social Security Number:
---------------------------- ---------------
(Please Print)
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
Signature(s): Date:
-------------------------- ---------------------------------
- -------------------------------------------------------------
Note: If shares are held in more than one name, all must sign.
5
<PAGE>
USF&G PACHOLDER FUND, INC.
1,663,880 Shares of Common Stock Issuable Upon Exercise
of Non-Transferable Rights to Subscribe for
Such Shares of Common Stock
DEALER MANAGER AGREEMENT
------------------------
January __, 1997
Winton Associates, Inc.
Bank One Towers
8044 Montgomery Road, Suite 382
Cincinnati, Ohio 45236
Dear Sirs:
USF&G Pacholder Fund, Inc., a Maryland corporation (the "Fund"), is a
closed-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Fund proposes to issue to holders of its common stock, par value $.01 per share
(the "Common Stock"), of record as of the close of business on January 24, 1997
("Record Date Shareholders") rights (the "Rights") to subscribe for an aggregate
of 1,663,880 shares (the "Shares") of Common Stock.
The Fund appoints Winton Associates, Inc. (the "Dealer Manager") as
exclusive dealer manager in connection with the offer of the Shares contemplated
by the proposed issuance of the Rights (the "Offer"), and the Dealer Manager
accepts such appointment. The Dealer Manager represents and warrants that it is
a broker-dealer registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pacholder & Company, an affiliate of the Dealer Manager
(the "Adviser"), manages the investments of the Fund pursuant to an Investment
Advisory Agreement with the Fund, dated November 16, 1988, as amended (the
"Advisory Agreement").
In connection with the Offer, each Record Date Shareholder will be issued
one Right for each full share of Common Stock held on January 24, 1997 (the
"Record Date"). No fractional Rights will be issued. The Rights will entitle
shareholders to acquire at the subscription price per Share described in the
Prospectus (as hereinafter defined) one Share for each three Rights held. The
period of subscription (the "Subscription Period") will commence on January 27,
1997 and end at 5:00 P.M., New York City time, on February 20, 1997, unless
extended by the Fund (the "Expiration
<PAGE>
Date"). Any Record Date Shareholder who fully exercises all Rights held by him
will be entitled to subscribe for Shares that were not otherwise subscribed for
by others during the Subscription Period (the "Over-Subscription Privilege").
The Fund may, at the discretion of the Board of Directors, increase the number
of Shares subject to subscription by up to 25%. Additional terms and conditions
of the Offer are set out in the registration statement with respect to the
Rights and Shares filed by the Fund with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), and the Investment Company Act and the rules and regulations (the "Rules
and Regulations") of the Commission thereunder.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the Fund, the
Adviser and the Dealer Manager hereby agree as follows:
1. Representations and Warranties of the Fund and the Adviser.
-----------------------------------------------------------
(a) The Fund represents and warrants as follows:
(i) The registration statement on Form N-2 (Nos. 333-17313; 811-5639)
with respect to the Rights and Shares has been carefully prepared by the
Fund in conformity with the requirements of the Securities Act and the
Investment Company Act and the Rules and Regulations. Copies of such
registration statement, including any amendments thereto, the preliminary
prospectuses and statement of additional information (meeting the
requirements of Rule 430A under the Securities Act) contained therein and
the exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Fund to the Dealer Manager.
Such registration statement, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A under the Securities Act and contained
in the Prospectus referred to below, has been declared effective by the
Commission under the Securities Act and no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement.
The forms of prospectus and statement of additional information first filed
by the Fund with the Commission pursuant to its Rule 497(b) or (h) and
Rule 430A are herein referred to respectively as the "Prospectus" and
"SAI." Each preliminary prospectus and preliminary statement of additional
information included in the Registration Statement prior to the time it
becomes effective is hereinafter referred to as a "Preliminary Prospectus"
and a "Preliminary SAI."
(ii) The Fund has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland, with
corporate power and authority to own its properties and conduct its
business as described in the Registration Statement; and the Fund is duly
qualified to transact
-2-
<PAGE>
business in all jurisdictions in which the conduct of its business requires
such qualification.
(iii) The Fund's authorized capitalization is as set forth in the
Prospectus; the outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable; the
Shares have been duly authorized and when issued, delivered and paid for as
described in the Registration Statement, will be validly issued, fully paid
and non-assessable; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue and sale thereof.
(iv) The Rights and Shares conform to the statements concerning them
in the Registration Statement.
(v) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Preliminary SAI or the Prospectus
or the SAI relating to the Offer nor instituted proceedings for that
purpose. The Registration Statement contains, and the Prospectus and any
amendments or supplements thereto, and the SAI and any amendments or
supplements thereto, will contain, all statements which are required to be
stated therein by, and in all respects conforms or will conform, as the
case may be, to the requirements of, the Securities Act, the Investment
Company Act and the Rules and Regulations. Neither the Registration
Statement nor any amendment thereto, and neither the Prospectus, the SAI
nor any supplement thereto, contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that the Fund makes no representations or warranties as
to information contained in or omitted from the Registration Statement, the
Prospectus or the SAI, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Fund by
or on behalf of the Dealer Manager, specifically for use in the preparation
thereof.
(vi) The Fund has not, directly or indirectly, (A) taken any action
designed to cause or to result in, or that constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Fund to facilitate the sale or resale of
the Shares, or (B) since the filing of the Registration Statement (1) sold,
bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Shares or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Fund, except as contemplated by this Agreement or the Fund's dividend
reinvestment plan or as disclosed in writing to the Dealer Manager.
-3-
<PAGE>
(vii) The financial statements of the Fund, together with the related
notes and schedules set forth in the Registration Statement, present fairly
the financial position of the Fund at the indicated dates. Such financial
statements have been prepared in accordance with generally accepted
principles of accounting.
(viii) There is no action or proceeding pending or, to the knowledge of
the Fund, threatened against the Fund before any court or administrative
agency which might result in any material adverse change in the business,
condition or prospects of the Fund.
(ix) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Fund or the earnings, business affairs, management or
business prospects of the Fund, whether or not occurring in the ordinary
course of business, and there has not been any material transaction entered
into by the Fund, other than transactions in the ordinary course of
business and changes and transactions contemplated by the Registration
Statement, as it may be amended or supplemented. The Fund has no material
contingent obligations which are not disclosed in the Registration
Statement, as it may be amended or supplemented.
(x) The Fund is not in default under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it or any of its properties is bound and which default is of material
significance in respect of the business or financial condition of the Fund.
The consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust or other agreement or instrument to
which the Fund is a party, the charter or bylaws of the Fund or any order,
rule or regulation applicable to the Fund of any court or of any regulatory
body or administrative agency or other governmental body having
jurisdiction.
(xi) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Fund of, and the consummation of the transactions contemplated by,
this Agreement and the Fund Agreements (as hereinafter defined) (except
such additional steps as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the
Rights and Shares
-4-
<PAGE>
for public offering by the Fund under state securities or "blue sky" laws)
has been obtained or made and is in full force and effect.
(xii) The Fund holds all material licenses, certificates and permits
from governmental authorities which are necessary to the conduct of its
business.
(xiii) Deloitte & Touche LLP, who have certified the financial
statements of the Fund filed with the Commission as part of the
Registration Statement, are independent public accountants as required by
the Securities Act and the Rules and Regulations.
(xiv) The Fund is registered with the Commission pursuant to
Section 8 of the Investment Company Act as a closed-end, diversified
management investment company, and no order of suspension or revocation of
such registration has been issued or proceedings therefor initiated or
threatened by the Commission.
(xv) The Advisory Agreement, the Administration Agreement dated as of
June 5, 1996 between the Fund and Kenwood Administrative Management,
Limited Partnership (the "Administration Agreement"), the Accounting
Services Agreement dated as of May 20, 1991, as amended, between the Fund
and Pacholder Associates, Inc. (the "Accounting Services Agreement"), the
Custody Agreement dated as of May 1, 1996, between the Fund and Star Bank,
N.A. (the "Custodian Agreement"), the Transfer Agency and Service Agreement
dated as of September 23, 1996, between the Fund and Fifth Third Bank (the
"Transfer Agency Agreement"), the Subscription Rights Agency Agreement
dated as of January __, 1997, between the Fund and State Street Bank and
Trust Company (the "Subscription Agent Agreement") and the Information
Agent Agreement dated as of January __, 1997, between the Fund and
Shareholder Communications Corporation (the "Information Agent Agreement")
(collectively, the "Fund Agreements") have been duly authorized, executed
and delivered on behalf of the Fund, are valid and binding obligations of
the Fund enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws affecting the rights of creditors generally and
such principles of equity as a court having jurisdiction may apply, and are
in all respects in full compliance with all applicable provisions of the
Exchange Act, the Investment Company Act and the Investment Advisers Act of
1940, as amended (the "Advisers Act").
(xvi) The Common Stock has been duly listed on the American Stock
Exchange, Inc. and the Shares have been approved for listing, subject to
official notice of issuance.
-5-
<PAGE>
(b) The Adviser represents and warrants as follows:
(i) The Adviser has been duly organized and is validly existing as a
general partnership in good standing under the laws of the State of Ohio,
with power and authority to own its properties and conduct its business as
described in the Prospectus; and the Adviser is duly qualified to transact
business in all jurisdictions in which the conduct of its business requires
such qualification.
(ii) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Preliminary SAI or the Prospectus
or the SAI relating to the Offer nor instituted proceedings for that
purpose. The Registration Statement contains, and the Prospectus and SAI
and any amendments or supplements thereto will contain, all statements
which are required to be stated therein by, and in all respects conforms or
will conform, as the case may be, to the requirements of, the Securities
Act, the Investment Company Act and the Rules and Regulations. Nothing has
come to the attention of the Adviser that causes the Adviser to believe
that the Registration Statement or any amendment thereto, and the
Prospectus and SAI or any supplement thereto, contains or will contain any
untrue statement of a material fact or omits or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Adviser makes no
representations or warranties as to information contained in or omitted
from the Registration Statement, the Prospectus or the SAI, or any such
amendment or supplement, in reliance upon, and in conformity with, written
information furnished to the Fund or the Adviser by or on behalf of the
Dealer Manager specifically for use in the preparation thereof; provided
further, however, that with respect solely to information contained in or
omitted from the Registration Statement, the Prospectus or the SAI, or any
such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Fund by or on behalf of the Adviser,
specifically for use in the preparation thereof, the Adviser represents and
warrants that such information does not contain any untrue statement of a
material fact and does not omit or will not omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(iii) The Adviser has not, directly or indirectly, (A) taken any
action designed to cause or to result in, or that constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Fund to facilitate the
sale or resale of the Shares, or (B) since the filing of the Registration
Statement (1) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Shares or (2) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
-6-
<PAGE>
securities of the Fund, except as contemplated by this Agreement or the
Fund's dividend reinvestment plan or as disclosed in writing to the Dealer
Manager.
(iv) There is no action or proceeding pending or, to the knowledge of
the Adviser, threatened against the Adviser before any court or
administrative agency which might result in any material adverse change in
the business, condition or prospects of the Adviser.
(v) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Adviser or the earnings, business affairs, management or
business prospects of the Adviser, whether or not occurring in the ordinary
course of business, and there has not been any material transaction entered
into by the Adviser, other than transactions in the ordinary course of
business and changes and transactions contemplated by the Registration
Statement, as it may be amended or supplemented. The Adviser has no
material contingent obligations which are not disclosed in the Registration
Statement, as it may be amended or supplemented.
(vi) The Adviser is not in default under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it or any of its properties is bound and which default is
of material significance in respect of the business or financial condition
of the Adviser. The consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or result in
a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Adviser is a party, the partnership agreement of
the Adviser or any order, rule or regulation applicable to the Adviser of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(vii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Adviser of, and the consummation of the transactions contemplated
by, this Agreement and the Advisory Agreement (except such additional steps
as may be required by the NASD or may be necessary to qualify the Rights
and Shares for public offering by the Fund under state securities or "blue
sky" laws) has been obtained or made and is in full force and effect.
-7-
<PAGE>
(viii) Subject to the exceptions noted above, the Adviser holds all
material licenses, certificates and permits from governmental authorities
which are necessary to the conduct of its business.
(ix) The Adviser is duly registered with the Commission under the
Advisers Act as an investment adviser, and there does not exist any
proceeding or any facts or circumstances the existence of which could lead
to any proceeding which would adversely affect the registration or good
standing of the Adviser with the Commission. The Adviser is not prohibited
from performing its obligations under the Advisory Agreement.
(x) The Advisory Agreement had been duly authorized, executed and
delivered on behalf of the Adviser, is a valid and binding obligation of
the Adviser enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
and other laws affecting the rights of creditors generally and such
principles of equity as a court having jurisdiction may apply, and is in
all respects in full compliance with all applicable provisions of the
Investment Company Act and the Advisers Act.
2. Agreement to Act as Dealer Manager.
----------------------------------
(a) On the basis of the representations and warranties, and subject to the
terms and conditions, set forth in this Agreement:
(i) The Dealer Manager agrees to engage and organize a group of
securities brokers and dealers ("Soliciting Dealers") who will enter into
an agreement with the Fund in the form attached hereto as Exhibit A (the
"Soliciting Dealer Agreement") and solicit, in accordance with the
Securities Act, the Exchange Act and the Investment Company Act, and their
customary practice, the exercise of the Rights, subject to the terms and
conditions of this Agreement, the Subscription Agent Agreement and the
procedures described in the Registration Statement.
(ii) The Fund agrees to furnish, or cause to be furnished, to the
Dealer Manager, lists, or copies of such lists, showing the names and
addresses of, and number of shares of Common Stock held by, Record Date
Shareholders as of the Record Date; and the Dealer Manager agrees to use
such information only in connection with the Offer, and not to furnish the
information to any other person, except for securities brokers and dealers
that the Dealer Manager has requested to solicit exercises of Rights.
-8-
<PAGE>
(iii) The Fund will advise or cause the subscription agent for the
Offer to advise the Dealer Manager and each Soliciting Dealer from day to
day during the Subscription Period, and promptly after the Expiration Date,
as to the names and addresses of all Record Date Shareholders exercising
Rights, the total number of Rights exercised by each Record Date
Shareholder during the immediately preceding day, indicating the total
number of Rights verified to be in proper form for exercise, rejected for
exercise and being processed and, for each Soliciting Dealer, the number of
Rights exercised on subscription forms designating such Soliciting Dealer
as the broker-dealer with respect to such exercise, and as to such other
information as the Dealer Manager may reasonably request; and will notify
the Dealer Manager and each Soliciting Dealer, not later than 5:00 P.M.,
New York City time, on the first business day following the Expiration
Date, of the total number of Rights exercised and Shares related thereto,
the total number of Rights verified to be in proper form for exercise,
rejected for exercise and being processed and, for each Soliciting Dealer,
the number of Rights exercised on subscription forms designating such
Soliciting Dealer as the broker-dealer with respect to such exercise, and
as to such other information as the Dealer Manager may reasonably request.
(iv) In addition to the services described in paragraph (a) (i) of
this Section 2, the Dealer Manager agrees to provide financial and
marketing advisory services to the Fund in connection with the Offer. No
advisory fee, other than the fees provided for in Section 3 of this
Agreement and the reimbursement of the Dealer Manager's out-of-pocket
expenses as described in Section 5 of this Agreement, shall be payable by
the Fund to the Dealer Manager in connection with the financial and
marketing advisory services provided by the Dealer Manager pursuant to this
paragraph (a)(iv).
(b) The Fund and the Dealer Manager agree that the Dealer Manager is an
independent contractor with respect to solicitation of the exercise of Rights
contemplated by this Agreement and the performance of the financial and
marketing advisory services to the Fund contemplated by this Agreement; and the
Dealer Manager represents and warrants that it is not a partner or agent of any
other securities broker, dealer or other person soliciting the exercise of
Rights contemplated by this Agreement, or of the Fund or any of its affiliates.
(c) In rendering the services contemplated by this Agreement, the Dealer
Manager shall not be subject to any liability to the Fund or the Adviser, or any
of their affiliates, for any act or omission on the part of any securities
broker or dealer (other than the Dealer Manager) or any other person, and the
Dealer Manager shall not have any liability (whether direct or indirect, in
contract or tort or otherwise) for or in connection with the performance of its
obligations under this Agreement, except for any such liability for losses,
claims, damages or liabilities incurred that are finally judicially
-9-
<PAGE>
determined to have resulted primarily from the bad faith or gross negligence of
the Dealer Manager.
3. Dealer Manager and Soliciting Dealer Fees.
-----------------------------------------
(a) In full payment for the financial and marketing advisory services and
other services provided and to be provided hereunder by the Dealer Manager, the
Fund agrees to pay to the Dealer Manager a fee equal to the amount computed by
multiplying (i) 0.90 of 1% by (ii) the aggregate number of Shares purchased in
the Offer by (iii) the subscription price per Share described in the Prospectus
(the "Subscription Price").
(b) The Fund agrees to pay each Soliciting Dealer, as provided in the
Soliciting Dealer Agreement, a fee equal to the amount computed by multiplying
(i) .020 (2.0%) by (ii) the Subscription Price by (iii) (A) the aggregate number
of Shares purchased pursuant to subscription forms on which the Soliciting
Dealer is designated by name as having solicited the exercise of such Rights
plus (B) Shares purchased pursuant to the Offer through the Soliciting Dealer by
beneficial owners of the Fund's Common Stock on whose behalf the Soliciting
Dealer acts as nominee, either directly or through The Depository Trust Company
("DTC") or any other applicable depository, as listed in the Appendix to the
Soliciting Dealer Agreement. In no event shall the number in (iii)(B) above
exceed, as applicable, the number of Shares reported as purchased by beneficial
owners through the Soliciting Dealer by DTC, or any other applicable depository,
or the number of Shares the Soliciting Dealer is entitled to purchase as a
Record Date Shareholder (excluding in either case Shares held for its own
account). If more than one Soliciting Dealer is identified as having solicited
the exercise of identical Rights, the fee described above shall be shared
equally by all such Soliciting Dealers.
(c) Payment to the Dealer Manager by the Fund shall be in the form of a
wire transfer of same day funds to an account or accounts identified by the
Dealer Manager. Such payment shall be made concurrently with the issuance of
the Shares on the date on which the Offer is consummated (the "Closing Date").
Payment to a Soliciting Dealer shall be made by the Fund directly to such
Soliciting Dealer by wire transfer of same day funds to an account or accounts
identified by such Soliciting Dealer. Such payments shall be made on the
Closing Date. The Fund shall be under no liability for any payment made to any
Soliciting Dealer which payment is made in accordance with instructions received
from the Dealer Manager.
4. Covenants of the Fund and the Adviser.
-------------------------------------
(a) The Fund covenants and agrees with the Dealer Manager that:
(i) The Fund will (A) prepare and timely file with the Commission
under Rule 497(b) and (h) of the Rules and Regulations a Prospectus and SAI
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<PAGE>
containing any information previously omitted at the time of the
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations and (B) will not file any amendment to the
Registration Statement or supplement to the Prospectus or the SAI of which
the Dealer Manager shall not previously have been advised and furnished
with a copy or to which the Dealer Manager shall have reasonably objected
in writing or which is not in compliance with the Rules and Regulations.
(ii) The Fund will advise the Dealer Manager promptly of any request
of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus or any order
under Section 8(e) of the Investment Company Act or of the institution of
any proceedings for those purposes, and the Fund will use its best efforts
to prevent the issuance of any orders preventing or suspending the use of
the Prospectus or the SAI and to obtain as soon as possible the lifting
thereof, if issued.
(iii) The Fund will deliver to, upon the order of, the Dealer Manager
during the period when delivery of a Prospectus is required under the
Securities Act, as many copies of the Prospectus and SAI in final form, or
as thereafter amended or supplemented, as the Dealer Manager may reasonably
request. The Fund will deliver to the Dealer Manager at or before the date
hereof, one signed copy of the Registration Statement and all amendments
thereto, including all exhibits filed therewith, and will deliver to the
Dealer Manager such number of copies of the Registration Statement, but
without exhibits, and of all amendments thereto, as the Dealer Manager may
reasonably request.
(iv) If, during the period in which a prospectus is required by law to
be delivered by the Fund or a Soliciting Dealer, any event shall occur as a
result of which, in the judgment of the Fund or in the opinion of counsel
for the Dealer Manager, it becomes necessary to amend or supplement the
Prospectus or SAI in order to make the statements therein, in the light of
the circumstances existing at the time the Prospectus is delivered, not
misleading, or if it is necessary at any time to amend or supplement the
Prospectus or SAI to comply with any law, the Fund promptly will prepare
and file with the Commission an appropriate amendment or supplement to the
Prospectus or SAI so that the Prospectus or SAI as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus or SAI will comply with
such law.
(v) The Fund will cooperate with the Dealer Manager in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions
as the
-11-
<PAGE>
Dealer Manager may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose; provided, however, that the Fund
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction where it is not
now so qualified or required to file such a consent. The Fund will, from
time to time, prepare and file such statements, reports and other documents
as are or may be required to continue such qualifications in effect during
the Subscription Period.
(vi) The Fund will not, directly or indirectly, (A) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Fund to facilitate the sale or resale of
the Shares, or (B) (1) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Shares or (2) pay or agree to
pay to any person any compensation for soliciting another to purchase any
other securities of the Fund, except as contemplated by this Agreement or
the Fund's dividend reinvestment plan or as disclosed in writing to the
Dealer Manager.
(vii) The Fund will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 60
days after the close of the period covered thereby, an earnings statement
covering a period of at least twelve consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Securities Act and
Rule 158 thereunder.
(b) The Adviser covenants and agrees with the Dealer Manager that it will
not, directly or indirectly, (i) take any action designed to cause or to result
in, or that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any securities of the Fund to
facilitate the sale or resale of Shares, or (ii) (A) sell, bid for, purchase, or
pay anyone any compensation for soliciting purchases of, the Shares or (B) pay
or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Fund, except as contemplated by this
Agreement or the Fund's dividend reinvestment plan or as disclosed in writing to
the Dealer Manager.
5. Costs and Expenses.
------------------
(a) The Fund will pay all costs, expenses and fees incident to the
performance of its obligations under this Agreement, including, without limiting
the generality of the foregoing, the following: accounting fees of the Fund;
the fees and disbursements of counsel for the Fund; the cost of printing and
delivering to, as requested by, the Dealer Manager copies of the Registration
Statement and the Prospectus and SAI, and any
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<PAGE>
supplements or amendments thereto, this Agreement, the Soliciting Dealer
Agreement, any sales literature distributed to Soliciting Dealers or
shareholders, certificates for the Shares and subscription forms relating to the
exercise of Rights; the filing fees of the Commission; the filing fees and
expenses incident to securing any required review by the NASD of the terms of
the sale of the Shares; the listing fee of the American Stock Exchange, Inc.;
the expenses, including the fees and disbursements of counsel, incurred in
connection with the qualification of the Rights and the Shares under state
securities or "blue sky" laws and preparation of the Blue Sky Survey; and the
fees and expenses incurred pursuant to the Subscription Agent Agreement and the
Information Agent Agreement.
(b) In addition to any fees that may be payable to the Dealer Manager
under this Agreement, the Fund agrees to reimburse the Dealer Manager upon
request made from time to time for its reasonable expenses incurred in
connection with its activities under this Agreement in an amount up to $50,000.
(c) If this Agreement is cancelled by the Dealer Manager in accordance
with the provisions of Section 6 or is terminated by the Dealer Manager in
accordance with the provisions of Section 10(a)(iii), the Fund agrees to
reimburse the Dealer Manager for all of its reasonable out-of-pocket expenses
incurred in connection with its performance hereunder. In the event the
transactions contemplated hereunder are not consummated, the Fund agrees to pay
all of the costs and expenses set forth in paragraphs (a) and (b) of this
Section 5 which the Fund would have paid if such transactions had been
consummated.
6. Conditions of Obligations of the Dealer Manager. The obligations of
-----------------------------------------------
the Dealer Manager hereunder are subject to the accuracy of the representations
and warranties of the Fund and the Adviser contained herein, to the performance
by the Fund and the Adviser of their respective obligations hereunder, and to
the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Fund or the Adviser, shall be
contemplated by the Commission.
(b) The Dealer Manager shall have received on the date on which the Offer
commences (the "Commencement Date") the opinion of Piper & Marbury L.L.P.,
counsel for the Fund, dated the Commencement Date, addressed to the Dealer
Manager to the effect that:
(i) the Fund is a corporation duly incorporated and validly existing
in good standing under the laws of the State of Maryland, and has the
corporate power to own its properties and conduct its business as described
in the
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<PAGE>
Prospectus; and the Fund is qualified to transact business in all
jurisdictions in which the conduct of its business requires such
qualification, or in which failure to qualify would have a material adverse
effect upon the business of the Fund;
(ii) the Fund has authorized and outstanding capital stock as set
forth in the Prospectus; the outstanding shares of Common Stock and the
Rights have been duly authorized and the outstanding shares of Common Stock
have been validly issued and are fully paid and non-assessable; the Rights
and the Shares conform to the descriptions thereof contained in the
Prospectus; the certificates for the Shares are in due and proper form; the
Shares, including the Shares to be issued pursuant to the Over-Subscription
Privilege, have been duly authorized and will be validly issued, fully paid
and non-assessable when issued and paid for as contemplated by the terms of
the Offer; and no preemptive rights of stockholders exist with respect to
any of the Rights or the Shares or the issue and sale thereof;
(iii) the Registration Statement has become effective under the
Securities Act and, to the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Securities Act;
(iv) the Registration Statement and the Prospectus, the SAI and any
amendments or supplements thereto (other than the financial statements,
schedules and other financial information included therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Securities Act or the Investment
Company Act, as applicable, and the applicable rules and regulations
thereunder;
(v) the statements under the captions "Investment Objective and
Policies," "Dividend Reinvestment Plan," "Taxation," "Share Repurchases;
Conversion to Open-End Company" and "Description of Capital Stock" in the
Prospectus and "Investment Policies and Restrictions," "Dividend
Reinvestment Plan" and "Taxation" in the SAI to the extent that they
constitute matters of law or legal descriptions, are accurate, and fairly
and correctly present the information called for with respect to such
matters;
(vi) such counsel does not know of any contracts or documents required
to be filed as exhibits to the Registration Statement or described in the
Registration Statement, the Prospectus or the SAI which are not so filed or
described as required, and such contracts and documents as are summarized
in the Registration Statement, the Prospectus or the SAI are fairly
summarized in all material respects;
-14-
<PAGE>
(vii) such counsel knows of no material legal proceedings pending or
threatened against the Fund;
(viii) this Agreement has been duly authorized, executed and delivered
by the Fund;
(ix) the execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, the charter or bylaws of the Fund, or any
agreement or instrument known to such counsel to which the Fund is a party
or by which the Fund may be bound;
(x) no approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation by the Fund of the
transactions herein contemplated (other than as may be required by the NASD
or as required by state securities or "blue sky" laws as to which such
counsel need express no opinion) except such as have been obtained or made,
specifying the same;
(xi) the Fund Agreements have each been duly authorized and approved
by the Fund and comply with all applicable provisions of the Investment
Company Act and the Advisers Act, and the Fund Agreements have each been
duly executed and delivered by the Fund and constitute the valid and
binding agreements of the Fund enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws affecting
the rights of creditors generally and such principles of equity as a court
having jurisdiction may apply;
(xii) the execution and delivery of the Fund Agreements and
fulfillment of the terms thereof will not result in a breach or violation
of the terms and provisions of, or constitute a default under, any
agreement or instrument known to such counsel to which the Fund is a party
or of which its property is the subject nor will such action result in any
violation of the terms and provisions of the charter or bylaws of the Fund
or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Fund or any of its
properties; and
(xiii) the Fund is registered with the Commission under the Investment
Company Act as a closed-end, diversified management investment company, and
all required action has been taken by the Fund under the Securities Act,
the Investment Company Act and the Exchange Act to make the public offering
and
-15-
<PAGE>
consummate the sale of the Shares as contemplated by the Offer; and the
provisions of the charter and bylaws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act.
In rendering such opinion, Piper & Marbury L.L.P. may rely upon
certificates of officers of the Fund and of public officials as to matters of
fact, and may rely as to matters governed by the laws of states other than
Maryland or Federal laws on local counsel in such jurisdictions, provided that
in each case Piper & Marbury L.L.P. shall state that they believe that they and
the Dealer Manager are justified in relying on such other counsel.
In addition to the foregoing opinion, such counsel shall also advise the
Dealer Manager that, while they have not themselves checked the accuracy and
completeness of or otherwise verified, and are not passing upon and assume no
responsibility for the accuracy or completeness of, the statements contained in
the Registration Statement, the Prospectus and the SAI, except to the limited
extent stated in paragraphs (ii) and (v) above, in the course of their review
and discussion of the contents of the Registration Statement, the Prospectus and
the SAI with certain officers of the Fund and its independent accountants and
others, no facts have come to their attention which would cause them to believe
that the Registration Statement, at the time it became effective, or the
Prospectus and SAI, at the time they were filed with the Commission pursuant to
Rule 497(b) and (h) of the Rules and Regulations, or the Registration Statement,
the Prospectus and SAI, at the time they were first provided to the Dealer
Manager, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included therein
or excluded therefrom).
(c) The Dealer Manager shall have received on the Commencement Date the
opinion of James P. Shanahan, Jr., Executive Vice-President and General Counsel
of the Adviser, dated the Commencement Date, addressed to the Dealer Manager to
the effect that:
(i) the Adviser is a partnership duly organized and validly existing
in good standing under the laws of the State of Ohio and has the power to
own its properties and conduct its business as described in the Prospectus;
and the Adviser is qualified to transact business in all jurisdictions in
which the conduct of its business requires such qualification, or in which
the failure to qualify would have a material adverse effect upon its
business;
(ii) such counsel knows of no material legal proceedings pending or
threatened against the Adviser; such counsel knows of no material legal
-16-
<PAGE>
proceedings pending or threatened against any affiliate of the Adviser
which are required to be disclosed in the Prospectus;
(iii) this Agreement has been duly authorized, executed and delivered
by the Adviser;
(iv) the Adviser is registered with the Commission as an investment
adviser under the Advisers Act and is not prohibited by the Advisers Act or
the Investment Company Act, or the rules and regulations under such acts,
from acting as investment adviser to the Fund as contemplated by the
Advisory Agreement;
(v) the Advisory Agreement has been duly authorized, executed and
delivered on behalf of the Adviser and constitutes a valid and binding
agreement of the Adviser enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws affecting the rights of creditors
generally and such principles of equity as a court having jurisdiction may
apply; and
(vi) the execution and delivery by the Adviser of this Agreement or
Advisory Agreement and the performance by the Adviser of its obligations
thereunder or hereunder will not result in a breach or violation of the
terms and provisions of, or constitute a default under, any agreement or
instrument known to such counsel to which the Adviser is a party or of
which its property is the subject nor will such action result in any
violation of the provisions of the partnership agreement of the Adviser or
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Adviser or any of its
properties.
In rendering such opinion, Mr. Shanahan may rely upon certificates of
officers of the Adviser and of public officials as to matters of fact, and may
rely as to matters governed by the laws of states other than Ohio or Federal
laws on local counsel in such jurisdictions, provided that in each case he shall
state that he believes that he and the Dealer Manager are justified in relying
on such other counsel.
(d) The Dealer Manager shall have received from James P. Shanahan, Jr.,
Executive Vice-President and General Counsel of the Dealer Manager, an opinion
dated the Commencement Date with respect to the organization and existence of
the Fund, the validity of the Rights and Shares and other matters as the Dealer
Manager may reasonably request. In rendering such opinion, Mr. Shanahan may
rely as to all matters governed by the laws of the State of Maryland on the
opinion of Piper & Marbury L.L.P. delivered to the Dealer Manager on the
Commencement Date. In addition, such opinion shall also include a statement to
the effect that nothing has come to the attention of such
-17-
<PAGE>
counsel which leads him to believe that the Registration Statement, the
Prospectus or the SAI contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading (except that such counsel need express no view
as to financial statements, schedules and other financial information included
therein or excluded therefrom). With respect to such statement, Mr. Shanahan may
state that his belief is based upon the procedures set forth therein, but is
without independent check and verification.
(e) The Dealer Manager shall have received at or prior to the Commencement
Date from Piper & Marbury L.L.P. a memorandum or summary, in form and substance
satisfactory to the Dealer Manager, with respect to the qualification for
offering and sale by the Fund of the Rights and Shares under the state
securities or "blue sky" laws of such jurisdictions as the Dealer Manager may
reasonably have designated to the Fund.
(f) The Dealer Manager shall have received on the Commencement Date a
signed letter from Deloitte & Touche LLP, dated the Commencement Date, in form
and substance satisfactory to the Dealer Manager, to the effect that:
(i) they are independent accountants with respect to the Fund under
Rule 101 of the AICPA's Code of Professional Conduct, and its
interpretations and rulings within the meaning of the Securities Act and
the Rules and Regulations;
(ii) they have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
statements of the Fund, a reading of the minute books of the Fund,
inquiries of officials of the Fund responsible for financial accounting
matters and such other inquiries and procedures as may be specified in such
letter, and on the basis of such inquiries and procedures nothing came to
their attention that caused them to believe that at the date of the latest
available financial statements read by such accountants, or at a subsequent
specified date not more than five business days prior to the Commencement
Date, there was any change in the capital stock or net assets of the Fund
as compared with amounts shown on the audited financial statements and the
unaudited interim report as of June 30, 1996, included in the Prospectus
except as set forth in the letter.
(g) The Dealer Manager shall have received on the Commencement Date a
certificate or certificates of the Chairman of the Board or President of the
Fund and the Adviser and the Vice-President and Secretary or an Assistant
Vice-President and Assistant Secretary of the Fund and the Adviser to the effect
that, as of the Commencement Date, each of them severally represents as follows:
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(i) The Registration Statement has become effective under the
Securities Act, and no order suspending the effectiveness of the
Registration Statement or under Section 8(e) of the Investment Company Act
has been issued, and no proceedings for such purpose have been taken or
are, to his knowledge, contemplated by the Commission.
(ii) He does not know of any litigation instituted or threatened
against the Fund or the Adviser of a character required to be disclosed in
the Registration Statement which is not so disclosed; he does not know of
any material contract required to be filed as an exhibit to the
Registration Statement which is not so filed; and the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof are
true and correct as of the Commencement Date.
(iii) He has carefully examined the Registration Statement, the
Prospectus and the SAI and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement, the Prospectus and the SAI were true and correct, and such
Registration Statement, Prospectus and SAI did not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading and, in his opinion, since the effective
date of the Registration Statement, no event has occurred which should have
been set forth in a supplement to or an amendment of the Prospectus or the
SAI which has not been so set forth in such supplement or amendment.
(h) The Fund and the Adviser shall have furnished to the Dealer Manager
such further certificates and documents confirming the representations and
warranties contained herein and related matters as the Dealer Manager may
reasonably have requested.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Dealer Manager and to James P. Shanahan, Jr.,
Executive Vice-President and General Counsel of the Dealer Manager.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Dealer Manager and its counsel, this Agreement and all
obligations of the Dealer Manager hereunder may be cancelled by the Dealer
Manager by notifying the Fund of such cancellation in writing or by telegram at
or prior to the Commencement Date.
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<PAGE>
In such event, the Adviser, the Fund and the Dealer Manager shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. Conditions of the Obligations of the Fund.
-----------------------------------------
The obligations of the Fund under this Agreement are subject to the
condition that at the Closing Date no stop order suspending the effectiveness of
the Registration Statement or order under Section 8(e) of the Investment Company
Act shall have been issued and in effect or proceedings therefor initiated or
threatened.
8. Indemnification.
----------------
(a) The Fund and the Adviser, jointly and severally, agree to indemnify
and hold harmless the Dealer Manager and each person, if any, who controls the
Dealer Manager within the meaning of the Securities Act against any losses,
claims, damages or liabilities to which the Dealer Manager or such controlling
person may become subject under the Securities Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (x) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, any Preliminary SAI, the Prospectus, the
SAI, or any amendment or supplement thereto, (y) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (z) the Fund or the
Adviser not complying with the Securities Act, the Exchange Act, the Investment
Company Act, the Advisers Act, or other applicable United States securities laws
and regulations; and will reimburse the Dealer Manager and each such controlling
person for any legal or other expenses reasonably incurred by the Dealer Manager
or such controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided, however,
that the Fund and the Adviser will not be liable in any case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement, or alleged untrue statement, or omission or alleged omission,
made in the Registration Statement, any Preliminary Prospectus, any Preliminary
SAI, the Prospectus, the SAI, or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Fund by or through
the Dealer Manager specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Fund or the
Adviser may otherwise have.
(b) The Dealer Manager will indemnify and hold harmless the Fund, each of
its directors, each of its officers who have signed the Registration Statement,
the Adviser and each person, if any, who controls the Fund or the Adviser within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities to which the Fund, the Adviser or any such director, officer or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or
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<PAGE>
actions or proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, any Preliminary SAI, the
Prospectus, the SAI, or any amendment or supplement thereto, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Fund, the
Adviser or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability action or
proceeding; provided, however, that the Dealer Manager will be liable in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, any Preliminary SAI, the
Prospectus, the SAI, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Fund by the Dealer Manager
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Dealer Manager may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or otherwise
than on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred the fees and expenses of the counsel
retained by the indemnified party in the event (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same
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<PAGE>
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm for all such indemnified parties. Such firm shall be designated in
writing by the Dealer Manager in the case of parties indemnified pursuant to
Section 8(a) and by the Fund and the Adviser in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
(d) In no case shall the indemnification provided for in this Section 8 be
available to protect any person against any liability to which such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its or his duties, or by reason of its or his
reckless disregard of its or his obligations and duties under this Agreement.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Fund and the Adviser on the one hand and
the Dealer Manager on the other from the Offer. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
Section 8(c) above, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Fund and the Adviser on the one hand and the Dealer Manager on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Fund and the Adviser on the one hand and the Dealer Manager on
the other hand shall be deemed to be in the same proportion as the total net
proceeds from the Offer (before deducting expenses) received by the Fund and the
Adviser bear to the fee received by the Dealer Manager pursuant to Section 3(a)
hereof. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Fund or the Adviser on the one hand or the Dealer Manager on the
other and the parties relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Fund, the Adviser and the Dealer Manager agree that it would not be
just and equitable if contributions pursuant to this paragraph (e) were
determined by pro rata
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<PAGE>
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above to this paragraph (e). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this paragraph (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this paragraph (e), (i) the Dealer Manager shall not be required
to contribute any amount in excess of the fee received pursuant to Section 3(a)
hereof, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(f) In any proceeding relating to the Registration Statement, the
Prospectus, the SAI, or any supplement or amendment thereto, each party against
whom contribution may be sought under this Section 8 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing party,
agrees that process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional defendant
in any such proceeding in which such other contributing party is a party.
(g) The Fund and the Adviser agree to indemnify each Soliciting Dealer and
its controlling persons to the same extent and subject to the same conditions
and to the same agreements, including with respect to contribution, provided for
in paragraphs (a), (b), (c), (d) and (e) of this Section 8.
9. Notices. All communications hereunder shall be in writing and, except
--------
as otherwise provided herein, shall be mailed, delivered or telegraphed and
confirmed as follows: if to the Dealer Manager, to Winton Associates, Inc.,
Bank One Towers, 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236; if to
the Fund or the Adviser, to USF&G Pacholder Fund, Inc. or Pacholder & Company,
as applicable, Bank One Towers, East Tower, 8044 Montgomery Road, Suite 382,
Cincinnati, Ohio 45236.
10. Termination.
-----------
(a) This Agreement shall be subject to termination in the absolute
discretion of the Dealer Manager, by notice given to the Fund prior to the
Expiration Date, if prior to such time (i) financial, political, economic,
currency or banking conditions in the United States shall have undergone any
material change the effect of which on the financial markets makes it, in the
Dealer Manager's reasonable judgment,
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<PAGE>
impracticable to proceed with the Offer, (ii) there has occurred any outbreak or
material escalation of hostilities or other calamity or crisis the effect of
which on the financial markets of the United States is such as to make it, in
the Dealer Manager's reasonable judgment, impracticable to proceed with the
Offer, (iii) trading in the shares of Common Stock shall have been suspended by
the Commission or the American Stock Exchange, Inc., (iv) trading in securities
generally on the New York Stock Exchange, Inc. or the American Stock Exchange,
Inc. shall have been suspended or limited or minimum prices that, as of the date
hereof, do not already exist, shall have been established on such exchanges, or
(v) a banking moratorium shall have been declared either by Federal or New York
State authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 5.
11. Successors. This Agreement has been and is made solely for the
----------
benefit of the Dealer Manager, the Fund and the Adviser and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares merely because of such purchase.
12. Survival of Representations, Warranties and Agreements. The respective
-------------------------------------------------------
agreements, representations, warranties, indemnities and other statements of the
Fund or its officers, of the Adviser or its officers and of the Dealer Manager
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any (a) cancellation or termination of this Agreement, (b)
any investigation made by or on behalf of Dealer Manager, the Fund or the
Adviser or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and (c) delivery of and payment for the Shares pursuant to the
Offer.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Ohio.
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<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
it will become a binding agreement among the Fund, the Adviser and the Dealer
Manager in accordance with its terms.
Very truly yours,
USF&G PACHOLDER FUND, INC.
By:
--------------------------------
PACHOLDER & COMPANY
By: PACHOLDER ASSOCIATES, INC.
General Partner
By:
--------------------------------
Confirmed and Accepted,
as of the date first above written:
WINTON ASSOCIATES, INC.
as Dealer Manager
By:
-------------------------------
James P. Shanahan, Jr.
Executive Vice-President and
General Counsel
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<PAGE>
EXHIBITS
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Exhibit A - Form of Soliciting Dealer Agreement
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<PAGE>
USF&G PACHOLDER FUND, INC.
Rights Dealer for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON FEBRUARY 20, 1997,
UNLESS EXTENDED (THE EXPIRATION DATE)
To Securities Dealers and Brokers:
USF&G Pacholder Fund, Inc. (the "Fund") is issuing to holders of its common
stock, par value $.01 per share (the "Common Stock"), of record ("Record Date
Shareholders") as of the close of business on January 24, 1997 (the "Record
Date"), non-transferable rights ("Rights") to subscribe for an aggregate of
1,663,880 shares (the "Shares") of Common Stock of the Fund upon the terms and
subject to the conditions set forth in the Fund's Prospectus (the "Prospectus")
dated January ___, 1997 (the "Offer"). Each Record Date Shareholder is being
issued one Right for each full share of Common Stock owned on the Record Date.
The Rights entitle the shareholders, during the Subscription Period (as
hereinafter defined) to acquire at the Subscription Price (as hereinafter
defined), one Share for each three Rights held in the Primary Subscription (the
"Primary Subscription"). No Rights will be issued for fractional shares. The
subscription price per Share (the "Subscription Price") will be equal to 90% of
the net asset value of a share of the Fund's Common Stock on the Expiration Date
(as defined below). The Subscription Period commences on January 27, 1997 and
ends at 5:00 p.m., New York City time, on February 20, 1997. (With respect to
the Offer, the term "Expiration Date" means 5:00 p.m., New York City time, on
February 20, 1997, unless and until the Fund shall, in its sole discretion, have
extended the period for which the Offer is open, in which event the term
"Expiration Date" with respect to the Offer will mean the latest time and date
on which the Offer, as so extended by the Fund, will expire.) Any shareholder
who fully exercises all Rights held by him (other than those Rights that cannot
be exercised because they represent the right to acquire less than one Share) is
entitled to subscribe for additional Shares (the "Over-Subscription Privilege").
Pursuant to the Over-Subscription Privilege, the Fund may, at the discretion of
the Board of Directors, increase the number of Shares subject to subscription by
up to 25%. Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, which is more fully discussed in the Prospectus.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Prospectus.
For the duration of the Offer, the Fund has agreed to pay Soliciting Dealer
Fees to any qualified broker or dealer executing a Soliciting Dealer Agreement
who solicits the exercise of Rights in connection with the Offer and who
complies with the procedures described below (a "Soliciting Dealer"). Upon
timely delivery to State Street Bank and Trust Company, the Fund's
<PAGE>
Subscription Agent for the Offer, of payment for Shares purchased pursuant to
the exercise of Rights and of properly completed and executed documentation as
set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be
entitled to receive a Soliciting Dealer Fees equal to an amount computed by
multiplying (i) .020 (2.0%) by (ii) the Subscription Price by (iii) (A) the
aggregate number of Shares purchased pursuant to subscription forms on which the
Soliciting Dealer is designated by name as having solicited the exercise of such
Rights plus (B) Shares purchased pursuant to the Offer through the Soliciting
Dealer by beneficial owners of the Fund's Common Stock on whose behalf the
Soliciting Dealer acts as nominee, either directly or through The Depository
Trust Company ("DTC") or any other applicable depository, as listed in the
Appendix to this Soliciting Dealer Agreement. In no event shall the number in
(iii) (B) above exceed, as applicable, the number of Shares reported as
purchased by beneficial shareholders through the Soliciting Dealer by DTC, or
any other applicable depository, or the number of Shares the Soliciting Dealer
is entitled to purchase as a record shareholder (excluding in either case shares
held for its own account). If more than one Soliciting Dealer is identified as
having solicited the exercise of identical Rights, the fee described above shall
be shared equally by all such Soliciting Dealers.
A qualified broker or dealer is a broker or dealer which is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is qualified to act as a dealer in each jurisdiction in which
it solicits the exercise of Rights and is a member of a registered national
securities exchange in the United States or the National Association of
Securities Dealers, Inc. ("NASD") or is a foreign broker or dealer not eligible
for membership which agrees to conform to the Conduct Rules of the NASD,
including Sections 2730, 2740, 2420 and 2750 thereof, in making solicitations in
the United States to the same extent as if it were a member thereof.
The Fund hereby agrees to pay the Soliciting Dealer Fees payable to the
undersigned Soliciting Dealers and to indemnify each Soliciting Dealer against
all losses, claims, damages and liabilities to which each Soliciting Dealer may
become subject as a result of (a) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus, as amended or
supplemented from time to time, or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (b) any actions taken or omitted to be taken in
connection with the performance by such Soliciting Dealer of its service as a
Soliciting Dealer pursuant hereto, except to the extent any such loss, claim,
damage or liability results from the negligence, willful misconduct or bad faith
of such Soliciting Dealer in performing its services as a Soliciting Dealer or
as a result of any breach by such Soliciting Dealer of its obligations herein.
Solicitation and other activities by Soliciting Dealers may be undertaken only
in accordance with the applicable rules and regulations of the Securities and
Exchange Commission (the "SEC") and the NASD and only in those states and other
jurisdictions where such solicitations and other activities may lawfully be
undertaken and in accordance with the laws thereof. Soliciting Dealers recognize
that persons associated with the Soliciting Dealers who are licensed only to
engage in activities in connection with investment company securities and
variable contract products may not solicit the exercise of Rights in
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<PAGE>
connection with the Offer. Soliciting Dealers represent and agree that persons
associated with the Soliciting Dealers that are duly qualified with a national
securities exchange or the NASD will solicit the exercise of the rights in
connection with the Offer. Compensation will not be paid for solicitations in
any state or other jurisdiction in which in the opinion of counsel to the Fund
or counsel to the Dealer Manager, such compensation may not lawfully be paid. No
Soliciting Dealer shall be paid Soliciting Dealer Fees with respect to Shares
purchased pursuant to an exercise of Rights for its own account or for the
account of any affiliate of the Soliciting Dealer. No Soliciting Dealer or any
other person is authorized by the Fund or the Dealer Manager to give any
information or make any representations in connection with the Offer other than
those contained in the Prospectus and other authorized solicitation material
furnished by the Fund through the Dealer Manager. No Soliciting Dealer is
authorized to act as agent of the Fund or the Dealer Manager in any connection
or transaction. In addition, nothing herein contained shall constitute the
Soliciting Dealers partners with the Dealer Manager or with one another, or
agents of the Dealer Manager or of the Fund, or create any association between
such parties, or shall render the Dealer Manager or the Fund liable for the
obligations of any Soliciting Dealer. The Dealer Manager shall be under no
liability to make any payment to any Soliciting Dealer, and shall be subject to
no other liabilities to any Soliciting Dealer, and no obligations of any sort
shall be implied.
In order for a Soliciting Dealer to receive Soliciting Dealer Fees, the
Subscription Agent must have received from such Soliciting Dealer, no later than
5:00 p.m., New York City time, on the Expiration Date, a properly completed and
duly executed Soliciting Dealer Agreement (or a facsimile thereof), and, as
applicable, (i) properly completed and duly executed Subscription Certificates
with respect to Shares purchased pursuant to the exercise of Rights, on which
the Soliciting Dealer is designated by name as having solicited the exercise of
such Rights, and full payment for such Shares; or (ii) a Notice of Guaranteed
Delivery guaranteeing delivery to the Subscription Agent by close of business on
the third American Stock Exchange trading day after the Expiration Date, of
properly completed and duly executed Subscription Certificates with respect to
Shares purchased pursuant to the exercise of Rights, on which the Soliciting
Dealer is designated by name as having solicited the exercise of such Rights,
and full payment for such Shares. In the case of a Notice of Guaranteed
Delivery, Soliciting Dealer Fees will only be paid after payment and delivery in
accordance with such Notice of Guaranteed Delivery have been effected.
All questions as to the form and validity (including time of receipt) of
the Soliciting Dealer Agreement and eligibility for Soliciting Dealer Fees
thereunder or otherwise will be determined by the Fund, in its sole discretion,
which determination shall be final and binding. Unless waived, any
irregularities in connection with a Soliciting Dealer Agreement or delivery
thereof must be cured within such time as the Fund shall determine. None of the
Fund, the Dealer Manager, the Subscription Agent, the Information Agent for the
Offer (Shareholder Communications Corporation) or any other person will be under
any duty to give notification of any defects or irregularities in any Soliciting
Dealer Agreement or incur any liability for failure to give such notification.
-3-
<PAGE>
The execution of this Soliciting Dealer Agreement and the acceptance of
Soliciting Dealer Fees from the Fund by a Soliciting Dealer shall constitute a
representation by such Soliciting Dealer to the Fund that: (i) it has received
and reviewed the Prospectus; (ii) in soliciting purchase of Shares pursuant to
the exercise of the Rights, it has complied with the requirements of the
Securities Act of 1933, as amended, the Exchange Act, the applicable rules and
regulations thereunder, any applicable securities laws of any state or
jurisdiction where such solicitations may lawfully be made, and the applicable
rules and regulations of any self-regulatory organization or registered national
securities exchange; (iii) in soliciting purchase of Shares pursuant to the
exercise of the Rights, it has not published, circulated or used any soliciting
materials other than the Prospectus and any other authorized solicitation
material furnished by the Fund through the Dealer Manager; (iv) it has not
purported to act as agent of the Fund or the Dealer Manager in any connection or
transaction relating to the Offer; (v) the information contained in this
Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vi)
it is not affiliated with the Fund; (vii) it will not accept Soliciting Dealer
Fees paid by the Fund pursuant to the terms hereof with respect to Shares
purchased by the Soliciting Dealer pursuant to an exercise of Rights for its own
account; (viii) it will not remit, directly or indirectly, any part of
Soliciting Dealer Fees paid by the Fund pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
agreed to the amount of the Soliciting Dealer Fees and the terms and conditions
set forth herein with respect to receiving such Soliciting Dealer Fees. By
executing and returning a Soliciting Dealer Agreement and accepting Soliciting
Dealer Fees, a Soliciting Dealer will be deemed to have agreed to indemnify the
Fund against losses, claims, damages and liabilities to which the Fund may
become subject a a result of the breach of such Soliciting Dealer's
representations made herein and described above. In making the foregoing
representations, Soliciting Dealers are reminded of the possible applicability
of Rule 10b-6 under the Exchange Act if they have bought, sold, dealt in or
traded in any Shares for their own account since the commencement of the Offer.
Soliciting Dealer Fees due to eligible Soliciting Dealers will be paid
promptly after consummation of the Offer. No Soliciting Dealer Fees will be
payable to Soliciting Dealers with respect to Shares purchased after the
expiration of the Offer.
This Soliciting Dealer Agreement will be governed by the laws of the State
of Ohio, without reference to the choice of law principles thereof.
Please list in the Appendix attached hereto and forming part of this
Soliciting Dealer Agreement the number of Shares purchased pursuant to exercise
of the Rights by each beneficial owner whose purchases pursuant to the exercise
of Rights you, as a Soliciting Dealer, have solicited. All amounts beneficially
owned by a beneficial owner, whether in one account or several, and in however
many capacities, must be aggregated for purposes of completing the table in the
Appendix hereto. Any questions as to what constitutes beneficial ownership
should be directed to the Fund. The number of shares not listed in the Appendix
for reasons of inadequate space should be listed in a separate schedule attached
to, and forming part of, this Soliciting Dealer Agreement.
-4-
<PAGE>
Please execute this Soliciting Dealer Agreement below, accepting the terms
and conditions hereof and confirming that you are (i) registered as a broker-
dealer under the Exchange Act, (ii) qualified to act as a dealer in each
jurisdiction in which you have solicited the exercise of Rights and (iii) a
member firm of a registered national securities exchange or of the NASD or a
foreign broker or dealer not eligible for membership who has conformed to the
Conduct Rules of the NASD, including Sections 2730, 2740, 2420 and 2750 thereof,
in making solicitations of the type being undertaken pursuant to the Offer in
the United States to the same extent as if you were a member thereof; and
certifying that you have solicited the purchase of the Shares pursuant to
exercise of the Rights, all as described above, in accordance with the terms and
conditions set forth in this Soliciting Dealer Agreement.
Very truly yours,
USF&G PACHOLDER FUND, INC.
By:
-------------------------------
Name:
Title:
-5-
<PAGE>
ACCEPTED AND CONFIRMED
- ---------------------------------- ----------------------------------------
Printed Firm Name Address
- ---------------------------------- ----------------------------------------
Authorized Signature Area Code and Telephone Number
- ---------------------------------- ----------------------------------------
Name and Title DTC Participation Number (if applicable)
Dated:
----------------------
Payment of Soliciting Dealer Fees shall
be wired to the following account:
Account Number:
-------------------
Name of Bank or other
Recipient Institution:
------------------
Additional Account
Information:
----------------------------
--------------------------
All soliciting dealer agreements should be returned to State Street Bank
and Trust Company by facsimile at (617) 794-6333. Facsimile transmissions may
be confirmed by calling (617) 794-6388.
All questions concerning soliciting dealer agreements should be directed to
Shareholder Communications Corporation, toll free at (800) 733-8481, Ext. 351,
or call collect (212) 805-7000.
-6-
<PAGE>
APPENDIX TO SOLICITING DEALER AGREEMENT
TO BE COMPLETED BY THE SOLICITING DEALER
- --------------------------------------------------------------------------------
.Beneficial Owners Number of Shares Purchased
- --------------------------------------------------------------------------------
Beneficial Owner No. 1
- --------------------------------------------------------------------------------
Beneficial Owner No. 2
- --------------------------------------------------------------------------------
Beneficial Owner No. 3
- --------------------------------------------------------------------------------
Beneficial Owner No. 4
- --------------------------------------------------------------------------------
Beneficial Owner No. 5
- --------------------------------------------------------------------------------
Beneficial Owner No. 6
- --------------------------------------------------------------------------------
Beneficial Owner No. 7
- --------------------------------------------------------------------------------
Beneficial Owner No. 8
- --------------------------------------------------------------------------------
Beneficial Owner No. 9
- --------------------------------------------------------------------------------
Beneficial Owner No. 10
- --------------------------------------------------------------------------------
Beneficial Owner No. 11
- --------------------------------------------------------------------------------
Beneficial Owner No. 12
- --------------------------------------------------------------------------------
Beneficial Owner No. 13
- --------------------------------------------------------------------------------
Beneficial Owner No. 14
- --------------------------------------------------------------------------------
Beneficial Owner No. 15
- --------------------------------------------------------------------------------
Beneficial Owner No. 16
- --------------------------------------------------------------------------------
Beneficial Owner No. 17
- --------------------------------------------------------------------------------
Beneficial Owner No. 18
- --------------------------------------------------------------------------------
Beneficial Owner No. 19
- --------------------------------------------------------------------------------
Beneficial Owner No. 20
- --------------------------------------------------------------------------------
Beneficial Owner No. 21
- --------------------------------------------------------------------------------
Beneficial Owner No. 22
- --------------------------------------------------------------------------------
Beneficial Owner No. 23
- --------------------------------------------------------------------------------
Beneficial Owner No. 24
- --------------------------------------------------------------------------------
Beneficial Owner No. 25
- --------------------------------------------------------------------------------
TOTAL:
- --------------------------------------------------------------------------------
<PAGE>
CUSTODY AGREEMENT
between
USF&G Pacholder Fund, Inc.
and
Star Bank, N.A.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article I Certain Definitions............................................ 1
1.1 Authorized Person........................................ 1
1.2 Board of Trustees........................................ 1
1.3 Business day............................................. 1
1.4 CFTC..................................................... 1
1.5 Custody Account.......................................... 1
1.6 DTC...................................................... 1
1.7 NASD..................................................... 2
1.8 OCC...................................................... 2
1.9 Officer.................................................. 2
1.10 Proper Instructions...................................... 2
1.11 SEC...................................................... 2
1.12 Securities............................................... 2
1.13 Securities System........................................ 2
1.14 Shares................................................... 3
Article II Appointment of Custodian....................................... 3
2.1 Appointment.............................................. 3
2.2 Acceptance............................................... 3
Article III Custody of Cash Securities..................................... 3
3.1 Segregation.............................................. 3
3.2 Custody Accounts......................................... 3
3.3 Appointment of Sub-Custodians............................ 3
3.4 Appointment of Agents.................................... 4
3.5 Delivery of Assets to Custodian.......................... 4
3.6 Securities Systems....................................... 4
3.7 Collection of Income..................................... 5
3.8 Disbursement of Moneys from Custody Account.............. 6
3.9 Delivery of Securities from Custody Account.............. 7
3.10 Bank Accounts............................................ 9
3.11 Payments for Shares...................................... 9
3.12 Availability of Federal Funds........................... 9
3.13 Actions Not Requiring Proper Instructions................ 9
3.14 Ownership Certificates for Tax Purposes.................. 10
3.15 Registration and Transfer of Securities.................. 10
3.16 Records.................................................. 10
3.17 Portfolio Reports by Custodian........................... 11
3.18 Other Reports by Custodian............................... 11
<PAGE>
Page
----
3.19 Proxies and Other Materials............................... 11
3.20 Information on Corporate Actions.......................... 11
Article IV Purchase and Sale of Portfolio Investments...................... 11
4.1 Purchase of Securities.................................... 11
4.2 Liability for Payment in Advance of Receipt
of Securities Purchased................................ 12
4.3 Sale of Securities........................................ 12
4.4 Payment for Securities Sold............................... 12
4.5 Advances by Custodian for Settlement...................... 12
Article V Redemption of Shares............................................ 13
5.1 Transfer of Funds......................................... 13
5.2 No Duty Regarding Paying Banks............................ 13
Article VI Segregated Accounts............................................. 13
Article VII Concerning the Custodian........................................ 14
7.1 Standard of Care.......................................... 14
7.2 No Responsibility for Title............................... 14
7.3 Reliance Upon Documents and Instructions.................. 14
7.4 Express Duties Only....................................... 14
7.5 Cooperation............................................... 14
7.6 Force Majeure............................................. 14
Article VIII Indemnification................................................. 15
8.1 Indemnification........................................... 15
8.2 Indemnity to be Provided.................................. 15
Article IX Effective Period; Termination................................... 15
9.1 Effective Period.......................................... 15
9.2 Termination............................................... 15
9.3 Successor Custodian....................................... 15
9.4 Continuing Obligations.................................... 16
Article X Compensation of Custodian....................................... 16
Article XI Notices......................................................... 16
-ii-
<PAGE>
Page
----
Article XII Miscellaneous............................................... 17
12.1 Governing Law......................................... 17
12.2 References to Custodian............................... 17
12.3 No Waiver............................................. 17
12.4 Amendments............................................ 18
12.5 Counterparts.......................................... 18
12.6 Severability.......................................... 18
12.7 Successors and Assigns................................ 18
12.8 Headings.............................................. 18
-iii-
<PAGE>
CUSTODY AGREEMENT
-----------------
This Agreement is dated as of May 1, 1996, by and between USF&G Pacholder
Fund, Inc., a Maryland corporation (the "Fund"), and Star Bank, N.A., a national
banking association chartered under the laws of the United States (the
"Custodian").
W I T N E S S E T H:
WHEREAS, the Fund is an closed-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund desires to retain the Custodian to serve as custodian for
the Fund, and the Custodian is willing to furnish such services;
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
-------------------
Whenever used in this Agreement the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
1.1 "Authorized Person" means any officer of the Fund or other person duly
-----------------
authorized by resolution of the Board of Directors to give Proper Instructions
on behalf of the Fund and named in Exhibit A hereto or in such resolutions of
the Board of Directors, certified by an officer of the Fund, as may be received
by the Custodian from time to time. The Fund will provide the Custodian with
authenticated specimen signatures of each Authorized Person.
1.2 "Board of Directors" means the directors from time to time serving in
------------------
office pursuant to the charter and bylaws of the Fund.
1.3 "Business day" means any day recognized as a settlement day by the New
------------
York Stock Exchange, Inc. and any other day for which the Fund computes the net
asset value of its shares of common stock.
1.4 "CFTC" means the U.S. Commodity Futures Trading Commission.
----
1.5 "Custody Account" means the account in the name of Fund which is
---------------
provided for in Section 3.2.
1.6 "DTC" means the Depository Trust Company.
---
<PAGE>
1.7 "NASD" means the National Association of Securities Dealers, Inc.
----
1.8 "OCC" means The Options Clearing Corporation.
---
1.9 "Officer" of the Fund means the Chairman, President, any Vice-
-------
President, the Secretary, any Assistant Secretary, the Treasurer, or any
Assistant Treasurer of the Fund.
1.10 "Proper Instructions" means:
-------------------
(i) a writing (including, without limitation, a facsimile
transmission or tested telex) constituting a request, direction,
instruction or certification signed or initiated by or on behalf of the
Fund by one or more Authorized Persons or reasonably believed by the
Custodian to have been signed by such Authorized Persons;
(ii) a telephone or other oral communication by one or more
Authorized Persons or reasonably believed by the Custodian to have been
communicated by such Authorized Persons; or
(iii) communications transmitted electronically through the
Institutional Delivery System (IDS), or any other similar electronic
instruction system acceptable to the Custodian and approved by resolution
of the Board of Directors, a copy of which, certified by an officer of the
Fund, shall have been delivered to the Custodian.
The Fund shall cause all Proper Instructions in the form of oral
communications to be promptly confirmed in writing, as specified in clause (i)
of this Section 1.10. In the event that an oral communication is not so
confirmed, or in the event that a written confirmation differs from the related
oral communication, the Fund will hold the Custodian harmless and without
liability for any claims or losses in connection with such oral communication.
Proper Instructions may be in the form of standing instructions. In respect of
trades reported on the Fund's behalf through DTC, instructions from DTC (whether
in a DTC report or otherwise) shall constitute Proper Instructions.
1.11 "SEC" means the U.S. Securities and Exchange Commission.
---
1.12 "Securities" include, without limitation, common and preferred
----------
stocks, bonds, call options, put options, debentures, notes, bank certificates
of deposit, bankers' acceptances, mortgage-backed securities, other money market
instruments or other obligations, and any certificates, receipts, warrants or
other instruments or documents representing rights to receive, purchase or
subscribe for the same, or evidencing or representing any other rights or
interests therein, or any similar property or assets that the Custodian has the
facilities to clear and to service.
1.13 "Securities System" means (i) any clearing agency registered with the
-----------------
SEC under Section 17A of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), which acts as a system for the central handling of securities where
all securities of any particular class or series
-2-
<PAGE>
of an issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of the
Securities; and (ii) the book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O.
1.14 "Shares" means the shares of capital stock issued by the Fund.
------
ARTICLE II
APPOINTMENT OF CUSTODIAN
------------------------
2.1 Appointment. The Fund hereby constitutes and appoints the Custodian
-----------
as custodian of the assets of the Fund for the term and subject to the
provisions of this Agreement.
2.2 Acceptance. The Custodian hereby accepts appointment as such
----------
custodian and agrees to perform the duties thereof as hereinafter set forth. In
performing the services to be provided to the Fund hereunder, the Custodian
agrees to comply with all relevant provisions of the 1940 Act and the
regulations promulgated thereunder.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
------------------------------
3.1 Segregation. All securities and non-cash property held by the
-----------
Custodian for the account of the Fund, except securities maintained in a
Securities System pursuant to Section 3.6, shall be physically segregated from
other securities and non-cash property in the possession of the Custodian and
shall be identified as subject to this Agreement.
3.2 Custody Account. The Custodian shall open and maintain in its trust
---------------
department a custody account in the name of the Fund, subject only to draft or
order of the Custodian, in which the Custodian shall enter and carry all
securities, cash and other assets of the Fund which are delivered to it.
3.3 Appointment of Sub-Custodians. In its discretion, the Custodian may
-----------------------------
appoint, and at any time remove, any bank or trust company which has been
approved by the Board of Directors and is qualified to act as a custodian under
the 1940 Act, as sub-custodian, to hold securities and cash of the Fund and to
carry out such other provisions of this Agreement as it may determine, and may
also open and maintain one or more banking accounts with such a bank or trust
company (any such accounts to be in the name of the Custodian on behalf of its
customers and subject only to its draft or order pursuant to the terms of this
Agreement); provided, however, that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of such sub-custodian so employed than any such sub-custodian has to the
Custodian.
-3-
<PAGE>
3.4 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the 1940 Act to act as a custodian, as its agent
to carry out such of the provisions of this Agreement as the Custodian may from
time to time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.5 Delivery of Assets to Custodian. The Fund shall deliver, or cause to
-------------------------------
be delivered, to the Custodian all securities, cash and other assets of the Fund
other than securities, cash or other assets to be delivered to any sub-custodian
appointed pursuant to Section 3.3, including (i) all payments of income,
payments of principal or capital distributions received by the Fund with respect
to such securities, cash or other assets owned by the Fund at any time during
the period of this Agreement, and (ii) all cash received by the Fund for the
issuance, at any time during such period, of its Shares. The Custodian shall
not be responsible for such securities, cash or other assets until actually
received by it.
3.6 Securities Systems. The Custodian may deposit and/or maintain
------------------
securities of the Fund in a Securities System, subject to the following
provisions:
(a) Prior to a deposit of securities of the Fund in a particular
Securities System, the Fund shall deliver to the Custodian a
resolution of the Board of Directors, certified by an officer of the
Fund, specifically approving the use of such Securities System as a
depository for the Fund and authorizing and instructing the Custodian
on an ongoing basis to deposit in such Securities System all
securities eligible for deposit therein and to make use of such
Securities System to the extent possible and practical in connection
with its performance hereunder, including, without limitation, in
connection with settlements of purchases and sales of securities,
loans of securities, and deliveries and returns of collateral
consisting of securities.
(b) Securities of the Fund kept in a Securities System shall be kept in an
account (the "Depository Account") of the Custodian in such Securities
System which includes only assets held by the Custodian as a
fiduciary, custodian or otherwise for customers.
(c) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-
entry those securities belonging to the Fund.
(d) If securities purchased by the Fund are to be held in a Securities
System, the Custodian shall pay for such securities upon (i) receipt
of advice from the Securities System that such securities have been
transferred to the Depository Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and transfer
for the account of the Fund. If securities sold by the
-4-
<PAGE>
Fund are held in a Securities System, the Custodian shall transfer
such securities upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the
Depository Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer and payment for the account of
the Fund.
(e) Upon request, the Custodian shall provide the Fund with copies of any
report (obtained by the Custodian from a Securities System in which
securities of the Fund are kept) on the internal accounting controls
and procedures for safeguarding securities deposited in such
Securities System.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall not be liable to the Fund for any loss or damage to
the Fund resulting from the use by the Custodian of a Securities
System, unless such loss or damage is caused by or results from the
negligence or willful misconduct on the part of the Custodian or its
agents or any of its (or their) employees; provided, however, that in
the event of any such loss or damage the Custodian shall take
reasonable steps to enforce effectively such rights as it may have
against the Securities System. At its election, the Fund shall be
subrogated to the rights of the Custodian with respect to any claim
against a Securities System or any other person for any loss or damage
to the Fund arising from the use of such Securities System, if and to
the extent that the Fund has not been made whole for any such loss or
damage.
3.7 Collection of Income. Subject to the provisions of Section 3.15, the
--------------------
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent hereunder and shall credit such income, as
collected, to the Custody Account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. The collection of
income due the Fund on securities loaned pursuant to the provisions of Section
3.9(j) shall be the responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to provide the Fund with
such information or data as may be necessary to assist the Fund in arranging for
the timely delivery to the Custodian of the income to which the Fund is properly
entitled.
The Custodian shall promptly notify the Fund whenever income due on
securities is not collected in due course and will provide the Fund with monthly
reports of the status of past due income. Except as set forth herein, the
Custodian shall not be required to enforce collection, by legal means or
otherwise, of any money or property due and payable with respect to securities
held for the Fund if such securities are in default or payment is not made after
due demand or presentation.
-5-
<PAGE>
3.8 Disbursement of Moneys from Custody Account. Upon receipt of Proper
-------------------------------------------
Instructions from or on behalf of the Fund, the Custodian shall disburse moneys
from the Custody Account, but only in the following cases:
(a) For the purchase of securities for the account of the Fund but only
(i) in the case of securities (other than options on securities,
futures contracts and options on futures contracts), against the
delivery to the Custodian (or any sub-custodian or agent appointed
pursuant to Section 3.3 or Section 3.4, respectively) of such
securities to be registered as provided in Section 3.15 in proper form
for transfer, or if the purchase of such securities is effected
through a Securities System, in accordance with the conditions set
forth in Section 3.6; (ii) in the case of options on securities,
against delivery to the Custodian (or such sub-custodian) of such
receipts as are required by the customs prevailing among dealers in
such options; (iii) in the case of futures contracts and options on
futures contracts, against delivery to the Custodian (or such sub-
custodian) of evidence of title thereto in favor of the Fund or any
nominee referred to in Section 3.15; and (iv) in the case of
repurchase or reverse repurchase agreements entered into by the Fund
and any other party, against delivery of the purchased securities
either in certificate form or through an entry crediting the
Custodian's (or such sub-custodian's) account at a Securities System
with such securities;
(b) In connection with the conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 3.9(g);
(c) For the payment of any dividends or distributions declared by the Fund
on its Shares;
(d) In payment of the redemption price of Shares as provided in Section
5.1;
(e) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of
the Fund: interest; taxes; investment management or advisory,
administration, accounting, auditing, transfer agent, custody,
directors' and legal fees; and other operating expenses of the Fund;
in all cases, whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the 1934
Act and a member of the NASD, relating to compliance with rules of the
OCC and of any registered national securities exchange (or of any
similar organization or organizations), regarding escrow or other
arrangements in connection with transactions by the Fund;
-6-
<PAGE>
(g) For transfer in accordance with the provisions of any agreement among
the Fund, the Custodian and a futures commission merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the CFTC and/or any contract market (or any similar
organization or organizations), regarding account deposits in
connection with transactions by the Fund;
(h) For the funding of any uncertificated time deposit or other interest-
bearing account with any banking institution (including the
Custodian), which deposit or account has a term of one year or less;
and
(i) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions, a copy of a resolution of the Board of Directors,
certified by an officer of the Fund, specifying the amount and purpose
of such payment, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom such payment is to
be made.
3.9 Delivery of Securities from Custody Account. Upon receipt of Proper
-------------------------------------------
Instructions from or on behalf the Fund, the Custodian shall release and deliver
securities from the Custody Account, but only in the following cases:
(a) Upon the sale of securities for the account of the Fund but only
against receipt of payment therefor;
(b) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 3.6;
(c) To the depositary agent in connection with tender or other similar
offers for securities of the Fund;
(d) To the issuer thereof or its agent when such securities are called,
redeemed, retired, or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
(e) To the issuer thereof or its agent (i) for transfer into the name of
the Fund, the Custodian or any sub-custodian or agent appointed
pursuant to Section 3.3 or Section 3.4, respectively, or any nominee
or nominees of any of the foregoing, or (ii) for exchange for a
different number of certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any
such case, the new securities are to be delivered to the Custodian;
(f) To the broker selling securities or its clearing agent, for
examination in accordance with the "street delivery" custom; provided
that, in any such case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of such securities
prior to receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
-7-
<PAGE>
(g) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities or the issuer of such securities, or pursuant provisions
for conversion contained in such securities, or pursuant to any
deposit agreement, including surrender or receipt of underlying
securities in connection with the issuance or cancellation of
depositary receipts; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
(h) Upon receipt of payment therefor pursuant to any repurchase or reverse
repurchase agreement related to such securities entered into by the
Fund;
(i) In the case of warrants, rights or similar securities, upon the
exercise thereof, the surrender thereof in the exercise of such
warrants, rights or similar securities, or the surrender of interim
receipts or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
(j) For delivery in connection with any loans of securities of the Fund,
but only against receipt by the Custodian of such collateral as shall
have been specified to the Custodian in Proper Instructions, except
that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Fund prior to the receipt of such collateral;
(k) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets, but only against receipt by the
Custodian of the amounts borrowed;
(l) Pursuant to any authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund;
(m) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the 1934
Act and a member of the NASD, relating to compliance with the rules of
the OCC and of any registered national securities exchange (or of any
similar organization or organizations), regarding escrow or other
arrangements in connection with transactions by the Fund;
(n) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a futures commission merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the CFTC and/or any contract market (or any similar
organization or organizations), regarding account deposits in
connection with transactions by the Fund;
-8-
<PAGE>
(o) Upon receipt of instructions from the transfer agent for the Fund,
for delivery to such transfer agent or to the holders of Shares in
connection with distributions in kind, upon the repurchase or
redemption of such Shares by the Fund; and
(p) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a copy of a resolution of the Board of
Directors, certified by an officer of the Fund, specifying the
securities to be delivered and the purpose for which such delivery is
to be made, declaring such purpose to be a proper corporate purpose,
and naming the person or persons to whom delivery of such securities
shall be made.
3.10 Bank Accounts. The Custodian may open and maintain a separate bank
-------------
account or accounts in the name of the Fund, subject only to draft or order by
the Custodian acting pursuant to the terms of this Agreement, and shall hold in
such account or accounts, subject to the provisions hereof, all cash received by
it from or for the account of the Fund, other than cash maintained in a bank
account established and used in accordance with Rule 17f-3 under the 1940 Act.
Funds held by the Custodian for the Fund may be deposited by it to its credit as
custodian in the banking department of the Custodian or in such other banks or
trust companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be qualified to
act as a custodian under the 1940 Act and that each such bank or trust company
and the funds to be deposited with each such bank or trust company shall be
approved by the vote of a majority of the Board of Directors of the Fund. Such
funds shall be deposited by the Custodian in its capacity as custodian and shall
be withdrawable by the Custodian only in that capacity. If requested by the
Fund, the Custodian shall furnish the Fund, not later than twenty (20) days
after the last business day of each month, an internal reconciliation of the
closing balance as of that day in all accounts described in this section to the
balance shown on the daily cash report for that day rendered to the Fund.
3.11 Payments for Shares. The Custodian shall make such arrangements with
-------------------
the transfer agent for the Fund, as will enable the Custodian to receive the
cash consideration due to the Fund and will deposit into the Custody Account
such payments as are received from the transfer agent. The Custodian will
provide timely notification to the Fund and the transfer agent of any receipt by
it of payments for Shares.
3.12 Availability of Federal Funds. Upon mutual agreement between the
-----------------------------
Fund and the Custodian, the Custodian shall make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks, clearing house funds, and other non-federal
funds received in payment for Shares which are deposited into the Custody
Account.
3.13 Actions Not Requiring Proper Instructions. The Custodian may in its
-----------------------------------------
discretion, without express authority from or on behalf the Fund:
-9-
<PAGE>
(a) Make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to
the Fund;
(b) Endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments;
(c) Surrender interim receipts or securities in temporary form for
securities in definitive form; and
(d) In general, and except as otherwise directed in Proper Instructions,
attend to all non-discretionary details in connection with the sale,
exchange, substitution, purchase, transfer and other dealings with
the securities and assets of the Fund.
3.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
any necessary declarations or certificates of ownership under the federal income
tax laws or the laws or regulations of any other taxing authority now or
hereafter in effect, and prepare and submit reports to the Internal Revenue
Service and to the Fund at such time, in such manner and containing such
information as is prescribed by the Internal Revenue Service.
3.15 Registration and Transfer of Securities. All securities held for the
---------------------------------------
Fund that are issued or issuable only in bearer form shall be held by the
Custodian in that form, provided that any such securities shall be held in a
Securities System if eligible therefor. All other securities held for the Fund
may be registered in the name of the Fund, the Custodian, or any sub-custodian
or agent appointed pursuant to Section 3.3 or Section 3.4, respectively, or in
the name of any nominee of any of them, or in the name of a Securities System or
any nominee thereof. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Agreement shall be in "street name" or other good
delivery form. If, however, the Custodian is directed to maintain securities of
the Fund in "street name", the Custodian shall utilize its best efforts only
timely to collect income due the Fund on such securities and to notify the Fund
on a best efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers. The Fund
shall furnish to the Custodian appropriate instruments to enable the Custodian
to hold or deliver in proper form for transfer, or to register in the name of
any of the nominees hereinabove referred to or in the name of a Securities
System, any securities registered in the name of the Fund.
3.16 Records. The Custodian shall create and maintain all records
-------
relating to its activities and obligations under this Agreement in such manner
as will meet the obligations of the Fund under the 1940 Act, with particular
attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such
records shall be the property of the Fund and shall at all times during the
regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the SEC. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as
-10-
<PAGE>
shall be agreed upon between the Fund and the Custodian, include certificate
numbers in such tabulations.
3.17 Portfolio Reports by Custodian. The Custodian shall furnish the Fund
------------------------------
with a daily activity statement and a summary of all transfers to or from the
Custody Account on the day following such transfers. At least monthly and from
time to time, the Custodian shall furnish the Fund with a detailed statement of
the securities and moneys held for the Fund under this Agreement.
3.18 Other Reports by Custodian. The Custodian shall provide the Fund, at
--------------------------
such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Agreement;
such reports shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
3.19 Proxies and Other Materials. The Custodian shall cause all proxies
---------------------------
relating to securities which are not registered in the name of the Fund to be
promptly executed by the registered holder, without indication of the manner in
which such proxies are to be voted, and shall promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices to such securities.
3.20 Information on Corporate Actions. Subject to the provisions of
--------------------------------
Section 3.15, the Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the Custodian from issuers
or writers of the securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from the issuers of securities whose
tender or exchange offer is sought from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect to
any tender offer, exchange offer, or any other similar transaction, the Fund
shall notify the Custodian at least three (3) business days prior to the date on
which the Custodian is to take such action.
ARTICLE IV
PURCHASE AND SALE OF PORTFOLIO INVESTMENTS
------------------------------------------
4.1 Purchase of Securities. Promptly upon each purchase of securities for
----------------------
the Fund, Proper Instructions shall be delivered to the Custodian, specifying
(i) the name of the issuer or
-11-
<PAGE>
writer of such securities, and the title or other description thereof, (ii) the
number of shares, principal amount (and accrued interest, if any) or other units
purchased, (iii) the date of purchase and settlement, (iv) the purchase price
per unit, (v) the total amount payable upon such purchase, and (vi) the name of
the person to whom such amount is payable. The Custodian shall, upon receipt of
such securities purchased by the Fund, pay out of the moneys held in the Custody
Account the total amount specified in such Proper Instructions to the person
named therein. The Custodian shall not be under any obligation to pay out moneys
to cover the cost of a purchase of securities for the Fund, if there is
insufficient cash available in the Custody Account for which such purchase was
made.
4.2 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
Except as provided in this Agreement, in any and every case where payment for
the purchase of securities for the Fund is made by the Custodian in advance of
receipt of the securities purchased but in the absence of Proper Instructions so
to pay in advance, the Custodian shall be liable to the Fund for such securities
to the same extent as if the securities had been received by the Custodian.
4.3 Sale of Securities. Promptly upon each sale of securities by the
------------------
Fund, Proper Instructions shall be delivered to the Custodian, specifying (i)
the name of the issuer or writer of such securities, and the title or other
description thereof, (ii) the number of shares, principal amount (and accrued
interest, if any) or other units sold, (iii) the date of sale and settlement,
(iv) the sale price per unit, (v) the total amount payable upon such sale, and
(vi) the person to whom such securities are to be delivered. Upon receipt of
the total amount payable to the Fund as specified in such Proper Instructions,
the Custodian shall deliver such securities to the person specified in such
Proper Instructions. Subject to the foregoing, the Custodian may accept payment
in such form as shall be satisfactory to it, and may deliver securities and
arrange for payment in accordance with the customs prevailing among dealers in
securities.
4.4 Payment for Securities Sold. In its sole discretion and from time to
---------------------------
time, the Custodian may credit the Custody Account, prior to actual receipt of
final payment thereof, with (i) proceeds from the sale of securities which it
has been instructed to deliver against payment, (ii) proceeds from the
redemption of securities or other assets of the Fund, and (iii) income from
cash, securities or other assets of the Fund. Any such credit shall be
conditional upon actual receipt by the Custodian of final payment and may be
reversed if final payment is not actually received in full. The Custodian may,
in its sole discretion and from time to time, permit the Fund to use funds so
credited to its Custody Account in anticipation of actual receipt of final
payment. Any such funds shall be repayable immediately upon demand made by the
Custodian at any time prior to the actual receipt of all final payments in
anticipation of which funds were credited to the Custody Account.
4.5 Advances by Custodian for Settlement. The Custodian may, in its sole
------------------------------------
discretion and from time to time, advance funds to the Fund to facilitate the
settlement of transactions in the Custody Account. Any such advance shall be
repayable immediately upon demand by the Custodian.
-12-
<PAGE>
ARTICLE V
REDEMPTION OF SHARES
--------------------
5.1 Transfer of Funds. From such funds as may be available for the
-----------------
purpose in the Custody Account of the Fund, and upon receipt of Proper
Instructions specifying that the funds are required to redeem Shares, the
Custodian shall wire each amount specified in such Proper Instructions to or
through such bank as may be designated with respect to such amount in such
Proper Instructions.
5.2 No Duty Regarding Paying Banks. The Custodian shall not be under any
------------------------------
obligation to effect payment or distribution by any bank designated in Proper
Instructions given pursuant to Section 5.1 of any amount paid by the Custodian
to such bank in accordance with such Proper Instructions.
ARTICLE VI
SEGREGATED ACCOUNTS
-------------------
Upon receipt of Proper Instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of the Fund, into
which account or accounts may be transferred cash and/or securities, including
securities maintained in a Depository Account:
(a) In accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the 1934 Act and a
member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the
rules of the OCC and of any registered national securities exchange
(or the CFTC or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements
in connection with transactions by the Fund;
(b) For purposes of segregating cash or securities in connection with
options purchased, sold or written by the Fund, or in connection with
futures contracts (or options thereon) purchased or sold by the Fund;
(c) Which constitute collateral for loans of securities made by the Fund;
(d) For purposes of compliance by the Fund with requirements under the
1940 Act for the maintenance of segregated accounts by registered
investment companies in connection with reverse repurchase agreements,
and when-issued, delayed delivery and firm commitment transactions,
and other similar transactions; and
-13-
<PAGE>
(e) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions, a certified copy of a resolution of the Board of
Directors, certified by an officer of the Fund, specifying the purpose
of such segregated account and declaring such purpose to be a proper
corporate purpose.
ARTICLE VII
CONCERNING THE CUSTODIAN
------------------------
7.1 Standard of Care. The Custodian shall be held to a standard of
----------------
reasonable care in carrying out the provisions of this Agreement. The Custodian
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. Subject to the
limitations set forth in this Agreement, the Custodian shall be kept indemnified
by and shall be without liability to the Fund for any action taken or omitted by
it in good faith without negligence.
7.2 No Responsibility for Title. So long as and to the extent that it is
---------------------------
in the exercise of reasonable care, the Custodian shall not be responsible for
the title, validity or genuineness of any property or evidence of title thereto
received or delivered by it pursuant to this Agreement.
7.3 Reliance Upon Documents and Instructions. The Custodian shall be
----------------------------------------
entitled to rely upon any certificate, notice or other instrument in writing
received by it and reasonably believed by it to be genuine. The Custodian shall
be entitled to rely upon any Proper Instructions actually received by it
pursuant to this Agreement.
7.4 Express Duties Only. The Custodian shall have no duties or
-------------------
obligations whatsoever except such duties and obligations as are specifically
set forth in this Agreement, and no covenant or obligation shall be implied in
this Agreement against the Custodian.
7.5 Cooperation. The Custodian shall cooperate with and supply necessary
-----------
information to the entity or entities appointed by the Fund to keep its books of
account and/or compute its net asset value. The Custodian shall take all such
reasonable actions as the Fund may from time to time request to enable the Fund
to obtain, from year to year, favorable opinions from the Fund's independent
accountants with respect to the Custodian's activities hereunder in connection
with (i) the preparation of any registration statement of the Fund on Form N-2
and of the Fund's reports on Form N-SAR and any other reports required by the
SEC, and (ii) the fulfillment by the Fund of any other requirements of the SEC.
7.6 Force Majeure. The Custodian shall not be responsible or liable for
-------------
any failure or delay in the performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
reasonable control, including without limitation, acts of God, earthquakes,
fires, floods, wars, civil or military disturbances, sabotage, epidemics, riots,
loss or malfunctions of utilities, transportation, computer (hardware or
software) or
-14-
<PAGE>
communications service, labor disputes, acts of civil or military authority,
governmental, judicial or regulatory actions or inability to obtain labor,
material, equipment or transportation.
ARTICLE VIII
INDEMNIFICATION
---------------
8.1 Indemnification. The Fund shall indemnify and hold harmless the
---------------
Custodian and its duly appointed sub-custodians and agents, and any nominee
thereof, from and against any loss, damage, cost, expense (including attorneys'
fees and disbursements), liability (including, without limitation, liability
arising under the Securities Act of 1933, as amended, the 1934 Act, the 1940
Act, and any state securities or banking laws) or claim arising, directly or
indirectly, (i) from any action or inaction pursuant to Proper Instructions or
otherwise taken at the request or direction of or in reliance on the advice of
the Fund, or (ii) from the fact that securities are registered in the name of
any such nominee, or (iii) generally, from the performance of its or their
obligations under this Agreement or any sub-custody agreement; provided,
however, that neither the Custodian nor any sub-custodian or agent shall be
indemnified and held harmless from and against any such loss, damage, cost,
expense, liability or claim arising from the failure to act in accordance with
the standard of reasonable care set forth in Section 7.1.
8.2 Indemnity to be Provided. If the Fund requests the Custodian to take
------------------------
any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee becoming liable for the payment of money or incurring
liability of some other form, the Custodian shall not be required to take such
action until the Fund shall have provided indemnity therefor to the Custodian in
an amount and form satisfactory to the Custodian.
ARTICLE IX
EFFECTIVE PERIOD; TERMINATION
-----------------------------
9.1 Effective Period. This Agreement shall become effective as of its
----------------
execution and shall continue in full force and effect until terminated as
hereinafter provided.
9.2 Termination. Either party hereto may terminate this Agreement by
-----------
giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of the
giving of such notice. The Fund may at any time immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Custodian by regulatory authorities or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
9.3 Successor Custodian. If a successor custodian for the Fund shall have
-------------------
been appointed by the Board of Directors, the Custodian shall, upon receipt of a
notice of acceptance by the successor custodian, on date of termination
specified pursuant to Section 9.2, (i) deliver
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<PAGE>
directly to the successor custodian all securities (other than securities held
in a Securities System) and cash then owned by the Fund and held by the
Custodian as custodian, and (ii) transfer any securities held in a Securities
System to an account of or for the Fund at the successor custodian, provided
that the Fund shall have paid to the Custodian all fees, expenses and other
amounts to the payment or reimbursement of which it shall then be entitled. Upon
such delivery and transfer, the Custodian shall be relieved of all obligations
under this Agreement. If a successor custodian is not designated by the Fund on
or before the date of termination specified pursuant to Section 9.2, then the
Custodian shall have the right to deliver to a bank or trust company of its own
selection, which (i) is a "bank" as defined in the 1940 Act, (ii) has aggregate
capital, surplus and undivided profits as shown on its then most recent public
report of not less than $25 million, and (iii) is doing business in New York,
New York, all securities, cash and other property held by the Custodian under
this Agreement and to transfer to an account of or for the benefit of the Fund
at such bank or trust company all securities of the Fund held in a Securities
System. Upon such delivery and transfer, such bank or trust company shall be the
successor custodian for the Fund under this Agreement and the Custodian shall be
relieved of all obligations under this Agreement. If, after reasonable inquiry,
the Custodian cannot find a successor custodian as contemplated in this Section
9.3, then the Custodian shall have the right to deliver to the Fund all
securities and cash held by the Custodian under this Agreement and to transfer
any securities held in a Securities System to an account of or for the benefit
of the Fund. Thereafter, the Fund shall be deemed to be its own custodian and
the Custodian shall be relieved of all obligations under this Agreement.
9.4 Continuing Obligations. Nothing contained in this Article IX shall be
----------------------
construed to excuse the Fund from payment of all charges due and payable to the
Custodian. The provisions of Section 12.2, "References to Custodian", Article
VII, "Concerning the Custodian" and Article VIII, "Indemnification" shall
survive the termination or expiration of this Agreement for any reason.
ARTICLE X
COMPENSATION OF CUSTODIAN
-------------------------
The Custodian shall be entitled to compensation as agreed upon from time to
time by the Fund and the Custodian. The fees and other charges in effect on the
date hereof and applicable to the Fund are set forth in Exhibit B hereto.
ARTICLE XI
NOTICES
-------
Unless otherwise specified herein, all demands, notices, instructions and
other communications to be given hereunder shall be in writing and shall be sent
or delivered to the recipient at the address set forth after its name herein
below:
-16-
<PAGE>
If to the Fund:
--------------
USF&G Pacholder Fund, Inc.
Bank One Towers
8044 Montgomery Road, Suite 382
Cincinnati, OH 45236
Attention: Secretary
Telephone: (513) 985-3200
Facsimile: (513) 985-3217
If to the Custodian:
-------------------
Star Bank, N.A.
425 Walnut Street
M.L. 6118
Cincinnati, OH 45202
Attention: Mutual Fund Custody Department
Telephone: (513) 632-4199
Facsimile: (513) 632-4448
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XI. Writing shall include
transmission by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
ARTICLE XII
MISCELLANEOUS
-------------
12.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Ohio.
12.2 References to Custodian. The Fund shall not circulate any printed
-----------------------
matter which contains any reference to the Custodian without the prior written
approval of the Custodian, excepting printed matter contained in any prospectus
or statement of additional information of the Fund and such other printed matter
as merely identifies the Custodian as custodian for the Fund. The Fund shall
submit printed matter requiring approval to the Custodian in draft form,
allowing sufficient time for review by the Custodian and its counsel prior to
any deadline for printing.
12.3 No Waiver. No failure by either party hereto to exercise, and no
---------
delay by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the
-17-
<PAGE>
remedies provided herein are cumulative and not exclusive of any remedies
provided at law or in equity.
12.4 Amendments. This Agreement cannot be changed orally and no amendment
----------
to this Agreement shall be effective unless evidenced by an instrument in
writing executed by the parties hereto.
12.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
12.6 Severability. If any provision of this Agreement shall be invalid,
------------
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.
12.7 Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that this Agreement shall not be assignable by
either party without the written consent of the other.
12.8 Headings. The headings of sections in this Agreement are for
--------
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered in its name and on its behalf by its representatives
thereunto duly authorized, all as of the day and year first above written.
ATTEST: USF&G PACHOLDER FUND, INC.
By:
- -------------------------- ---------------------------------
Anthony L. Longi, Jr.
President
ATTEST: STAR BANK, N.A.
By:
- -------------------------- ---------------------------------
Title:
------------------------------
-18-
<PAGE>
Exhibit A
to the
Custody Agreement
The undersigned, President of the Fund, hereby designates the following
individuals as authorized by the Fund to give Proper Instructions to the
Custodian.
Name Title Signature
- ---- ----- ---------
Anthony L. Longi, Jr. President -----------------------
William J. Morgan Executive Vice
President, Treasurer
and Director -----------------------
James P. Shanahan, Jr. Secretary and Director -----------------------
The undersigned, Secretary of the Fund, hereby certifies that the persons
listed above are duly elected, qualified and acting officers of the Fund in the
capacities set forth after their respective names and that the signatures set
forth after their respective names and titles are the genuine signatures of such
officers.
------------------------------
James P. Shanahan, Jr.
The undersigned, President of the Fund, hereby certifies that James P.
Shanahan, Jr. is the duly elected, qualified and acting Secretary of the Fund
and that the signature set forth after his name and title above is his true and
genuine signature.
------------------------------
Anthony L. Longi, Jr.
<PAGE>
Exhibit B
to the
Custody Agreement
SCHEDULE OF COMPENSATION
Annual Fee
- ----------
For the services to be provided to the Fund pursuant to the Custody
Agreement, the Fund shall pay the Custodian an annual fee based upon the average
weekly net assets of the Fund and payable monthly as follows:
$0 to $30 million 2.5 basis points
$30 to $50 million 1.0 basis point
Over $50 million .75 basis point
Expenses
- --------
The only out-of-pocket expenses will be shipping fees and transfer fees.
Dated: __________________
_________ initials
_________ initials
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 23rd day of September, 1996, by and between USF&G
Pacholder Fund, Inc., a Maryland corporation (the "Fund"), and Fifth Third Bank,
an Ohio banking corporation (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar, transfer
agent, dividend disbursing agent, and agent in connection with certain other
activities; and
WHEREAS, the Bank is engaged in the business of providing services for
issuers of securities and desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Terms of Appointment; Duties of the Bank.
----------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Bank to act as, and the Bank agrees to act
as, the registrar, transfer agent, dividend disbursing agent and agent in
connection with the dividend reinvestment plan for the authorized and issued
shares of common stock, par value $.01 per share ("Shares"), of the Fund.
1.02 The Bank agrees that it will perform the services listed in the
attached service responsibility schedule in accordance with such procedures as
may be established from time to time by written agreement between the Fund and
the Bank. In addition to and neither in lieu nor in contravention of the
services referred to in the preceding sentence, the Bank shall perform all the
customary services of a registrar, transfer agent, dividend disbursing agent and
dividend reinvestment plan agent, including but not limited to maintaining all
Shareholder accounts, preparing shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing shareholder reports and prospectuses
to current Shareholders, withholding taxes on U.S. resident and non-resident
alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases of Shares and
other confirmable transactions in Shareholder accounts, and providing
Shareholder account information.
2. Fees and Expenses.
-----------------
2.01 For the services to be performed by the Bank pursuant to this
Agreement, the Fund agrees to pay the Bank the fees provided in the attached fee
schedule.
2.02 In addition to the fee paid under Section 2.01 above, the Fund agrees
to reimburse the Bank promptly for reasonable out-of-pocket expenses or advances
incurred by the Bank in connection with its performance under this Agreement for
the items set out in the fee schedule
<PAGE>
attached hereto. In addition, any other special out-of-pocket expenses incurred
by the Bank at the request or with the consent of the Fund will be promptly
reimbursed by the Fund. Postage for mailing of dividends, proxies, shareholder
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank at least three business days prior to the mailing date of such materials.
3. Representations and Warranties.
------------------------------
3.01 The Bank represents and warrants to the Fund that:
(i) It is a banking corporation duly organized and existing and in good
standing under the laws of the State of Ohio.
(ii) It is duly qualified to carry on its business in the State of Ohio.
(iii) It is empowered under applicable laws and by its charter and bylaws
to enter into and perform this Agreement.
(iv) All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
(v) It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to
perform its duties and obligations hereunder.
3.02 The Fund represents and warrants to the Bank that:
(i) It is a corporation duly organized and existing and in good standing
under the laws of the State of Maryland.
(ii) It is empowered under applicable laws and by its charter and bylaws
to enter into and perform this Agreement.
(iii) All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
(iv) It is a closed-end management investment company registered under
the Investment Company Act of 1940.
(v) Appropriate federal and state securities law filings have been made
and will continue to be made with respect to all Shares being
offered for sale.
-2-
<PAGE>
4. Indemnification.
---------------
4.01 The Bank shall not be responsible for, and the Fund shall indemnify
and hold the Bank harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(i) All actions of the Bank or its agents required to be taken by the
Bank pursuant to this Agreement, provided that the Bank has acted in
good faith and without negligence or willful misconduct.
(ii) The reliance by the Bank on, or use by the Bank of, information,
records and documents or services which have been prepared or
maintained by or on behalf of the Fund or any of the Fund's other
service providers, or have been furnished to the Bank by or on
behalf of the Fund or any of the Fund's other service providers.
(iii) The reliance by the Bank on, or the carrying out by the Bank of, any
instructions or requests of the Fund.
(iv) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state, or in violation of any stop order or other
determination or ruling by any federal agency or any state with
respect to the offer or sale of Shares in such state, unless such
violation results from any failure by the Bank to comply with the
written instructions of the Fund that no offers or sales of Shares
be made in general or to the residents of a particular state.
(v) The Fund's refusal or failure to comply with the terms of this
Agreement, or the Fund's bad faith, negligence or willful
misconduct, or the breach of any representation or warranty of the
Fund hereunder.
4.02 The Bank shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to the Bank's refusal or failure to
comply with the terms of this Agreement, or the Bank's bad faith, negligence or
willful misconduct, or the breach of any representation or warranty of the Bank
hereunder.
4.03 At any time the Bank may apply to an authorized officer of the Fund
for instructions, and may consult with the Fund's legal counsel, at the expense
of the Fund, with respect to any matter arising in connection with the services
to be performed by the Bank under this Agreement, and the Bank shall not be
liable and shall be indemnified by the Fund for any action taken or omitted in
good faith by it in reliance upon such instructions or upon the opinion of such
counsel. The Bank shall be protected and indemnified in acting upon any paper
or document reasonably believed by the Bank to be genuine and to have been
signed by the proper person or persons, and shall not be held to have notice of
any change of authority of any person,
-3-
<PAGE>
until receipt of written notice thereof from the Fund. The Bank shall also be
protected and indemnified in recognizing stock certificates which the Bank
reasonably believes to bear the proper manual or facsimile signatures of the
officers of the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
4.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
4.05 In no event and under no circumstances shall either party to this
Agreement be liable to the other party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.
4.06 In order that the indemnification provisions contained in this
Article 4 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
5. Covenants of the Fund and the Bank.
----------------------------------
5.01 The Fund shall promptly furnish to the Bank the following:
(i) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of the Bank and the execution and
delivery of this Agreement.
(ii) A certified copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto.
5.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any,
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
5.03 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable; provided, however,
that all accounts, books and other records of the Fund prepared or maintained by
the Bank hereunder shall be maintained and kept current in compliance with
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder, as
the same may be amended from time to time. To the extent required by such
section and rules, the Bank agrees that all Fund records prepared or maintained
by the Bank
-4-
<PAGE>
hereunder are the property of the Fund and shall be preserved and made available
in accordance with such section and rules, and shall be surrendered promptly to
the Fund on its request.
5.04 The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
5.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
6. Effective Period; Termination.
-----------------------------
6.01 This Agreement shall become effective as of its execution and shall
continue in full force and effect until terminated as hereinafter provided.
6.02 This Agreement may be terminated by either party upon sixty days
written notice to the other. Any unpaid fees or reimbursable expenses payable
to the Bank shall be due on any such termination date. The Bank agrees to use
its best efforts to cooperate with the Fund and the successor transfer agent in
accomplishing an orderly transition.
7. Miscellaneous.
-------------
7.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party;
provided, however, that no consent shall be required for any merger of the Fund
with, or sale of all or substantially all the assets of the Fund to, another
investment company.
7.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
7.03 This Agreement shall be governed by and construed in accordance with
the laws of the State of Ohio without giving effect to the choice of law
provisions thereof and, to the extent applicable, the federal law of the United
States. To the extent applicable Ohio law or any of the provisions of this
Agreement conflict with applicable provisions of the Investment Company Act of
1940 or other applicable federal laws and regulations, the latter shall control.
7.04 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof, whether oral or written, and may not be modified except by a written
instrument executed by both parties.
-5-
<PAGE>
7.05 If any provision of this Agreement shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions shall not be affected or impaired
thereby.
7.06 The headings of sections in this Agreement are for convenience of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
7.07 This Agreement may be executed in one or more counterparts, and by
the parties hereto on separate counterparts, each of which shall be deemed an
original but all of which together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
ATTEST: USF&G PACHOLDER FUND, INC.
By:
- ----------------------- ----------------------------
James P. Shanahan, Jr. James E. Gibson
Secretary Senior Vice President
ATTEST: FIFTH THIRD BANK
By:
- ----------------------- ----------------------------
Name:
Assistant Secretary Title:
-6-
<PAGE>
SERVICE RESPONSIBILITY SCHEDULE
-------------------------------
A. Transfer Agent Services
-----------------------
i. Maintaining Shareholder account records, including name, address,
taxpayer identification number, Shares held and certificate
numbers.
ii. Processing of all transfers of certificates including the review
of those transfer items requiring supporting documents commonly
referred to as "legal transfers".
iii. Furnishing a list of Shareholders as of each dividend record
date if requested by the Fund.
iv. Furnishing a journal sheet reflecting the daily transfer activity
if requested by the Fund.
v. Maintaining a record of all certificates against which a stop
transfer notice has been placed.
B. Registrar Services
------------------
i. Maintaining a record of the number of authorized and outstanding
Shares.
ii. Registering upon original issue or transfer all certificates for
securities.
C. Dividend Disbursing Agent Services
----------------------------------
i. Preparing dividend checks for each Shareholder of record as of
the record date established for such dividend or dividend credit
for those Shareholders who participate in the dividend
reinvestment plan.
ii. Mailing dividend checks by first-class regular mail.
iii. Maintaining a checking account against which checks will be paid
with funds to be supplied by the Fund.
iv. Preparing applicable Internal Revenue Service forms, mailing
copies of such forms to the Shareholders annually and furnishing
a computer tape summary of such forms to the U.S. Treasury
Department.
v. Mailing quarterly financial reports of the Fund.
vi. Obtaining U.S. Treasury forms or other certificates with respect
to Taxpayer Identification Numbers as may be required under U.S.
Treasury regulations.
<PAGE>
vii. Withholding of federal income tax on such dividends and
processing the payment of that tax over to the U.S. Treasury as
may from time to time be required by the U.S. Treasury
regulations.
viii. Filing tax information returns on Shares held and dividends
paid with the various states as requested by the Fund.
D. Dividend Reinvestment Services
------------------------------
i. Collecting the dividends from the Shareholders.
ii. Purchasing of Shares at market price on a quarterly basis.
iii. Crediting full and fractional Shares to the participant
accounts.
iv. Updating and balancing participant records as transactions
occur.
v. Generating quarterly reports for the Fund.
vi. Generating quarterly statements for the participants.
vii. Issuing, as applicable, all Internal Revenue Service forms.
E. Proxy Agent Services
--------------------
Mailing broker-search cards prior to the voting record date of annual
and special meetings of shareholders, preparing one set of proxies for the
general annual or any special meeting of shareholders for each Shareholder
of record on the record date established for such meeting. If requested by
the Fund mailing those proxies along with the proxy statement and annual
report; tabulating those proxies voted and furnishing the Fund with interim
reports and a summary of such vote; and providing the Fund with a
Shareholder list as of record date of the proxy, in alphabetical sequence
for the annual meeting of shareholders.
-2-
<PAGE>
FEE SCHEDULE
------------
Annual Account Maintenance/Transaction Fee $4,000
Conversion/Acceptance Fee WAIVED*
Fee includes: all routine maintenance, ordinary 1099 quarterly dividend
disbursements (including direct deposit), related 1099 reporting, proxy mailing
and tabulation, toll free shareholder inquiry service, transactions for
registered shareholders with limitations as noted below:
* Maintenance of 1,000 open accounts excess
@ $3.75
* Preparation of ten full and four partial lists, reports, or mailing
labels as required by the Fund
* Administration and processing of four dividend reinvestment
purchases annually 300 participants each, excess @ $1.50
* Issuance of up to 200 certificates or transfer credits annually
excess @ $1.30 per transaction
Special projects such as stock dividends, stock splits, non-routine (other
than 1099 DIV) tax reporting, merger activity, etc. are not considered routine
transactions and will be billed on an appraisal basis.
Out-of-pocket expenses include but are not limited to: postage, insurance,
stationary and telephone line charges.
* Fee waived provided that automated data is provided for conversion. The Bank
agrees to a one time credit of $1,000 towards the cost of certificate re-
silvering, transfer agent change card, etc.
<PAGE>
ADMINISTRATION AGREEMENT
This AGREEMENT made as of this 5th day of June, 1996, by and between
Kenwood Administrative Management, Limited Partnership, an Ohio limited
partnership (the "Administrator"), and USF&G Pacholder Fund, Inc., a Maryland
corporation (the "Fund").
W I T N E S S T H:
WHEREAS, the Fund is a closed-end diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Administrator to provide
administrative services to the Fund, and the Administrator is willing render
such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and mutual convenants set
forth herein, the parties hereto agree as follows:
1. Appointment of Administrator. The Fund hereby retains the
----------------------------
Administrator to act as the administrator of the Fund and to furnish the Fund
with the administrative services described in Section 2 below. The
Administrator hereby accepts such employment and agrees to perform the services
described in Section 2.
2. Administrative Services. (a) As administrator, and subject to the
-----------------------
supervision and control of the Board of Directors of the Fund, the Administrator
will perform (or supervise the performance by others) and will provide
facilities, equipment and personnel to carry out the following administrative
services for operation of the business and affairs of the Fund:
(i) with the assistance of the Fund's legal counsel, prepare, file and
maintain the Fund's governing documents and corporate records, including its
charter, bylaws, and minutes of the meetings of the stockholders, the Board of
Directors and any committees thereof;
(ii) assist the Fund's legal counsel in the preparation and filing with
the Securities and Exchange Commission (the "Commission") and the appropriate
state securities authorities of the registration statements for the Fund and its
shares of capital stock and all amendments thereto, reports to regulatory
authorities and shareholders, prospectuses, proxy statements and such other
documents as may be necessary or convenient to enable the Fund to offer its
share from time to time;
(iii) assist with and coordinate the layout and printing of all publicly
disseminated prospectuses and reports;
(iv) provide individuals reasonably acceptable to the Board of Directors
of the Fund for nomination, appointment or election as officers or directors of
the Fund, who will be
<PAGE>
responsible for the management of certain of the Fund's affairs as determined
by the Board of Directors;
(v) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Fund in accordance the
requirements of Rules 17g-1 and 17d-1(d)(7) under the 1940 Act, as such bonds
and policies are approved by the Board of Directors of the Fund;
(vi) with the approval of the Fund's counsel and cooperation of its
investment adviser and other relevant parties, prepare and disseminate materials
for meetings of the Board of Directors of the Fund;
(vii) prepare such reports relating to the business and affairs of the
Fund (not otherwise appropriately prepared by the Fund's investment adviser,
legal counsel or auditors) as the Board of Directors of the Fund may from time
to time reasonably request in connection with the performance of its duties;
(viii) provide reviews and quarterly compliance reports to the Board of
Directors regarding all applicable regulatory and operating requirements;
(ix) supervise the declaration of dividends and other distributions to
shareholders of the Fund and prepare and distribute to appropriate parties
notices announcing the declaration of such dividends and other distributions;
(x) compute the Fund's yield, total return, expense ratio and portfolio
turnover rate for dissemination to information services covering the investment
company industry and for other appropriate purposes;
(xi) administer contracts on behalf of the Fund with, among others, the
Fund's investment adviser, custodian and transfer agent;
(xii) calculate contractual Fund expenses and control all disbursements
for the Fund;
(xiii) arrange for and supervise independent auditors as appropriate and
take all reasonable action in the performance of its obligations under this
Agreement to ensure that the necessary information is made available to such
accountants for the expression of their opinion as such may be required by the
Fund from time to time;
(xiv) monitor and advise the Fund on its status as a regulated investment
company under the Internal Revenue Code of 1986, as amended;
(xv) prepare and file the Fund's federal and state tax returns;
(xvi) develop and prepare communications to shareholders, including the
annual report to shareholders, coordinate the mailing of notices, proxy
statements and other materials to
-2-
<PAGE>
shareholders, and supervise and facilitate the solicitation of proxies solicited
by the Fund for all shareholder meetings, including the tabulation process for
shareholder meetings:
(xvii) answer correspondence and inquiries from shareholders, securities
broker-dealers and others relating to the Fund;
(xviii) provide internal legal and administrative services as reasonably
requested by the Fund from time to time; and
(xix) advise the Fund and its Board of Directors on matters concerning
the Fund and its affairs.
(b) The Administrator may perform such other services for the Fund as
agreed from time to time, at the request of the Board of Directors. The
services provided by the Administrator to the Fund hereunder shall not include
any duties, functions or services to be performed for the Fund by its investment
adviser, custodian, transfer agent, or accounting and pricing agent pursuant to
their respective agreements with the Fund.
3. Records. The Administrator shall maintain customary records in
-------
connection with its duties as specified in this Agreement. Any records required
to be maintained and preserved pursuant to Rules 31a-1 and 31a-2 under the 1940
Act which are prepared or maintained by the Administrator on behalf of the Fund
shall be prepared and maintained at the expense of the Administrator, but shall
be the property of the Fund and will be made available or surrendered to the
Fund promptly on request. In case of any request or demand for the inspection
of such records by another party, the Administrator shall notify the Fund and
follow the Fund's instructions as to permitting or refusing such inspection;
provided, however, that the Administrator may exhibit such records to any person
in any case where it is advised by its counsel that it may be held liable for
failure to do so, unless (in cases involving potential exposure only to civil
liability) the Fund has agreed to indemnify the Administrator against such
liability.
4. Expenses. The Administrator shall be responsible for expenses incurred
--------
in providing office space, equipment and personnel as may be necessary or
convenient to provide administrative services to the Fund, including the
compensation of employees of the Administrator who serve as officers or
directors of the Fund. The Fund assumes and shall pay or cause to be paid all
other expenses of the Fund not otherwise allocated herein, including, without
limitation, all fees and charges of its investment adviser and its accounting
and pricing agent; the cost of custodial and transfer-agent services; expenses
for legal and auditing services; the expenses of preparing (including
typesetting), printing and mailing reports, prospectuses and proxy materials to
existing shareholders; all expenses incurred in connection with issuing and
redeeming shares of its capital stock; the cost of registration of the Fund's
shares under federal and state securities laws and of listing such shares on any
securities exchange; fees and out-of-pocket expenses of directors who are not
affiliated persons of the Administrator or the Fund's investment adviser, or any
affiliated person of the Administrator or investment adviser; taxes;
-3-
<PAGE>
insurance premiums; interest; brokerage costs; trade association dues; and
litigation and other extraordinary or nonrecurring expenses.
5. Compensation. For the services to be rendered, the facilities
------------
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Fund shall pay to the Administrator a fee at the annual rate of
0.1% of the Fund's average weekly net assets. Such fee shall be computed and
accrued weekly and paid monthly as soon as practicable after the end of each
month. The Fund shall also reimburse the Administrator for its reasonable out-
of-pocket expenses.
6. Limitation of Liability. (a) The Administrator shall not be liable
-----------------------
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties under this Agreement. The duties of the Administrator shall be
confined to those expressly set forth herein, and no implied duties are assumed
by or may be asserted against the Administrator hereunder.
(b) Any person, even though also an officer, employee or agent of the
Administrator, who may be or become an officer, employee or agent of the Fund,
shall be deemed when rendering services to the Fund or acting on any business of
the Fund (other than services or business in connection with the duties of the
Administrator hereunder) to be rendering such services to or acting solely for
the Fund and not as an officer, director, employee or agent or one under the
control or direction of the Administrator, even though paid by the
Administrator.
(c) The Administrator may apply to the Fund at any time for instructions
and may consult counsel for the Fund or its own counsel and with accountants and
other experts with respect to any matter arising in connection with its duties
and obligations hereunder, and the Administrator shall not be liable or
accountable for any action taken or omitted by it in good faith in accordance
with such instruction or the opinion of such counsel, accountants or other
experts.
7. Indemnification. (a) The Fund agrees to indemnify and hold harmless
---------------
the Administrator and its partners, employees and agents from and against any
and all losses, claims, damages or liabilities to which the Administrator or any
of its partners, employees or agents may become subject, insofar as such losses,
claims, damages or liabilities (or any actions in respect thereof) arise out of
or are based upon the performance by the Administrator of its duties hereunder,
and to reimburse, as incurred, the Administrator and its partners, employees and
agents for any legal or other expenses reasonably incurred in connection with
investigating or defending against any alleged loss, claim, damage or liability;
provided, that the Administrator and any such director, officer, employee or
agent has acted in good faith without negligence.
(b) A party seeking indemnification under this Section 7 in respect of any
claim or other assertion of liability shall give the Fund written notice of such
claim or other assertion of liability
-4-
<PAGE>
promptly after the indemnified party receives notice thereof. Failure of an
indemnified party to give such notice promptly shall not be deemed a waiver of
any right to indemnification it may have under this Agreement, except to the
extent any such failure shall have damaged the Fund. In case any action is
brought against any indemnified party, the Fund shall be entitled to participate
therein and, to the extent that it may wish, to assume the defense thereof, with
counsel satisfactory to the indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the Fund
and the indemnified party shall have reasonably concluded that there may be one
or more legal defenses available to it or other indemnified parties which are
different from or additional to those available to the Fund, the Fund shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on their behalf. After notice from
the Fund to an indemnified party of its election so to assume the defense of any
such action and approval by such indemnified party of counsel appointed in
connection therewith, the Fund shall not be liable to the indemnified party
hereunder for any legal or other expense, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in the manner provided for herein or (ii) the Fund has
authorized the employment of counsel for the indemnified party at its expense.
After notice from the Fund to an indemnified party, the Fund shall not be liable
for the costs and expenses of any settlement of such action effected by such
indemnified party without the consent of the Fund, unless the Fund waived its
rights hereunder in which case the indemnified party may effect such a
settlement without such consent.
(c) The Fund agrees to notify the Administrator promptly of the
commencement of any litigation or proceeding against the Fund or any of its
officers or directors related to the services provided by the Administrator
under this Agreement.
8. Activities of Administrator. (a) The services furnished by the
---------------------------
Administrator to the Fund hereunder are not to be deemed exclusive, and the
Administrator and its affiliates shall be free to render services to others and
engage in other activities; provided, however, that any such other services and
activities do not, during the term of this Agreement, interfere, in a material
manner, with the Administrator's ability to meet all of its obligations to the
Fund hereunder.
(b) Subject to and in accordance with the charter and bylaws of the Fund,
the 1940 Act and the rules thereunder, it is understood that directors,
officers, agents and shareholders of the Fund are or may be interested in the
Administrator or its affiliated persons as directors, officers, agents or
shareholders or otherwise; that directors, officers, agents and shareholders of
the Administrator or its affiliated persons are or may be interested in the Fund
as directors, officers, agents, shareholders or otherwise; that the
Administrator or its affiliated persons may be interested in the Fund as a
shareholder or otherwise; and that the effect of any such interests shall be
governed by the charter and bylaws of the Fund and the 1940 Act and the rules
thereunder.
-5-
<PAGE>
9. Effective Date; Term. This Agreement shall become effective as of the
--------------------
date hereof. Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect for an initial period of two years and thereafter may
be continued for successive periods of one year, but only so long as each such
continuance is specifically approved at least annually (i) by the Board of
Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund, and (ii) by the vote of a majority of the directors of
the Fund, who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval.
10. Termination. Notwithstanding any provision of this Agreement, it may
-----------
be terminated at any time, without payment of any penalty, by the Board of
Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund on 60 days' written notice to the Administrator, or by
the Administrator on 60 days' written notice to the Fund. This Agreement shall
terminate automatically in the event of its assignment. The indemnity and
defense provisions set forth in Section 7 shall indefinitely survive the
termination of this Agreement.
11. Amendment. This Agreement may be amended at any time by agreement of
---------
the parties, provided that the amendment shall be approved both by the vote of a
majority of the directors of the Fund, who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for
that purpose, and where required by the 1940 Act by a majority of the
outstanding voting securities of the Fund.
12. Notices. Any notices required to be given hereunder shall be in
-------
writing and shall be deemed effective, if mailed, five business days after being
deposited in the mails with proper postage affixed thereto or, if delivered by
hand or courier service or in the form of a facsimile transmission, when
received, in each case addressed or directed as follows:
If to the Fund:
USF&G Pacholder Fund, Inc.
Towers of Kenwood
8044 Montgomery Road, Suite 382
Cincinnati, OH 45236
Attention: Anthony L. Longi, Jr., President
Facsimile number: (513) 985-3217
-6-
<PAGE>
If to the Administrator:
Kenwood Administrative Management,
Limited Partnership
Towers of Kenwood
8044 Montgomery Road, Suite 382
Cincinnati, OH 45236
Attention: James E. Gibson
Facsimile number: (513) 985-3217
Either party may change its address and/or facsimile number for the purpose
of all notices or communications required or permitted to be given pursuant to
this Agreement by notice to the other party.
13. Certain Terms. The terms "affiliated person", "assignment",
-------------
"interested person" and "vote of a majority of the outstanding voting
securities", when used in this Agreement, shall have the respective meanings set
forth in the 1940 Act and the rules and regulations thereunder, subject to any
applicable orders of exemption issued by the Commission.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Ohio without giving effect to the
choice of law provisions thereof and, to the extent applicable, the federal law
of the United States. To the extent applicable Ohio law or any of the
provisions of this Agreement conflict with applicable provisions of the 1940 Act
or other applicable federal laws and regulations, the latter shall control.
15. Miscellaneous. If any provision of this Agreement shall be held or
-------------
made invalid by a court decision, statute, rule or otherwise, the remainder
shall not be affected thereby. The title of this Agreement and the headings to
the sections herein are for convenience of the parties only, and are not
intended to be part of or affect the meaning or interpretation of this
Agreement. This Agreement constitutes the entire agreement of the parties
hereto with respect to the matters referred to herein, and no other agreement,
verbal or otherwise, shall be binding as between the parties. No failure or
delay on the part of any party hereto in exercising any right, power or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. Any
waiver granted hereunder must be in writing and shall be valid only in the
specific instance in which given. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one original instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed for and on behalf of
the undersigned as of the day and year first above written.
USF&G PACHOLDER FUND, INC.
By:
--------------------------------
Anthony L. Longi, Jr., President
KENWOOD ADMINISTRATIVE
MANAGEMENT, LIMITED PARTNERSHIP
By: Kenwood Administrative Management, Inc.,
its general partner
By:
--------------------------------
James E. Gibson, President
-8-
<PAGE>
Schedule A
----------
AMENDED FEE SCHEDULE
Annual Fee
- ----------
For the services provided to the Fund pursuant to the Accounting Services
Agreement, the Fund shall pay the Agent an annual fee calculated based upon the
average weekly net assets of the Fund and payable monthly as follows:
First $100 million 2.5 basis points
Over $100 million 1.5 basis points
In the event the Agreement is in effect for only aportion of any one month,
the fee payable shall be reduced proportionately on the basis of the number of
business days (any day on which the New York Stock Exchange is open for trading)
during which the Agreement is in effect for that month.
Expenses
- --------
The fund shall also reimburse the Agent for its reasonable out-of-pocket
expenses as they relate to services provided under the Agreement including, but
not limited to, expenses for such customary items as telephone and
telecommunications (including facsimile), postage and insurance, courier
services, and independent pricing services.
IN WITNESS WHEREOF, the parties have caused this Amended Fee Schedule to
be executed on their behalf by their duly authorized officers as of this ______
day of March, 1996.
USF&G PACHOLDER FUND, INC.
By:
----------------------------
PACHOLDER ASSOCIATES, INC.
By:
----------------------------
-1-
<PAGE>
[LETTERHEAD OF PIPER & MARBURY L.L.P. APPEARS HERE]
January 17, 1997
USF&G Pacholder Fund, Inc.
Towers of Kenwood
8044 Montgomery Road, Suite 382
Cincinnati, Ohio 45236
Re: Registration Statement on Form N-2
----------------------------------
Dear Sirs:
We have acted as counsel to Pacholder Fund, Inc., a Maryland corporation
(the "Corporation"), in connection with the filing with the Securities and
Exchange Commission (the "Commission") of the Corporation's registration
statement on Form N-2 (File Nos. 333-17313; 811-5639), including all amendments
or supplements thereto (the "Registration Statement"), registering 2,079,850
shares of the Corporation's Common Stock, par value of $.01 per share (the
"Shares"), issuable upon the exercise of non-transferable rights (the "Rights")
to subscribe therefor and registering such Rights under the Securities Act of
1933, as amended (the "Act"). In this capacity, we have examined the charter and
bylaws of the Corporation, the Registration Statement, the corporate action
taken by the Corporation that provides for the issuance of the Rights and
Shares, and such other documents and matters as we have deemed necessary and
appropriate to render the opinions set forth in this letter. In such
examination, we have assumed the authenticity of all documents submitted to us
as originals, the conformity with originals of all documents submitted to us as
certified or photostatic copies, all signatures on all documents submitted to us
for examination are genuine, and all public records reviewed are accurate and
complete.
Based upon and subject to the foregoing, we are of the opinion and
advise you that the Rights and Shares have been duly authorized for issuance
and, when issued and paid for as described in the Registration Statement, the
Shares will be validly issued, fully paid and non-assessable.
<PAGE>
PIPER & MARBURY
L.L.P.
USF&G Pacholder Fund, Inc.
January 17, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm and the opinions set
forth herein in the Registration Statement and the Statement of Additional
Information which is a part thereof. In giving our consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-17313 of USF&G Pacholder Fund, Inc. of our report dated February 13, 1996
appearing in the Statement of Additional Information, which is a part of such
Registration Statement and to the reference to us under the captions "FINANCIAL
HIGHLIGHTS" and "EXPERTS", in such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Dayton, Ohio
January 16, 1997
