<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
File No. 333-_____
[_] Pre-Effective Amendment No. ____
[_] Post-Effective Amendment No. ____
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
File No. 811-5639
[X] Amendment No. 15
PACHOLDER FUND, INC.
Exact Name of Registrant as Specified in Charter
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
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 20036-2430
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. [X]
_________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=====================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Securities Being Amount Being Offering Aggregate Amount of
Registered Registered Price Per Unit (1) Offering Price Registration Fees
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value and
Rights to subscribe therefor 2,374,907 $ 14.52 $ 34,483,650 $ 9,586
=====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457 on the basis of $15.28 per share, the net asset value per share
on January 14, 1999.
____________________________________
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>
Cross Reference Sheet
Part A -- Prospectus
<TABLE>
<CAPTION>
Items in Part A of Form N-2 Location in Prospectus
- --------------------------- ----------------------
<S> <C>
1. Outside Front Cover................................. Outside Front Cover
2. Inside Front and Outside Back Cover Page............ Inside Front Cover; Outside Back Cover
3. Fee Table and Synopsis.............................. Fee Table and Example; Prospectus Summary
4. Financial Highlights............................... Financial Highlights; Information Regarding Senior
Securities
5. Plan of Distribution............................... Outside Front Cover; Prospectus Summary;
The Offer
6. Selling Shareholders............................... Not applicable
7. Use of Proceeds.................................... Use of Proceeds
8. General Description of the Registrant.............. Outside Front Cover; Prospectus Summary;
The Fund; Investment Policies and Limitations;
Incorporation of Financial Information by
Reference
9. Management......................................... Prospectus Summary; Management of the Fund
10. Capital Stock, Long-Term Debt, and Other Securities Description of Capital 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.......................... Not applicable
</TABLE>
Part B -- Statement of Additional Information
<TABLE>
<CAPTION>
Items in Part B of Form N-2
- ---------------------------
<S> <C>
14. Cover Page......................................... Not applicable
15. Table of Contents.................................. Not applicable
16. General Information and History.................... Prospectus Summary; The Fund
17. Investment Objective and Policies.................. Prospectus Summary; Investment Policies and
Limitations
18. Management......................................... Prospectus Summary; Management of the Fund
19. Control Persons and Principal Holders
of Securities...................................... Management of the Fund; Description of Capital
Stock
20. Investment Advisory and Other Services............. Prospectus Summary; Management of the Fund;
The Offer; Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar; Experts
21. Brokerage Allocation and Other Practices........... Management of the Fund
22. Tax Status......................................... Federal Taxation
23. Financial Statements............................... Incorporation of Financial Statements By Reference
</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>
SUBJECT TO COMPLETION
PACHOLDER FUND, INC.
________ Shares of Common Stock
Issuable Upon Exercise of Rights to Subscribe
for Such Shares of Common Stock
Pacholder Fund, Inc. is issuing non-transferable rights to its
shareholders. You will receive one right for each share of common stock you own
on the record date, which is _____ __, 1999. These rights entitle you to
subscribe for shares of the Fund's common stock. You may purchase one new share
of common stock for every three rights you receive. If you receive fewer than
three rights, you will be entitled to buy one share. Also, you may purchase the
shares not acquired by other shareholders in this rights offering, subject to
the limitations as discussed in this prospectus.
The subscription price will be __% of the net asset value of a share of
common stock on the expiration date of the offer. You will not know the actual
subscription price at the time you exercise your rights. Once you subscribe for
shares and your payment is received, you will not be able to change your
decision.
The Fund's shares of common stock are listed, and the shares issued in this
offer will be listed, on the American Stock Exchange under the symbol "PHF." On
_____ __, 1999, the net asset value per share of the Fund's common stock was
$____ and the last reported sale price of a share on the Exchange was $____.
This offer will expire at 5:00 p.m., Eastern time, on _____ __, 1999,
unless the Fund extends the offer as described in this prospectus.
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. 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 (commonly
referred to as "junk bonds") of domestic companies.
THE FUND'S INVESTMENTS IN "HIGH YIELD, HIGH RISK" SECURITIES AND ITS
LEVERAGED CAPITAL STRUCTURE INVOLVE SPECIAL RISKS. AN INVESTMENT IN THE FUND IS
NOT APPROPRIATE FOR ALL INVESTORS. NO ASSURANCE CAN BE GIVEN THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. SEE THE "RISK FACTORS AND SPECIAL
CONSIDERATIONS" SECTION ON PAGE __ OF THIS PROSPECTUS FOR A MORE COMPREHENSIVE
DISCUSSION OF RISKS.
Further information concerning the Fund and the securities in which it
invests can be found in the Fund's registration statement, of which this
prospectus constitutes a part, on file with the Securities and Exchange
Commission.
<PAGE>
These securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Securities and Exchange Commission passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Estimated Subscription Price $ $
Sales Load $ $
Estimated Proceeds to Fund $ $
</TABLE>
This prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this prospectus and to retain it for future reference.
ALL QUESTIONS AND INQUIRIES RELATING TO THE OFFER SHOULD BE DIRECTED TO
SHAREHOLDER COMMUNICATIONS CORPORATION TOLL FREE AT (800) 733-8481, EXT. ___.
The Fund's address is 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236,
and its telephone number is (513) 985-3200.
The date of this Prospectus is _____ __, 1999
[red herring]
Information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information from this Prospectus. It
may not contain all of the information that is important to you. To understand
the Offer fully, you should read the entire Prospectus carefully, including the
risk factors.
Purpose of the Offer
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of outstanding
shares of the Fund and to increase the assets of the Fund available for
investment. In reaching its decision, the Board noted that investment
opportunities in the lower rated "high yield, high risk" fixed income securities
market have broadened, and that many more investment opportunities for the Fund
exist now than in the recent past. The Board concluded that an increase in the
assets of the Fund would permit the Fund to take advantage of attractive
investment opportunities, consistent with the Fund's investment objective and
policies, while retaining attractive investments in the Fund's portfolio.
In addition, the Board believes that the issuance of additional shares may
enhance the liquidity of the Fund's shares on the American Stock Exchange. Also,
the Offer may lower the Fund's expense ratio. This is because the Fund's fixed
costs can be spread over a larger asset base. The Board believes that the Offer
would permit the Fund to accomplish these objectives while providing existing
shareholders with an opportunity to purchase additional shares of Common
Stock at a price below net asset value without paying a brokerage commission.
The Board of Directors has considered the impact of the Offer on its
current policy to maintain, subject to market conditions, a relatively stable
level of dividends. Based on current market conditions, the Board believes that
the Offer will not result in a decrease in the Fund's current level of dividends
per share, while achieving other net benefits to the Fund.
<TABLE>
<S> <C>
Important Terms of the Offer
Aggregate number of Shares offered..............
Number of Rights issued to each shareholder..... One Right for each whole
share owned on the Record Date
Estimated Subscription Price.................... $
Subscription ratio.............................. One Share for every three Rights
(1-for-3)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Important Dates to Remember
. Record Date................................. _____ __, 1999
. Expiration Date (payment for Shares
and Notices of Guaranteed Delivery due)..... _____ __, 1999*
. Due date for delivery by brokerage
firms or custodian banks of payment
and Subscription Certificates to
Subscription Agent pursuant to Notice
of Guaranteed Delivery...................... _____ __, 1999*+
. Mailing of Shares Not later than _____ __, 1999*
</TABLE>
_____________________
* Unless the Offer is extended.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed
Delivery by _____ __, 1999.
Shareholders Should Direct Their Questions to the Information Agent:
Shareholder Communications Corporation
17 State Street, 27th Floor
New York, New York 10004
Toll Free: (800) 733-8481, ext. ___
How to Exercise Rights
If your existing shares are held in a brokerage account or by a custodian
bank or trust company, contact your broker or financial advisor for additional
instructions on how to participate in the Offer. Complete, sign and date the
enclosed Subscription Certificate. Make your check or money order payable to
"Pacholder Fund, Inc." in the amount of $___ for each Share you wish to buy,
including any Shares you wish to buy pursuant to the Over-Subscription
Privilege. This payment may be more or less than the actual Subscription Price.
Additional payment may be required when the actual Subscription Price is
determined.
You should mail the Subscription Certificate and your payment in the
enclosed envelope to State Street Bank and Trust Company in a manner that will
ensure receipt prior to 5:00 p.m., Eastern time, on _____ __, 1999, unless
extended.
Once you subscribe for Shares and your payment is received, you will not be
able to change your decision. See "The Offer -- Method for Exercising Rights"
and "Payment for Shares."
Terms of the Offer
The Fund is issuing Rights to its Record Date Shareholders. The Rights
entitle you to subscribe for Shares at the rate of one Share for every three
Rights held by you. You will receive one Right for each share of Common Stock
you hold on the Record Date. For example, if you own 300 shares, you will
receive 300 Rights entitling you to purchase up to 100 additional Shares at the
Subscription Price. You may exercise Rights at any time from the date of this
Prospectus until 5:00 p.m., Eastern time, on _____ __, 1999, unless extended.
<PAGE>
In addition, if you subscribe for the maximum number of Shares to which you
are entitled, you also may subscribe for Shares that were not otherwise
subscribed for by other shareholders. Shares acquired pursuant to the Over-
Subscription Privilege are subject to allotment, which is more fully discussed
below under "The Offer -- Over-Subscription Privilege" on page ___.
The Fund
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. 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.
The Fund invests in a portfolio comprised primarily of lower rated "high
yield, high risk" fixed income securities (commonly referred to as "junk bonds")
and other types of high risk securities. The Fund maintains a leveraged capital
structure which creates the opportunity for greater total returns, but also
involves certain substantial additional risks.
No assurance can be given that the Fund will achieve its investment
objective.
The Adviser
Pacholder & Company, LLC serves as the Fund's investment adviser.
Pacholder & Company served as the Fund's investment adviser from the date the
Fund commenced operations in 1988 until August 1998.
The overall portfolio management strategy for the Fund is determined under
the general supervision and direction of William J. Morgan. Anthony L. Longi,
Jr. is responsible for the day-to-day management of the Fund's portfolio.
The Adviser's fee is based on the average net assets of the Fund. Thus,
the Adviser will benefit from an increase in the Fund's assets resulting from
the Offer. The Dealer Manager, the Administrator and Pacholder Associates,
affiliates of the Adviser, also will benefit from the Offer.
Risk Factors and Special Considerations
Before exercising your Rights pursuant to the Offer, you should consider
the factors described in this Prospectus, including without limitation, the
factors described under "The Fund," "Investment Policies and Limitations" and
"Risk Factors and Special Considerations." These factors include the effects of
the Offer, the effects of the Fund's use of leverage, the significant and
substantial risks involved in investing in lower rated "high yield, high risk"
fixed income securities, the limitations on the ability of the Fund to pay
dividends if it fails to meet certain asset coverage requirements, and the fact
that shares of the Fund's Common Stock sometimes trade above or below their net
asset value.
-3-
<PAGE>
FEE TABLE AND EXAMPLE
The following Fee Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in the Fund will bear
directly or indirectly.
<TABLE>
<CAPTION>
Fee Table:
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per Share)(1)............... 2.90%
Annual Expenses (as a percentage of net assets attributable to Common Stock)
Management Fees(2)................................................................ 1.35%
Administration Fees............................................................... 0.15%
Other Expenses(3)................................................................. 0.23%
Total Annual Expenses........................................................ 1.73%
- ----------
</TABLE>
(1) The Fund will pay to broker-dealers that have executed and delivered a
Soliciting Dealer Agreement with the Fund solicitation fees equal to 2.00%
of the Subscription Price per Share for each Share issued pursuant to the
exercise of Rights as a result of their soliciting efforts. The Fund has
agreed to pay Winton Associates, Inc. (the "Dealer Manager") a fee for its
financial advisory, marketing and soliciting services equal to 0.90% of the
aggregate Subscription Price for Shares issued pursuant to the Offer. The
Fund also has agreed to reimburse the Dealer Manager for its expenses
relating to the Offer up to an aggregate of $50,000. In addition, the Fund
has agreed to pay fees to the Subscription Agent and the Information Agent,
estimated to be $_____ and $_____, respectively, for their services related
to the Offer, excluding reimbursement for their out-of-pocket expenses.
These fees and expenses will be borne by the Fund and indirectly by all of
the Fund's shareholders, including those shareholders who do not exercise
their Rights.
(2) Based on the 0.90% "fulcrum fee" applied to the Fund's net assets
attributable to Common Stock as required by SEC regulations. The Fund pays
the Adviser a monthly fee at an annual rate ranging from 0.40% to 1.40%. For
the fiscal year ended December 31, 1998 (unaudited), the Fund paid
Management Fees equal to 0.80% of its net assets attributable to Common
Stock and 0.53% of its average net assets. See "Management of the Fund--The
Adviser."
(3) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offer assuming that
all of the Rights are exercised and assuming the Fund increases its leverage
by issuing an additional series of Preferred Stock as described under
"Description of Capital Stock" at page __ of this Prospectus.
Example:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
1 Year 3 Years 5 Years 10 Years
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming a 5% annual
return throughout the periods $ 47 $ 84 $ 124 $ 234
</TABLE>
-4-
<PAGE>
The Example set forth above assumes reinvestment of all dividends and other
distributions at net asset value, and an annual expense ratio of 1.73%. The Fee
Table above and the assumption in the Example of a 5% annual return are required
by SEC regulations applicable to all management investment companies. THE
EXAMPLE AND FEE TABLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN, WHICH MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE AND FEE TABLE. In addition, while the
Example assumes reinvestment of all dividends and other distributions at net
asset value, participants in the Fund's Dividend Reinvestment Plan may receive
shares purchased or issued at a price or value different from net asset value.
See "Dividends and Distributions."
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of
Common Stock outstanding throughout each period presented. The financial
highlights for each of the five years ended December 31, 1997 have been audited
by Deloitte & Touche LLP, the Fund's independent auditors, whose report thereon
was unqualified. The information should be read in conjunction with the
financial statements and notes thereto, which are incorporated herein by
reference, in the Fund's December 31, 1997 Annual Report and unaudited June 30,
1998 Semi-Annual Report, which are available upon request from the Fund.
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1998
(Unaudited) Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 17.40 $17.44 $16.02 $ 16.86 $ 19.23 $18.52
------- ------ ------ ------ ------- ------
Net investment income ..................................... 1.16 2.22 2.16 2.19 2.12 2.48
Net realized and unrealized gain/(loss) on investments .... (0.07) 0.83 1.42 (0.06) (1.64) 1.42
------- ------ ------ ------ ------- ------
Net increase in net asset value
resulting from operations ................................ 1.09 3.05 3.58 2.13 0.48 3.90
------- ------ ------ ------ ------- ------
Distributions to Stockholders from:
Preferred dividends ....................................... (0.25) (0.49) (0.46) (0.29) (0.24) (0.38)
Common:
Net investment income and short-term gains ............... (0.85) (1.72) (1.70) (1.90) (1.92) (2.09)
Net realized long-term gains ............................. -- (0.16) -- -- -- (0.21)
------- ------ ------ ------ ------- ------
Total distributions to preferred and common stockholders .. (1.10) (2.37) (2.16) (2.19) (2.16) (2.68)
------- ------ ------ ------ ------- ------
Capital Change Resulting from the Issuance of Fund Shares:
Common Shares ............................................. -- (0.69) -- (0.67) (0.69) (0.51)
Preferred Shares .......................................... -- (0.03) -- (0.11) -- --
------- ------ ------ ------ ------- ------
-- (0.72) -- (0.78) (0.69) (0.51)
------- ------ ------ ------ ------- ------
Net asset value, end of period ............................ $ 17.39 $17.40 $17.44 $ 16.02 $ 16.86 $19.23
======= ====== ====== ====== ======= ======
Market value per share, end of period ..................... $ 18.25 $18.19 $17.88 $ 17.38 $ 16.75 $21.25
======= ====== ====== ====== ======= ======
TOTAL INVESTMENT RETURN:
Based on market value per share (1) ....................... 5.24% 13.23% 14.37% 16.04% (11.12%) 22.41%
Based on net asset value per share (2) .................... 4.83% 15.44% 20.40% 10.68% 0.72% 20.27%
RATIOS TO AVERAGE NET ASSETS (3):
Expenses ................................................. 1.26%* 1.47% 1.80% 0.86% 1.64% 1.81%
Net investment income .................................... 9.37%* 8.92% 9.21% 10.45% 10.17% 10.33%
SUPPLEMENTAL DATA:
Net assets at end of period, net of
preferred stock (000) .................................... $123,540 $123,442 $87,054 $ 79,596 $58,925 $44,458
Average net assets during period,
net of preferred stock (000) ............................. $126,200 $118,893 $83,074 $ 79,614 $59,002 $43,275
Portfolio turnover rate ................................... 44% 116% 76% 83% 102% 97%
Number of preferred shares outstanding
at end of period ......................................... 2,450,000 2,450,00 1,650,000 1,650,000 8,600 9,400
Asset coverage per share of preferred
stock outstanding at end of period ....................... $ 70 $ 70 $ 73 $ 66 $ 7,852 $ 5,730
Liquidation and average market value per
share of preferred stock.................................... $ 20 $ 20 $ 20 $ 20 $ 1,000 $ 1,000
</TABLE>
*Annualized
(1) Total investment return excludes the effects of commissions.
(2) Dividends and distributions, if any, are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's Dividend
Reinvestment Plan. Rights offerings, if any, are assumed, for purposes of
this calculation, to be fully subscribed under the terms of the rights
offering.
(3) 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.
-5-
<PAGE>
CAPITALIZATION AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Amount Held
Amount By Fund For
Title of Class Amount Authorized Outstanding Its Account
--------------- ------------------ ------------- ------------
<S> <C> <C> <C>
Common Stock, $.01 par value.................... 47,550,000 shares 7,124,721 shares 0 shares
Cumulative Preferred Stock, $.01 par value...... 2,450,000 shares 2,450,000 shares 0 shares
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of
senior security of the Fund as of the end of each fiscal year of the Fund since
its inception.
<TABLE>
<CAPTION>
Involuntary
Liquidation Approximate
Total Amount Asset Coverage for Preference Market Value
At December 31 Outstanding (shs) Shares ($) (4) Per Share ($) Per Share (5)
----------------- ---------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
8.60% Cumulative 1992(1) 10,000 4,400 1,000 --
Preferred Stock 1993 9,400 5,730 1,000 --
1994 8,600 7,852 1,000 --
6.95% Cumulative 1995(2) 1,650,000 66 20 --
Preferred Stock 1996 1,650,000 73 20 --
Cumulative 1997(3) 2,450,000 70 20 --
Preferred Stock 1998 2,450,000 70 20 --
</TABLE>
___________________
(1) 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 of such stock having an aggregate liquidation value of $800,000.
(2) 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.
(3) On March 3, 1997, the shares of 6.95% Cumulative Preferred Stock were
exchanged on a share-for-share basis for shares of Series A Cumulative
Preferred Stock and the Fund issued 800,000 shares of Series B Cumulative
Stock. On December 14, 1998, the shares of Series A and Series B Cumulative
Preferred Stock were exchanged on a share-for-share basis for shares of
Series C and Series D Cumulative Preferred Stock, respectively. The Fund
expects to issue an additional series of Cumulative Preferred Stock upon
completion of the Offer. See "The Fund," "Risk Factors and Special
Considerations" and "Description of Capital Stock--Preferred Stock."
(4) Amount shown is per share of Preferred Stock. Calculated by subtracting the
Fund's total liabilities (not including senior securities constituting debt
but including Preferred Stock) from the Fund's total assets and dividing
such amount by the number of outstanding shares of Preferred Stock.
(5) All shares of Preferred Stock have been issued in private placements and
there have been no market transactions.
-6-
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the Offer or that the shares will not
again trade at a discount. Shares of closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sales prices of the Fund's
Common Stock on the American Stock Exchange (the "Exchange"), quarterly trading
volume on the Exchange, the high and low net asset value per share, and the high
and low premium or discount at which the Fund's shares were trading for each
fiscal quarter during the two most recent fiscal years.
<TABLE>
<CAPTION>
Market Price Quarterly Trading
Quarter Ended High Low Volume (000s)
- --------------------------- ---- --- -------------
<S> <C> <C> <C>
March 31, 1997............. 18.75 16.625 2,061
June 30, 1997.............. 18.00 16.625 597
September 30, 1997......... 18.00 17.3125 799
December 31, 1997.......... 18.6875 17.4375 843
March 31, 1998............. 18.875 18.00 652
June 30, 1998.............. 18.8125 17.875 473
September 30, 1998......... 18.4375 14.50 664
December 31, 1998.......... 16.8125 15.00 460
<CAPTION>
Premium/(Discount)
Net Asset Value To Net Asset
Quarter Ended High Low Value (%)
- --------------------------- ---- --- ---------
<S> <C> <C> <C> <C>
March 31, 1997............. 18.06 16.68 5.18 (5.87)
June 30, 1997.............. 17.74 16.57 2.72 (0.31)
September 30, 1997......... 18.15 17.32 2.14 (1.40)
December 31, 1997.......... 17.96 17.36 4.77 (1.57)
March 31, 1998............. 18.13 17.51 4.94 2.28
June 30, 1998.............. 17.89 17.39 6.38 1.17
September 30, 1998......... 17.57 15.07 6.38 (9.94)
December 31, 1998.......... 15.64 14.30 11.48 4.89
</TABLE>
The net asset value per share of the Fund's Common Stock at the close of
business on January 14, 1999 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement of the Offer), and on
_____ __, 1999, was $15.28 and $___, respectively, and the last reported sales
price of a share of the Fund's Common Stock on the Exchange on those dates was
$16.1875 and $___, respectively.
THE FUND
Pacholder Fund, Inc. (the "Fund") is a diversified, closed-end management
investment company with a leveraged capital structure. 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. An investment in the Fund may not be
appropriate for all investors, and no assurance can be given that the Fund will
achieve its investment objective.
The Fund invests primarily in fixed income securities rated in the lower
categories by established rating agencies, consisting principally of fixed
income securities rated BB or lower by Standard & Poor's Ratings Group ("S&P")
and Ba or lower by Moody's Investors Service, Inc.("Moody's"), or non-rated
fixed income securities deemed by the Adviser to be of comparable quality.
Securities rated BB or lower by S&P or Ba or lower by Moody's are commonly
referred to as
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<PAGE>
"high yield, high risk" securities or "junk bonds." Such securities generally
are regarded by the rating agencies as significantly more speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and more likely to default than higher quality debt
securities. (See Appendix A for a description of Bond Ratings.) The Fund also
may invest in U.S. dollar denominated high yield debt securities issued by
foreign companies, as well as securities issued or guaranteed by foreign
governments, quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities. No more than 25% of the Fund's total
assets will be invested in U.S. dollar denominated foreign issues. Investment in
lower rated securities and foreign securities involves special risks. See
"Investment Policies and Limitations" and "Risk Factors and Special
Considerations."
The Fund may invest up to 25% of its total assets in securities that are
restricted as to disposition under the federal securities laws or are otherwise
not readily marketable, as well as in repurchase agreements maturing in more
than seven days. Securities eligible for resale in accordance with Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act") that have
legal or contractual restrictions on resale but are otherwise liquid ("Rule 144A
Securities") are not subject to this 25% limitation. The Adviser monitors the
liquidity of such restricted securities under the supervision of the Board of
Directors. The Fund may invest in securities that are in the lower rating
categories or non-rated securities, but only when the Adviser believes that the
potential return from such investments remains attractive despite the risks
involved. In addition to investing in such lower rated debt securities, the Fund
also may invest in equity and other debt securities; and hybrid securities
having debt and equity characteristics.
The Fund is a closed-end investment company. These companies differ from
open-end investment companies (commonly referred to as "mutual funds") in that
closed-end investment companies have a fixed capital base, whereas open-end
companies issue securities redeemable at net asset value at any time at the
option of the shareholder and typically engage in a continuous offering of their
shares. Accordingly, open-end investment companies are subject to periodic
asset in-flows and out-flows that can complicate portfolio management. Closed-
end investment companies do not face the prospect of having to liquidate
portfolio holdings to satisfy redemptions at the option of shareholders or
having to maintain cash positions to meet the possibility of such redemptions.
The Fund will, however, be required to have sufficient cash or cash equivalents
to meet dividend payments on its preferred stock and to fund certain redemptions
of the outstanding shares of preferred stock in certain circumstances. See
"Description of Capital Stock--Preferred Stock."
The Fund completed a non-transferable rights offering in March 1993 which
permitted shareholders to acquire, at a subscription price of $16.56, one new
share for every four rights held as of the record date of such rights offering.
In addition, the Fund completed non-transferable right offerings on March 24,
1994, March 16, 1995 and March 14, 1997, which permitted shareholders to
acquire, at a subscription price of $17.71, $15.65 and $16.25, respectively,
one new share for each three rights held as of the respective record dates of
such rights offerings. All of the rights issued by the Fund pursuant to the
rights offerings completed
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<PAGE>
in March 1993 and March 1994 were exercised and, as a result, 459,088 shares of
Common Stock were issued in March 1993 with net proceeds to the Fund of
approximately $7.4 million and 1,160,115 shares of Common Stock were issued in
March 1994 with net proceeds to the Fund of approximately $20.4 million. All of
the rights issued by the Fund pursuant to the rights offerings completed in
March 1995 and March 1997 were exercised plus an additional 25% pursuant to the
exercise of an over-allotment option by subscribers and, as a result, 1,457,942
new shares of Common Stock were issued in March 1995 with net proceeds to the
Fund of approximately $22.0 million and 2,079,850 new shares of Common Stock
were issued in March 1997 with net proceeds to the Fund of approximately $32.7
million. All of the net proceeds from the exercise of the rights issued pursuant
to the prior rights offerings have been invested in accordance with the Fund's
investment objective and policies.
The Fund was organized as a corporation under the laws of Maryland on
August 17, 1988 and has registered with the SEC under the Investment company Act
of 1940, as amended (the "1940 Act"). The Fund's principal office is located at
8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236, and its telephone
number is (513) 985-3200. The Fund's investment adviser is Pacholder & Company,
LLC (the "Adviser"), an investment management firm registered with the SEC under
the Investment Advisers Act of 1940. See "Management of the Fund--The Adviser."
THE OFFER
Purpose of the Offer
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of outstanding
shares of Common Stock and to increase the assets of the Fund available for
investment by making the Offer. The Adviser informed the Board of Directors
that it believes the high-yield bond market presents a number of attractive
investment opportunities. The Board of Directors concluded that an increase in
the assets of the Fund would permit the Fund to take advantage of these
opportunities, consistent with the Fund's investment objective and policies,
while retaining attractive investments in the Fund's portfolio. The Board
considered that the Offer may enhance the Fund's ability to buy and sell larger
blocks of securities on better terms. The Board of Directors believes that the
Offer would permit the Fund to accomplish these objectives while allowing
existing shareholders an opportunity to purchase additional shares of Common
Stock at a price below net asset value without paying a brokerage commission.
The Board of Directors believes that a larger number of outstanding shares
and a larger number of shareholders could increase the level of market interest
in the Fund and the liquidity of the Fund's shares on the Exchange. The Board
of Directors also believes that increasing the size of the Fund may lower its
expenses as a percentage of average net assets because the Fund's fixed costs
can be spread over a larger asset base.
The Board of Directors also considered the impact of the Offer on the
Fund's current monthly dividends. Based on the Adviser's assessment of
current market conditions in the lower rated debt market and available leverage
opportunities, the Board of Directors believes the Offer will not result in a
decrease in the Fund's current level of dividends per share. For a further
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<PAGE>
discussion of the anticipated impact of the Offer on the Fund's dividends and
other distributions, please refer to "Risk Factors and Special
Considerations -- Dividends and Distributions."
In considering the Offer and its effect on the Fund and its shareholders,
the Board of Directors retained the Dealer Manager to provide the Fund with
financial advisory, marketing and soliciting services relating to the Offer,
including the structure, timing and terms of the Offer. In addition to the
foregoing, the Board of Directors considered, among other things, the benefits
and drawbacks of conducting a transferable rights offering versus a non-
transferable offering, the pricing structure of the Offer, the effect on the
Fund if the Offer is undersubscribed, and the experience of the Dealer Manager
in conducting rights offerings. Since the fees of the Adviser, the
Administrator and Pacholder Associates are based on the Fund's average net
assets, the Adviser, the Administrator and Pacholder Associates will benefit
from an increase in the Fund's assets resulting from the Offer. See "Management
of the Fund--The Adviser" and "--Administrative and Accounting Services."
The Fund may, in the future and at its discretion, choose to 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.
Terms of the Offer
The Fund is issuing to its shareholders of record ("Record Date
Shareholders"), as of the close of business on _________ __, 1999 (the "Record
Date"), non-transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of ___________ shares (the "Shares") of the Fund's
Common Stock (the "Offer"). Each Record Date Shareholder is being issued one
Right for each whole share of Common Stock owned on the Record Date. The Rights
entitle the holders thereof to subscribe for one Share for every three Rights
held (1-for-3) (the "Primary Subscription"). Fractional shares will not be
issued upon the exercise of Rights. Record Date Shareholders issued fewer than
three Rights are entitled to subscribe for one Share pursuant to the Primary
Subscription.
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, the
Shares have been approved for listing on the Exchange. Record Date Shareholders
purchasing Shares in the Primary Subscription or pursuant to the Over-
Subscription Privilege are hereinafter referred to as "Exercising Rights
Holders."
Rights may be exercised at any time during the subscription period (the
"Subscription Period"), which commences on _____ __, 1999 and ends at 5:00 p.m.,
Eastern time, on _____ __, 1999, unless extended by the Fund (the "Expiration
Date"). The Rights are evidenced by subscription certificates ("Subscription
Certificates") that will be mailed to Record Date Shareholders, except as
discussed below under "Foreign Shareholders."
Shares not subscribed for in the Primary Subscription will be offered, by
means of the over-subscription privilege (the "Over-Subscription Privilege"), to
those Record Date
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<PAGE>
Shareholders who have exercised all Rights issued to them and who wish to
acquire more than the number of Shares they are entitled to purchase pursuant to
the exercise of their Rights (other than those Rights which cannot be exercised
because they represent the right to acquire less than one Share). Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
as more fully discussed below under "Over-Subscription Privilege." For purposes
of determining the maximum number of Shares a shareholder may acquire pursuant
to the Offer, shareholders whose shares are held of record by Cede & Co.
("Cede"), as nominee for The Depository Trust Company ("DTC"), or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf.
The first dividend to be paid on Shares acquired upon exercise of Rights
will be the first monthly dividend, the record date for which occurs after the
issuance of the Shares. Assuming the Subscription Period is not extended, it is
expected that the first dividend received by shareholders acquiring Shares in
the Offer will be paid on the tenth day of _______. "Business Day" means a day
on which the Exchange is open for trading and which is not a Saturday or Sunday
or a holiday, including New Year's Day, Martin Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day,
Christmas Day, or any other day on which banks in New York City or Boston are
authorized or obligated by law or executive order to close.
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
Over-Subscription Privilege
Shares not subscribed for by Record Date Shareholders (the "Excess Shares")
will be offered, by means of the Over-Subscription Privilege, to the Record Date
Shareholders who have exercised all exercisable Rights issued to them (other
than those Rights which 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 the Rights issued to them, how many Excess
Shares they are willing to acquire pursuant to the Over-Subscription Privilege.
If sufficient Excess Shares remain, all Record Date Shareholders' over-
subscription requests will be honored in full. If Record Date Shareholder
requests for Shares pursuant to the Over-Subscription Privilege exceed the
Excess Shares available, the available Excess Shares will be allocated pro rata
among Record Date Shareholders who oversubscribe based on the number of Rights
originally issued to such Record Date Shareholders.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights
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<PAGE>
exercised pursuant to the Primary Subscription and the number of Shares
subscribed for pursuant to the Over-Subscription Privilege by such beneficial
owner and that such beneficial owner's Primary Subscription was exercised in
full. Nominee Holder Over-Subscription Forms and Beneficial Owner Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the Over-
Subscription Privilege.
Subscription Price
The Subscription Price for each Share to be issued pursuant to the Offer
will be _____% of the net asset value of a share of Common Stock as of the close
of business on the Expiration Date.
Exercising Rights Holders will not know the actual Subscription Price at
the time of exercise and will be required initially to pay for Shares at the
Estimated Subscription Price of $____ per Share (based on the Fund's net asset
value per share on _____ __, 1999). The actual Subscription Price may be more
than the Estimated Subscription Price.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on January __, 1999. The net asset values per share at
the close of business on January 14, 1999 (the last trading date on which the
Fund publicly reported its net asset value prior to the announcement) and on
_____ __, 1999 (the last trading date prior to the date of this Prospectus on
which the Fund publicly reported its net asset value) were $15.28 and $___,
respectively, and the last reported sales prices of a share on the Exchange on
those dates were $16.1875 and $___, respectively.
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern time, on _____ __, 1999, unless
extended by the Fund. The Rights will expire on the Expiration Date and
thereafter may not be exercised. The Fund may make one or more extensions of
the Offer, as discussed below, up to an aggregate of 45 days from the Expiration
Date. Any extension of the Offer will be followed as promptly as practicable by
announcement thereof. Such announcement will be issued no later than 9:00 a.m.,
Eastern time, on the next Business Day following the previously scheduled
Expiration Date. Without limiting the manner in which the Fund may choose to
make such announcement, the Fund will not, unless otherwise required by law,
have any obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as the Fund deems appropriate.
Subscription Agent
The subscription agent is State Street Bank and Trust Company (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent a
fee estimated to be approximately $_____, excluding
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reimbursement for its out-of-pocket expenses related to the Offer. Questions
regarding the Subscription Certificates should be directed to Shareholder
Communications Corporation at (800) 733-8481, ext. ____ (toll free);
shareholders may also consult their brokers or nominees. Completed Subscription
Certificates must be sent together with proper payment of the Estimated
Subscription Price for all Shares subscribed for in the Primary Subscription and
the Over-Subscription Privilege to the Subscription Agent by one of the methods
described below. Alternatively, Notices of Guaranteed Delivery may be sent by
brokerage firms and custodian banks and trust companies exercising Rights on
behalf of Exercising Rights Holders whose Shares are held by such institutions
by facsimile to (___) ___-____ to be received by the Subscription Agent prior to
5:00 p.m., Eastern time, on the Expiration Date. Facsimiles should be confirmed
by telephone at (___) ___-____. The Fund will accept only properly completed and
executed Subscription Certificates actually received at any of the addresses
listed below, prior to 5:00 p.m., Eastern time, on the Expiration Date or by the
close of business on the third Business Day after the Expiration Date following
timely receipt of a Notice of Guaranteed Delivery. See "Payment for Shares"
below.
(1) BY FIRST CLASS MAIL:
(2) BY OVERNIGHT COURIER:
(3) BY HAND:
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL
NOT CONSTITUTE VALID DELIVERY.
Method for Exercising Rights
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the Record
Date to Record Date Shareholders or, if a shareholder's shares are held by Cede
or any other depository or nominee on their behalf, to Cede or such depository
or nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares to be purchased at the Estimated Subscription Price by the Expiration
Date. Rights may also be exercised by contacting your broker, bank or trust
company, which can arrange, on your behalf, to guarantee delivery of payment and
delivery of a properly completed and executed Subscription Certificate pursuant
to a Notice of Guaranteed Delivery by the close of business on _____ __, 1999,
the third Business Day after the Expiration Date. A fee may be charged by the
broker, bank or trust company for this service. Fractional Shares will not be
issued upon the exercise of Rights.
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<PAGE>
Completed Subscription Certificates must be received by the Subscription Agent
prior to 5:00 p.m., Eastern time, on the Expiration Date at one of the addresses
set forth above (unless the guaranteed delivery procedures are complied with as
described below under "Payment for Shares"). Exercising Rights Holders will have
no right to rescind their subscriptions after receipt of their payment for
Shares by the Subscription Agent.
Shareholders Who are Record Owners. Shareholders who are record owners can
choose between two options to exercise their Rights, as described below under
"Payment for Shares." If time is of the essence, option (2) under "Payment for
Shares" below will permit delivery of the Subscription Certificate and payment
after the Expiration Date, but such delivery of the Subscription Certificate
must be accompanied by a Notice of Guaranteed Delivery from a financial
institution meeting certain requirements.
Shareholders Whose Shares are Held by a Nominee. Shareholders whose shares
are held by a nominee, such as a bank, broker or trustee, must contact that
nominee to exercise their Rights. In such case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."
Nominees. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment as described below under "Payment for Shares."
Information Agent
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
Shareholder Communications Corporation (the "Information Agent") at its
telephone number and address listed below:
17 State Street, 27th floor
New York, New York 10004
Toll Free: (800) 733-8481, ext. ___
Shareholders also may contact their brokers or nominees for information with
respect to the Offer. The Information Agent will receive a fee estimated to be
$_______, excluding reimbursement for its out-of-pocket expenses related to the
Offer.
Payment for Shares
Shareholders who wish to acquire Shares pursuant to the Offer may choose
between the following methods of payment:
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<PAGE>
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment (based on the Estimated Subscription Price) for
the Shares acquired in the Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege to
the Subscription Agent. A subscription will be accepted when payment,
together with a properly completed and executed Subscription
Certificate, is received by the Subscription Agent's office at one of
the addresses set forth above no later than 5:00 p.m., Eastern time, on
the Expiration Date. The Subscription Agent will deposit all checks and
money orders received by it for the purchase of Shares into a
segregated interest-bearing account (the interest from which will
accrue to the benefit of the Fund) pending proration and distribution
of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY
MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO PACHOLDER FUND, INC. AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS
SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., EASTERN TIME, ON
THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK
OR MONEY ORDER.
(2) Alternatively, an Exercising Rights Holder may acquire Shares, and a
subscription will be accepted by the Subscription Agent if, prior to
5:00 p.m., Eastern time, on the Expiration Date, the Subscription Agent
has received a Notice of Guaranteed Delivery by facsimile (telecopy) 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 Estimated
Subscription Price for the Shares subscribed for in 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 and full payment for the Shares is received by
the Subscription Agent by the close of business on ______ __, 1999, the
third Business Day after the Expiration Date.
On a date within eight Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription, (ii) the number of
Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) any
excess to be refunded by the Fund to such Exercising Rights Holder as a result
of payment for Shares pursuant to the Over-Subscription Privilege which the
Exercising Rights Holder is not
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<PAGE>
acquiring and (iv) any additional amount payable by such Exercising Rights
Holder to the Fund or any excess to be refunded by the Exercising Rights Holder
to the Fund, in each case, based on the actual Subscription Price as determined
on the Expiration Date. Any additional payment required from Exercising Rights
Holders must be received by the Subscription Agent within seven Business Days
after the Confirmation Date. Any excess payment to be refunded by the Fund to an
Exercising Rights Holder will be mailed by the Subscription Agent as promptly as
practicable. All payments by Exercising Rights Holder must be in U.S. dollars by
money order or check drawn on a bank or branch located in the United States and
payable to PACHOLDER FUND, INC.
The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will accrue to the benefit of the Fund) pending proration and distribution of
the Shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE BY THE
TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE SUBSCRIPTION AGENT RESERVES
THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (I) FIND OTHER RECORD
DATE SHAREHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES; (II) APPLY ANY
PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER
OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY
SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/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.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion. The Subscription Agent will not be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
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<PAGE>
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
Distribution Arrangements
Winton Associates, Inc., 8044 Montgomery Road, Suite 382, Cincinnati, Ohio,
which is a broker-dealer and member of the National Association of Securities
Dealers, Inc., will act as the Dealer Manager for the Offer. Under the terms
and subject to the conditions contained in the Dealer Manager Agreement dated
the date hereof (the "Dealer Manager Agreement"), the Dealer Manager will
provide financial advisory and marketing services in connection with the Offer
and will solicit the exercise of Rights and participation in the Over-
Subscription Privilege. The Offer is not contingent upon any number of Rights
being exercised.
The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 0.90% of the aggregate
Subscription Price for Shares issued pursuant to the Offer. In addition, the
Fund may reimburse the Dealer Manager up to an aggregate of $50,000 for its out-
of-pocket costs and expenses incurred in connection with the Offer.
The Fund will pay to broker-dealers that have entered into a Soliciting
Dealer Agreement with the Fund, solicitation fees equal to 2.00% of the
Subscription Price per Share for each Share issued pursuant to the exercise of
Rights as a result of their soliciting efforts. Fees will be paid to the broker-
dealer designated on the applicable portion of the Subscription Certificates.
The Fund has agreed to indemnify the Dealer Manager or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act. The Dealer Manager Agreement also provides that the Dealer Manager will
not be subject to any liability to the Fund in rendering the services
contemplated by such Agreement except for any act of bad faith, willful
misconduct or gross negligence of the Dealer Manager, or reckless disregard by
the Dealer Manager of its obligations and duties under such Agreement.
The Dealer Manager is a wholly-owned subsidiary of Pacholder Associates, an
affiliate of the Adviser. See "Management of the Fund -- The Adviser." William
J. Morgan and James P. Shanahan, Jr., officers and/or directors of the Fund, are
officers and directors of the Dealer Manager.
Delivery of Share Certificates
Except as described herein, certificates representing Shares acquired in
the Primary Subscription and representing Shares acquired pursuant to the Over-
Subscription Privilege will be mailed promptly after the expiration of the Offer
once full payment for such Shares has been received and cleared. Participants
in the Fund's Dividend Reinvestment Plan will have any Shares acquired in the
Primary Subscription and pursuant to the Over-Subscription Privilege credited to
their shareholder dividend reinvestment accounts in the Plan. Participants in
the Plan wishing to exercise Rights for the shares held in their accounts in the
Plan must exercise such Rights in accordance with the procedures set forth
above. Shareholders whose shares are held of record by Cede or by any other
depository or nominee on their behalf or their broker-dealer's
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<PAGE>
behalf will have any Shares acquired in the Primary Subscription credited to the
account of Cede or such other depository or nominee. Shares acquired pursuant to
the Over-Subscription privilege will be certificated and certificates
representing such Shares will be sent directly to Cede or such other depository
or nominee. Stock certificates will not be issued for Shares credited to Plan
accounts.
Foreign Shareholders
SUBSCRIPTION CERTIFICATES WILL NOT BE MAILED TO RECORD DATE SHAREHOLDERS
WHOSE RECORD ADDRESSES ARE OUTSIDE THE UNITED STATES (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Foreign
Record Date Shareholders will be sent written notice of the Offer. The Rights to
which such 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 have been received by 5:00
p.m., Eastern time, on the Expiration Date, the Rights of those Foreign Record
Date Shareholders will expire and thereafter may not be exercised.
Federal Income Tax Consequences of the Offer
The U.S. federal income tax consequences to shareholders with respect to
the Offer will be as follows:
1. 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 the Rights. No loss
will be realized if the Rights expire without exercise.
2. The basis of a Right will be zero (unless the shareholder elects,
by filing a statement with his timely filed federal income tax return for
the year in which the Rights are received, to allocate the basis of the
share between the Right and the share based on their respective fair market
values immediately after the Right is issued).
3. The holding period of a Right received by a Record Date
Shareholder includes the holding period of the share with regard to which
the Right is issued. If the Right is exercised, the holding period of the
Share acquired begins on the date the Right is exercised.
4. An Exercising Rights Holder's basis for determining gain or loss
upon the sale of a Share acquired upon the exercise of a Right will be
equal to the sum of the Record Date Shareholder's basis in the Right, if
any, and the Subscription Price per Share. An Exercising Rights Holder's
gain or loss recognized upon a sale of a Share acquired upon the exercise
of a Right will be capital gain or loss if the Share was held at the time
of sale as a capital asset and will be long-term capital gain or loss if
the Share is held for more than one year.
-18-
<PAGE>
The foregoing is a general summary of the material U.S. federal income tax
consequences of the Offer under the provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), and Treasury regulations presently in effect
that are generally applicable to Record Date Shareholders that are United States
persons within the meaning of the Code, and does not cover foreign, state or
local taxes. The Code and such regulations are subject to change by legislative
or administrative action, which may be retroactive. Record Date Shareholders
should consult their tax advisors regarding specific questions as to foreign,
federal, state or local taxes. See "Federal Taxation."
Notice of Net Asset Value Decline
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
Shareholders of any such decline and permit Exercising Rights Holders to cancel
their exercise of Rights.
Employee Plan Considerations
Shareholders who are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including
corporate savings and 401(k) plans, Keogh or H.R. 10 plans of self-employed
individuals and individual retirement accounts (collectively, "Retirement
Plans") should be aware that additional contributions of cash to the Retirement
Plan (other than rollover contributions or trustee-to-trustee transfers from
other Retirement Plans) in order to exercise Rights would be treated as
contributions to the Retirement Plan and, when taken together with contributions
previously made, may result in, among other things, excise taxes for excess or
nondeductible contributions. In the case of Retirement Plans qualified under
Section 401(a) of the Code and certain other Retirement Plans, additional cash
contributions could cause the maximum contribution limitations of Section 415 of
the Code or other qualification rules to be violated. It may also be a
reportable distribution and there may be other adverse tax and ERISA
consequences if Rights are sold or transferred by a Retirement Plan.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
individual retirement account ("IRA") is used as security for a loan, the
portion so used is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transaction rules that may impact the exercise of
Rights. Due to the complexity of these rules and the penalties for non-
compliance, Retirement Plans should consult with their counsel and other
advisors regarding the consequences of their exercise of Rights under ERISA and
the Code.
-19-
<PAGE>
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $___ per Share, the net proceeds of the Offer are estimated to be
$________ after payment of the Dealer Manager's fees, the solicitation fees and
the estimated offering expenses. These expenses will be borne by the Fund and
will reduce the net asset value of the Fund's shares. The Adviser anticipates
that investment of substantially all of such net proceeds in accordance with the
Fund's investment objective and policies will take up to sixty days from their
receipt by the Fund, depending on market conditions and the availability of
appropriate securities for purchase, but in no event is such investment expected
to take longer than six months. Pending such investment, the proceeds will be
held in high quality short-term money market instruments and U.S. government
securities (which term includes obligations of the U.S. government, its agencies
or instrumentalities).
INVESTMENT POLICIES AND LIMITATIONS
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.
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
may seek to invest a portion of its portfolio in securities which are trading at
a significant discount from their face value or principal amount. These
securities offer 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 significant 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 company if the Adviser believes accurate financial and
business information is not available.
-20-
<PAGE>
2. Value of Assets. The Adviser generally estimates the value of a company
to measure the risk of loss in case the company is unable to meet its debt
obligations. If the investment is purchased at or below this 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, which may include 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 restructuring or 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 also may 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.
-21-
<PAGE>
As of December 31, 1998, 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 11.16
B............................ 66.77
CCC or Caa................... 5.99
CC or Ca. 0
C............................ 0.16
D............................ 0
Non-rated.................... 10.53
Common Stock/Warrants...... 3.07
Cash and cash equivalents.. 2.32
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.
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.
Investment Policies and Restrictions
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.
Zero Coupon Securities. The Fund may invest in zero coupon securities. Zero
coupon securities are debt securities which are issued at a discount to their
face amount and do not entitle the holder to any periodic payments of interest
prior to maturity. Rather, interest earned on zero coupon securities accretes at
a stated yield until the security reaches its face amount at maturity.
Generally, the prices of zero coupon securities may be more sensitive to market
interest rate fluctuations than conventional securities.
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. See "Risk Factors and Special Considerations--Foreign Securities" for
a discussion of the risks of investing in foreign securities.
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.
-22-
<PAGE>
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 nonaccruing securities for the Fund if, at the time
of proposed acquisition, nonaccruing securities comprise 20% or more of the net
assets of the Fund.
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.
Industrial Development Bonds. 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.
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,
-23-
<PAGE>
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.
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
-24-
<PAGE>
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 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.
Lending Securities
Consistent with applicable regulatory requirements, the Fund may lend up to
25% of its portfolio securities to brokers, dealers, banks or other recognized
institutional borrowers of securities, provided that such loans are callable at
any time by the Fund and are at all times secured by cash or equivalent
collateral that is equal to at least the market value, determined daily, of the
loaned securities. The advantage of such loans is that the Fund continues to
receive the interest and dividends, if any, on the loaned securities, while at
the same time earning a fee or interest from the borrower.
A loan may be terminated by the borrower on one Business Day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms that the Adviser
and the Board of Directors deem to be creditworthy. On termination of the loan,
the borrower is required to return the securities to the Fund, and any gain or
loss in the market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finder's, administrative and custodial fees in connection with a loan of its
securities and may share the interest earned on collateral with the borrower.
-25-
<PAGE>
Investment Restrictions
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and will not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment.
The Fund may not:
(1) Borrow money (through repurchase agreements or otherwise) or issue
senior securities unless immediately thereafter the Fund has an asset
coverage of all senior securities and borrowing of at least 200%;
(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) 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;
(4) 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;
(5) Make loans, except as described above and under "Investment Policies
and Restrictions--Lending Securities" above or by entering into
repurchase agreements;
(6) 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 Policies and
Restrictions--Industrial Development Bonds" above;
(7) Purchase or retain the securities of any company if, to the knowledge
of the Fund, those officers and directors of the Fund or managers 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;
(8) 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
-26-
<PAGE>
(9) 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.
Asset Coverage Restrictions
The Fund's portfolio investments are 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. 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 Adviser does not expect
these asset coverage and other financial tests and restrictions 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."
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. From time to time, the Fund also may
engage 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.
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
-27-
<PAGE>
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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
Dilution
You may experience an immediate dilution of the aggregate net asset value
of your shares of Common Stock if you do not fully exercise your Rights pursuant
to the Offer. This is because the Subscription Price per Share will be less
than the Fund's net asset value per share on the Expiration Date, and the
number of shares of Common Stock outstanding after the Offer is likely to
increase in a greater percentage than the increase in the size of the Fund's
assets. Such dilution could be substantial. For example, assuming that all
Rights are exercised at the Estimated Subscription Price of $___, the Fund's net
asset value per share (after payment of the Dealer Manager and soliciting fees
and estimated offering expenses) would be reduced by approximately $___ per
share.
You should also expect that if you do not fully exercise your Rights you
will, at the completion of the Offer, own a smaller proportional interest in the
Fund than would otherwise be the case.
Risk of Leverage
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
risks include a higher volatility of the net asset value of the Common Stock and
potentially more volatility in the market value of the Common Stock. If the
investment performance of the assets purchased with the proceeds of any leverage
fails to cover the dividends on such leverage, the value of the Common Stock may
decrease more quickly than would otherwise be the case and dividends thereon
will be reduced or eliminated. This is the speculative effect of leverage.
The dividend rate on the Fund's Preferred Stock is 7.15% for the Series C
shares and 7.05% for the Series D shares. Based on the dividend rate payable
under the charter, the annual return of the Fund's portfolio must equal at least
2.22% in order to cover the dividend payments on the Fund's outstanding
Preferred Stock. In addition, the Fund expects to issue an additional series
of Preferred Stock upon completion of the Offer.
You, as holders of Common Stock, will bear any decline in the net asset
value of the Fund's investments. As a result, the effect of leverage in a
declining market would result in a greater decrease in net asset value to be
reflected in a greater decline in the market price for the Common Stock. In an
extreme case, if the Fund's current investment income were not sufficient to
meet dividend payments due in respect of any leverage, it could be necessary for
the Fund to
-28-
<PAGE>
liquidate certain of its investments, thereby reducing the net asset
value attributable to the Common Stock. In addition, a decline in the net asset
value of the Fund's investments may affect the ability of the Fund to make
dividend payments on the Common Stock and such failure to pay dividends or make
distributions may result in the Fund ceasing to qualify as a regulated
investment company under the Code.
The issuance of the Preferred Stock and other forms of leverage may
constitute a substantial lien and burden on the Common Stock by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation.
The following table illustrates the effect of leverage (using senior
securities - i.e., $49.0 million of currently outstanding Preferred Stock) on
the return of a holder of Common Stock, assuming a Fund portfolio of
approximately $157 million, the annual returns set forth in such table and
assuming an effective dividend rate of 7.12% payable on the Preferred Stock:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses)........................ -10% -5% 0% 2.22% 5% 10%
Corresponding Return to
Common Stockholders........................ -17.77% -10.50% -3.23% 0% 4.04% 11.31%
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST YOU IN UNDERSTANDING THE EFFECTS OF
LEVERAGE. THE FIGURES IN THE TABLE ARE HYPOTHETICAL AND THE ACTUAL RETURNS TO A
HOLDER OF COMMON STOCK MAY BE GREATER OR LESS THAN THOSE APPEARING IN THE TABLE.
The Fund will not be permitted to declare dividends or other distributions
with respect to the Common Stock or purchase shares of Common Stock unless at
the time the of the Fund meets certain asset coverage requirements, including
those imposed by the 1940 Act. Further, the Fund will not be permitted to pay
any dividends or other distributions with respect to the Common Stock if a
default or an event of default has occurred and is continuing under the Fund's
charter or if payment of such dividend or distribution would result in a default
or an event of default under the charter. Failure to pay dividends or other
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Code.
In the event the Fund fails to satisfy certain asset coverage requirements,
the Fund may be required to redeem immediately all outstanding shares of
Preferred Stock. Redeeming the Preferred Stock would reduce the Fund's leverage
and could negatively affect potential returns with respect to the Common Stock.
Discount from Net Asset Value
Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets attributable to those shares. The possibility
that shares of the Fund will trade at a discount from net asset value is a
separate risk from the risk that the Fund's net asset value will decrease. It
should be noted, however, that in some cases shares of closed-end funds may
trade at a premium to net asset value. The Fund's shares have traded in the
market above, at and below
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<PAGE>
net asset value since the commencement of the Fund's operations. The Fund cannot
predict whether its shares will trade at, below or above net asset value.
The risk of purchasing shares of a closed-end investment company that might
trade at a discount is more pronounced for investors who wish to sell their
shares in a relatively short period of time. For those investors, realization
of gain or loss on their investments is likely to be more dependent upon the
existence of a premium or discount than upon portfolio performance.
High Yield Investments
The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments in
long-term, high yielding, lower quality, fixed income securities. Consistent
with long-term investment approach, investors in the Fund should not rely on
the Fund for their short-term financial needs. The principal value of the lower
quality securities in which the Fund invests will be affected by interest rate
levels, general economic conditions, specific industry conditions and the
creditworthiness of the individual issuer. Although the Fund seeks to reduce
risk by portfolio diversification, extensive credit analysis, and attention to
trends in the economy, industries and financial markets, such efforts will not
eliminate risk.
Fixed income securities offering the high current income sought by the Fund
will ordinarily be in the lower rating categories of recognized rating agencies
or will not be rated. The values of such securities tend to reflect individual
corporate developments or adverse economic change to a greater extent than
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of high yield,
high risk securities and thus in the Fund's net asset value. The rating agencies
generally regard these securities as predominantly speculative with respect to
capacity to pay interest and repay principal and riskier than securities in the
higher rating categories.
The Fund may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal of or interest on its
portfolio holdings. The high yield, high risk securities held by the Fund are
frequently subordinated to the prior payment of senior indebtedness and are
traded in markets that may be relatively less liquid than the market for higher
rated securities. Changes by recognized rating services in their ratings of any
fixed income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of the Fund's investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from such securities, but will affect the Fund's net asset value.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Some of the lower-rated securities in which the Fund invests were issued to
raise funds in connection with the acquisition of a company, in a so-called
"leveraged buy-out" transaction.
-30-
<PAGE>
The highly leveraged capital structure of such issuers may make them especially
vulnerable to adverse changes in economic conditions, including rising interest
rates.
Generally, when interest rates rise, the value of fixed-rate debt
obligations, including high yield, high risk securities, tends to decrease; when
interest rates fall, the value of fixed rate debt obligations tends to increase.
In addition, in a period of rising interest rates the high cost of the Fund's
leverage and/or increasing defaults by issuers of high-yield debt obligations
would likely exacerbate any decline in the Fund's net asset value. If an issuer
of a high yield, high risk security containing a redemption or call provision
exercises either provision in a declining interest rate market, the Fund would
have to replace the security, which could result in a decreased return for
shareholders.
The market for high yield, high risk securities has expanded rapidly in
recent years. This expanded market has not yet completely weathered an
economic downturn. An economic downturn or an increase in interest rates
could have a negative effect on the high yield, high risk securities market
and on the market value of the high yield, high risk securities held by the
Fund, as well as on the ability of the issuers of such securities to repay
principal and interest on their borrowings.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of high
yield, high risk securities. Also, credit rating agencies may fail to change on
a timely basis a credit rating to reflect change in economic or company
conditions that affect a security's market value. Although the Adviser
considers ratings of recognized rating services such as Moody's and S&P, the
Adviser primarily relies on its own credit analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors the investments in
the Fund's portfolio and carefully evaluates whether to dispose of or retain
high yield, high risk securities whose credit ratings have changed. As of
December 31, 1998, approximately 97% of the market value of the Fund's total
investments was represented by fixed income securities regarded by the rating
services as below investment grade (that is rated Ba1 or lower by Moody's or BB+
or lower by S&P).
At times a major portion of an issue of lower-rated securities may be held
by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Adviser believes it advisable to do so or may be able to sell such securities
only at prices lower than if the securities were more widely held. In such
circumstances, the Fund also may find it more difficult to value such
securities for purposes of computing the Fund's net asset value. Securities
for which market quotations are not readily available will be valued at fair
value as
-31-
<PAGE>
determined in good faith by or under the direction of the Board of Directors of
the Fund. The Fund also purchases a significant number of Rule 144A securities
which are considered "restricted" securities but which may be treated as liquid
by the Fund in appropriate circumstances, in accordance with SEC guidelines.
The Adviser, pursuant to the Board of Directors supervision, makes a
determination regarding the liquidity of such securities prior to their purchase
and continue to analyze the liquidity of such securities. Investing in Rule
144A securities, however, could have the effect of increasing the illiquidity of
the Fund's assets to the extent that qualified institutional buyers become, for
a time, uninterested in purchasing these securities.
Dividends and Distributions
Subject to market conditions, the Fund seeks to provide holders of its
Common Stock with a relatively stable level of dividends per share. However,
the Fund cannot give any assurance that it will be able to maintain its current
level of dividends per share. The Board of Directors may, in its sole
discretion, change the Fund's current dividend policy or its current level of
dividends per share in response to market or other conditions. The Fund's
ability to maintain a stable level of dividends is a function of the yield
generated by the Fund's investments, which depends on market conditions at the
time those investments are made and on the performance of those investments.
To the extent that the Fund's portfolio investments generate income
exceeding that which is required to pay any target level of dividends set by the
Board of Directors, the Fund may decide to retain and accumulate that portion of
the Fund's income which exceeds such dividend level and may pay applicable taxes
thereon, including any federal income or excise taxes. Alternatively, to the
extent that the Fund's current income is not sufficient to pay any target level
of dividends set by the Board of Directors, the Fund may distribute to holders
of its Common Stock all or a portion of any retained earnings or make a return
of capital to maintain such target level. The Fund currently has accumulated
undistributed net investment income upon which is has paid taxes.
Based on information provided by the Adviser on current market conditions
in the high-yield bond market, the Board of Directors believes that the Offer
will not result in a decrease in the Fund's current level of dividends per
share.
Restricted and Illiquid Securities
The Fund may invest a large portion of its assets in certain restricted
securities. To the extent that, for a period of time, qualified institutional
buyers cease purchasing such restricted securities, the Fund's continued
investment in such securities may have the effect of increasing the level of
illiquidity in its investment portfolio.
Foreign Securities
Investing in the U.S. dollar denominated obligations of non-U.S. companies
involves certain risk considerations not typically associated with investing in
the obligations of domestic
-32-
<PAGE>
companies. These risks may include: (i) price volatility and less liquidity;
(ii) exposure to political and economic risks, including the risk of
nationalization, expropriation of assets and war; (iii) possible imposition of
foreign taxes and exchange control and currency restrictions; (iv) lack of
uniform accounting, auditing and financial reporting standards; (v) less
governmental supervision of issuers; (vi) difficulty in enforcing legal rights
outside of the United States; and (vii) higher costs.
Banking Law Matters
Banking laws and regulations generally permit bank holding companies and
their non-bank affiliates to act as an investment adviser to registered closed-
end investment companies. However, banking laws and regulations, including the
Glass-Steagall Act as currently interpreted by the Board of Governors of the
Federal Reserve System, prohibit a bank holding company registered under the
Federal Bank Holding Company Act of 1956, or any affiliate thereof, from
sponsoring, organizing, controlling or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distributing
securities.
The Adviser believes that it possesses the legal authority to perform the
investment advisory services contemplated by the Advisory Agreement without
violation of applicable statutes and regulations. Future changes in either
federal or state statutes and regulations relating to the permissible activities
of banks or bank holding companies and the subsidiaries or affiliates of those
entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict the Adviser from continuing to perform such services for the Fund.
Depending upon the nature of any changes in the services which could be provided
by the Adviser, the Board of Directors of the Fund would review the Fund's
relationship with the Adviser and consider taking all action necessary in the
circumstances. It is not anticipated, however, that any such change would
affect the net asset value of the Fund's shares or result in any financial loss
to any shareholders.
Year 2000 Processing Issue
Many computer systems were designed using only two digits to signify the
year (i.e., 98 for 1998). On January 1, 2000, if these systems are not
corrected, they may incorrectly interpret 00 as 1900 instead of 2000, leading to
computer shutdowns and errors. To the extent these systems conduct forward-
looking calculations, the computer problems may occur prior to January 1, 2000.
Like other investment companies and financial and business organizations, the
Fund could be adversely affected in its ability to process securities trades,
price securities, provide shareholder account services and otherwise conduct
normal business operations if the computer systems used by the Adviser or other
Fund service providers do not adequately address this problem in a timely
manner. The Adviser does not anticipate that the Year 2000 processing issue
will have any material impact on its ability to continue to service the Fund at
current levels. In addition, the Fund has sought assurances from the other
service providers that they are taking the steps necessary to deal with the
problems associated with computer processing of the year 2000. The cost of any
systems remediation by persons other than the Fund will not be borne by
-33-
<PAGE>
the Fund. However, no assurance can be given that the actions taken by the
Fund's service providers will be sufficient to avoid any adverse effect of the
Fund.
Additional Risk Considerations
The Fund may not achieve its investment objectives.
The Fund's non-fundamental investment policies may be changed without
shareholder approval.
Investment in the Fund should not be considered a complete investment
program and may not be appropriate for all investors. Investors should
carefully consider their ability to assume theses risks before making an
investment in the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The directors and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Positions with Registrant Age Past Five Years
- ---------------------------- ----------------------------- ------- --------------------------
<S> <C> <C> <C>
William J. Morgan* (1) Chairman of the Board 44 President, Secretary and
8044 Montgomery Road and Treasurer Director, Pacholder
Cincinnati, OH 45236 Associates, Inc.
Daniel A. Grant (1) Director 54 President, Utility
1440 Greenfield Crossing Management Services.
Ballwin, MO 63021
John F. Williamson (2)(3) Director 60 Chairman and President
2109 S.W. Cedar Hill Lane Williamson Associates, Inc.
Lee's Summit, MO 64081 (since 1997); Executive
Vice President and Chief
Financial Officer, Asset
Allocation Concepts, Inc.
(1995 to 1996); Vice
President and Senior
Portfolio Manager, American
Life & Casualty Insurance
Co. (1993 to 1994).
George D. Woodard(2)(3) Director 52 Closely Held Business
22229 North 54th Way Specialist, Henry & Horne,
Phoenix, AZ 85054-7144 P.L.C. (since 1996);
Principal, George D.
</TABLE>
-34-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Woodard, C.P.A. (1995-1996);
Vice President, Rider Kenley
& Associates (1994 to 1995).
Anthony L. Longi, Jr. President and Assistant 33 Executive Vice
8044 Montgomery Road Treasurer President, Pacholder
Cincinnati, OH 45236. Associates, Inc.
James P. Shanahan, Jr. Secretary 37 Executive Vice President and
8044 Montgomery Road General Counsel, Pacholder
Cincinnati, OH 45326 Associates, Inc.
James E. Gibson Senior Vice President 34 Executive Vice President,
8044 Montgomery Road Pacholder
Cincinnati, OH 45236. Associates, Inc.
Mark H. Prenger Assistant Treasurer 28 Vice President, Pacholder
8044 Montgomery Road Associates, Inc. (since
Cincinnati, OH 45236. 1994); full-time university
student prior thereto
</TABLE>
______________
* Directors who are "interested persons" of the Fund, as defined in the 1940
Act.
(1) Elected by holders of the Common Stock.
(2) Elected by holders of the Preferred Stock.
(3) Directors who are members of the Audit Committee of the Fund's Board of
Directors.
For the fiscal year ended December 31, 1998, the Fund's directors received
the following compensation for serving as directors.(1)
<TABLE>
<CAPTION>
Total Compensation
Name of Director of Officer from Fund
- --------------------------- ------------------
William J. Morgan None
<S> <C>
Daniel A. Grant $ 17,000
John F. Williamson $ 17,000
George D. Woodard $ 17,000
</TABLE>
- ---------------
(1) The Fund does not currently provide pension or retirement plan benefits to
directors. The Fund is not part of a fund complex.
Holdings of Common Stock
As of December 31, 1998, DTC, 7 Hanover Square, New York, New York 10004,
owned of record 6,646,084 shares representing 93% of the outstanding shares of
Common Stock. Principal Mutual Life Insurance Company, 711 High Street, Des
Moines, Iowa 50392, owns all of the Fund's outstanding Preferred Stock.
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<PAGE>
As of December 31, 1998, all directors and officers of the Fund owned in
the aggregate less than 1% of the common stock.
The Adviser
Pacholder & Company, LLC (the "Adviser"), 8044 Montgomery Road, Suite 382,
Cincinnati, Ohio 45236, is the Fund's investment adviser. The Adviser is an
Ohio limited liability company organized in 1998. Pacholder Associates, Inc.
("Pacholder Associates") owns 51% of the equity interest in the Adviser, and
Banc One Investment Advisors Corporation ("Banc One Advisors") owns the
remaining 49%. Pacholder Associates was a general partner of the Fund's
previous investment adviser, Pacholder & Company, which served as the Fund's
investment adviser from the time it commenced operations in 1988 until
August 1998.
Pacholder Associates is an investment advisory firm formed in 1983 which
specializes in high yield, high risk fixed income securities. Pacholder
Associates currently manages in excess of approximately $625 million for
institutional clients and provides research and consulting services to those
clients and others. Approximately $435 million of the accounts currently
managed by Pacholder Associates are dedicated to investing in securities similar
to those eligible for purchase by the Fund. Asher O. Pacholder owns a majority
of Pacholder Associates' outstanding stock. Employees of Pacholder Associates
own the remaining outstanding stock. William J. Morgan, James P. Shanahan,
Jr., Anthony L. Longi, Jr., James E. Gibson and Mark H. Prenger, directors
and/or officers of the Fund, are shareholders, officers and/or directors of
Pacholder Associates.
Banc One Investment Advisors is an indirect wholly-owned subsidiary of BANK
ONE CORPORATION, a bank holding company located in the state of Ohio. As of
December 31, 1998, Banc One Investment Advisors managed over $__ billion in
assets. BANK ONE CORPORATION has affiliated banking organizations in __ states
and has several affiliates that engage in data processing, venture capital,
investment and merchant banking, and other diversified services including trust
management, investment management, brokerage, equipment leasing, mortgage
banking, consumer finance, and insurance. On a consolidated basis, BANK ONE
CORPORATION had assets of over $____ billion as of December 31, 1998.
Banc One Investment Advisors represents a consolidation of the investment
advisory staffs of a number of bank affiliates of BANK ONE CORPORATION, which
have considerable experience in the management of open-end management investment
company portfolios, including The One Group(R) (an open-end management
investment company which offers units of beneficial interest in __ separate
funds).
The overall portfolio management strategy for the Fund is determined under
the general supervision and direction of William J. Morgan. Mr. Morgan is
President and Managing Director of Pacholder Associates and is responsible for
the overall management of the firm. He has been responsible for Pacholder
Associates' investment management operations since the inception of the firm.
Prior to co-founding Pacholder Associates, Mr. Morgan was the Fixed Income
Portfolio Manager at the Union Central Life Insurance Company and was
responsible for research and management of a wide variety of securities,
primarily fixed-income debt obligations of the U.S. government and corporate
issuers. Anthony L. Longi, Jr. is responsible for day-to-day management of
the Fund. Mr. Longi is an Executive Vice President of Pacholder Associates
where he has worked as an
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<PAGE>
investment grade and high yield bond investment analyst and trader, portfolio
manager and special situations analyst for more than eleven years.
Advisory Agreement
Pursuant to an Investment Advisory Agreement dated August 20, 1998 (the
"Advisory Agreement"), the Adviser manages the investment and reinvestment of
the Fund's assets and continuously reviews, supervises and administers the
Fund's investment program. The Adviser determines in its discretion the
securities to be purchased or sold, subject to the ultimate supervision and
direction of the Fund's Board of Directors.
The Adviser bears all expenses of its employees and overhead incurred in
connection with its duties under the Advisory Agreement.
As compensation for its services, the Adviser receives an annual 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 12-month period relative to the percentage change in the Credit Suisse
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 12-month periods ended
December 31, 1989 through 1998 are set forth in Appendix B.
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 fee is structured so that
it will be 0.90% if the Fund's investment performance for the preceding 12
months (net of all fees and expenses, including the advisory fee) equals the
Index Return. The advisory fee increases or decreases from the 0.90% "fulcrum
fee" by 10% of the difference between the Fund's investment performance during
the preceding 12 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 the fee rates that would be applicable based on
the relative performance of the Fund and the Index during for a particular 12-
month period:
<TABLE>
<CAPTION>
Fund Performance Advisory Fee Rate*
(net of fees and expenses) (% of average 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%.
-37-
<PAGE>
For the fiscal years ended December 31, 1996, 1997 and 1998 (unaudited),
the Adviser received advisory fees totaling $1,624,992, $1,948,943 and $889,000,
respectively, which represent 1.40%, 1.18% and 0.53%, respectively, of the
Fund's average net assets during such periods.
The advisory fee paid by the Fund has exceeded for certain periods, and may
in the future exceed, the fees paid by other closed-end investment companies.
In addition, the 0.90% "fulcrum fee" is higher than the fees paid by many
closed-end funds. The advisory fee paid by the Fund may exceed the advisory
fees paid other comparable funds even if the Fund's investment performance is
not equal to the Index Return. Moreover, the Adviser could receive the maximum
fee, even if the Fund's absolute investment performance is negative. The
Adviser also could receive the minimum fee when the Fund experiences significant
positive performance.
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
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
Advisory Agreement and the fee payable under the new advisory agreement.
The Advisory Agreement was approved by the Fund's shareholders on June 30,
1998. The Advisory Agreement will continue in effect until June 30, 1999, and
thereafter from year to year if specifically approved at least annually by the
Fund's Board of Directors or by a vote of the holders of a majority of the
Fund's outstanding voting securities. In either event, the Advisory Agreement
also must be approved annually by vote of a majority of the directors who are
not parties to the agreement or "interested persons" of any such party
("Independent Directors"), cast in person at a meeting called for that purpose.
The Advisory Agreement may be terminated by either party at any time without
penalty upon 30 days' written notice, and will terminate automatically in the
event of its assignment. Termination will not affect the right of the Adviser
to receive payments of any unpaid compensation earned prior to termination.
The Adviser will not be liable for any error of judgment or for any loss
suffered by the Fund in connection with the performance of its obligations under
the Advisory Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of, or from reckless
disregard by it of its obligations and duties under, such Agreement, or damages
resulting from a breach of fiduciary duty with respect to receipt of
compensation for services.
The services of the Adviser to the Fund are not deemed to be exclusive, and
nothing in the Advisory Agreement prevents the Adviser, or any affiliate
thereof, from providing similar services to other investment companies and other
clients (whether or not their investment objectives and policies are similar to
those of the Fund) or from engaging in other activities.
Portfolio Transactions
Subject to policy established by the Board of Directors of the Fund, the
Adviser is responsible for arranging for the execution of the Fund's portfolio
transactions and the allocation
-38-
<PAGE>
of brokerage transactions. In executing portfolio transactions, the Adviser
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved. The Fund may invest in securities traded in the over-the-
counter markets and deal directly with the dealers who make markets in the
securities involved, unless a better price or execution could be obtained by
using a broker. Fixed income securities are traded principally in the over-the-
counter market on a net basis through dealers acting for their own account and
not as brokers. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
While the Adviser generally will seek reasonably competitive commission rates,
payment of the lowest commission is not necessarily consistent with best results
in particular transactions.
In placing orders with brokers and dealers, the Adviser will attempt to
obtain the best net price and the most favorable execution for orders; however,
the Adviser may, in its discretion, purchase and sell portfolio securities
through brokers and dealers who provide the Adviser or the Fund with research,
analysis, advice and similar services. The research services provided by
broker-dealers may be useful to the Adviser in serving other clients, but they
can also be useful in serving the Fund. Not all of such services may be used by
the Adviser in connection with the Fund. The Adviser may, in return for
research and analysis, pay brokers a higher commission than may be charged by
other brokers, provided that the Adviser determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of the Adviser to the Fund and its other clients, and
that the total commission paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. Information and research received from
such brokers and dealers will be in addition to, and not in lieu of, the
services with the Fund, and the advisory fee that the Fund pays to the Adviser
will not be reduced as a consequence of the Adviser's receipt of brokerage and
research services.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
The Adviser's investment management personnel evaluate the quality of
research provided by brokers or dealers. The Adviser sometimes uses evaluations
resulting from this effort as a consideration in the selection of brokers or
dealers to execute portfolio transactions. However, the Adviser is unable to
quantify the amounts of commission that might be paid as a result of such
research because certain transactions might be effected through brokers which
provide research but which would be selected principally because of their
execution and capabilities.
Investment decisions for the Fund and for other investment accounts managed
by the Adviser are made independently of each other in the light of differing
considerations for the
-39-
<PAGE>
various accounts. However, the same investment decision may be made for two or
more such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated to accounts
according to a formula deemed equitable to each account. While in some cases
this practice could have a detrimental effect upon the price or value of the
security as far as the Fund is concerned, in other cases it is believed to be
beneficial to the Fund.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of transactions.
Administrative and Accounting Services
Kenwood Administrative Management, Limited Partnership (the
"Administrator"), 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236, an
affiliate of the Adviser, serves as the administrator of the Fund pursuant to an
Administration Agreement with the Fund dated June 5, 1996 (the "Administration
Agreement"). 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. Under
the Administration Agreement, the Fund pays the Administrator a monthly fee at
the annual rate of 0.10% of the Fund's average weekly net assets.
The Administration Agreement was approved by the Fund's shareholders on
June 4, 1996. Continuance of the Administration Agreement was approved by the
Fund's Board of Directors, including a majority of the Independent Directors,
most recently on May 30, 1998. It may continue thereafter from year to year if
specifically approved at least annually by the Fund's Board of Directors or by a
vote of a majority of the Fund's outstanding voting securities. In either
event, the Administration Agreement also must be approved annually by vote of a
majority of the Independent Directors, cast in person at a meeting called for
that purpose.
Pursuant to an Accounting Services Agreement with the Fund dated May 20,
1991, as amended, Pacholder Associates, a affiliate 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 Associates a
monthly fee at the annual rate of 0.025% of the first $100 million of the Fund's
average weekly net assets and 0.015% of such assets in excess of $100 million,
and reimburses it for out-of-pocket expenses.
Because the fees of the Adviser, the Administrator and Pacholder Associates
are based on the average net assets of the Fund, they will benefit from any
increase in the Fund's net assets resulting from the Offer. It is not possible
to state precisely the amount of additional compensation the Adviser, the
Administrator and Pacholder Associates will receive as a result of the Offer
because it is not known how many Shares will be subscribed for and because the
proceeds of the Offer will be invested in additional portfolio securities which
will fluctuate in
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value. However, based on the estimated proceeds from the Offer assuming all
Rights are exercised in full for the Estimated Subscription Price of $___ per
Share, and assuming the Adviser receives the 0.90% "fulcrum fee," the Adviser
would receive additional annual advisory fees of approximately $___, and the
Administrator and Pacholder Associates would receive additional annual fees of
approximately $_____ and $______, respectively, as a result of the increase in
the average net assets under management over the Fund's current assets under
management, assuming no fluctuations in the value of Fund portfolio securities.
NET ASSET VALUE
The net asset value of the Common Stock is computed at least weekly,
generally on Thursday of each week on which the Exchange is open for trading.
This determination is made as of the close of the Exchange by deducting the
amount of the liabilities (including accrued expenses) of the Fund and the
liquidation value of the outstanding shares of Preferred Stock from the value of
the Fund's assets (including interest and dividends accrued but not collected)
and dividing the difference by the number of shares of Common Stock outstanding.
Fixed income securities (other than short-term obligations, but including listed
issues) are valued by an independent pricing service approved by the Board of
Directors which utilizes both dealer supplied valuations and electronic data
processing techniques that take into account appropriate factors such as
institutional size trading in similar groups of characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Securities (other than fixed income securities) for which the principal market
is one or more securities exchanges are valued at the last reported sale price
prior to the determination (or if there has been no current sale, at the closing
bid price) on the primary exchange on which such securities are traded. If a
securities exchange is not the principal market for a security, such security
will be valued, if market quotations are readily available, at the closing bid
prices in the over-the-counter market. Portfolio securities for which there are
no such valuations, including restricted securities that are not liquid, are
valued at fair value as determined in good faith by or at the direction of the
Board of Directors. Short-term investments which mature in less than 60 days
will be valued at amortized cost.
DIVIDENDS AND DISTRIBUTIONS
Dividend Policy
It is the Fund's present policy, which may be changed by the Board of
Directors, it to pay dividends on a monthly basis to holders of its Common Stock
of investment company taxable income (but not including short-term capital gains
or "net capital gains," defined as the excess of net long-term capital gains
over net short-term capital losses), and to distribute any net short-term
capital gains and net capital gains annually. Under present law, if the Fund
were to retain ordinary income or net capital gains, taxes would be imposed with
respect to those amounts. Subject to market conditions, the Fund seeks to
provide holders of its Common Stock with a relatively stable level of dividends.
However, there can be no assurance that the Fund will be able to maintain its
current level of dividends, and the Board of Directors of the Fund may, in its
sole discretion, change the Fund's current dividend policy or its current level
of dividends in
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response to market or other conditions. See "Risk Factors and Special
Considerations--Dividends and Distributions." See also "Federal Taxation" and
"Description of Capital Stock--Common Stock" for a discussion of certain
possible restrictions on the Fund's ability to declare dividends on the
Common Stock.
Dividend Reinvestment Plan
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by Star
Bank, N.A. (the "Bank"), as agent under the Plan, unless a shareholder elects to
receive cash. An election to receive cash may be revoked or reinstated at the
option of the shareholder. Shareholders whose shares are held in the name of a
broker or nominee will have distributions reinvested automatically by the broker
or nominee in additional shares under the Plan, unless the service is not
provided by the broker or nominee, or unless the shareholder elects to receive
distributions in cash. If the service is not available, such distributions will
be paid in cash. Shareholders whose shares are held in the name of a broker or
nominee should contact the broker or nominee for details. All distributions to
investors who elect not to participate (or whose broker or nominee elects not to
participate) in the Plan, will be paid by check mailed directly to the record
holder by the Bank, as dividend paying agent.
The Bank will furnish each person who buys shares in the offering with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Board of Directors of the Fund declares a dividend or capital gains
distribution payable either in shares of Common Stock or in cash, as holders of
Common Stock may have elected, then non-participants in the Plan will receive
cash and participants in the Plan will receive the equivalent in shares of
Common Stock valued at the lower of market price or net asset value. Whenever
market price is equal to or exceeds net asset value at the time shares are
valued for the purpose of determining the number of shares equivalent to the
cash dividend or capital gains distribution, participants will be issued shares
of Common Stock at the net asset value most recently determined as provided
under "Net Asset Value," but in no event less than 95% of the market price. If
the net asset value of the Common Stock at such time exceeds the market price of
Common Stock at such time, or if the Fund should declare a dividend or capital
gains distribution payable only in cash, the Bank will, as agent for the
participants, buy Common Stock in the open market, on the Exchange or elsewhere,
for the participants' accounts. If, before the Bank has completed its purchases,
the market price exceeds the net asset value of the Common Stock, the average
per share purchase price paid by the Bank may exceed the net asset value of the
Common Stock, resulting in the acquisition of fewer shares than if the dividend
or capital gains distribution has been paid in Common Stock issued by the Fund.
The Bank will apply all cash received as a dividend or capital gains
distribution to purchase Common Stock on the open market as soon as practicable
after the payment date of such dividend or capital gains
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distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the federal securities laws.
The Bank maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in such accounts, including information
needed by shareholders for personal and tax records. Common Stock in the
account of each Plan participant will be held by the Bank in non-certificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Bank's fees for handling the reinvestment of dividends
and capital gains distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares of Common Stock issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
stock or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Bank's open market purchases
in connection with the reinvestment of dividends and capital gains
distributions.
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that change are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written notice
of the change sent to participants in the Plan at least 90 days before the
record date for such dividend or capital gains distribution. The Plan also may
be amended or terminated by the Bank, with the Fund's prior written consent but,
except when necessary or appropriate to comply with applicable law or the rules
or policies of a regulatory body, only on at least 90 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Bank at 425 Walnut Street, Cincinnati, Ohio 45201-1118.
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Common Stock and is based on the federal
tax laws in effect on the date hereof. Such tax laws are subject to change by
legislative, judicial or administrative action, possibly with retroactive
effect. Investors should consult their own tax advisors for more detailed
information and for information regarding the impact of state, local and foreign
taxes on an investment in the Fund.
General
The Fund has elected to be, and qualifies for treatment as, a regulated
investment company ("RIC") under Subchapter M of the Code. To qualify, the Fund
must, among other things, (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options or futures
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contracts) derived from its business of investing in securities or those
currencies ("Income Requirement"); and (b) diversify its holdings so that, at
the end of each quarter of its taxable year, (i) at least 50% of the value of
its total assets is represented by cash, U.S. government securities, securities
of other RICs and other securities, with such other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
its assets and that does not represent more than 10% of the issuer's outstanding
voting securities and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
For each taxable year that the Fund qualifies as a RIC, it will not be
subject to federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gain and net realized gain from certain foreign currency transactions) and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) that it distributes to its shareholders, if it distributes at
least 90% of its investment company taxable income for that year ("Distribution
Requirement"). The Fund intends to make sufficient distributions of its
investment company taxable income each taxable year to meet the Distribution
Requirement.
The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year
to retain all or a portion of the Fund's net capital gain, that decision will
not affect the Fund's ability to qualify as a RIC but will subject the Fund to a
tax of 35% of the amount retained. In that event, the Fund expects to designate
the retained amount as undistributed capital gains in a notice to its
shareholders, who (i) will be required to include their proportionate shares of
the undistributed amount in their gross income as long-term capital gain and
(ii) will be entitled to credit their proportionate shares of the 35% tax paid
by the Fund against their federal income tax liabilities. For federal income
tax purposes, the tax basis of shares owned by a Fund shareholder will be
increased by an amount equal to 65% of the amount of undistributed capital gains
included in the shareholder's gross income.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
For this and other purposes, a distribution will be treated as paid by the Fund
and received by the shareholders on December 31 of a calendar year if it is
declared by the Fund in that month of that year, payable to shareholders of
record on a date in that month and paid by the Fund at any time through the
end of the following January. Any such distribution thus will be taxable to
shareholders in the year the distribution is declared, rather than the year in
which the distribution is received.
Dividends and Distributions
Dividends from the Fund's investment company taxable income will be taxable
to its shareholders as ordinary income, whether paid in cash or reinvested in
shares. Distributions of the Fund's net capital gain and undistributed capital
gains, if any, will be taxable to the
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shareholders as long-term capital gain, regardless of how long they have held
their shares. Dividends are not expected to be, and capital gain distributions
will not be, eligible for the dividends-received deduction allowed to
corporations.
A participant in the Dividend Reinvestment Plan who receives a distribution
that is reinvested in shares will be treated as having received a taxable
distribution and will have a basis for those shares equal to their fair market
value on the distribution date. Shareholders will be notified annually as to
the federal income tax status of distributions to them. Investors should be
careful to consider the tax implications of buying shares just prior to a
distribution. The price of shares purchased at that time may reflect the amount
of the forthcoming distribution. Those purchasing just prior to the record date
for a distribution will receive the distribution, which nevertheless will be
taxable to them.
Sale of Shares
On a sale of shares of the Fund, a shareholder will realize taxable gain or
loss depending upon the amount realized on the sale and the shareholder's basis
for the shares. That gain or loss will be treated as capital gain or loss if
the shareholder held the shares as capital assets and will be long-term capital
gain or loss if the shares were held for more than one year. Any such loss will
be disallowed to the extent the shares that were disposed of are replaced (such
as pursuant to the Dividend Reinvestment Plan) within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition. In
such a case, the basis of the acquired shares will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of shares held
for six months or less will be treated as long-term, instead of short-term,
capital loss to the extent of any capital gain distributions received by the
shareholder on those shares or any undistributed capital gains designated with
respect thereto.
Original Issue Discount
The Fund may purchase debt securities (such as zero-coupon debt securities
and zero-fixed-coupon debt securities; see "Investment Policies and Limitations-
Investment Policies and Restrictions") that have original issue discount, which
generally is included in income ratably over the term of the security. The
discount that accrues each year on those securities thus will increase the
Fund's investment company taxable income, thereby increasing the amount that
must be distributed to satisfy the Distribution Requirement, without providing
the cash with which to make the distribution. Accordingly, the Fund may have
to dispose of other securities, thereby realizing gain or loss at a time when
it otherwise might not want to do so, to provide the cash necessary to make
distributions to shareholders.
Backup Withholding
The Fund is required to withhold federal income tax at the rate of 31% on
all dividends, capital gain distributions and repurchase proceeds payable to any
individuals and certain other non-corporate shareholders who fail to provide the
Fund with their correct taxpayer identification number or (with respect to
dividends and capital gain distributions) who otherwise are subject to backup
withholding.
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Foreign Withholding Taxes
Income received by the Fund from sources within foreign countries, and
gains realized on foreign securities, may be subject to withholding and other
taxes imposed by such countries, which would reduce the Fund's yield and/or
total return. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes, and many foreign countries do not impose
taxes on capital gains from investments by foreign investors. It is impossible
to determine the rate of foreign tax in advance, because the amount of the
Fund's assets to be invested in various countries is not known. If, as is
expected, the Fund does not have more than 50% of its assets invested in the
securities of foreign corporations at the close of its taxable year, it will not
be entitled to "pass through" to its shareholders the amount of foreign taxes it
paid.
Foreign Shareholders
U.S. federal income taxation of a shareholder who, as to the United States,
is a non-resident alien individual, foreign trust or estate, foreign corporation
or foreign partnership depends on whether the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by the
shareholder. Ordinarily, income from the Fund will not be treated as so
"effectively connected." In such case, dividends will be subject to U.S.
withholding tax of 30% (or lower treaty rate). Foreign shareholders are advised
to consult their own tax advisors with respect to the particular tax
consequences to them of an investment in shares, including the effect of any
applicable tax treaties.
Other Taxation
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders. Distributions also may
be subject to state, local and foreign taxes, depending on each shareholder's
particular situation. Investors are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in the
Fund.
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Fund consists of 47,550,000 shares of
Common Stock, $.01 par value (the "Common Stock"), and 2,450,000 shares of
Cumulative Preferred Stock, $.01 par value (the "Preferred Stock"), consisting
of 1,650,000 Series C shares and 800,000 Series D shares. As of December 31,
1998, 7,124,721 shares of Common Stock and 2,450,000 shares of Preferred Stock
were outstanding. 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
an additional series of Preferred Stock. The newly classified series of
preferred shares would be issued, in a private
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placement 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 rate of the series, the
terms of the newly classified preferred series are expected to be the same in
all material respects as the Fund's outstanding Series C and Series D Preferred
Stock. The Board of Directors is expected to set the annual dividend rate of the
new series at .
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 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.
Under the 1940 Act, the Fund may not declare or pay any dividend or
distribution on the Common Stock, or repurchase any shares of Common Stock,
unless full cumulative dividends on all shares of preferred stock have been
declared and paid and unless immediately thereafter the preferred stock has an
"asset coverage" (as defined in the 1940 Act) of at least 200% after deducting
the amount of such dividend, distribution or purchase price, as the case may be.
See "Asset Coverage and Other Financial Tests" below.
Preferred Stock
The outstanding shares of Preferred Stock are fully paid and non-
assessable, are not convertible into shares of Common Stock (or any other
capital stock of the Fund), and have no preemptive rights. The terms of the
Preferred Stock, as fixed by the Fund's Articles Supplementary Creating and
Fixing the Rights of Series C and Series D Cumulative Preferred Stock dated
December 1, 1998 (the "Articles Supplementary"), are summarized below. The
following summary does not purport to be complete and is qualified by
reference to the Articles Supplementary, which have been filed with the SEC as
an exhibit to the Fund's Registration Statement. See "Further Information."
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Dividends. Holders of the Preferred Stock are entitled to receive
cumulative cash dividends payable quarterly at the annual rate of 7.15%, in the
case of the Series C shares, and 7.05%, in the case of the Series D shares, of
the liquidation preference ($20 per share) of the Preferred Stock. A quarterly
dividend may not be declared or paid on the Preferred Stock unless full
cumulative dividends have been or contemporaneously are declared and paid on all
outstanding shares of Preferred Stock through the most recent quarterly dividend
payment dates therefor. If full cumulative dividends have not been paid, any
dividends on the Preferred Stock are required to be paid pro rata on all
outstanding shares.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary, holders
of the Preferred Stock will be entitled to receive a preferential liquidating
distribution in the amount of $20 per share, plus an amount equal to all accrued
and unpaid dividends to the date of distribution, before any distribution or
payment is made in respect of the Common Stock. If the assets of the Fund are
insufficient to pay holders of the Preferred Stock the liquidating distribution
to which they are entitled, then holders of the Preferred Stock will share
ratably in any assets available for distribution. Unless and until the
liquidation preference of the Preferred Stock has been paid in full, the Fund
may not pay any dividends or distributions on the Common Stock.
Redemption. On March 2, 2002, the Fund is required to redeem all of the
then outstanding shares of Preferred Stock at a price equal to $20 per share
plus accumulated and unpaid dividends through the date of redemption. 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 at the liquidation value thereof that, after giving effect to such
redemption, the restrictions would be met. The Fund also may redeem the
Preferred Stock, in whole or in part, at any time at a redemption price equal to
$20 per share, plus accumulated and unpaid dividends through the date of
redemption and a make-whole premium equal to the discounted value of the
remaining scheduled payments with respect to the redeemed shares over the amount
of the liquidation preference of such shares.
Voting Rights. Except as described below, holders of the Preferred Stock
have equal voting rights with holders of the Common Stock of one vote per share,
and holders of the Preferred Stock and the Common Stock vote together as a
single class. Under the Articles Supplementary, holders of the Preferred Stock,
as a class, are entitled to elect two directors; holders of the Common Stock, as
a class, are entitled to elect two directors; and holders of the Common Stock
and the Preferred Stock, voting together as a single class, are entitled to
elect the remaining directors of the Fund. In addition, if at any time
dividends on the Preferred Stock shall be unpaid in an amount equal to two full
years' dividends, or if the Fund shall have failed to redeem any shares of
Preferred Stock as required, then holders of the outstanding shares of Preferred
Stock will be entitled to elect a majority of the Fund's directors.
As long as any shares of Preferred Stock are outstanding: (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
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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 Preferred Stock and 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 requires 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
requires the approval of a majority of the outstanding shares of Preferred Stock
and Common Stock, each voting as a separate class; (4) the Fund may not amend,
alter or repeal any of the preferences, rights or powers of the Preferred Stock
without the approval of a majority of the outstanding shares of Preferred Stock,
voting separately as a class; (5) the Fund may not (a) increase or decrease the
number of shares of Preferred Stock authorized to be issued; (b) create,
authorize or issue any class or series of stock ranking on a 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 Fund; (c) create, authorize, assume or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness; or (d) 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 Preferred Stock, voting separately as a class; (6) holders
of the Preferred Stock and the Common Stock vote as separate classes in
connection with the election of directors as described above; and (7) the Common
Stock and the Preferred Stock vote as separate classes to the extent otherwise
required under Maryland law or the 1940 Act. For purposes of the foregoing, a
"majority of the outstanding shares" means the vote, at the annual or a special
meeting of shareholders, (i) of 67% or more of the shares present at such
meeting, if the holders of more than 50% of the outstanding shares are present
or represented by proxy; or (ii) of more than 50% of the outstanding shares,
whichever is the less.
Asset Coverage and Other Financial Tests. The Articles Supplementary
require the Fund to determine periodically that certain asset coverage and other
financial tests have been met and that the Fund has complied with certain other
restrictions. In the event that, on any date of determination, the Fund does
not comply with an applicable asset coverage test or restriction, then the Fund
will be required to cure such violation within a stated cure period or, if such
violation cannot be cured, to redeem the Preferred Stock. For so long as any
shares of Preferred Stock are outstanding, the Fund is required (i) to make bi-
weekly determinations that the amount of certain eligible 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 Preferred Stock and the
amount of all unpaid dividends accrued to and including the date of
determination on all outstanding shares of Preferred Stock is at least 250%.
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 Preferred Stock, (i) lend securities, (ii) issue any class of
stock ranking
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prior to or on a 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 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 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.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held by Star Bank, N.A., whose principal
business address is 425 Walnut Street, Cincinnati, Ohio 45201-1118, as custodian
under a custodian contract. Star Bank, N.A. serves as dividend disbursing
agent, as agent under the Fund's Dividend Reinvestment Plan, and as transfer
agent and registrar for the Common Stock.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed on for the Fund by
Piper & Marbury L.L.P., Washington, D.C. Certain matters will be passed on for
the Dealer Manger by James P. Shanahan, Jr., Executive Vice President and
General Counsel of the Dealer Manager.
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REPORTS TO SHAREHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The financial statements as of December 31, 1997 included in this
Prospectus and the related financial statement schedules included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the Registration Statement, and have been so included in reliance upon the
reports of such firm given their authority as experts in auditing and
accounting. The address of Deloitte & Touche LLP is 1700 Courthouse Plaza, NE,
Dayton, Ohio 45402.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements for the
fiscal year ended December 31, 1997, and the Fund's Semi-Annual Report, which
includes unaudited financial statements for the six months ended June 30, 1998,
each of which either accompanies this Prospectus or has previously been provided
to the person to whom this Prospectus is being sent, are incorporated herein by
reference with respect to all information other than information set forth in
the Letter to Shareholders included therein. Any statement contained in the
Fund's Annual Report and Semi-Annual Report that was incorporated herein shall
be deemed modified or superseded for purposes of this Prospectus to the extent a
statement contained in this Prospectus varies from such statement. Any such
statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of this Prospectus. The Fund will
furnish, without charge, a copy of its Annual Report and a copy of its Semi-
Annual Report, upon request to Star Bank, N.A., 425 Walnut Street, Cincinnati,
Ohio 45201-1118, telephone (800) 727-1919, ext. 5788, Monday through Friday from
9:00 a.m. to 5:00 p.m.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, D.C. 20549, a Registration
Statement under the Securities Act with respect to the Shares offered hereby.
Further information concerning these securities and the Fund may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the SEC. The Registration Statement may be inspected without charge at the
SEC's office in Washington, D.C., and copies of all or any part thereof may be
obtained from such office after payment of the fees prescribed by the SEC.
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files reports
and other information with the SEC. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, NW, Washington, D.C. 20549 and the SEC's regional offices at
Seven World Trade Center, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
NW,
-51-
<PAGE>
Washington, D.C. 20549 at prescribed rates. Such reports and other information
concerning the Fund also may be inspected at the offices of the Exchange.
-52-
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Long-Term Ratings
Aaa: Bonds which 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 edged." 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 which 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 which make the long-term risks appear
somewhat larger than in Aaa securities.
A: Bonds which 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 which 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 which 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 which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which 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.
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which 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.
Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
A-2
<PAGE>
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Preferred Stock Ratings
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba: An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa: An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca: An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating category
from Aa to Caa. The modifier 1 indicates that the issuer is in the higher
end of its letter rating category; the modifier 2 indicates a mid-range
ranking; the modifier 3 indicates that the issuer is in the lower end of
the letter rating category.
A-3
<PAGE>
STANDARD & POOR'S RATING DEFINITIONS
Long-Term Issue Credit Ratings
AAA: An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in the
higher rated categories. However, the obligor's capacity to meet its
financial commitment is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligator to meet its
financial commitment on the obligation.
Obligations rated "BB", "B", "CCC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor"s inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
A-4
<PAGE>
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made even if the applicable
grace period has not expired, unless Standard & Poor's 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 or the taking of a similar
action if payments on an obligation are jeopardized.
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.
Short-Term Issue Credit Ratings
A-1: A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is extremely
strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity
to meet its financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment and
is depend upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will
A-5
<PAGE>
be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
AAA: This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations in
very strong, although not as overwhelming as for issues rated "AAA."
A: An issue rated "A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for preferred stock in this category than for issues in the "A"
category.
BB, B Preferred stock rated "BB", "B" or "CCC" are regarded, on balance, as a
CCC: predominately speculative with respect to the issuer's capacity to pay
preferred
stock obligations. "BB" indicates the lowest degree of speculation and
"CCC" the highest. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
CC: the Rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated "C" is a non-paying issue.
D: A preferred stock rated "D" is a non-payment issue with the issuer in
default on debt instruments.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred stock
quality, 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.
A-6
<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 12-month periods indicated relative to the
percentage changes in the Credit Suisse First Boston High Yield Index (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,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Fund -3.12 15.44 20.40 10.68 0.72 20.27 18.78 36.71 -0.87 3.72
The Index 0.58 12.63 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, 1998 included ___ issues with an aggregate par value of $_____
billion and an aggregate market value of $____ billion. The securities
comprising the Index are selected primarily on the basis of size, liquidity and
diversification. The factors considered with regard to diversification are
industry, rating, yield and duration. With regard to size, an issue is added to
the Index if it is larger than $__ 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 $____
million for six consecutive months is deleted from the Index. Likewise, non-
defaulted issues whose market value falls below $__ million for six consecutive
months are deleted from the Index. On December 31,
<PAGE>
1998, of the ___ issues comprising the Index, ___ (____% of market value) were
cash paying issues not in default, __ issues (____% of market value) were zero
coupon or deferred interest issues not in default, and __ issues (___% of market
value) were in default. The Index is calculated daily and published monthly by
Credit Suisse First Boston Corporation High Yield Research. Credit Suisse
First Boston Corporation High Yield Research 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 ______ rating from Morningstar, Inc., an
independent publisher of financial information and investment company ratings.
The Fund's _____ rating is based upon its performance for the five-year period
ended December 31, 1998. The Fund received a _____ rating for the 60-month
period ended December 31, 1998 and an average historical rating of ____ 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; and a three-star rating is
characterized as "Average" and is limited to the middle 35% of scores in the
rating group. The Fund is included among ____ 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>
No person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus and,
if given or made, such information
or representation must not be
relied upon as having been
authorized by the Fund, the Adviser
or the Dealer Manager. Neither the
delivery of this Prospectus nor any
sale made hereunder shall under any
circumstances, create any
implication that there has been no
change in the affairs of the Fund
since the date hereof or that the
information contained herein is
correct as of any time subsequent
to its date. However, if any
material change occurs while this
prospectus is required by law to be
delivered, this Prospectus will be
amended or supplemented
accordingly. This Prospectus does
not constitute an offer to sell or
a solicitation of an offer to buy,
any securities other than the
registered securities to which it
relates. This Prospectus does not
constitute an offer to sell or a
solicitation of an offer to buy in
any circumstances in which such
offer or solicitation is unlawful.
____________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Prospectus Summary.................................
Fee Table and Example..............................
Financial Highlights...............................
Capitalization at December 31, 1998................ Pacholder Fund, Inc.
Information Regarding Senior Securities............
Trading and Net Asset Value Information............
The Fund...........................................
The Offer..........................................
Use of Proceeds.................................... _________Shares of Common Stock
Investment Policies and Limitations................ Issuable Upon Exercise of
Risks Factors and Special Considerations........... Rights To Subscribe for
Management of the Fund............................. Such Shares
Net Asset Value....................................
Dividends and Distributions........................
Federal Taxation...................................
Description of Capital Stock....................... ----------
Custodian, Transfer Agent, Dividend PROSPECTUS
Disbursing Agent and Registrar................... ----------
Legal Opinions.....................................
Reports to Shareholders............................
Experts............................................ __________ __, 1999
Financial Statements...............................
Further Information................................
Appendix A......................................... A-1
Appendix B......................................... B-1
</TABLE>
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
(a) Statement of Net Assets at June 30, 1998 (Unaudited)
(b) Statement of Operations For the Six Months Ended June 30, 1998
(Unaudited)
(c) Statements of Changes in Net Assets For the Six Months Ended
June 30, 1998 (Unaudited) and For the Year Ended December 31, 1997
(d) Financial Highlights (Unaudited as to June 30, 1998)
(e) Notes to Financial Statements (Unaudited)
(f) Statement of Net Assets at December 31, 1997
(g) Statement of Operations For the Year Ended December 31, 1997
(h) Statements of Changes in Net Assets For the Years Ended December 31,
1997 and 1996
(i) Financial Highlights
(j) Notes to Financial Statements
(k) Independent Auditors' Report
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 Series C
and Series D 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 Series C Cumulative Preferred Stock.*
(iii) Specimen certificate for Series D Cumulative Preferred Stock.*
<PAGE>
(iv) Subscription Certificate for subscribing for Shares pursuant to the
Offer.*
(v) Notice of Guaranteed Delivery for subscribing for Shares pursuant to
the Offer.*
(e) Dividend Reinvestment Plan.*
(f) Not applicable.
(g) Investment Advisory Agreement dated August 20, 1998.
(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 January 1, 1999.
(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.
(l) Opinion and Consent of Piper & Marbury L.L.P.*
(m) Not applicable.
(n) Consent of Deloitte & Touche LLP.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Financial Data Schedule.*
_________________
* To be filed by amendment.
Item 25. Marketing Arrangements
See Exhibit (h)(i).
Item 26. Other Expenses of Issuance and Distribution
The expenses in connection with the Offer, all of which are being borne by the
Registrant, are as follows:
Registration fee.................................... $9,586
National Association of Securities Dealers,
Inc. fee .......................................... *
American Stock Exchange listing fee................. *
Printing (other than stock certificates)............ *
Accounting fees and expenses........................ *
Legal fees and expenses............................. *
Dealer Manager's expense reimbursement.............. *
C-2
<PAGE>
<TABLE>
<S> <C>
Information Agent fees and expenses................. *
Subscription Agent fees and expenses................ *
Miscellaneous....................................... *
Total........................................... $
========
</TABLE>
______________
* To be completed by amendment.
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 December 31, 1998,
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................................ 448
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 "Securities 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
C-3
<PAGE>
indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and other connections of Investment Adviser.
Pacholder & Company, LLC is engaged primarily in the business of providing
investment advisory services. A description of the members of Pacholder &
Company, LLC and other required information is included in the Form ADV and
schedules thereto of Pacholder & Company, LLC on file with the Securities and
Exchange Commission (File No. 801-55869) and is incorporated herein by
reference.
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 8044 Montgomery Road, Suite 382, Cincinnati,
Ohio 45236. Certain records, including records relating to the Registrant's
shareholders and certain records relating to the physical possession of the
Registrant's securities, may be maintained at the offices of the Registrant's
custodian, transfer agent, dividend disbursing agent and registrar, Star Bank,
N.A., located at 425 Walnut Street, Cincinnati, Ohio 45201-1118.
Item 32. Management Services
Not applicable.
Item 33. Undertakings.
1. The Registrant undertakes to suspend offering of shares until the
prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of this Registration Statement or
(2) 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. The Registrant undertakes:
C-4
<PAGE>
a. to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
b. that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of those securities at that time shall be deemed to be the initial
bona fide offering thereof; and
c. to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities
Act, 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 1933Act shall
be deemed to be part of the Registration Statement as of the time it was
declared effective; and
b. for the purpose of determining any liability under the Securities
Act, 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cincinnati, and State of Ohio, on the 18th day of
January, 1999.
PACHOLDER FUND, INC.
By: /s/ William J. Morgan
---------------------
William J. Morgan,
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William J. Morgan Director, Chairman of the Board January 18, 1999
- --------------------- (principal executive officer), and
William J. Morgan Treasurer (principal financial
and accounting officer)
/s/ Daniel A. Grant Director January 18, 1999
- -----------------------
Daniel A. Grant
/s/ John F. Williamson Director January 18, 1999
- -----------------------
John F. Williamson
/s/ George D. Woodard Director January 18, 1999
- -----------------------
George D. Woodard
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Letter Description
- ------ -----------
<S> <C>
(a)(iii) Articles Supplementary Creating and Fixing the Rights of Series C and
Series D Cumulative Preferred Stock............................................
(b) Amended and Restated By-Laws...................................................
(d)(ii) Specimen certificate for Series C Cumulative Preferred Stock*
(iii) Specimen certificate for Series D Cumulative Preferred Stock*
(iv) Subscription Certificate for subscribing for Shares pursuant to the Offer*
(v) Notice of Guaranteed Delivery for subscribing for Shares*
(e) Dividend Reinvestment Plan*
(g) Investment Advisory Agreement dated August 20, 1998............................
(h)(i) Dealer Manager Agreement*
(ii) Soliciting Dealer Agreement*
(j) Custody Agreement dated May 1, 1996............................................
(k)(i) Transfer Agency and Service Agreement dated January 1, 1999....................
(ii) Administration Agreement dated June 5, 1996....................................
(l) Opinion and Consent of Piper & Marbury L.L.P.*
(n) Consent of Deloitte & Touche LLP...............................................
(r) Financial Data Schedule.*
</TABLE>
- ----------
* To be filed by amendment.
<PAGE>
================================================================================
EXHIBIT 99(a)(iii)
Pacholder Fund, Inc.
Articles Supplementary
Creating and Fixing the Rights of
Series C and Series D
Cumulative Preferred Stock
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C> <C>
ARTICLE I PREFERRED STOCK........................................ 1
Section 1. Dividends; Additional 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; Additional Reporting Requirements.. 14
ARTICLE II AMENDMENTS; CLASS VOTING............................... 15
ARTICLE III DEFINITIONS............................................ 16
ARTICLE IV NO INCREASE TO AUTHORIZED CAPITAL STOCK................ 27
</TABLE>
ATTACHMENTS TO ARTICLES SUPPLEMENTARY:
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
-i-
<PAGE>
ARTICLES SUPPLEMENTARY
CREATING AND FIXING THE RIGHTS OF
SERIES C AND SERIES D
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 2,450,000
authorized and unissued shares of the Common Stock (par value $.0l per
share) of the Corporation as shares of the Corporation's Cumulative
Preferred Stock (par value $.01 per share) and has further classified
1,650,000 of such shares as "Series C Shares" and 800,000 of such shares as
"Series D Shares" (respectively the "Series C Shares" and the "Series D
Shares" and each a "Series" of Cumulative Preferred Stock).
SECOND: The preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of each Series 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 of each Series 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 of such Series at the applicable Regular Dividend Rate (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 second day
of each January, April, July and October in each year commencing January 2, 1999
(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
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 1. Dividends; Additional Dividends
declared and paid at any time, without reference to any Dividend 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. The "Regular Dividend
Rate" shall mean:
(A) in the case of the Series C Shares, 7.15% per annum; and
(B) in the case of the Series D Shares, 7.05% per annum.
(ii) Holders of shares of Preferred Stock of each Series 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 of such Series at the applicable
Regular Dividend Rate plus 2.0% 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 in accordance with the accrued and unpaid amount of
such dividends. 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 the charter of the Corporation 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
-2-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 1. Dividends; Additional Dividends
Corporation has redeemed the full number of shares of Preferred Stock required
to be redeemed by any provision contained in its charter 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.
(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
-3-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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 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 March 2, 2002 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
-4-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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
(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 February 26, 1997) 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 February 26, 1997,
either the Advisor or another Person in which Pacholder Associates,
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;
-5-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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, 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 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/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,
Pacholder Associates or the Advisor in that certain Preferred Stock
Purchase Agreement dated as of December 1, 1998, or made by the
Corporation, Pacholder Associates or the Advisor in any statement or
certificate furnished by the Corporation, Pacholder Associates or the
Advisor in connection with the consummation of the issuance and delivery of
the Series C Shares and Series D Shares, 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, Pacholder Associates or the Advisor to the
holders of the Preferred Stock at any time subsequent to the issuance and
delivery of the Series C Shares and Series D Shares pursuant to the
requirements of that certain Preferred Stock Purchase Agreement dated as of
December 1, 1998 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
-6-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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 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
and Series 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
-7-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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 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 at any time fixed
for redemption thereof, such redemption shall be made pro rata from each
holder of such shares of Preferred Stock in accordance with the aggregate
redemption price of such 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 the
charter of the Corporation, 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 the charter of the Corporation or by laws, 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
-8-
<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 3. Redemption
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,
(ii) the holders of the Common Stock shall be entitled as a class, to the
exclusion of the holders of the Preferred Stock, to elect two directors of the
Corporation, 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 (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,
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<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 4. Voting Rights
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 in
Section 4(b) hereof. Whether or not a quorum is present, 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 further notice,
other than an announcement at the meeting, to a date not more than 120 days
after the original record date. 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 the
charter of the Corporation, 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 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 additional
directors that they are entitled to elect, and the additional directors so
elected by the holders of the Preferred Stock, together with the incumbent
directors, shall constitute the entire Board of Directors.
(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 elected by the holders of
the Preferred Stock) may be filled only by vote of the holders of the Preferred
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<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 4. Voting Rights
Stock, and if not so filled such vacancy may (subject to the provisions of any
applicable law) be filled by a majority of the remaining directors (or the
remaining director) who were elected by the holders of Preferred Stock. Any
other vacancy on the Board of Directors during a Voting Period may 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 Preferred Stock of such non-compliance and within two Business Days
following such Asset Coverage Non-Compliance Date deliver to each such 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
Preferred Stock of such non-compliance and within two Business Days following
such Eligible Portfolio Coverage Non-Compliance Date deliver to each such 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
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<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 5. Coverage and Other Financial Tests
respect to such Eligible Portfolio Evaluation Date, together with each other
Certificate of Eligible Portfolio 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 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 total
assets in accordance with the 1940 Act (as in effect on February 26, 1997)
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.
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<PAGE>
Pacholder Fund, Inc. Article I. Preferred Stock
Articles Supplementary Section 5. Coverage and Other Financial Tests
The Corporation shall cause each Accountants' Certificate, together with the
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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<PAGE>
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 and Eligible Portfolio Coverage are 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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<PAGE>
Pacholder Fund, Inc. Article II. Amendments; Class Voting
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 of any Series or the Common Stock shall require the separate
approval of a Majority of the Outstanding Shares of such class or such Series;
(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 amend, alter or repeal
any of the preferences, rights or powers of the Preferred Stock or any Series
thereof without the approval of a Majority of the Outstanding Shares of
Preferred Stock or of such Series, voting separately as a class; (5) the
Corporation may not (a) increase or decrease the number of shares of Preferred
Stock authorized to be issued, (b) 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,
(c) 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 (d) 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; (6) 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 (7) the Common Stock
and the Preferred Stock shall vote as separate classes to the extent otherwise
required under Maryland law or the 1940 Act.
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
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.
"Advisor" means Pacholder & Company, LLC, an Ohio limited liability
company.
"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 February 26, 1997), less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act as in effect on February 26, 1997), 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 250% (or such other percentage as shall
be established by the Board of Directors of the Corporation with the prior,
written consent of the holders of shares of the Preferred Stock); provided,
however, that such percentage shall at all times be equal to or greater than the
percentage specified in or under the 1940 Act as the minimum asset coverage for
preferred stock 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.
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"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 (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
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
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 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 Property, Portfolio Property,
Issue Size of Each Invested in any One Issuer /2/ Invested in any One
Rating Agencies' Ratings/1/ Issue ($ in millions) 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
</TABLE>
- ------------------------------
/1/ References to ratings by the Rating Agencies in this definition and
throughout these Articles 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.
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
<TABLE>
<S> <C> <C> <C>
"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
"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).
- ---------------------------------
/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
/5/ Represents commercial paper investments.
-19-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"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 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
-20-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
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 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.
-21-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Liquidation Preference" shall have the meaning set forth in Section 2(a)
of Article I hereof.
"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 percentages 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, 0.50% 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, the scheduled mandatory redemption 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 a liquidation distribution is to be made in respect of
such share of Preferred Stock pursuant to Section 2 of Article I hereof or
such share of Preferred Stock is to be redeemed pursuant to Section 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, and in turn provided in writing 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 two bid prices for the same kind of securities or
instruments, as the case may be, having, as nearly as practicable,
comparable
-23-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
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 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 and in turn provided to the
Corporation in writing 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 telefacsimile or other electronic communication, 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.
"Pacholder Associates" means Pacholder Associates, Inc., an Ohio
corporation.
"Pacholder & Company" means Pacholder & Company, LLC, an Ohio limited
liability company.
"Paying Agent" means Star Bank, N.A. 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.
-24-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"Preferred Stock" means the Cumulative Preferred Stock (par value $.0l per
share) of the Corporation.
"Pricing Agent" means Pacholder Associates 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.
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.
"Regular Dividend Rate" shall have the meaning set forth in Section 1(a)(i)
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.
"Series", "Series C Shares" and "Series D Shares" shall have the respective
meanings set forth in paragraph First of the preamble hereto.
"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;/*/
- -------------------------
/*/ Eurodollar deposits issued by such a 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 are also included. In
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<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
(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 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.
- ------------------------
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.
-26-
<PAGE>
Pacholder Fund, Inc. Article III. Definitions
Articles Supplementary
"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.
"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.
ARTICLE IV
NO INCREASE TO AUTHORIZED CAPITAL STOCK
The foregoing Amendment to the charter of the Corporation does not increase
the authorized capital stock of the Corporation.
-27-
<PAGE>
Pacholder Fund, Inc. Signatures
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 December 1, 1998.
PACHOLDER FUND, INC.
WITNESS:
By
- -------------------------------- -----------------------------------
Its Secretary Its 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.
________________________________
-28-
<PAGE>
DISCOUNT FACTORS SUPPLIED BY MOODY'S
<TABLE>
<CAPTION>
Discount Factor
---------------
<S> <C>
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 nor 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 20 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
</TABLE>
Schedule I
(to Articles Supplementary)
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
I-2
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
I-3
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
I-4
<PAGE>
DISCOUNT FACTORS SUPPLIED BY STANDARD & POOR'S
<TABLE>
<CAPTION>
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
<S> <C>
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
</TABLE>
Schedule II
(to Articles Supplementary)
<PAGE>
INDUSTRY CATEGORIES
<TABLE>
<CAPTION>
<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
Clothing/Textiles pictures
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
</TABLE>
Schedule III
(to Articles Supplementary)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Financial intermediaries Telecommunications/cellular
communications
Banking Utilities
Finance companies Electric
Food/drug retailers Local gas
Water
</TABLE>
III-2
<PAGE>
Form of Certificate of Asset Coverage
Exhibit A
(to Articles Supplementary)
<PAGE>
Form of Certificate of Eligible Portfolio Coverage
Exhibit B
(to Articles Supplementary)
<PAGE>
Exhibit 99(b)
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 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.
-2-
<PAGE>
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 be held on such date and at any place as may be designated from time to
time by the Board of Directors.
-4-
<PAGE>
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. Unless otherwise provided by statute or
regulation, participation in a meeting by these means constitutes presence in
person at the meeting.
-5-
<PAGE>
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 committee may conduct any
meeting thereof by telephone in accordance with the provisions of 2.10.
-6-
<PAGE>
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
-7-
<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
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<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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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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<PAGE>
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>
EXHIBIT 99(g)
INVESTMENT ADVISORY AGREEMENT
-----------------------------
AGREEMENT made as of the 20th day of August, 1998, by and between
Pacholder Fund, Inc., a Maryland corporation (hereinafter called the "Fund"),
and Pacholder & Company, LLC, an Ohio limited liability company (hereinafter
called the "Adviser").
WHEREAS, the Fund is engaged in business as a diversified, closed-end
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and engages in
the business of acting as investment adviser; and
WHEREAS, the Fund desires to retain the Adviser to render management
and investment advisory services in the manner and on the terms and conditions
hereinafter set forth; and
WHEREAS, the Adviser desires to be retained to perform services on
said terms and conditions;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants hereinafter contained, the Fund and the Adviser agree as follows:
1. Duties and Responsibilities of Adviser.
--------------------------------------
A. Investment Advisory Services. The Fund hereby retains the Adviser to
-----------------------------
act as investment manager of the Fund and, subject to the supervision of the
Fund's Board of Directors, to supervise the investment activities of the Fund as
hereinafter set forth giving due consideration to the policies of the Fund as
expressed in the Fund's Registration Statement on Form N-2 under the 1940 Act
and under the Securities Act of 1933, as amended, as well as to the factors
affecting the status of the Fund as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended. Without limiting the generality of
the foregoing, the Adviser:
(i) shall obtain and evaluate such information and advice
relating to the economy, securities market and securities as it deems
necessary or useful to discharge its duties hereunder;
(ii) shall continuously manage the assets of the Fund in a manner
consistent with the investment objectives and policies of the Fund;
(iii) shall determine the securities to be purchased, sold or
otherwise disposed of by the Fund and the timing of such purchases, sales
and dispositions; and
<PAGE>
(iv) shall take such further action, including the placing of
purchase and sale orders on behalf of the Fund, as the Adviser shall deem
necessary or appropriate. The Adviser shall also furnish to or place at
the disposal of the Fund such of the information, evaluations, analyses and
opinions formulated or obtained by the Adviser in the discharge of its
duties as the Fund may, from time to time, reasonably request.
B. Reports to Fund. The Adviser shall furnish to or place at the disposal
---------------
of the Fund such information, reports, evaluations, analyses and opinions as the
Fund may, at any time or from time to time, reasonably request or as the Adviser
may deem helpful to the Fund.
C. Fund Personnel. The Adviser agrees to permit individuals who are
--------------
officers or employees of the Adviser to serve (if duly elected or appointed) as
officers, directors, members of any committee of directors, members of any
advisory board, or members of any other committee of the Fund, without
remuneration from or other cost to the Fund.
D. Personnel, Office Space, and Facilities of Adviser. The Adviser at its
--------------------------------------------------
own expense shall furnish or provide and pay the cost of such office space,
office equipment, office personnel, and office services as the Adviser requires
in the performance of its investment advisory and other obligations under this
Agreement.
2. Allocation of Expenses.
----------------------
A. Expenses Paid by Adviser. The Adviser shall bear the cost of rendering
------------------------
the investment management and supervisory services to be performed by it under
this Agreement, and shall, at its own expense, pay the compensation of the
officers and employees of the Fund who are employees of the Adviser or any
corporate affiliate of the Adviser, if any, and provide such office space,
facilities and equipment and such clerical help and bookkeeping services as the
Fund shall reasonably require in the conduct of its business. The Adviser shall
also bear the cost of telephone service, heat, light, power and other utilities
provided to the Fund.
B. Expenses Paid by Fund. The Fund assumes and shall pay or cause to be
----------------------
paid all other expenses of the Fund, including without limitation: the charges
and expenses of any registrar, any custodian or depository appointed by the Fund
for the safekeeping of its cash, portfolio securities and other property, and
any stock transfer or dividend agent or agents appointed by the Fund; brokers'
commissions chargeable to the Fund in connection with portfolio transactions to
which the Fund is a party; all taxes, including securities issuance and transfer
taxes, and fees payable by the Fund to federal, state or other governmental
agencies; the cost and expense of engraving or printing of certificates
representing shares of the Fund; all costs and expenses in connection with the
registration and maintenance of registration of the Fund and its shares with the
Securities and Exchange Commission and various states and other jurisdictions
(including filing fees and legal fees and disbursements of counsel and the costs
and expenses of preparation, printing (including typesetting) and distributing a
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<PAGE>
prospectus for such purposes); all expenses of stockholders' and directors'
meetings and of preparing, printing and mailing proxy statements and reports to
stockholders; fees of directors or members of any advisory board or committee
who are not employees of the Adviser or any corporate affiliate of the Adviser;
travel expenses of directors; all expenses incident to the payment of any
dividend reinvestment program; charges and expenses of any outside service used
for pricing of the Fund's portfolio securities; charges and expenses of legal
counsel, including counsel to the directors of the Fund who are not "interested
persons" (as defined in the 1940 Act) of the Fund or the Adviser, and of
independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
fees and expenses incident to the listing of the Fund's shares on any stock
exchange; postage; insurance premiums on property or personnel (including
officers and directors) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification related thereto); fees and expenses of
counsel, accountants and investment bankers; and all other charges and costs of
the Fund's operation unless otherwise explicitly provided herein.
3. Compensation.
------------
A. Fulcrum Fee. As full compensation for the services provided,
-----------
facilities furnished and expenses paid by the Adviser under this Agreement, the
Fund agrees to pay the Adviser an annual investment advisory fee, which
increases and decreases proportionately based on the investment performance of
the Fund in relation to the investment record of the CS First Boston High Yield
Index/TM/ (the "Index"). The advisory fee shall be accrued at least weekly and
paid quarterly as soon as practicable after the end of each calendar quarter, as
follows:
(i) If the Fund's investment performance for the twelve months
immediately preceding the end of the quarter is equivalent to the
investment record of the Index for the same 12-month period, then the
advisory fee shall be computed at the annual rate of 0.90% of the Fund's
average net assets. The rate at which the advisory fee is computed shall
be increased or decreased from the 0.90% fulcrum fee by 10% of the amount
by which the investment performance of the Fund exceeds or is less than the
investment record of the Index, up to a maximum of 1.40% and down to a
minimum of 0.40%. For purposes of calculating the amount of the advisory
fee, the Fund's average net assets shall be determined by taking the
average of all determinations of such net assets during the applicable 12-
month period. The investment performance of the Fund and the investment
record of the Index shall be determined in accordance with the Advisers Act
and the rules and regulations promulgated thereunder.
(ii) The compensation payable to the Adviser after the end of
each quarter shall be equal to the amount of the annual advisory fee
calculated as provided in sub-paragraph (i) above reduced by the
compensation previously paid by the Fund to the Adviser and/or to Pacholder
& Company in respect of the applicable 12-month
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<PAGE>
period. In the event that such prior payments should exceed the amount of
the annual advisory fee payable hereunder, the Adviser shall remit to the
Fund such excess as soon as practicable after the end of the quarter.
B. Proration. If the Adviser shall serve for less than the whole of any
---------
quarter, the investment advisory fee shall be prorated on the basis of the
twelve-month period immediately preceding the date of termination of this
Agreement.
4. Brokerage. Subject to the approval of the Board of Directors of the
---------
Fund, the Adviser, in carrying out its duties under Section 1. A., may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services
within the meaning of Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a higher commission than that which might be
charged by another broker-dealer, if such commission is deemed reasonable in
relation to the brokerage and research services provided by the broker-dealer,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to the accounts as to which it
exercises investment discretion (as such term is defined under Section 3(a)(35)
of the Exchange Act).
5. Adviser's Use of the Services of Others. The Adviser may (at its cost
---------------- ----------------------
except as contemplated by Sections 2 and 4 of this Agreement) employ, retain or
otherwise avail itself of the services or facilities of other persons or
organizations for the purpose of providing the Adviser or the Fund with such
statistical and other factual information, such advice regarding economic
factors and trends, such advice as to occasional transactions in specific
securities or such other information, advice or assistance as the Adviser may
deem necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to the Fund, or in the discharge of Adviser's
overall responsibilities with respect to the other accounts which it serves as
investment adviser.
6. Ownership of Records. All records required to be maintained and
--------------------
preserved by the Fund pursuant to the provisions of rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the 1940 Act and
maintained and preserved by the Adviser on behalf of the Fund are the property
of the Fund and will be surrendered by the Adviser promptly on request by the
Fund.
7. Limitation of Liability of Adviser. The Adviser will use its best
----------------------------------
efforts in the supervision and management of the investment activities of the
Fund, but in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations hereunder the Adviser shall not be liable
to the Fund or any of its shareholders for any error of judgment or mistake of
law or for any act or omission by the Adviser or for any losses sustained by the
Fund or its shareholders.
8. Services to Other Clients. Subject to Section 12 of this Agreement,
-------------------------
nothing contained in this Agreement shall prevent the Adviser or any affiliated
person of the Adviser from acting as investment adviser or manager for any other
person, firm or corporation and
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<PAGE>
shall not in any way bind or restrict the Adviser or any such affiliated person
from buying, selling or trading any securities or commodities for their own
accounts or for the account of others for whom they may be acting. Nothing in
this Agreement shall limit or restrict the right of any director, officer or
employee of the Adviser to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any other
business whether of a similar or dissimilar nature.
9. Use of Adviser's Name. The Fund may include the name "Pacholder" or
---------------------
any other name derived from the name "Pacholder" only for so long as this
Agreement or any extension, renewal or amendment hereof remains in effect,
including any similar agreement with any organization which shall have succeeded
to the business of the Adviser as investment adviser. At such time as this
Agreement or any extension, renewal or amendment hereof, or such other similar
agreement shall no longer be in effect, the Fund will (by corporate action, if
necessary) cease to use any name derived from the name "Pacholder", any name
similar thereto or any other name indicating that it is advised by or otherwise
connected with the Adviser, or with any organization which shall have succeeded
to the Adviser's business as investment adviser.
10. Term of Agreement. This Agreement shall become effective as of the
-----------------
date first written above and, unless sooner terminated as provided herein shall
continue in effect until June 30, 1999. Thereafter, if not terminated, this
Agreement shall continue in effect for successive periods of 12 months each
ending on June 30 of each year, provided such continuance is specifically
approved at least annually by the vote of holders of "a majority of the
outstanding voting securities" (as defined in the 1940 Act) of the Fund or by
the Board of Directors of the Fund, and, in either event, by the vote of a
majority of the directors of the Fund who are not parties to this 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.
Notwithstanding the foregoing, (a) the Fund may, at any time and without the
payment of any penalty, terminate this Agreement upon 30 days' written notice to
the Adviser, either by majority vote of the directors of the Fund or by the vote
of the holders of a majority of the outstanding voting securities of the Fund;
(b) this Agreement shall immediately terminate in the event of its assignment
(to the extent required by the 1940 Act and the rules thereunder) unless such
automatic termination shall be prevented by an exemptive order of the Securities
and Exchange Commission; and (c) the Adviser may terminate this Agreement
without payment of penalty on 180 days' written notice to the Fund. In the
event the Adviser elects to terminate this Agreement, the advisory fee payable
during the 180-day period will be the lesser of the fee payable under this
Agreement or the fee which will be payable to the Adviser under any new advisory
agreement with the Fund. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed post-paid, to the other party at the
principal office of such party.
11. Amendment. This Agreement may be amended by the parties without the
---------
vote or consent of the stockholders of the Fund to supply any omission, to cure,
correct or supplement any ambiguous, defective or inconsistent provision hereof,
or if they deem it
-5-
<PAGE>
necessary to conform this Agreement to the requirements of applicable federal
laws or regulations, but neither the Fund nor the Adviser shall be liable for
failing to do so.
12. Allocation of Services. The Adviser reserves the right to manage
----------------------
other investment accounts, including those with investment objectives similar to
the Fund. Securities considered as investments for the Fund may also be
appropriate for other investment accounts managed by the Adviser. Subject to
applicable laws and regulations, the Adviser will attempt to allocate equitably
portfolio transactions among the portfolios of its other investment accounts
whenever decisions are made to purchase or sell securities by the Fund and one
or more of such other accounts simultaneously. In making such allocations, the
main factors to be considered by the Adviser will be the respective investment
objectives of the Fund and such other accounts, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment by the Fund and such other accounts, the size of investment
commitments generally held by the Fund and such accounts, and the opinions of
the persons responsible for recommending investments to the Fund and such other
accounts.
13. Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of Ohio and the applicable provisions of the 1940 Act and
the Advisers Act. To the extent the applicable law of the State of Ohio, or any
of the provisions herein, conflict with the applicable provisions of the 1940
Act or the Advisers Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the day and year first above written in Cincinnati, Ohio.
WITNESS: PACHOLDER FUND, INC.
By:
- -------------------------- ---------------------
James E. Gibson
Senior Vice President
WITNESS: PACHOLDER & COMPANY, LLC
By: PACHOLDER ASSOCIATES, INC.
By:
- -------------------------- ---------------------
William J. Morgan
President
-6-
<PAGE>
EXHIBIT 99(j)
CUSTODY AGREEMENT
between
USF&G Pacholder Fund, Inc.
and
Star Bank, N.A.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Page
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<S> <C> <C>
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
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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
</TABLE>
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.
-9-
<PAGE>
3.13 Actions Not Requiring Proper Instructions. The Custodian may in its
-----------------------------------------
discretion, without express authority from or on behalf the Fund:
(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 shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
-10-
<PAGE>
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 communications service, labor disputes, acts of civil or military
authority, governmental, judicial or regulatory actions or inability to obtain
labor, material, equipment or transportation.
-14-
<PAGE>
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.
-15-
<PAGE>
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 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.
-16-
<PAGE>
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:
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 remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.
-17-
<PAGE>
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>
EXHIBIT 99(k)(i)
Revised
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of January 1, 1999, by and between Pacholder Fund, Inc.,
a Maryland Corporation (the Fund"), and Star Bank, N.A., a national banking
association (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:
I. 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 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
<PAGE>
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 national banking corporation duly organized and
existing and in good standing under the laws of the United
States.
(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.
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.
<PAGE>
(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, 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
<PAGE>
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 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
<PAGE>
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.
6.03 The indemnification provisions of Section 4 of this Agreement will
survive any termination for a period of 6 months following such termination
date.
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.
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
<PAGE>
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: PACHOLDER FUND, INC.
By: __________________________________
Name: _______________________________
Title: ________________________________
ATTEST: STAR BANK, N.A.
By: __________________________________
Name: _______________________________
Title: ________________________________
<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.
vii. Withholding of federal income tax on such dividends and
<PAGE>
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 monthly basis.
iii. Crediting full and fractional Shares to the participant
accounts.
iv. Updating and balancing participant records as transactions
occur.
v. Generating monthly reports for the Fund.
vi. Generating monthly 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.
<PAGE>
FEE SCHEDULE
------------
Annual Service Fee $8,300.00
Conversion Fee WAIVED
The Annual Service Fee is inclusive of the provision by the Bank to the Fund of
the Transfer Agent, Registrar, Dividend Disbursing Agent, Dividend Reinvestment
and Proxy Agent Services 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.
<PAGE>
EXHIBIT 99(k)(ii)
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 responsible for the management of certain of the Fund's
affairs as determined by the Board of Directors;
<PAGE>
(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; insurance
premiums; interest; brokerage costs; trade association dues; and litigation and
other extraordinary or nonrecurring expenses.
-3-
<PAGE>
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>
EXHIBIT 99(n)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Pacholder Fund, Inc. on Form N-2 under the Securities Act of 1933
and the Investment Company Act of 1940 (Amendment No. 15; File No. 811-5639) of
our report dated February 20, 1998, related to USF&G Pacholder Fund, Inc. (now
Pacholder Fund, Inc.) incorporated by reference in the prospectus and to the
reference to us under the captions "Financial Highlights" and "Experts" in the
prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
- -------------------------
Dayton, Ohio
January 19, 1999
