<PAGE>
Filed Pursuant to Rule 497(h)
Registration No. 333-70767
PACHOLDER FUND, INC.
2,375,662 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 February 23, 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 95% 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 common stock is listed, and the shares issued in this offer will
be listed, on the American Stock Exchange under the symbol "PHF." On February
23, 1999, the net asset value per share of the Fund's common stock was $15.41
and the last reported sales price of a share on the Exchange was $14.9375.
This offer will expire at 5:00 p.m., Eastern time, on March 18, 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 25 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.
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............................. $14.64 $34,779,692
- --------------------------------------------------------------------------------
Sales Load............................................... $ 0.51 $1,210,000
- --------------------------------------------------------------------------------
Estimated Proceeds to Fund............................... $14.13 $33,569,692
</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. 480.
The Fund's address is 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236,
and its telephone number is (513) 985-3200.
Winton Associates, Inc.
The date of this Prospectus is February 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 3
Fee Table and Example...................................................... 6
Financial Highlights....................................................... 7
Capitalization at December 31, 1998........................................ 8
Information Regarding Senior Securities.................................... 8
Trading and Net Asset Value Information.................................... 9
The Fund................................................................... 9
The Offer.................................................................. 11
Use of Proceeds............................................................ 19
Investment Policies and Limitations........................................ 19
Risks Factors and Special Considerations................................... 25
Management of the Fund..................................................... 30
Net Asset Value............................................................ 35
Dividends and Distributions................................................ 35
Federal Taxation........................................................... 37
Description of Capital Stock............................................... 39
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar......... 42
Legal Opinions............................................................. 42
Reports to Shareholders.................................................... 42
Experts.................................................................... 43
Incorporation of Financial Statements by Reference......................... 43
Further Information........................................................ 43
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
2
<PAGE>
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 slightly by spreading the
Fund's fixed costs 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.
Important Terms of the Offer
<TABLE>
<S> <C>
Aggregate number of 2,375,662
Shares offered.........
Number of Rights issued
to each shareholder.... One Right for each whole share owned on the Record Date
Estimated Subscription $14.64
Price..................
Subscription ratio...... One Share for every three Rights (1-for-3)
</TABLE>
Important Dates to Remember
<TABLE>
<S> <C>
.Record Date............................................. February 23, 1999
. Expiration Date (payment for Shares and Notices of
Guaranteed Delivery due)............................... March 18, 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............................................... March 23, 1999*+
. Confirmation mailed to Exercising Rights Holders not
later than............................................. March 30, 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 March 18, 1999, unless the Offer is extended.
3
<PAGE>
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. 480
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 $14.64 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 March 18, 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 March 18, 1999, unless extended.
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 12.
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. The Fund's
prior investment adviser, Pacholder & Company, served as the Fund's investment
adviser from the date the Fund commenced operations in 1988 until August 1998.
4
<PAGE>
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."
As discussed more fully in the body of this Prospectus, investment in the
Fund involves a number of significant risks, including:
. the possibility that the lower quality securities in which the Fund
invests may be more likely to default and more volatile than other debt
securities
. the fluctuation of the Fund's net asset value in connection with changes
in the value of its portfolio securities
. risks associated with the Fund's investments in restricted and illiquid
securities, foreign securities, and use of certain investment strategies
The Fund's leveraged capital structure involves certain substantial additional
risks, including:
. exaggeration of any increases or decreases in the net asset value of the
Common Stock and the yield on the Fund's portfolio
. the possibility that the dividends payable on the Preferred Stock may
exceed the income from the securities purchased by the Fund
The Offer also involves the risk of an immediate dilution of the aggregate
net asset value of your shares of Common Stock if you do not fully exercise
your Rights.
5
<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>
<S> <C>
Fee Table:
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 $7,500 and $5,500, 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, the Fund paid Management Fees
equal to 0.80% of its net assets attributable to Common Stock and 0.52% 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 39 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>
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."
6
<PAGE>
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, 1998 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, 1998 Annual Report which is available
upon request from the Fund.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year...... $17.40 $17.44 $16.02 $16.86 $19.23
--------- --------- --------- --------- -------
Net investment income... 2.30 2.22 2.16 2.19 2.12
Net realized and
unrealized gain/(loss)
on investments......... (2.32) 0.83 1.42 (0.06) (1.64)
--------- --------- --------- --------- -------
Net increase in net
asset value resulting
from operations........ (0.02) 3.05 3.58 2.13 0.48
--------- --------- --------- --------- -------
Distributions to
Stockholders from:
Preferred dividends..... (0.49) (0.49) (0.46) (0.29) (0.24)
Common:
Net investment income
and short-term gains... (1.70) (1.72) (1.70) (1.90) (1.92)
Net realized long-term
gains.................. -- (0.16) -- -- --
--------- --------- --------- --------- -------
Total distributions to
preferred and
common stockholders.... (2.19) (2.37) (2.16) (2.19) (2.16)
--------- --------- --------- --------- -------
Capital Change Resulting from the
Issuance of Fund Shares:
Common Shares........... -- (0.69) -- (0.67) (0.69)
Preferred Shares........ -- (0.03) -- (0.11) --
--------- --------- --------- --------- -------
-- (0.72) -- (0.78) (0.69)
--------- --------- --------- --------- -------
Net asset value, end of
year................... $15.19 $17.40 $17.44 $16.02 $16.86
========= ========= ========= ========= =======
Market value per share,
end of year............ $16.38 $18.19 $17.88 $17.38 $16.75
========= ========= ========= ========= =======
Total Investment Return:
Based on market value
per share (1).......... (0.16%) 13.23% 14.37% 16.04% (11.12%)
Based on net asset value
per share (2).......... (3.19%) 15.44% 20.40% 10.68% 0.72%
Ratios To Average Net
Assets (3):
Expenses................ 0.83% 1.47% 1.80% 0.86% 1.64%
Net investment income... 9.72% 8.92% 9.21% 10.45% 10.17%
Supplemental Data:
Net assets at end of
year, net of preferred
stock (000)............ $108,190 $123,442 $87,054 $79,596 $58,925
Average net assets
during year, net
of preferred stock
(000).................. $119,223 $118,893 $83,074 $79,614 $59,002
Portfolio turnover
rate................... 88% 116% 76% 83% 102%
Number of preferred
shares outstanding
at end of year......... 2,450,000 2,450,000 1,650,000 1,650,000 8,600
Asset coverage per share
of preferred stock
outstanding at end of
year................... $64 $70 $73 $66 $7,852
Liquidation and average
market value
per share of preferred
stock.................. $20 $20 $20 $20 $1,000
</TABLE>
- --------
(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.
7
<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
Preferred Stock........ 1992(1) 10,000 4,400 1,000 --
1993 9,400 5,730 1,000 --
1994 8,600 7,852 1,000 --
6.95% Cumulative Pre-
ferred Stock........... 1995(2) 1,650,000 66 20 --
1996 1,650,000 73 20 --
Cumulative Preferred
Stock.................. 1997(3) 2,450,000 70 20 --
1998(3) 2,450,000 64 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.
8
<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 Net Asset Value Premium/(Discount)
--------------- Quarterly Trading --------------- To Net Asset
Quarter Ended High Low Volume (000s) High Low Value (%)
------------- ------- ------- ----------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997.......... 18.75 16.625 2,061 18.06 16.68 5.18 (5.87)
June 30, 1997........... 18.00 16.625 597 17.74 16.57 2.72 (0.31)
September 30, 1997...... 18.00 17.3125 799 18.15 17.32 2.14 (1.40)
December 31, 1997....... 18.6875 17.4375 843 17.96 17.36 4.77 (1.57)
March 31, 1998.......... 18.875 18.00 652 18.13 17.51 4.94 2.28
June 30, 1998........... 18.8125 17.875 473 17.89 17.39 6.38 1.17
September 30, 1998...... 18.4375 14.50 664 17.57 15.07 6.38 (9.94)
December 31, 1998....... 16.8125 15.00 460 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
February 23, 1999, was $15.28 and $15.41, 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 $14.9375, 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 Ba or lower by Moody's Investors Service, Inc.
("Moody's") and BB or lower by Standard & Poor's Ratings Group ("S&P"), or
non-rated fixed income securities deemed by the Adviser to be of comparable
quality. Securities rated Ba or lower by Moody's or BB or lower by S&P are
commonly referred to as "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."
9
<PAGE>
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 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."
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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 of Directors believes that the Offer would permit the Fund to accomplish
this objective 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 slightly 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
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.
The Dealer Manager, the Adviser and the Administrator are affiliates of
Pacholder Associates. 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 February 23, 1999 (the "Record
Date"), non-transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 2,375,662 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.
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<PAGE>
The Rights are non-transferable and therefore may not be purchased or sold.
However, the Shares will be listed for trading 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 February 24, 1999 and ends at 5:00
p.m., Eastern time, on March 18, 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 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 the April dividend, which will be paid on the tenth day
of May to shareholders of record as of the last Business Day of April.
"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
Luther King, Jr. Day, 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 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 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. Beneficial
Owner Certification Forms will be distributed to banks, brokers, trustees and
other nominee holders with the Subscription Certificates.
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<PAGE>
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 95% 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 $14.64 per Share (based on the Fund's net
asset value per share on February 23, 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 20, 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
February 23, 1999 were $15.28 and $15.41, respectively, and the last reported
sales prices of a share on the Exchange on those dates were $16.1875 and
$14.9375, respectively.
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern time, on March 18, 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, invoicing and other services as subscription agent a fee
estimated to be approximately $7,500, excluding reimbursement for its
processing and 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. 480 (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 (781) 575-4817 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 (781) 575-
4816. 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:
EquiServe L.P.
Corporate Actions Dept.
P.O. Box 9573
Boston, MA 02205-8686
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<PAGE>
(2)BY OVERNIGHT COURIER:
EquiServe L.P.
Corporate Actions Dept.
40 Campanelli Drive
Braintree, MA 02184
(3)BY HAND:
Securities Transfer & Reporting Services, Inc.
c/o EquiServe L.P.
100 William Street, Galleria
New York, NY 10038
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 March 23, 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.
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."
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<PAGE>
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. 480
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
$5,500, 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:
(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 account and the proceeds will be held by the Fund in an
interest-bearing account at its custodian bank (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 March 23, 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
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<PAGE>
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 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.
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."
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<PAGE>
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
Certificate.
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 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 (the "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. Stock certificates
will not be issued for Shares credited to Plan accounts. 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 behalf will
have any Shares acquired in the Primary Subscription and pursuant to the Over-
Subscription privilege credited to the account of Cede or such other
depository or nominee. Certificates representing such Shares will be sent
directly to Cede or such other depository or nominee.
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.
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<PAGE>
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 to a Record Date Shareholder will be (a) zero, if
the Right's fair market value on the distribution date is less than 15% of
the fair market value on that date of the Share with regard to which it is
issued (unless the holder elects with respect to all Rights received, by
filing a statement with his or her 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 on that date), or (b) a portion of the basis in the Share based upon
those respective fair market values, if the Right's fair market value on
that date is 15% or more of the Share's fair market value on that date. The
basis of a Right to a Record Date Shareholder who allows the Right to
expire will be zero.
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.
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 that are tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans,
and Keogh plans of self-employed individuals), individual retirement accounts
under Code section 408(a) ("IRAs"), Roth IRAs under Code section 408A, and
custodial accounts under Code section 403(b) (collectively, "Retirement
Plans"), should be aware that additional contributions of cash to a Retirement
Plan (other than permitted rollover contributions or trustee-to-trustee
transfers from another Retirement Plan) in order to exercise Rights, when
taken together with contributions previously made, may result in, among other
things, excise taxes for excess or nondeductible contributions or the
Retirement Plan's loss of its tax-favored status. Furthermore, the sale or
transfer of Rights may be treated as a distribution or result in other adverse
tax consequences. In the case of Retirement Plans qualified under Code section
401(a) and certain other Retirement Plans, additional cash contributions could
cause the maximum contribution limitations of Code section 415 or other
qualification rules to be violated.
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<PAGE>
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 Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated
as distributed to the IRA or Roth IRA owner, which may result in current
income taxation and penalty taxes.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights. Due to the complexity of these
rules and the penalties for noncompliance, shareholders that are Retirement
Plans should consult with their counsel and other advisors regarding the
consequences of their exercise of Rights under ERISA, the Code, and, where
applicable, state law.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $14.64 per Share, the net proceeds of the Offer are estimated to be
$33,569,692 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 high yield 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.
19
<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.
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
Equity........................................................ 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.
20
<PAGE>
The Adviser anticipates that most of the companies issuing securities
acquired by the Fund will not be involved, at the time of acquisition or
thereafter, in reorganization, restructuring or bankruptcy proceedings.
However, the Fund may from time to time become an active participant in those
activities. It is the policy of the Fund not to invest in the securities of an
issuer for the purpose of exercising control or management. The Adviser may,
however, intentionally seek an active role in reorganization, restructuring or
bankruptcy proceedings at the time of investment, or may decide to assume such
a role as a result of subsequent events. Active participation is often
necessary to monitor a non-accruing security and to avoid the divisive
techniques used by management and certain creditors to enhance their own
positions at the expense of other creditors. The Adviser's active
participation in reorganization, restructuring or bankruptcy proceedings,
whether as a member of creditors' or equity holders' committees or otherwise,
may restrict for some time the Fund's ability to sell the related portfolio
securities.
Additional Investment Policies
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 total 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. However, some portfolio securities may become
non-accruing securities after they are acquired by the Fund. Given the
unpredictability of performance by the issuers of the Fund's portfolio
investments, it is impossible to estimate the amount of the Fund's assets
which could become invested in non-accruing securities. Accordingly, there can
be no assurance that the level of non-accruing securities will not exceed 20%
of the Fund's net assets. The Adviser will not purchase additional non-
accruing securities for the Fund if, at the time of proposed acquisition, non-
accruing securities comprise 20% or more of the net assets of the Fund.
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
21
<PAGE>
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. For this purpose,
temporary investments include (i) short-term debt obligations, such as
commercial paper, bank certificates of deposit, bankers' acceptances and
short-term obligations of the U.S. Government, its agencies or
instrumentalities, and repurchase agreements with respect to any of the
foregoing, and (ii) certain corporate fixed income securities, such as
variable or floating rate notes and preferred stock, with structural
characteristics which are intended to reduce the risk of loss from interest
rate fluctuations. Temporary investments with longer maturities may be rated
in the lower rating categories classified by Moody's or S&P or may not be
rated. The yield on temporary investments generally will tend to be lower than
the yield on the Fund's other portfolio securities. 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-
22
<PAGE>
dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
securities ("collateral"), which are held by the Fund's custodian bank, at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The Fund will receive interest from the
institution until the date when the repurchase is to occur. Repurchase
agreements involve certain risks not associated with direct investments in
debt securities and the Fund will follow procedures designed to minimize these
risks. The procedures include effecting repurchase transactions only with
larger, well-capitalized and well-established financial institutions, whose
financial condition will be continually monitored. In addition, the Adviser
will attempt to ensure that the value of the collateral underlying the
repurchase agreement is always at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement. In the
event of a default or bankruptcy by a selling financial institution, the Fund
will seek to liquidate the collateral. Exercise of the Fund's right to
liquidate the collateral, however, could involve certain costs or delays, and,
to the extent that proceeds 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 net assets 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.
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);
23
<PAGE>
(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 under "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 "Additional Investment Policies--
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
(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 9.
Asset Coverage Restrictions
The Fund's portfolio investments are subject to certain coverage and other
financial tests and restrictions adopted in connection with the issuance of
the Preferred Stock. While any shares of the Preferred Stock are outstanding,
these tests and restrictions will remain in effect. In general, the coverage
tests require that the Fund maintain sufficient assets to meet both an
eligible portfolio test and an asset coverage test. Under the eligible
portfolio test the Fund must maintain sufficient eligible portfolio assets
such that, when discounted by applicable factors, the Fund will meet the
required eligible portfolio coverage. The eligible portfolio coverage test
does 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. Under the
asset coverage test, the Fund must maintain a specified ratio of total assets
less certain indebtedness to the sum of (i) the aggregate amount of senior
securities representing indebtedness of the Fund, (ii) the aggregate
liquidation preference of all outstanding shares of Preferred Stock, and (iii)
the amount of all unpaid dividends accrued to and including the date of
determination, whether or not declared by the Fund, on all outstanding shares
of Preferred Stock. Finally, the Fund is required to comply with certain
investment restrictions, which are in addition to and more limiting than the
investment restrictions set forth above. These additional investment
restrictions relate to (i) the diversification of the Fund's portfolio, (ii)
the amount the Fund invests in any one issue of securities or in securities
other than publicly traded domestic fixed income securities, and (iii) the
Fund's incurrence of debt. The Adviser does not expect these 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
24
<PAGE>
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 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 will 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 $14.64, the Fund's net asset
value per share (after payment of the Dealer Manager's fee, solicitation fees
and the estimated offering expenses) would be reduced by approximately $0.32
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 price 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 these dividend rates
payable under the Fund's charter, the annual return of the Fund's portfolio
must equal at least 2.22% in order to cover the dividend payments on the
outstanding Preferred Stock. In addition, the Fund expects to issue an
additional series of Preferred Stock upon completion of the Offer. See
"Description of Capital Stock--General."
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
holders of Common Stock than if the Fund were not leveraged. This would likely
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 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.
25
<PAGE>
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 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 on 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 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 these 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 total return through current income and
capital appreciation by investing in "high yield, high risk" 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.
26
<PAGE>
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 agencies 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. 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 rating agencies 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, 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 agencies 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 agencies as below investment grade (that is rated Ba1
or lower by Moody's or BB+ or lower by S&P).
27
<PAGE>
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 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 procedures adopted by the Board of
Directors supervision, makes a determination regarding the liquidity of such
securities prior to their purchase and continues 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 it
will pay 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 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.
28
<PAGE>
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 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 could 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 service providers do not adequately address this problem
in a timely manner. The Adviser, the Administrator and Pacholder Associates do
not anticipate that the year 2000 processing issue will have any material
impact on their ability to continue to service the Fund. In addition, the Fund
has sought assurances from its 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 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 on the Fund.
Additional Risk Considerations
The Fund may not achieve its investment objective.
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 these risks before making an
investment in the Fund.
29
<PAGE>
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>
Positions with Principal Occupations During
Name and Address Registrant Age Past Five Years
---------------- -------------- --- ----------------------------
<S> <C> <C> <C>
William J. Morgan* (1)... Chairman of the 44 President, Secretary and
8044 Montgomery Road, Board Director, Pacholder
Suite 382 and Treasurer Associates, Inc.
Cincinnati, OH 45236
Daniel A. Grant (1)(2)... Director 54 President, Utility
1440 Greenfield Crossing Management Services.
Ballwin, MO 63021
John F. Williamson Director 60 Chairman and President,
(2)(3).................. Williamson Associates, Inc.
2109 S.W. Cedar Hill (since 1997); Executive
Lane Lee's Summit, MO Vice President and Chief
64081 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.
Woodard, C.P.A. (1995-
1996); Vice President,
Rider Kenley & Associates
(1994 to 1995).
</TABLE>
<TABLE>
<S> <C> <C> <C>
Anthony L. Longi, Jr...... President and 33 Executive Vice President,
8044 Montgomery Road, Assistant Pacholder Associates, Inc.
Suite 382 Treasurer
Cincinnati, OH 45236
James P. Shanahan, Jr. ... Secretary 37 Executive Vice President and
8044 Montgomery Road, General Counsel, Pacholder
Suite 382 Associates, Inc.
Cincinnati, OH 45326
James E. Gibson........... Senior Vice 34 Executive Vice President,
8044 Montgomery Road, President Pacholder Associates, Inc.
Suite 382
Cincinnati, OH 45236
Mark H. Prenger........... Assistant Treasurer 28 Vice President, Pacholder
8044 Montgomery Road, Associates, Inc.
Suite 382
Cincinnati, OH 45236
</TABLE>
- --------
* Directors who are "interested persons" of the Fund, as defined in the 1940
Act.
(1) Elected by holders of the Common Stock.
(2) Directors who are members of the Audit Committee of the Fund's Board of
Directors.
(3) Elected by holders of the Preferred Stock.
30
<PAGE>
For the fiscal year ended December 31, 1998, the Fund's directors received
the following compensation for serving as directors.
<TABLE>
<CAPTION>
Total
Compensation
Director from Fund(1)
-------- ------------
<S> <C>
William J. Morgan............................................ None
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, The Depository Trust Company, 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.
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 June 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 the Fund commenced operations in 1988 until
August 1998. The Fund is the only client of the Adviser.
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 $625 million for institutional
clients and provides research and consulting services to those clients and
others. Approximately $500 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 Advisors is an indirect wholly-owned subsidiary of BANK ONE
CORPORATION, a bank holding company located in the state of Illinois. As of
December 31, 1998, Banc One Advisors managed over $62 billion in assets. BANK
ONE CORPORATION has affiliated banking organizations in 18 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 $260 billion as of December 31, 1998.
Banc One 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 35 separate
funds).
31
<PAGE>
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 in 1983, Mr. Morgan was the Fixed
Income Portfolio Manager at 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 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%.
32
<PAGE>
For the fiscal years ended December 31, 1996, 1997 and 1998, the Adviser
received advisory fees totaling $1,624,992, $1,948,943 and $869,714,
respectively, which represent 1.40%, 1.18% and 0.52%, 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 though 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" (as defined in the 1940
Act) 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 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 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 obtaining the best results in
particular transactions.
33
<PAGE>
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 with research,
analysis, advice and similar services. The research services provided by
broker-dealers may be useful to Pacholder Associates in serving its clients,
but they can also be useful to the Adviser in serving the Fund. Not all of
such services may be used by the Adviser in connection with the Fund. The Fund
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 and its affiliates
to the Fund and 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 required to be performed by the
Adviser under its Advisory Agreement 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 capabilities.
Investment decisions for the Fund and for other investment accounts managed
by Pacholder Associates are made independently of each other in the light of
differing considerations for the 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 Pacholder Associates, 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. Continuation 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 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.
34
<PAGE>
Pursuant to an Accounting Services Agreement with the Fund dated May 20,
1991, as amended, Pacholder Associates, an 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 the Adviser, the Administrator and Pacholder Associates
receive from the Fund 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 value. However, based
on the estimated proceeds from the Offer assuming all Rights are exercised in
full for the Estimated Subscription Price of $14.64 per Share, and assuming
the Adviser receives the 0.90% "fulcrum fee," the Adviser would receive
additional annual advisory fees of approximately $303,940, and the
Administrator and Pacholder Associates would receive additional annual fees of
approximately $33,771 and $5,066, 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 Fund's liabilities (including accrued expenses) 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 outstanding shares of
Common Stock. 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 sales 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 under procedures established and monitored by 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, 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
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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 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 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
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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 Star Bank, N.A., Corporate Trust Services, at 425
Walnut Street, P.O. Box 1118, Cincinnati, Ohio 45201-1118; or telephone toll
free (800) 727-1919, ext. 5788, Monday through Friday from 9:00 a.m. to 5:00
p.m.
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
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
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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 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) that have original issue discount,
which generally is included in income annually over the term of the security
in accordance with a certain formula. 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.
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Backup Withholding
The Fund is required to withhold federal income tax at the rate of 31% on
all dividends and capital gain distributions 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.
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 with the result that the income on foreign securities will effectively be
subject to both foreign and United States taxation.
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 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 a spread of 130 basis points over the yield on the 6 5/8% U.S.
Treasury Note due March 2002 as of the third Business Day after the Expiration
Date.
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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."
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
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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 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 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
determine (a) weekly and (b) the Business Day 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
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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%; and (ii) 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). 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 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, provided that the Fund may borrow money to
clear securities transactions if the asset coverage and eligible portfolio
coverage tests are met after giving effect to such borrowing; 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 has considered
these provisions and believes that they are in the shareholders' best
interest.
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., Baltimore, Maryland. 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.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.
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EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Fund's December 31, 1998 Annual Report have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report which is
incorporated herein by reference and have been so incorporated in reliance
upon the report of such firm given their authority as experts in accounting
and auditing. 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, 1998, which either accompanies this Prospectus or has
previously been provided to the person to whom this Prospectus is being sent,
is 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 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 upon request to Star
Bank, N.A., Corporate Trust Services, 425 Walnut Street, P.O. Box 1118,
Cincinnati, Ohio 45201-1118; or telephone toll free (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, 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. The SEC maintains a Web site (http://www.sec.gov) that
contains material incorporated by reference into this Prospectus, and reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. In addition, reports, proxy and
information statements and other information concerning the Fund can be
inspected at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006-1881.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Long-Term Ratings
<TABLE>
<C> <S>
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.
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.
</TABLE>
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.
Among the obligations covered are commercial paper, Eurocommercial paper,
bank deposits, bankers' acceptances and obligations to deliver foreign
exchange. Obligations relying upon support mechanisms such as letters-of-
credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
<TABLE>
<C> <S>
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:
</TABLE>
A-1
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--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.
<TABLE>
<C> <S>
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.
</TABLE>
<TABLE>
<C> <S>
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
</TABLE>
Preferred Stock Ratings
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<C> <S>
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.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each ratings
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-2
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STANDARD & POOR'S CORPORATION
Long-Term Issue Credit Ratings
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<C> <S>
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.
</TABLE>
Obligations rated "BB", "B", "CCC", "CC" 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.
<TABLE>
<C> <S>
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.
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 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 be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
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.
<TABLE>
<S> <C>
NR: Indicates that no public 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.
</TABLE>
Short-Term Issue Credit Ratings
<TABLE>
<C> <S>
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.
</TABLE>
A-3
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<TABLE>
<C> <S>
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 dependent 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 be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
Preferred Stock
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
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.
</TABLE>
A-4
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<TABLE>
<C> <S>
BB, B: Preferred stock rated "BB", "B" or "CCC" are regarded, on balance, as
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 degree of speculation. 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-paying issue with the issuer in
default on debt instruments.
NR: 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.
</TABLE>
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-5
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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(TM) (the
"Index") for the same periods (the "Index Returns"). The total return
investment performance of the Fund means the sum of (i) the change in the net
asset value per share of the Fund's Common Stock during the period, (ii) the
value of the cash distributions per share of Common Stock accumulated to the
end of the period, and (iii) the value of capital gains taxes per share paid
or payable on undistributed realized long-term capital gains accumulated to
the end of the period. For this purpose, the value of distributions per share
of realized capital gains, of dividends per share paid from investment income,
and of capital gains taxes paid or payable on undistributed realized long-term
capital gains will be treated as reinvested in shares of the Fund's Common
Stock at the net asset value per share in effect at the close of business on
the record date for the payment of such dividends and distributions and the
date on which provision is made for such taxes, after giving effect to such
dividends, distributions and taxes. The calculation of the Index Returns
reflects cash distributions having an ex-dividend date occurring within the
period made by the companies whose securities comprise the Index. While
neither the Index nor the net asset value per share of the Fund reflects the
reinvestment of dividends and distributions, management of the Fund believes
the Index provides a reasonable comparison for measuring the Fund's
performance. It is important to remember that past performance is no guarantee
of future results.
<TABLE>
<CAPTION>
Total Return (%) for the 12-
Month Period Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----- ----- ----- ----- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Fund......... (3.19) 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 1,541 issues with an aggregate par value of $324.2
billion and an aggregate market value of $281.4 billion. The securities
comprising the Index are selected primarily on the basis of size, liquidity
and diversification. The factors considered with regard to diversification are
industry, rating, yield and duration. With regard to size, an issue is added
to the Index if it is larger than $75 million at the time of issuance.
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 two-month period is required prior to addition. A security that
goes into default after inclusion in the Index whose market value declines
below $20 million for six consecutive months is deleted from the Index.
Likewise, non-defaulted issues whose market value falls below $50 million for
six consecutive months are deleted from the Index. On December 31, 1998, of
the 1,541 issues comprising the Index, 1,347 (85.76% of market value) were
cash paying issues not in default, 163 issues (13.74% of market value) were
zero coupon or deferred interest issues not in default, and 31 issues (0.50%
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 Rating
The Fund has received a four-star rating from Morningstar, Inc., an
independent publisher of financial information and investment company ratings.
The Fund's four-star rating is based upon its performance for the ten-year,
five-year and three-year periods ended December 31, 1998. The Fund received a
five-star rating for the ten-year period ended December 31, 1998, a three-star
rating for the four-year period ended December 31, 1998 and rating of three
stars for the three-year period ended December 31, 1998.
B-1
<PAGE>
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 133 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>
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Pacholder Fund, Inc.
2,375,662 Shares of Common Stock
Issuable Upon Exercise of
Rights To Subscribe for
Such Shares
----------------
PROSPECTUS
----------------
February 23, 1999
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.
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