PROSPECTUS
4,210,217 SHARES
OF
COMMON STOCK ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK
BLUE CHIP VALUE FUND, INC.
Blue Chip Value Fund, Inc. (the "Fund") is offering to its stockholders of
record as of the close of business on February 19, 2002 rights ("Rights"),
entitling the holders thereof to subscribe for an aggregate of 4,210,217 shares
of the Fund's Common Stock (the "Offer") at the rate of one share of Common
Stock for each five (5) Rights held. Stockholders who fully exercise their
Rights will have, subject to certain limitations and subject to allotment, an
over-subscription privilege (the "Over-Subscription Privilege"). The Rights are
non-transferable and will not be admitted for trading on the New York Stock
Exchange. See "The Offer." THE SUBSCRIPTION PRICE PER SHARE WILL BE THE LESSER
OF 95% OF A) THE NET ASSET VALUE PER SHARE OF THE FUND'S COMMON STOCK ON MARCH
22, 2002 (THE "PRICING DATE") OR B) THE AVERAGE OF THE VOLUME-WEIGHTED AVERAGE
SALES PRICES OF A SHARE ON THE NEW YORK STOCK EXCHANGE ON THE PRICING DATE AND
THE FOUR PRECEDING TRADING DAYS.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON MARCH 21, 2002 (THE
"EXPIRATION DATE"), THE 30TH DAY AFTER THE DATE OF THIS PROSPECTUS. SINCE THE
CLOSE OF THE OFFERING ON THE EXPIRATION DATE IS PRIOR TO THE PRICING DATE,
HOLDERS WHO CHOOSE TO EXERCISE THEIR RIGHTS WILL NOT KNOW THE SUBSCRIPTION PRICE
PER SHARE AT THE TIME THEY EXERCISE SUCH RIGHTS.
The Fund is a closed-end diversified management investment company. Its
investment objective is to seek a high level of total return through capital
appreciation and current income consistent with investment primarily in a
diversified portfolio of common stocks. Denver Investment Advisors LLC ("DIA")
serves as the investment advisor to the Fund. The Fund will generally be fully
invested in approximately 50 common stocks, as well as other equity securities
believed by DIA to represent the best values among those issued by large
companies with headquarters in the United States, such as those included in, or
similar in size to those included in, Standard & Poor's 500 Composite Stock
Price Index. The address of the Fund is 1225 Seventeenth Street, 26th Floor,
Denver, Colorado 80202 and its telephone number is (800) 624-4190. The Fund's
Common Stock is listed on the New York Stock Exchange under the symbol "BLU."
Cover-1
The Fund announced the proposed Offer on December 21, 2001. The net asset
values per share of Common Stock at the close of business on December 20, 2001
and February 6, 2002 were $6.97 and $6.57, respectively, and the last reported
sale prices of a share of the Fund's Common Stock on such Exchange on those
dates were $7.67 and $7.15, respectively.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
FUND'S SHARES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
================================================================================
PROCEEDS TO
PRICE (1) SALES LOAD FUND (1)(2)
--------------------------------------------------------------------------------
Per Share $6.24 None $6.24
--------------------------------------------------------------------------------
Total $26,271,754 None $26,271,754
================================================================================
(1) Estimated based on an assumed Price per Share of 95% of the net asset value
per share of the Fund's Common Stock on February 6, 2002. Pursuant to the
Over-Subscription Privilege, the Fund may increase the number of shares
subject to subscription by up to 25% of the shares offered hereby. If the
Fund increases the number of shares subject to subscription by 25%, the
Total Price will be $32,839,691 and the Total Proceeds will be $32,839,691.
(2) Before deduction of expenses payable by the Fund, estimated at $190,000.
-----------------------------
As a result of the terms of this offer, stockholders who do not exercise
their Rights will, upon the completion of the Offer, own a smaller proportional
interest in the Fund. In addition, because the Subscription Price per share will
be less than the current net asset value per share, the Offer will result in a
reduction of net asset value, which will dilute the holdings of stockholders who
do not exercise their Rights.
-------------------------------
Cover-2
This Prospectus sets forth concisely the information that stockholders
should consider before exercising their Rights. Stockholders should retain this
Prospectus for future reference. Additional information about the Fund,
contained in a Statement of Additional Information, has been filed with the
Securities and Exchange Commission and is available upon request without charge
by contacting the Fund at its telephone number or address shown above. The
Prospectus and Statement of Additional Information are also available for
reference, along with material incorporated by reference and other related
materials, on the Securities and Exchange Commission Web site
(http://www.sec.gov). The Statement of Additional Information bears the same
date as, and is incorporated by reference in its entirety into, this Prospectus.
The table of contents of the Statement of Additional Information appears at the
end of this Prospectus.
-------------------------------
FEBRUARY 19, 2002
Cover-3
FEE TABLE
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees.............................. 0.60%
Other Expenses............................... 0.31%
-----
Total Annual Expenses........................ 0.91%
--------------------------------------------------------------------------------
Example 1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------
You would pay
the following
expenses on a
$1,000
investment,
assuming a 5%
annual return $ 9 $ 29 $ 51 $ 112
--------------------------------------------------------------------------------
The purpose of the Fee Table is to assist stockholders in understanding the
various costs and expenses that stockholders bear directly or indirectly. For a
more complete description of these costs and expenses, see "MANAGEMENT OF THE
FUND--Expenses of the Fund."
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. THE ACTUAL EXPENSES AND RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The table below sets forth selected data for a share of Common Stock
outstanding throughout each period presented. The per share operating
performance and ratios for the fiscal years ended December 31, 2000 and
thereafter have been audited by Deloitte & Touche LLP, the Fund's independent
auditors, whose reports thereon were unqualified. The following information
should be read in conjunction with the financial statements and notes thereto
for the fiscal year ended December 31, 2001, which are incorporated by reference
into the Statement of Additional Information. Further information about the
performance of the Fund is available in the annual report to stockholders. The
Statement of Additional Information and the annual report to stockholders may be
obtained from the Fund free of charge by calling 1-800-624-4190. The per share
operating performance and ratios for the fiscal years prior to December 31,
2000, were audited by the Fund's former auditors, whose reports thereon were
unqualified.
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of Year $ 8.17 $ 9.09 $ 10.25 $ 9.76 $ 8.94
Net Investment Income 0.04 0.05 0.03 0.05 0.10
Net Gain or (Loss) on
Investments (0.29) (0.08) 0.49 1.62 2.56
------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (0.25) (0.03) 0.52 1.67 2.66
Less Distributions:
Dividends (from net
Investment income) (0.04) (0.05) (0.03) (0.05) (0.10)
Distributions (from
Capital gains) (0.36) (0.84) (1.65) (1.08) (1.47)
Distributions in Excess
of Realized Gains(1) -- -- -- -- --
Return of Capital(1) (0.34) -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Distributions (0.74) (0.89) (1.68) (1.13) (1.57)
Dilutive Effect of
Rights Offerings (0.23) -- -- (0.04) (0.26)
Offering Costs
Charged to
Paid-in Capital (0.01) -- -- (0.01) (0.01)
------------ ------------ ------------ ------------ ------------
Total Capital Share
Transactions (0.24) -- -- (0.05) (0.27)
------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Year $ 6.94 $ 8.17 $ 9.09 $ 10.25 $ 9.76
============ ============ ============ ============ ============
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of Year $ 8.47 $ 6.98 $ 7.73 $ 7.63 $ 8.36
Net Investment Income 0.13 0.13 0.11 0.20 0.12
Net Gain or (Loss) on
Investments 1.69 2.45 (0.11) 0.76* (0.08)
------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 1.82 2.58 0.00 0.96* 0.04
Less Distributions:
Dividends (from net
Investment income) (0.13) (0.13) (0.11) (0.20) (0.12)
Distributions (from
Capital gains) (1.22) (0.95) (0.38) (0.14) --
Distributions in Excess
of Realized Gains(1) -- -- -- (0.41) (0.48)
Return of Capital(1) -- (0.01) (0.26) (0.07) (0.17)
------------ ------------ ------------ ------------ ------------
Total Distributions (1.35) (1.09) (0.75) (0.82) (0.77)
Dilutive Effect of
Rights Offerings -- -- -- (0.03)* --
Offering Costs
Charged to
Paid-in Capital -- -- -- (0.01)* --
------------ ------------ ------------ ------------ ------------
Total Capital Share
Transactions -- -- -- (0.04)* --
------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Year $ 8.94 $ 8.47 $ 6.98 $ 7.73 $ 7.63
============ ============ ============ ============ ============
-2-
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Per Share Market Value,
End of Year $ 7.56 $ 7.55 $ 8.6875 $ 9.75 $ 10.9375
============ ============ ============ ============ ============
Total Investment Return(2) 14.1% (3.2)% 6.7% 1.3% 40.5%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year $145,517,712 $140,862,608 $153,002,078 $171,511,852 $138,905,406
Ratio of Expenses to
Average Net Assets 0.91% 0.88% 0.85% 0.94% 0.94%
Ratio of Net Investment
Income to Average Net
Assets 0.56% 0.63% 0.32% 0.56% 1.01%
Portfolio Turnover Rate 73% 128% 54% 76% 55%
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Per Share Market Value,
End of Year $ 9.25 $ 7.625 $ 6.125 $ 7.875 $ 7.75
============ ============ ============ ============ ============
Total Investment Return(2) 39.5% 41.6% (13.2)% 13.7%* 12.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year $ 98,040,563 $ 92,886,640 $ 76,491,173 $ 84,168,306 $ 72,418,811
Ratio of Expenses to
Average Net Assets 1.05% 1.15% 1.22% 1.28% 1.42%
Ratio of Net Investment
Income to Average Net
Assets 1.39% 1.55% 1.46% 2.55% 1.57%
Portfolio Turnover Rate 42% 51% 63% 56% 118%
----------
(1) From 1989 through 1993, the Fund distributed to stockholders quarterly an
amount equal to 2.5% (10% on an annual basis) of the Fund's net asset value
per share, without regard to net investment income and net capital gains.
These distributions were previously reported as returns of capital in the
Fund's annual reports to stockholders. Under new accounting guidelines, the
distributions have been reclassified into two categories: (i) distributions
in excess of realized gains, which are distributions attributable to
realized gains in the current year offset by loss carryovers from prior
years--which are taxable to the recipient as ordinary income, and (ii)
return of capital, which are distributions that are in excess of current
and accumulated earnings and profits--which are not taxable to
stockholders.
(2) Total investment return is based on market value. Total investment return
is calculated assuming a purchase of Common Stock on the opening of the
first day and a sale on the closing of the last day of each period
reported. 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. The investment return does not reflect a sales load; the
Fund did not offer or sell shares that were subject to a sales load during
the period covered by the table.
* Restated.
-3-
SENIOR SECURITIES
At the time of its organization and public offering in 1987, the Fund
borrowed a total of $7,375,500 in the form of 8-1/2% Senior Installment Notes
(the "Notes"). Pursuant to the Notes, the Fund made monthly payments of
principal and interest, the last of which was paid in May 1993. The Fund has had
no Senior Securities outstanding since May 1993. The following table sets forth
the principal amount of the Notes outstanding at the end of each of the past ten
years, together with the asset coverage for each $1,000 of indebtedness.
ASSET COVERAGE PER
DECEMBER TOTAL AMOUNT $1,000 OF
31 OUTSTANDING INDEBTEDNESS
-------- ----------- ------------
2001 0 N/A
2000 0 N/A
1999 0 N/A
1998 0 N/A
1997 0 N/A
1996 0 N/A
1995 0 N/A
1994 0 N/A
1993 0 N/A
1992 $ 643,172 $ 113,596
THE OFFER
TERMS OF THE OFFER
The Fund hereby offers to the holders of its Common Stock of record as of
the close of business on February 19, 2002 (the "Record Date") the right to
subscribe for an aggregate of 4,210,217 shares of Common Stock (the "Shares") of
the Fund. Each such stockholder is being issued one (1) Right for each share of
Common Stock owned on the Record Date. The Rights entitle a stockholder to
acquire in the Primary Subscription at the Subscription Price one (1) Share for
each five (5) Rights held. Rights may be exercised at any time during the
Subscription Period, which commences on February 22, 2002 and ends as of 5:00
p.m. New York time, on March 21, 2002 (the "Expiration Date"). A stockholder's
right to acquire one (1) Share for each five (5) Rights held is hereinafter
referred to as the "Primary Subscription."
-4-
In addition, any stockholder who fully exercises all Rights issued to him
is entitled to subscribe for Shares which were not otherwise subscribed for in
the Primary Subscription. For purposes of determining the maximum number of
Shares a holder may acquire pursuant to the Offer, broker-dealers whose Shares
are held of record on the Record Date by Cede & Co. or by any other depository
or nominee will be deemed to be the holder of the Rights that are issued to Cede
& Co. or such other depository or nominee. Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment or increase, which is more
fully discussed below under "Over-Subscription Privilege."
The Rights are non-transferable. Therefore, only the underlying Shares, and
not the Rights, will be admitted for trading on the New York Stock Exchange.
Since fractional shares will not be issued, stockholders who receive, or who are
left with, fewer than five (5) Rights will be unable to exercise such Rights and
will not be entitled to receive any cash in lieu of fractional shares.
IMPORTANT DATES TO REMEMBER
EVENT DATE
----- ----
Record Date February 19, 2002
Subscription period February 22, 2002 through March 21, 2002
Expiration of the Offer March 21, 2002
Pricing Date March 22, 2002
Confirmation to participants March 29, 2002
Final payment for Shares April 12, 2002
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its stockholders to increase the assets of the
Fund available for investment. In addition, the Offer seeks to reward the
long-term stockholder by giving existing stockholders the right to purchase
additional Shares at a price below market value and net asset value without
brokerage commissions. Increasing the size of the Fund also might result in
lowering the Fund's expenses as a percentage of average net assets.
The purpose of setting the determination of the Subscription Price
subsequent to the Expiration Date is to insure that the Offer will attract the
maximum participation of stockholders with the minimum dilution to
non-participating stockholders.
DIA may benefit from the Offer because its fee is based on the net assets
of the Fund. It is not possible to state precisely the amount of additional
compensation DIA might 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 presumably
fluctuate in value. Two of the Fund's directors were affiliated with DIA at the
time they each voted to authorize the Offer and, therefore, could benefit
indirectly from the Offer. The other five directors are not "interested persons"
-5-
of the Fund within the meaning of the Investment Company Act of 1940, as amended
(the "1940 Act").
In addition to this Offer, the Fund completed rights offerings in 1993,
1997, 1998 and 2001. The Fund may, in the future and at its discretion, from
time to time, choose to make additional rights offerings, for a number of shares
and on terms which may or may not be similar to this Offer.
OVER-SUBSCRIPTION PRIVILEGE
If some stockholders do not exercise all of their Rights, the remaining
unsubscribed Shares will be offered, by means of the Over-Subscription
Privilege, to holders of Rights who wish to acquire more than the number to
which their Rights entitle them. Holders of Rights who fully exercise all their
Rights will be asked to indicate on the exercise form how many Shares they are
willing to acquire pursuant to this Over-Subscription Privilege. If there remain
sufficient Shares, all over-subscriptions will be honored in full. If there are
not sufficient Shares to honor all over-subscriptions, the Fund may, at its
discretion, issue up to an additional 25% of the Shares available pursuant to
the Offer in order to honor such over-subscriptions. To the extent the Fund
determines not to issue additional Shares to honor all over-subscriptions, the
available Shares will be allocated among those who oversubscribe based solely on
the number of shares of Common Stock held of record on the Record Date. The
percentage of remaining Shares each oversubscribing holder may acquire may be
rounded up or down to result in delivery of whole Shares. The allocation process
may involve a series of allocations in order to assure that the total number of
Shares available for oversubscriptions are distributed on a pro-rata basis.
The Fund will not offer or sell any shares which are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued on the exercise of the
Rights will be the lesser of 95% of a) the net asset value per Share on March
22, 2002 (the "Pricing Date") or b) the average of the volume-weighted average
sales prices of a Share on the New York Stock Exchange on the Pricing Date and
the four preceding trading days.
The Fund announced the proposed Offer on December 21, 2001. The net asset
values per share of the Fund's Common Stock at the close of business on December
20, 2001 and February 6, 2002 were $6.97 and $6.57, respectively, and the last
reported sale prices of a share of the Fund's Common Stock on such Exchange on
those dates were $7.67 and $7.15, respectively.
For example, if the net asset value per Share on the Pricing Date is $7.00
and the average of the volume-weighted average sale prices of a Share on the New
York Stock Exchange on the Pricing Date and the four preceding trading days is
$7.50, the Subscription Price would be $6.65 (95% of net asset value). If,
however, the net asset value per Share on the Pricing Date is $7.00 and the
-6-
average of the volume-weighted average sale prices of a Share on the New York
Stock Exchange on the Pricing Date and the four preceding trading days is $6.50,
the Subscription Price would be $6.18 (95% of the average sale prices). The
actual Subscription Price will not be determined until the Pricing Date.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on March 21, 2002, the
30th day after the date of this Prospectus (the "Expiration Date"). Rights will
expire on the Expiration Date and thereafter may not be exercised. Inasmuch as
the close of the offering on the Expiration Date is prior to the time of pricing
the Offering, stockholders who decide to acquire Shares in the Primary
Subscription or pursuant to the Over-Subscription Privilege will not know the
Subscription Price per share when they make their decisions.
SUBSCRIPTION AGENT
The Subscription Agent for the Offer is Mellon Bank, N.A., 85 Challenger
Road, Overpeck Centre, Ridgefield Park, NJ 07660, which will receive a fee in
the amount of $85,000 (estimated) including reimbursement for all out-of-pocket
expenses related to the Offer. Stockholders who acquire shares pursuant to the
Offer will not receive interest on funds held by the Subscription Agent. The
Subscription Agent will hold such funds in a segregated, depository account, and
will pay interest thereon to the Fund. The Subscription Agent is affiliated with
the Fund's Transfer Agent. Stockholder inquiries relating to the Offer should be
directed to the Fund by calling 1-800-624-4190.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the enclosed exercise
form and mailing it in the envelope provided, or delivering the completed and
signed exercise form to the Subscription Agent, together with payment for the
Shares as described below under "Payment for Shares." Fractional shares will not
be issued, and stockholders who receive, or who are left with, fewer than five
(5) Rights will not be able to exercise such Rights. Exercise forms must be
received by the Subscription Agent prior to 5:00 p.m., New York time, on the
Expiration Date (unless payment is effected by means of a notice of guaranteed
delivery (see "Payment for Shares") at the offices of the Subscription Agent.
Rights may also be exercised through a holder's broker.
PAYMENT FOR SHARES
Stockholders who acquire Shares in the Primary Subscription or pursuant to
the Over-Subscription Privilege may choose between the following methods of
payment:
(1) If, prior to 5:00 p.m., New York time, on the Expiration Date, the
Subscription Agent shall have received a notice of guaranteed delivery by
telegram or otherwise, from a bank or trust company or a New York Stock
Exchange member firm, together with payment of the full Subscription Price
-7-
for the Shares subscribed for in the Primary Subscription and any
additional Shares subscribed for pursuant to the Over-Subscription
Privilege, guaranteeing delivery of a properly completed and executed
exercise form, the subscription will be accepted by the Subscription Agent.
The Subscription Agent will not honor a notice of guaranteed delivery if a
properly completed and executed exercise form is not received by the
Subscription Agent prior to 5:00 p.m., New York time, on the third (3rd)
business day after the Expiration Date (the "Protect Period").
(2) Alternatively, a stockholder can, together with the exercise form,
send payment for the Shares acquired in the Primary Subscription and any
additional Shares subscribed for pursuant to the Over-Subscription
Privilege, to the Subscription Agent based on an assumed purchase price of
$6.24 per Share. (The formula used to calculate this price is listed on the
Cover Page of this Prospectus.) To be accepted, such payment, together with
the Exercise Form, must be received by the Subscription Agent prior to 5:00
p.m., New York time, on the Expiration Date.
If the assumed purchase price is greater than the actual per Share purchase
price, the excess payment will be applied toward the purchase of additional
Shares to the extent that there remain sufficient unsubscribed Shares available
after the Primary and Over-Subscription allocations are completed. To the extent
that sufficient unsubscribed Shares are not available to apply all of the excess
payment toward the purchase of additional shares, available Shares will be
allocated in the manner consistent with that described in the section entitled
"Over-Subscription Privilege" above. Any excess payment will be refunded to you
to the extent that additional shares are not available.
A PAYMENT, PURSUANT TO THE SECOND METHOD DESCRIBED ABOVE, MUST ACCOMPANY
ANY EXERCISE FORM FOR SUCH EXERCISE FORM TO BE ACCEPTED.
Within three (3) business days following the completion of the Protect
Period, a confirmation will be sent by the Subscription Agent to each
stockholder (or, if the Fund's shares on the Record Date are held by Cede & Co.
or any other depository or nominee, to Cede & Co. or such other depository or
nominee). The date of the confirmation is referred to as the "Confirmation
Date." The confirmation will show (i) the number of Shares acquired pursuant to
the Primary Subscription; (ii) the number of Shares, if any, acquired pursuant
to the Over-Subscription Privilege; (iii) the per Share and total purchase price
for the Shares; and (iv) any additional amount payable by such stockholder to
the Fund or any excess to be refunded by the Fund to such stockholder, in each
case based on the Subscription Price as determined on the Pricing Date. Any
additional payment required from a stockholder must be received by the
Subscription Agent prior to 5:00 p.m., New York time, on the tenth (10th)
business day after the Confirmation Date, and any excess payment to be refunded
by the Fund to such stockholder will be mailed by the Subscription Agent within
ten (10) business days after the Confirmation Date. All payments by a
stockholder must be made in United States dollars payable to Mellon Investor
Services LLC, acting on behalf of the Subscription Agent.
-8-
Whichever of the above two methods is used, issuance and delivery of
certificates for the Shares subscribed for are subject to collection of funds
and actual payment pursuant to any notice of guaranteed delivery.
YOU WILL HAVE NO RIGHT TO RESCIND YOUR SUBSCRIPTION AFTER RECEIPT OF YOUR
PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If a stockholder who acquires Shares pursuant to the Primary Subscription
or Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to (i) find other purchasers for such
subscribed and unpaid shares; (ii) apply any payment actually received by it
toward the purchase of the largest number of whole Shares which could be
acquired by such stockholder with such payment upon exercise of the Primary
Subscription and/or Over-Subscription Privilege; and/or (iii) exercise the right
to set-off against payments actually received by it with respect to such
subscribed Shares.
POSSIBLE SUSPENSION OR WITHDRAWAL OF THE OFFER
The Fund has, as required by the Securities and Exchange Commission's
registration form, undertaken to suspend the Offer until it amends this
Prospectus if, subsequent to February 13, 2002, 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 February 13, 2002 or the net asset value increases to
an amount greater than its net proceeds from the Offer, as stated herein.
Accordingly, the Fund will notify stockholders of any such decline or increase
and thereby permit them to cancel their exercise of Rights. Except for these
circumstances, a shareholder will have no right to rescind an exercise of Rights
after the Subscription Agent receives payment. It is possible that the Record
Date may change if the Offer is suspended.
The Fund reserves the right to withdraw the Offer at any time before the
Expiration Date for any reason.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted to trading on the New York Stock Exchange.
However, the Shares to be issued pursuant to the Rights will be listed and
admitted to trading on the New York Stock Exchange under the symbol "BLU."
-9-
DELIVERY OF STOCK CERTIFICATES
Stock certificates for all Shares acquired pursuant to the Primary
Subscription and the Over-Subscription Privilege will be mailed within fifteen
(15) business days after the Confirmation Date and after full payment of the
Shares subscribed for has cleared.
TAX CONSEQUENCES
For Federal income tax purposes, neither the receipt nor the exercise of
the Rights will result in taxable income to holders of Common Stock, and no loss
will be realized if the Rights expire without being exercised (unless the
stockholder elects to allocate to the Rights a portion of the basis of the
existing Common Stock in proportion to the relative values of the Rights and the
Common Stock).
A stockholder's holding period for a Share acquired upon exercise of a
Right begins with the date of exercise. In the absence of an election by the
stockholder to allocate basis to the Rights, the stockholder's basis for
determining gain or loss upon the sale of a Share acquired upon exercise of a
Right will be equal to the per Share Subscription price. A stockholder's gain or
loss recognized upon a sale of that Share will be capital gain or loss if the
Share was held as a capital asset at the time of sale and will be long-term
capital gain or loss if it was held, at the time of sale, for more than 12
months.
The foregoing does not cover the state or local tax consequences of
receiving or exercising a Right, as to which stockholders should consult their
own tax advisers.
SPECIAL RISK CONSIDERATIONS
As a result of the terms of the Offer, stockholders who do not exercise
their Rights will, at the completion of the Offer, own a smaller proportional
interest in the Fund. In addition, because the Subscription Price for each Share
will be less than the then current net asset value per share of the Fund's
Common Stock, the Offer will result in a reduction of net asset value which will
dilute the holdings of stockholders who do not exercise their Rights. For
example, assuming that all Shares offered hereby are purchased in the Offer and
the Fund increases the number of Shares subject to subscription by 25% in order
to satisfy the over-subscription, and that the Subscription Price is 95% of
$6.57 the net asset value per Share on February 6, 2002, the Fund's net asset
value per Share would be reduced by approximately $.08 per share as of that
date, and assuming that only one-half of the Shares offered hereby are purchased
in the Offer, the Fund's net asset value per Share would be reduced by
approximately $.04 per Share as of that date.
-10-
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the estimated Subscription
Price of $6.24 per Share, the net proceeds of the Offer are estimated to be
$26,081,754, after deducting expenses payable by the Fund estimated at
approximately $190,000. If the Fund in its sole discretion increases the number
of Shares subject to the Offer by 25% in order to satisfy over-subscriptions,
net proceeds will be approximately $32,649,691. The Fund will invest the net
proceeds of the Offer in accordance with its investment objective and policies.
It is anticipated that such investment will occur promptly, and in any event
within ten business days, after the proceeds are available to the Fund.
THE FUND
Blue Chip Value Fund, Inc. is a Maryland corporation that was organized on
February 4, 1987. The Fund is a closed-end diversified management investment
company registered under the 1940 Act.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of total return
through capital appreciation and current income consistent with investment
primarily in a diversified portfolio of common stocks. There can be no assurance
that the Fund will achieve its investment objective.
The Fund has a fundamental policy that during normal conditions it will at
all times have at least 80% of its net assets (plus the amount of any borrowings
for investment purposes) invested in equity securities of large companies with
headquarters in the United States, such as those included in, or similar in size
to those included in, Standard & Poor's 500 Composite Stock Price Index. As of
December 31, 2001, the average market capitalization of the companies included
in the Standard & Poor's 500 Composite Stock Price Index was approximately $2.9
billion. The Fund calculates this requirement by adding the market values of
common stocks, securities convertible into common stocks, rights and warrants to
acquire common stocks to the net option premiums on individual common stocks and
the amount of any borrowings for investment purposes and the notional principal
of net futures positions, and subtracting from that total the market values of
securities sold short and liabilities. The Fund's fundamental policies, like its
investment objective, cannot be changed without the approval of the holders of
the lesser of (i) 67% or more of the shares at a meeting, if the holders of a
majority of the shares are represented at the meeting, or (ii) more than 50% of
the outstanding shares.
Pursuant to its non-fundamental policies, the Fund's investment philosophy
is to identify and own securities that DIA believes are undervalued or mispriced
and have improving business prospects due to strong company and industry
dynamics. The Fund remains fully invested during normal market conditions in
approximately 50 common stocks, as well as other equity securities believed by
DIA to represent the best values among the investment opportunities described
above.
-11-
As the first step in identifying stocks for purchase, the portfolio manager
uses a proprietary computer model to find stocks that appear to be undervalued
based on traditional measures such as price-to-earnings, price-to-book value and
price-to-cash flow ratios. The model also incorporates positive earnings and
stock price momentum in order to assist the portfolio manager in the timing of
buy decisions. The second step in the process involves fundamental research of
companies in order to evaluate their business model, products and management.
Particular attention is paid to identifying a catalyst for unleashing the value
in a stock. The Fund may sell a stock when the model indicates it is no longer
undervalued or its fundamental business prospects change.
OTHER INVESTMENT POLICIES
Subject to the Fund's investment objective and policies described above,
the Fund may make certain other investments and use certain investment practices
as described below. These policies are non-fundamental, and may be changed in
the future by the Board of Directors without the vote of stockholders.
TEMPORARY INVESTMENTS. For temporary defensive purposes, the Fund may
retain assets in cash and may invest without limit in short-term debt securities
and instruments, which may include obligations of the United States Government,
its agencies or instrumentalities; commercial paper having, at the time of
purchase, a rating within the highest rating category by an unaffiliated
nationally recognized statistical rating organization (a "NRSRO"), or if not
rated, issued by companies having an outstanding unsecured debt issue currently
rated within one of the two highest rating categories by a NRSRO; certificates
of deposit or bankers' acceptances of domestic branches of U.S. Banks with total
assets at the time of purchase of $1 billion or more; repurchase agreements with
respect to such obligations; or securities issued by other investment companies
which invest in high quality, short-term debt securities and which seek to
maintain a $1.00 net asset value per share. The Fund may also acquire short-term
debt securities and instruments in the course of managing its daily cash
position. During normal market conditions, however, the Fund will not invest
more than 10% of its total assets in such securities. If securities issued by
other investment companies are acquired, it will be done within the limits
prescribed by the 1940 Act. As a shareholder of another investment company, the
Fund would bear, along with all other shareholders, its pro rata portion of the
other investment company's expenses.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may purchase or
write call and put options on any securities in which it may invest or on any
securities index composed of securities in which it may invest. The purchase and
writing of options involves some investment analysis and risks that are
different from those associated with securities transactions in common stocks.
Options can seek to enhance return through price appreciation of the option,
increase income, hedge to reduce overall portfolio risk, and/or hedge to reduce
individual security risk. Purchasing options to seek to increase return through
their price appreciation involves the risk of loss of option premium if DIA is
incorrect in its expectation of the direction or magnitude of the change in
securities prices. Writing options to seek to increase income in the Fund
involves the risk of net loss (after receiving the option premium) if DIA is
incorrect in its expectation of the direction or magnitude of the change in
-12-
securities prices. The successful use of options for hedging purposes also
depends in part on the degree of correlation between the option and a security
or index of securities. If DIA is incorrect in its expectation of changes in
securities prices or its estimation of the correlation between the option and a
security index, the investment performance of the Fund will be less favorable
than it would have been in the absence of such options transactions. The use of
options may increase the Fund's portfolio turnover rate and, therefore,
associated brokerage commissions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may purchase
and sell various kinds of financial futures contracts as well as purchase and
write options on any such futures contracts to hedge to reduce risk of loss,
hedge against changes in securities prices of a securities index, reduce trading
costs, or to seek to increase total return. The Fund may also enter into closing
purchase and sale transactions with respect to any such contracts and options.
The futures contracts may be based on various securities indices. The Fund may
engage in futures and related options transactions for bona fide hedging
purposes as defined in regulations of the Commodity Futures Trading Commission
or to seek to increase total return to the extent permitted by such regulations.
These transactions involve brokerage costs, require margin deposits and, in the
case of contracts and options obligating a Fund to purchase securities, require
the Fund to segregate cash or liquid assets with a value equal to the amount of
the Fund's obligations under the associated contracts.
Futures contracts are typically used to reduce risk in a portfolio by
hedging, which involves selecting futures contracts to offset a position in the
portfolio that may experience adverse price movement such that the net effect of
the combined position on investment performance is neutral. The successful use
of futures contracts or options on futures for hedging depends in part on the
degree of correlation between a futures position and the portfolio position.
Because perfect correlation between a futures position and the portfolio
position it was intended to protect is seldom achieved, full protection may not
be obtained and the Fund may still be exposed to risk of some loss. The
profitability of the Fund's trading in futures to seek to increase total return
depends upon the ability of DIA to correctly anticipate the securities markets
and the futures markets.
While the Fund may benefit from the use of futures and options on futures,
unanticipated changes in securities prices may result in less favorable
investment performance for the Fund than would have been the case in the absence
of such transactions. The risk of loss involved in entering into futures
contracts and in writing call options on futures to seek to increase total
return is potentially unlimited and a loss may exceed the amount of the premium
received. Financial futures markets typically have more trading liquidity than
equity markets making futures contracts easier to enter and exit than common
stocks. The use of futures to hedge is a risk-reducing strategy that in most
circumstances would decrease the volatility of the Fund's net asset value. The
use of futures to increase return may increase the volatility of the Fund's net
asset value. Due to the low margin deposits required in futures trading, it is
possible that a relatively small price movement in futures contracts used to
enhance return may result in substantial losses for the Fund.
-13-
LIMITATION ON USE OF OPTIONS AND FUTURES CONTRACTS. The use of options and
futures will be limited so that:
1) with respect to options and futures used for the purpose of hedging,
the sum of (i) premiums paid on outstanding options held by the Fund
and (ii) margin deposits on futures will at no time exceed 20% of the
value of the Fund's total assets; and
2) with respect to options and futures used for the purpose of enhancing
return, (i) the sum of premiums paid by the Fund for outstanding
options will at no time exceed 15% of the value of the Fund's total
assets, (ii) the sum of premiums received by the Fund from writing
outstanding options when the Fund does not own the securities to which
the option relates will at no time exceed 7% of the value of the
Fund's total assets, (iii) the sum of the net equity exposures
pertaining to each common stock underlying the outstanding options
written or held by the Fund when the Fund does not own the securities
to which the option relates will at no time exceed 7% of the value of
the Fund's total assets, and (iv) the notional principal on
outstanding futures positions will at no time exceed 7% of the value
of the Fund's total assets.
There is no limit on writing options if the Fund owns the securities to
which the option relates.
SHORT SALES. The Fund may make short sales of securities for purposes of
hedging securities held or to seek to enhance the performance of the Fund. In a
short sale transaction, the Fund borrows a security from a broker and sells it
with the expectation that it will replace the security borrowed from the broker
by repurchasing the same security at a lower price. These transactions may
result in gains if a security's price declines, but may result in losses if a
security's price does not decline in price. When the Fund engages in short
sales, unless the short sale is otherwise "covered" in accordance with the
policies of the SEC, the Fund will be required to maintain in a segregated
account an amount of liquid assets equal to the difference between: (a) the
market value of the security sold short as calculated on a daily basis and (b)
any cash or United States Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, the Fund will maintain the segregated account on a daily basis at such
a level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current market value of the security
sold short. Short sale transactions will be conducted so that not more than 10%
of the value of the Fund's total assets at the time of entering into the short
sale (exclusive of proceeds from short sales) will be, when added together, (a)
in deposits collateralizing the obligation to replace securities borrowed to
effect short sales, and (b) allocated to the segregated account in connection
with short sales.
BORROWING. In order to respond to changing market conditions and to raise
additional cash for investment, the Fund is authorized to issue senior
securities or borrow money from banks or other lenders in an amount not
exceeding 15% of the value of its total assets when DIA believes that the return
from securities purchased with borrowed funds will be greater than the cost of
-14-
the borrowing. Such borrowings will be unsecured. The Fund will maintain
continuous asset coverage of not less than 300% with respect to such borrowings.
If such asset coverage should decline to less than 300%, the Fund may be
required to sell some of its portfolio securities within three days in order to
reduce the Fund's debt and restore the 300% asset coverage, even though it may
be disadvantageous from an investment standpoint to sell securities at that
time. Any investment gains made on securities purchased with borrowed monies in
excess of interest paid on the borrowed monies will cause the net asset value of
the Fund's shares to rise faster than otherwise would be the case. On the other
hand, if the investment performance of the additional securities purchased fails
to cover their cost (including interest incurred on the monies borrowed) to the
Fund, the net asset value of the Fund will decrease faster than otherwise would
be the case. This is the speculative factor known as "leverage."
Except as provided above, the Fund will not issue senior securities or
borrow money except for (i) temporary bank borrowings (not in excess of 5% of
the value of its total assets), (ii) short-term credits (not in excess of 5% of
the value of its total assets) as are necessary for the clearance of securities
transactions, and (iii) borrowings from banks or other lenders to finance the
repurchase of its shares.
FUNDAMENTAL INVESTMENT POLICIES
The policies set forth below are fundamental policies of the Fund. The Fund
may not:
1. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of securities
transactions, and may make margin payments in connection with futures contracts
and related options.
2. Underwrite the securities of other issuers or invest in restricted
securities.
3. Invest more than 20% of its total assets in any one industry.
4. Purchase or sell real estate or real estate mortgage loans, or invest in
the securities of real estate companies unless such securities are publicly
traded.
5. Purchase or sell commodities, commodity contracts, or futures, except
futures on financial instruments.
6. Lend its portfolio securities in excess of 25% of its total assets,
taken at market value.
7. Make loans to other persons (except as provided in 6 above), provided
that for the purposes of this restriction the acquisition of short-term debt
securities and instruments and repurchase agreements in which the Fund may
invest shall not be deemed to be the making of a loan.
8. Invest in companies for the purpose of exercising control or management.
-15-
9. Invest in the securities of any one issuer (other than the United States
or an agency or instrumentality of the United States) if, at the time of
acquisition, the Fund would own more than 10% of the voting securities of such
issuer or, as to 75% of the Fund's total assets, more than 5% of such assets
would be invested in the securities of such issuer.
10. Invest more than 5% of its total assets in repurchase agreements.
11. Invest more than 5% of its total assets, taken at market value, in
securities of issuers (other than the United States or an agency or
instrumentality of the United States) having a record, together with
predecessors, of less than three years of continuous operation.
12. Invest in securities of foreign issuers whose securities are not traded
on the New York or American Stock Exchanges or the NASDAQ-National Market
System.
13. Issue senior securities or borrow money except to the extent permitted
under the 1940 Act.
14. Purchase portfolio securities from or sell such securities directly to
any of its officers, directors, employees or investment advisor as principal for
their own account.
In its last fiscal year, the Fund did not invest in repurchase agreements
referred to in restriction 10 above, or acquire securities described in
restriction 11 above, and it has no plans to invest in such agreements or
acquire such securities in the current year.
Except with respect to restriction 13 above, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or amount of total
assets will not be considered a violation of any of the foregoing restrictions.
INVESTMENT AND MARKET RISKS
As an investment company that holds common stocks, the Fund's portfolio is
subject to the possibility that common stock prices will decline over short or
even extended periods. The Fund will remain fully invested during periods when
stock prices generally rise and also during periods when they generally decline.
Risks are inherent in equity investing, and investors should be able to tolerate
significant fluctuations in the value of their investments. The Fund is subject
to the additional risk that the particular types of stocks held by the Fund will
underperform other stocks and may decline in value. The Fund is intended to be a
long-term investment vehicle and is not designed to provide investors with a
means of speculating on short-term stock market movements. Investors should not
consider the Fund a complete investment program. In addition, shares of
closed-end investment companies such as the Fund are not redeemable and
frequently trade at a discount from the Fund's per-share net asset value.
-16-
SHARE PRICE DATA
The Fund's Common Stock is publicly held and is listed and traded on the
New York Stock Exchange. The following table sets forth, for the periods
indicated, the high and low closing sales prices for the shares on the New York
Stock Exchange, the net asset values per share that immediately preceded the
high and low closing sales prices, and the discount or premium that each sales
price represented as a percentage of the preceding net asset value:
PRECEDING NET
ASSET VALUES DISCOUNT (-) OR
HIGH SALES LOW SALES PER SHARE(2) PREMIUM (+)(3)
QUARTER OR OTHER PRICE PRICE --------------- ---------------
PERIOD ENDED PER SHARE(1) PER SHARE(1) HIGH LOW HIGH LOW
---------------- ------------ ------------ ------ ----- ------ -----
March 31, 2000 $ 9.00 $ 7.6875 $ 8.62 $ 8.51 4.41% (9.67)%
June 30, 2000 8.5625 7.75 9.12 8.21 (6.11)% (5.60)%
September 30, 2000 8.6875 8.0625 8.65 8.46 0.43% (4.70)%
December 31, 2000 8.50 7.55 8.45 8.28 0.59% (8.82)%
March 31, 2001 8.50 6.79 8.35 7.88 1.80% (13.83)%
June 30, 2001 8.15 6.72 8.39 7.36 (2.86)% (8.70)%
September 30, 2001 8.12 6.41 7.96 6.26 2.01% 2.40%
December 31, 2001 7.76 7.10 7.13 6.60 8.83% 7.58%
----------
1. As reported on the New York Stock Exchange. During periods in which the
Fund's shares traded at the high or low price for more than one day, the
information is provided with respect to the trading day on which the
discount or premium was greatest.
2. The net asset value per share calculated by the Fund as of the date of each
high sales price in the first column and each low sales price in the second
column. Thus, this column does not necessarily show the highest or the
lowest net asset value per share during the period.
3. This column shows the discount or premium that the high and low sales
prices in the first two columns bore to the respective, preceding net asset
values in the third column. It does not necessarily show the highest or
lowest discount or premium during the period.
The Fund was organized in April 1987. Its Common Stock generally traded at
a discount from net asset value per share until the third quarter of 1992. From
the third quarter of 1992 through the first quarter of 1994 the Fund's Common
Stock traded at a slight premium above net asset value per share. After
modifying the Fund's distribution policy, as described below, the Fund's Common
Stock traded at a discount from net asset value per share until August of 1996.
Since the announcement of a revised distribution policy in August 1996
(described in the next paragraph), the discount has been reduced, and since
mid-January 1997 the Common Stock has on occasion traded at a premium above net
asset value per share.
Beginning in 1989 and until April 1994 the Fund attempted to reduce the
discount by distributing to stockholders quarterly an amount equal to 2.5% (10%
on an annual basis) of the Fund's net asset value per share, without regard to
net investment income and net capital gains. The Fund believes that this policy
tended to reduce the discount. In fact, from the third quarter of 1992 through
-17-
the first quarter of 1994, the Fund's Common Stock traded at a slight premium to
net asset value. In order to comply with a regulation of the Securities and
Exchange Commission, in April 1994 the Fund modified its distribution policy
from four quarterly distributions of 2.5% of net asset value to three quarterly
distributions of net investment income, followed by a fourth distribution of an
amount equal to the greater of 10% of net asset value less the prior three
distributions, or the sum of the Fund's net investment income and net capital
gains. The result was an aggregate annual distribution of substantially the same
amount, but it was paid in non-level quarterly distributions. Although the Fund
does not know what actual effect the distribution policy has on the market
price, after the Fund modified its distribution policy in April of 1994, its
Common Stock traded at a discount from its net asset value per share. In 1996
the Fund received an exemptive order from the Securities and Exchange Commission
allowing the Fund to make up to four distributions of long-term capital gains in
a taxable year as long as it maintains a policy of distributing a fixed
percentage of net asset value quarterly. This exemptive order permitted the Fund
to return to its previous distribution policy. In August of 1996 the Fund
announced a return to the Fund's prior policy of distributing 2.5% of the net
asset value quarterly to its stockholders. The first distribution under this
policy was in April of 1997. Since the announcement of a return to the Fund's
previous distribution policy, the Fund has on occasion traded at a premium.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund is responsible for the overall
management and operations of the Fund. The Statement of Additional Information
contains information concerning the directors.
INVESTMENT ADVISOR
Denver Investment Advisors LLC serves as the investment advisor to the
Fund. DIA's address is 1225 17th Street, 26th Floor, Denver, Colorado 80202. DIA
was organized in 1994, as a limited liability company. It is owned and operated
by the principal officers and employees of its predecessor firm. As of December
31, 2001, DIA had approximately $6.3 billion under management (including
approximately $540 million for 13 investment company portfolios).
Subject to the general supervision of the Board of Directors, DIA manages
the Fund's portfolio, makes decisions with respect to and places orders for all
purchases and sales of the Fund's securities, and maintains records relating to
such purchases and sales. The Fund pays DIA a monthly fee at the annual rate of
..65% of the Fund's average weekly net assets up to $100,000,000 and .50% of the
Fund's average weekly net assets over $100,000,000.
-18-
PORTFOLIO MANAGER
Charlotte Petersen, CFA, has been primarily responsible for the day-to-day
management of the Fund's portfolio since January 18, 2000. She has been a
Vice-President of the Fund since May 9, 2000, and a Vice-President of DIA (and
its predecessor) since 1993. Ms. Petersen has 15 years of research and portfolio
management experience, working with both value and growth styles, and has been
primarily responsible for managing portfolios of large institutional clients for
DIA (and its predecessor) since 1993.
Ms. Petersen has notified DIA that she will be resigning from DIA's staff
on a date to be agreed upon (but not later than July 12, 2002). DIA expects to
appoint a successor portfolio manager from investment personnel now assigned to
the Fund and is confident that its staff and other resources will continue to
provide the Fund effective portfolio management in accordance with its
investment objective and policies.
CO-ADMINISTRATORS
DIA and ALPS Mutual Funds Services, Inc. ("ALPS") furnish the Fund with
clerical, accounting, bookkeeping and related services, assist in the
preparation of annual and semi-annual reports to the Securities and Exchange
Commission and generally assist in all aspects of the Fund's operations. ALPS
computes the net asset value and net income of the Fund, prepares federal and
state tax returns and maintains the Fund's financial accounts and records
(except stockholders' records). The Fund pays DIA and ALPS a monthly fee based
on an annual rate of 0.01% and 0.08%, respectively, of the Fund's average daily
net assets up to $75,000,000, 0.005% and 0.04%, respectively, of the Fund's
average daily net assets between $75,000,000 and $125,000,000, and 0.005% and
0.02%, respectively, of the Fund's average daily net assets in excess of
$125,000,000.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 48 Wall Street, New York, New York 10286, serves as
the Fund's custodian.
Mellon Investor Services LLC, 85 Challenger Road, Overpeck Centre,
Ridgefield Park, NJ 07660, serves as the Fund's Transfer Agent, Dividend
Reinvestment and Cash Purchase Plan Agent.
EXPENSES OF THE FUND
The Fund pays all of its expenses other than those expressly assumed by
DIA. The expenses payable by the Fund include: expenses of the Offer, advisory
fees payable to DIA and administrative fees payable to DIA and ALPS; audits by
independent public accountants; transfer agent and registrar, custodian and
portfolio record keeping services; dividend disbursing agent and stockholder
record keeping services; taxes and the preparation of the Fund's tax returns;
brokerage fees and commissions; cost of director and stockholder meetings;
printing and mailing reports to stockholders; fees for filing reports with
regulatory bodies and the maintenance of the Fund's existence; legal fees; stock
exchange listing fees and expenses; fees and expenses of directors who are not
officers, employees or members of DIA; insurance and fidelity bond premiums; and
any extraordinary expenses.
-19-
DISTRIBUTIONS AND TAXES
From 1989 until April 1994 the Fund distributed quarterly to stockholders
an amount equal to 2.5% (10% on an annual basis) of the Fund's net asset value
per share, without regard to net investment income and net capital gains. From
April 1994 until December 1996 quarterly distributions were limited to net
investment income, and once a year the Fund supplemented the quarterly
distributions with an annual distribution that brought distributions for the
year to the greater of 10% of the Fund's net asset value per share, or the sum
of its net investment income and net capital gains. Beginning in April 1997, the
Fund returned to its previous distribution policy so that quarterly
distributions again equaled 2.5% (10% on an annual basis) of the Fund's net
asset value per share. See "THE FUND--Share Price Data." To the extent that the
Fund's distributions exceed its net investment income and net capital gains, the
Fund liquidates a portion of its portfolio to fund these distributions, which
represent a return of capital to stockholders and therefore may be deemed to be
a reduction of their principal.
The Fund qualified during its last taxable year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code") and
intends to continue to so qualify. This qualification relieves the Fund of
liability for federal income taxes to the extent the Fund's earnings are
distributed in accordance with the Code. Qualification as a regulated investment
company under the Code for a taxable year requires, among other things, that the
Fund distribute to its stockholders an amount equal to at least 90% of its
investment company taxable income for such taxable year (before taking into
account the deduction for such distributions). In general, the Fund's investment
company taxable income will be its taxable income, including dividends, interest
and the excess, if any, of net short-term capital gain over net long-term
capital loss, subject to certain adjustments, and excluding the excess, if any,
of net long-term capital gain for the taxable year over net short-term capital
loss.
Distributions by the Fund are taxable to the stockholders to the extent
paid out of the Fund's current or accumulated earnings and profits, regardless
of whether such distributions are received in cash or reinvested in additional
shares of Common Stock. Such distributions constitute ordinary income to the
stockholders except to the extent they are designated as capital gain dividends,
as discussed below. Any distributions by the Fund in excess of its current and
accumulated earnings and profits constitute a nontaxable return of capital to
stockholders to the extent of each stockholder's tax basis in his or her shares
(causing a reduction of such basis), and thereafter, to the extent of any excess
over such basis, capital gain. The dividends received deduction for corporations
which own shares in the Fund will apply to ordinary income distributions from
the Fund to the extent of such stockholders' ratable share of the total
qualifying dividends received by the Fund from domestic corporations for the
taxable year.
The Fund intends to designate as capital gain dividends any distributions
by the Fund of the excess of net long-term capital gain over net short-term
capital loss. Such capital gain dividends will be taxable to stockholders as
long-term capital gain, regardless of how long the stockholder has held the
Shares and whether such distributions are received in cash or reinvested in
additional shares of Common Stock. Such distributions are not eligible for the
dividends received deduction for corporations.
-20-
To the extent that the Fund distributes amounts in a given year that exceed
the Fund's investment company taxable income and excess of net long-term capital
gain over net short-term capital loss (after taking into account capital loss
carryovers), such excess distributions may nonetheless cause stockholders to
recognize taxable income under the federal income tax principles described
above.
Stockholders will be advised at least annually as to the federal income tax
consequences of distributions made each year. Dividends declared in October,
November or December of any year payable to stockholders of record as of a
specified date in such months will be deemed to have been received by
stockholders and paid by the Fund on December 31 of such year if such dividends
are actually paid during January of the following year.
Prior to purchasing shares, a purchaser should carefully consider the
impact of distributions which are expected to be declared or have been declared,
but have not been paid. Any such distributions, although in effect a return of
capital, are subject to tax as discussed above.
A taxable gain or loss may be recognized by a stockholder upon his or her
sale of shares of the Fund depending upon the tax basis and their price at the
time of sale. Generally, a stockholder may include brokerage costs incurred upon
the purchase and/or sale of Fund shares in his or her tax basis for such shares
for the purpose of determining gain or loss on a sale of such shares. Any such
capital gain or loss will be long-term or short-term depending on the
stockholder's holding period for the shares sold, except that any loss
recognized with respect to shares held six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received on
those shares.
The foregoing discussion summarizes some of the important federal tax
considerations generally affecting the Fund and its stockholders who are U.S.
citizens or residents or domestic corporations, and is not intended as a
substitute for careful tax planning. Accordingly, investors in the Fund should
consult their tax advisors with specific reference to their own tax situations.
Stockholders are also advised to consult their tax advisors concerning state and
local taxes, which may differ from the federal income taxes described above.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
All distributions to stockholders whose shares are registered in their own
names may be reinvested pursuant to the Dividend Reinvestment and Cash Purchase
Plan (the "Plan") in additional shares of the Fund. Stockholders who choose to
hold their shares in the name of a broker or nominee should contact such broker
or nominee to determine whether or how they may participate in the Plan. There
is no service charge for participation in the Plan.
A stockholder may elect to withdraw from the Plan at any time and thereby
elect to receive future dividends in cash in lieu of shares of the Fund. There
will be no penalty for withdrawal from the Plan and stockholders who have
previously withdrawn from the Plan may rejoin it at any time. Changes in
-21-
elections must be in writing and should include the stockholder's name and
address as they appear on the share certificate. They should be sent to the
Transfer Agent (referred to in this Section as the "Agent"). An election to
withdraw from the Plan will, until such election is changed, be deemed to be an
election by a stockholder to take all subsequent distributions in cash.
Elections will only be effective for subsequent distributions with a record date
of at least five (5) business days after such elections are received by the
Agent.
Funds credited to a participant's account will be used to purchase shares
of the Fund's Common Stock (the "Purchase"). With respect to funds derived from
distributions, if the price plus commission is greater than the net asset value
per share on the record date (the "Net Asset Value"), the Fund will issue to the
Agent shares of the Fund's Common Stock, valued at the Net Asset Value, in the
aggregate amount of the distribution. If the price plus commission is less than
the Net Asset Value, the Agent will attempt, commencing on the first trading day
and ending on the tenth trading day following the record date, to acquire shares
in the open market at a price, plus commission, which is less than the Net Asset
Value. If and to the extent that prior to the time such acquisition is finished
the market price of the Fund's Common Stock, plus commission, equals or exceeds
the Net Asset Value, or in the event that the Agent is unable to acquire
sufficient shares of the Fund's Common Stock at a price plus commission less
than the Net Asset Value, the Fund will issue to the Agent shares of the Fund's
Common Stock, valued at the Net Asset Value, in the aggregate amount of the
remaining value of the distribution.
The reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends or distributions. See "DISTRIBUTIONS AND TAXES."
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at net asset value, which is less than
they could otherwise purchase them in the open market and will have shares with
a market value greater than the value of any cash distribution they would have
received. There can be no assurance that the market price of the Fund's shares
of common stock will exceed their net asset value.
The Fund will increase the price at which its shares may be issued to the
Plan if the net asset value of the shares is less than 95% of the fair market
value of such shares on the payment date of any distribution of net investment
income or net capital gain, unless the Fund receives a legal opinion from
independent counsel that the issuance of shares at net asset value under these
circumstances will not have a material effect upon the federal income tax
liability of the Fund.
A participant may from time to time make voluntary cash contributions to
his or her account by sending to the Agent a check or money order payable to the
Agent in an amount not less than $50 and not in excess of $10,000 per month to
acquire additional shares of the Fund. In the case of any voluntary cash
contribution which exceeds $10,000 per month, the excess will be returned to the
participant by the Agent. All cash contributions to a participant's account made
pursuant to this paragraph will be invested in shares of the Fund's Common Stock
-22-
purchased in the open market (irrespective of net asset value). The Agent will
invest all voluntary cash contributions on or about the last business day of the
month, provided it receives the contributions at least two business days before
the last business day of the month (the "Cut-off date"). Because interest is not
paid on voluntary cash contributions, participants should make such
contributions shortly before the Cut-off Date, allowing sufficient time for mail
delivery. Voluntary cash contributions received after the Cut-off Date will be
used to acquire additional shares of the Fund on or about the last business day
of the following month. Following any monthly investment of voluntary cash
contributions, the Agent will send each investing participant a confirmation of
such investment. Voluntary cash contributions will be returned to the
participant upon written request, provided that such request is received more
than two days before the Cut-off Date.
The Fund reserves the right to amend the Plan.
Additional information about the Plan may be obtained from the Agent. See
"MANAGEMENT OF THE FUND--Custodian and Transfer Agent."
CAPITAL STOCK
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS
The Fund has one class of shares of Common Stock, par value $.01 per share,
of which 100,000,000 shares are authorized. When issued, shares of Common Stock
are fully paid and non-assessable. The Fund's shares have no pre-emptive,
conversion, exchange or redemption rights. Each share of the Fund's Common Stock
has one vote and shares equally in dividends and distributions when and if
declared by the Fund and in the Fund's net assets upon liquidation. All voting
rights for the election of directors are non-cumulative. Consequently, the
holders of more than 50% of the shares can elect 100% of the directors then
nominated for election if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors.
ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation and By-Laws include provisions that
are intended to have the effect of limiting the ability of other entities or
persons to acquire control of the Fund or to change the composition of its Board
of Directors and could have the effect of depriving stockholders 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. The Board
of Directors is divided into three classes, each having a term of three years.
The term of one class expires at each annual meeting of stockholders. This
provision could delay for up to two years the replacement of a majority of the
Board of Directors. The votes of the holders of a majority of the outstanding
shares is required to elect a director. A director may be removed from office
only by vote of the holders of at least 75% of the shares of the Fund entitled
to be voted on the matter.
-23-
The Articles of Incorporation also require the favorable vote of the
holders of at least 75% of the shares of the Fund then entitled to be voted to
approve, adopt or authorize the following:
(i) a merger or consolidation of the Fund with another corporation,
(ii) a sale or transfer of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's investment
activities),
(iii) a liquidation or dissolution of the Fund, or
(iv) a change in the nature of the Fund's business so as to cease to be an
investment company,
unless such action has been approved, adopted or authorized by the affirmative
vote of 75% of the total number of directors fixed in accordance with the
bylaws, in which case the affirmative vote of a majority of the outstanding
shares is required.
In addition, the Articles of Incorporation provide that these anti-takeover
provisions may only be changed by the favorable votes of the holders of at least
75% of the shares of the Fund then entitled to be voted. The Board of Directors
has determined that the 75% voting requirements, which are greater than the
minimum requirements under Maryland law or the 1940 Act, are in the best
interests of stockholders generally.
OUTSTANDING SECURITIES
Set forth below is information with respect to the Fund's outstanding
securities as of January 31, 2002:
----------------------------------------------------------------------------------------
(1) (2) (3) (4)
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT HELD BY AMOUNT OUTSTANDING
REGISTRANT OR FOR EXCLUSIVE OF AMOUNT
ITS ACCOUNT SHOWN UNDER (3)
----------------------------------------------------------------------------------------
Common Stock, 100,000,000 0 21,051,085
par value
$0.01 per share
-24-
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Fund is contained in a Statement of
Additional Information, which is available upon request without charge by
contacting the Fund. Set forth below is the Table of Contents of the Statement
of Additional Information:
TABLE OF CONTENTS
Investment Objectives and Policies
Management
Control Persons and Principal Holders of Securities
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Tax Status
Financial Statements
-25-
NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION MUST 4,210,217 SHARES OF
NOT BE RELIED UPON AS HAVING BEEN COMMON STOCK ISSUABLE UPON
AUTHORIZED BY THE FUND OR DIA. THE EXERCISE OF RIGHTS TO
PROSPECTUS DOES NOT CONSTITUTE AN SUBSCRIBE FOR SUCH SHARES
OFFERING BY THE FUND IN ANY OF COMMON STOCK
JURISDICTION IN WHICH SUCH OFFERING
MAY NOT BE LAWFULLY MADE.
--------------------------------------
TABLE OF CONTENTS BLUE CHIP VALUE FUND, INC.
Fee Table............................1
Financial Highlights.................2
The Offer............................4
Use of Proceeds.....................11
The Fund............................11
Management of the Fund..............18
Distributions and Taxes.............20
Dividend Reinvestment -------------------------
and Cash Purchase Plan............21 PROSPECTUS
Capital Stock.......................23 -------------------------
Statement of Additional
Information.......................25
FEBRUARY 19, 2002
-26-
BLUE CHIP VALUE FUND, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 19, 2002
TABLE OF CONTENTS
PAGE
----
Investment Objectives and Policies..........................................B-2
Management..................................................................B-8
Control Persons and Principal Holders of Securities.........................B-12
Investment Advisory and Other Services......................................B-12
Brokerage Allocation and Other Practices....................................B-14
Tax Status..................................................................B-15
Financial Statements........................................................B-18
This Statement of Additional Information applies to the Blue Chip Value
Fund, Inc. (the "Fund"). This Statement of Additional Information is not a
prospectus, and is meant to be read in conjunction with the Prospectus dated
February 19, 2002 (the "Prospectus"), which describes the Fund. This Statement
of Additional Information is incorporated by reference in its entirety into the
Prospectus. Copies of the Prospectus may be obtained by calling the Fund, at
(800) 624-4190. Capitalized terms used but not defined herein have the same
meaning as in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Fund describes the investment objectives and
policies of the Fund. The following policies supplement the non-fundamental
investment policies set forth in the Prospectus.
SECURITIES LENDING
Although it has not done so, the Fund is permitted, from time to time, to
lend its portfolio securities with an aggregate value not in excess of 25% of
total assets to brokers, dealers, and financial institutions such as banks and
trust companies, for which it will receive collateral in cash or United States
Government securities that will be maintained on a daily basis in an amount
equal to at least 100% of the current market value of the loaned securities. The
Fund would not pay administrative, finders, or other fees in connection
therewith. The Fund would continue to receive dividends on the securities
loaned. Cash collateral would be invested in short-term debt securities, which
would increase the current income of the Fund. Although voting rights, or rights
to consent, attendant to securities on loan pass to the borrower, such loans may
be called at any time and will be called so that the securities may be voted if
a material event affecting the investment occurs. During the fiscal year ended
December 2001, the Fund did not lend any portfolio securities. The Fund does not
currently intend to engage in securities lending so as to put more than 5% of
its net assets at risk.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on securities indices and
may also purchase and write options on such futures contracts. Futures contracts
entered into by the Fund, other than single stock futures and narrow based
security index futures, are traded either over the counter or on trading
facilities such as contract markets, derivatives transaction execution
facilities, exempt boards of trade or electronic trading facilities that are
licensed and/or regulated to varying degrees by the Commodity Futures Trading
Commission ("CFTC"). Single stock futures and narrow based security index
futures are traded either over the counter or on trading facilities such as
contract markets, derivatives transaction execution facilities, and electronic
trading facilities that are licensed and/or regulated to varying degrees by both
the CFTC and the SEC.
FUTURES CONTRACTS. A futures contract relating to a financial index may
generally be described as an agreement to buy or sell that index contract at the
initial transaction price, with the transaction amount to be transferred at a
specified future delivery date and offset by the final settlement price which
may result in a profit or a loss. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. If, in the opinion of DIA, there is a sufficient degree
of correlation between price trends for the Fund's portfolio securities and
futures contracts based on financial indices, the Fund may enter into such
futures contracts as a hedging strategy. Although under some circumstances
B-2
prices of securities in the Fund's portfolio may be more or less volatile than
prices of such futures contracts, DIA will attempt to estimate the extent of
this volatility difference based on historical patterns and compensate for any
such differential by having the Fund enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the Fund's securities portfolio. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of the
Fund's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when DIA anticipates the
subsequent purchase of particular securities when the Fund obtains the necessary
cash, but expects the prices then available to be less favorable than prices
that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give the Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
Writing covered options on futures is typically a strategy to reduce risk;
the benefit is that writing an option generates premium income, while the
drawback is that the strategy precludes the Fund from the opportunity to profit
above the exercise price. By writing a call option, the Fund becomes obligated,
in exchange for the premium, to sell a futures contract if the option is
exercised, and the futures contract may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates a
premium. However, the Fund becomes obligated to purchase a futures contract if
the option is exercised, and the futures contract may have a value lower than
the exercise price. The loss incurred by the Fund in writing options on futures
is potentially unlimited and may exceed the amount of the premium received. The
Fund will incur transaction costs in connection with purchasing or writing of
options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. The Fund's ability to establish and close out positions on such
options will be subject to the existence of a liquid market.
OTHER CONSIDERATIONS. The Fund will engage in futures transactions and will
engage in related options transaction only for bona fide hedging as defined in
the regulations of the CFTC or to seek to increase total return to the extent
permitted by such regulations. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging
purposes--i.e., futures contracts will be sold to protect against a decline in
the price of securities that the Fund owns, or futures contracts will be
B-3
purchased to protect the Fund against an increase in the price of securities it
intends to purchase. As evidence of this hedging intent, the Fund generally
expects that when it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or options position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test. Under this test the aggregate initial margin and premiums
required to establish positions in futures contracts and options on futures to
seek to increase total return may not exceed 5% of the net asset value of the
Fund's portfolio, after taking into account unrealized profits and losses on any
such positions and excluding the amount by which such options were in-the-money
at the time of purchase. The Fund will engage in transactions in futures
contracts and related options transactions only to the extent such transactions
are consistent with the requirements of the Internal Revenue Code of 1986 for
maintaining its qualification as a regulated investment company for federal
income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to segregate cash
or liquid assets in an amount equal to the underlying value of such contracts
and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in securities prices may result in a poorer overall
performance for the Fund than if it had not entered into any futures contracts
or options transactions. In the event of an imperfect correlation between a
futures position and a portfolio position which is intended to be protected, the
desired protection may not be obtained and the Fund may be exposed to risk or
loss.
Perfect correlation between the Fund's futures positions and portfolio
positions will be difficult to achieve particularly where the futures contract
is not based on individual equity securities.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING OPTIONS. The Fund may purchase put and call options on any
securities in which it may invest or options on any securities index composed of
securities in which it may invest. The Fund may also enter into closing sale
transactions in order to realize gains or minimize losses on options it has
purchased.
B-4
The Fund will normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option entitles the Fund, in return for the premium paid, to
purchase specified securities at a specified price during the option period. The
Fund will ordinarily realize a gain if, during the option period, the value of
such securities exceeds the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund will realize either no gain or a loss on
the purchase of the call option.
The Fund will normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio or in securities in which it may
invest. The purchase of a put option entitles the Fund, in exchange for the
premium paid, to sell specified securities at a specified price during the
option period. The purchase of puts is designed to offset or hedge against a
decline in the market value of the Fund's securities. Put options may also be
purchased by the Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. The Fund will ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreases below the exercise price sufficiently to more than cover
the premium and transaction costs; otherwise the Fund will realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options will tend to be offset by countervailing changes in the
value of the underlying portfolio securities.
The Fund will purchase put and call options on securities indices for the
same purposes as it will purchase options on individual securities.
WRITING COVERED OPTIONS. The Fund may write covered call and put options on
any securities in which it may invest. A call option written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by the Fund will be covered, which means that the
Fund will own the securities subject to the option as long as the option is
outstanding or the Fund will use the other methods described below. The Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, the Fund
foregoes the opportunity to profit from an increase in the market price of the
underlying security that exceeds the exercise price of the call option.
A put option written by the Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by the
Fund will be covered, which means that the Fund will have segregated cash or
liquid assets with a value at least equal to the exercise price of the put
option. The purpose of writing such options is to generate additional income for
the Fund. However, in return for the option premium, the Fund accepts the risk
that it may be required to purchase the underlying securities at a price in
excess of the securities' market value at the time of purchase.
Call and put options written by the Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund.
B-5
In addition, a written call option or put option may be covered by
segregating cash or liquid assets, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position.
The Fund may also write covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration segregated
by the Fund) upon conversion or exchange of other securities in its portfolio.
The Fund may cover call and put options on a securities index by segregating
cash or liquid assets with a value equal to the exercise price.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or option traded over-the-counter at any particular time.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of segregated assets until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it will have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of the underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (v) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options on that
exchange that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
B-6
The Fund may purchase and sell both options that are traded on U.S.
exchanges and options traded over-the-counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Securities and Exchange
Commission changes its position, the Fund will treat purchased over-the-counter
options and all assets used to cover written over-the-counter options as
illiquid securities.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of purchasing
puts for hedging purposes depends in part on DIA's ability to predict future
price fluctuations and the degree of correlation between the options and
securities markets.
WARRANTS AND STOCK PURCHASE RIGHTS
The Fund may invest up to 10% of its net assets, calculated at the time of
purchase, in warrants or rights (excluding those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. The Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by DIA for
investment by the Fund. Warrants and rights have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities whose
maturities at the time of acquisition were one year or less. Portfolio turnover
may vary greatly from year to year as well as within a particular year, and may
also be affected by requirements which enable the Fund to receive certain
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions. For the fiscal years ended December 31, 2000 and
2001, the Fund's portfolio turnover rates were, 127.55% and 73.3%, respectively.
B-7
MANAGEMENT
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
---------------- --- -------------- -----------------------
*Kenneth V. Penland, 59 Chairman of the Board Retired; from 1995 until December 2001,
CFA and Director Chairman and Executive Manager, Denver
1225 Seventeenth Street Investment Advisors LLC; prior thereto
26th Floor Chairman of the Board and Director of
Denver, Colorado 80202 Research, Denver Investment Advisors,
Inc.; President and Trustee, Westcore
Funds.
Robert J. Greenebaum 84 Director Independent Consultant; former Director,
828 Kimballwood Lane United Asset Management Corp., Boston,
Highland Park, IL 60035 Massachusetts (February 1982 - May
2000); former Chairman of the Board and
Director, Selected American Shares, Inc.
and Selected Special Shares, Inc., Santa
Fe, New Mexico (January 1970 - December
1997); former Chairman of the Board and
Trustee, Selected Capital Preservation
Trust, Santa Fe, New Mexico (September
1985 - December 1997). Consultant,
Denver Investment Advisors LLC, and its
predecessor, Denver Investment Advisors,
Inc.
Richard C. Schulte 57 Director Private Investor; from 1993 until 1996,
P. O. Box 952 President, Transportation Service
Evergreen, Colorado 80437 Systems, Inc.; Employee, Southern
Pacific Lines, Denver, Colorado (since
1993); prior thereto, Employee, Rio
Grande Industries, Denver, Colorado
(holding company) (since 1991); Vice
President Finance and Treasurer, Rio
Grande Holdings, Inc., Denver, Colorado
(since 1990); and Vice President, Denver
& Rio Grande Western Railroad Company,
Denver, Colorado (since 1990).
B-8
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
---------------- --- -------------- -----------------------
Roberta M. Wilson, 58 Director Retired; from 1985 until July 1998,
CFA Director of Finance, Denver Board of
9268 Weld County Road Water Commissioners, Denver, Colorado.
#28
Platteville, CO 80651
*Todger Anderson, 57 President and Director President and Executive Manager, Denver
CFA Investment Advisors LLC (since 1995);
1225 Seventeenth Street prior thereto President and Director of
26th Floor Portfolio Management, Denver Investment
Denver, Colorado 80202 Advisors, Inc.; Portfolio Manager,
Westcore MIDCO Growth Fund (since 1986);
Portfolio Co-Manager, Westcore Select
Fund (since 2001).
Lee W. Mather, Jr. 58 Director Director, American Rivers (conservation
6 Francine Drive organization) (since June 2000); former
Greenwich, Connecticut 06830 investment banker, Merrill Lynch & Co.
(January 1977 - April 2000).
Gary P. McDaniel 56 Director Chief Executive Officer, Chateau
32023 County Road 15 Communities, Inc. (REIT/ manufactured
Elizabeth, Colorado 80107 housing) (since 1997); prior thereto,
Chief Executive Officer ROC Communities,
Inc. (1980-1997).
Charlotte Petersen 41 Vice President Vice President, Denver Investment
CFA Advisors LLC (since 1995); prior thereto
1225 Seventeenth Street Vice President, Denver Investment
26th Floor Advisors, Inc. (since 1993); Portfolio
Denver, Colorado 80202 Manager, Westcore Blue Chip Fund (since
January 2000).
W. Bruce McConnel, III 59 Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP, Philadelphia, PA.
18th and Cherry Streets
Philadelphia, PA 19103
B-9
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
---------------- --- -------------- -----------------------
Jasper R. Frontz 33 Treasurer Vice President, Denver Investment
1225 Seventeenth Street Advisors LLC (since 2000); Director of
26th Floor Mutual Fund Administration, Denver
Denver, Colorado 80202 Investment Advisors LLC (since 1997);
prior thereto, Fund Controller, ALPS
Mutual Fund Services, Inc. (1995-1997);
Senior Accountant, Deloitte & Touche LLP
(1991-1995); Treasurer, Westcore Funds
(since 1997); Registered Representative,
ALPS Distributors, Inc. (since 1995).
----------
* Messrs. Penland and Anderson are considered to be "interested persons" of
the Fund (as that term is defined in the Investment Company Act of 1940).
No director or officer of the Fund who is also a director, officer, or
employee of the Advisor or any of its parents, received any remuneration from
the Fund during 2001. The other directors taken as a group were either paid or
had accrued directors' fees for 2001 from the Fund in the aggregate amount of
$52,500. Drinker Biddle & Reath LLP, of which W. Bruce McConnel, III, Secretary
of the Fund, is a partner, receives fees from the Fund for services rendered as
its legal counsel.
In 2001, the directors received an annual retainer of $6,000 for serving as
directors, plus a meeting fee of $1,500 for each regular Board meeting attended,
plus his or her out-of-pocket expenses incurred in attending Board meetings. The
Fund expects the basis of such compensation will be the same during 2002.
The following table provides information concerning the compensation of
each of the Fund's directors for services rendered during the Fund's fiscal year
ended December 31, 2001:
B-10
COMPENSATION TABLE
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM FUND
NAME OF PERSON FROM FUND PAID TO DIRECTORS
-------------- --------- -----------------
Todger Anderson $ -0- $ -0-
Robert J. Greenebaum $12,000 $12,000
Kenneth V. Penland $ -0- $ -0-
Richard C. Schulte $12,000 $12,000
Roberta M. Wilson $12,000 $12,000
Lee W. Mather, Jr. $ 6,000 $ 6,000
Gary P. McDaniel $ 6,000 $ 6,000
Robert H. Inman* $ 4,500 $ 4,500
* Retired in May 2001.
The Fund has a standing Audit Committee of the Board composed of Messrs.
Greenebaum, Mather, McDaniel and Schulte, and Ms. Wilson. The functions of the
Audit Committee are to meet with the Fund's independent auditors to review the
scope and findings of the annual audit, review matters of independence, discuss
the Fund's accounting policies, discuss any recommendation of the independent
auditors with respect to the Fund's management practices, review the impact of
changes in accounting standards upon the Fund's financial statements, recommend
to the Board of Directors the selection of independent auditors, and perform
such other duties as may be assigned to the Committee by the Board of Directors.
The Fund has a Nominating Committee comprised of Messrs. Greenebaum,
Mather, McDaniel and Schulte, and Ms. Wilson. The Nominating Committee is
responsible for the selection and nomination of candidates to serve as
directors.
CODES OF ETHICS
The Fund and DIA have adopted codes of ethics pursuant to Rule 17j-1 under
the 1940 Act that permits investment personnel subject to their particular codes
of ethics to invest in securities, including securities that may be purchased or
held by the Fund, for their own accounts. The codes of ethics are on public file
with, and are available from, the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-(202)-942-8090 and
these Codes of ethics are available on the EDGAR database on the Commission
internet site at http://www.sec.gov. Copies of these codes of ethics may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov or by writing the Commission's Public
Reference Section, Washington, D.C. 20549-0102.
B-11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this Statement of Additional Information, there were no
"Control Persons" as that term is defined in the Investment Company Act of 1940,
as amended (the "1940 Act").
As of January 31, 2002, Cede & Co. (as nominee for the Depository Trust
Company), 55 Water Street, New York, New York 10041, held of record 16,590,660
shares of the Common Stock of the Fund.
As of January 31, 2002, the directors and officers as a group owned
approximately 475,553 shares, representing 2.3% of the Common Stock of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR
Denver Investment Advisors LLC ("DIA") serves as investment advisor to the
Fund and is located at 1225 Seventeenth Street, 26th Floor, Denver, Colorado
80202. DIA is a limited liability company organized in 1994. It is owned and
operated by the principal officers and employees of its predecessor firm. The
current investment advisory agreement was approved by the stockholders at a
special meeting held on February 8, 1995.
Kenneth V. Penland, Chairman and a director of the Fund, was an officer and
executive manager of DIA until December 31, 2001. Todger Anderson, President and
a director of the Fund, is an officer and executive manager of DIA. Charlotte
Petersen, Vice President of the Fund, is a Vice President of DIA. Jasper R.
Frontz, Treasurer of the Fund, is also a Vice President of DIA.
DIA is entitled to receive a fee from the Fund for its services, computed
weekly and paid monthly, at an annual rate of .65% of the Fund's average weekly
net assets up to $100,000,000 and .50% of the Fund's average weekly net assets
in excess of $100,000,000. For the fiscal years ended December 31, 1999, 2000
and 2001, the Fund paid DIA, $987,011, $875,670 and $909,447 respectively, for
investment advisory services.
The Investment Advisory Agreement dated April 1, 1995 between the Fund and
DIA (the "Agreement") provides that the advisory fee shall be reduced as
required by expense limitations imposed upon the Fund by any state in which
shares of the Fund are sold. The Fund is not presently subject to any such
expense limitations.
In the Agreement, DIA agrees, subject to the supervision of the Fund's
Board of Directors, to provide a continuous investment program and strategy for
the Fund, including investment research and management with respect to all of
its securities, other investments, and cash equivalents and to make decisions
with respect to and place orders for all purchases and sales of portfolio
B-12
securities. The Agreement also requires DIA to prepare or supervise the
preparation of reports to the Securities and Exchange Commission or any other
governmental authority; provide personnel to act as officers of the Fund and pay
the salaries of such officers; assist to the extent requested by the Fund with
the Fund's preparation of its annual and semi-annual reports to stockholders;
transmit information concerning purchases and sales of the Fund's portfolio
securities to the custodian for proper settlement; supply the Fund and its Board
of Directors with reports and statistical data as requested; and prepare a
quarterly brokerage allocation summary.
The Agreement provides that DIA will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of DIA in the performance of its duties or from reckless disregard of its
obligations and duties under the Agreement.
ADMINISTRATOR
For the period from September 1, 1999 through December 31, 1999, and for
the fiscal years ended December 31, 2000 and December 31, 2001, ALPS Mutual
Funds Services, Inc. ("ALPS") and DIA served as co-administrators for the Fund.
For the administrative services provided, ALPS and DIA received fees of $29,130
and $3,908, respectively, for the fiscal period from September 1, 1999 through
December 31, 1999; and ALPS and DIA received fees $83,438 and $11,315,
respectively, for the fiscal year ended December 31, 2000 and $85,734 and
$11,269, respectively, for the fiscal year ended December 31, 2001.
Prior to September 1, 1999, American Data Services, Inc. ("ADS") served as
the Fund's administrator. For the administrative services provided, ADS received
a monthly fee at an annual rate of .10% of the Fund's average weekly net assets
up to $75,000,000, .05% of the Fund's average weekly net assets between
$75,000,000 and $125,000,000, and .03% of the Fund's average weekly net assets
in excess of $125,000,000, with a $7,463 per month minimum. For the fiscal
period from January 1, 1999 through August 31, 1999, ADS received fees of
$75,895.
B-13
CUSTODIAN
The custodian of the Fund's portfolio securities is The Bank of New York
("BONY"). BONY's address is 48 Wall Street, New York, New York 10286. Pursuant
to the Custody Agreement between the Fund and BONY, BONY provides the following
services: (i) maintains a separate account or accounts in the name of the Fund;
(ii) holds and disburses portfolio securities on account of the Fund; (iii)
collects and makes disbursements of money on behalf of the Fund; (iv) collects
and receives all income and other payments and distributions on account of the
Fund's portfolio; (v) furnishes monthly to the Fund a detailed statement of
property held for the Fund under the Custody agreement; (vi) maintains
appropriate books and records for the Fund with respect to its duties under the
Custody Agreement and (vii) makes periodic reports to the Fund concerning the
Fund's operations.
INDEPENDENT AUDITORS
Deloitte & Touche LLP serves as the Fund's independent auditors, providing
audit services including (1) audit of the annual financial statements, (2)
assistance and consultation in connection with SEC filings, and (3) review of
the income tax returns filed on behalf of the Fund. For the fiscal years prior
to December 31, 2000, the financial highlights for the Fund and the financial
statements included in the Fund's Annual Report to Stockholders were audited by
the Fund's former auditors.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokers are selected by DIA on the basis of best price and execution for
the Fund. In assessing best price and execution available to the Fund, DIA will
consider all factors it deems relevant, including the breadth, of the market in
the security, the price of the security, the financial condition and execution
capability of the broker/dealer, and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In selecting
brokers or dealers to execute particular transactions and in evaluating best net
price and execution available, DIA is authorized to consider "brokerage and
research services" (as defined in section 28(e) of the Securities Exchange Act
of 1934), statistical quotations, including the quotations necessary to
determine the Fund's net asset value, and other information provided to the Fund
and/or DIA or its affiliates. DIA is authorized to cause the Fund to pay to
brokers or dealers who provide such brokerage and research services brokerage
commissions which may be in excess of the amount that another broker or dealer
would have charged for effecting the same transactions if DIA determines in good
faith that such amount of commissions is reasonable in relation to the value of
brokerage and research services provided by such brokers or dealers, viewed in
terms of the particular transaction or in terms of all of the accounts over
which DIA exercises investment discretion.
Research material furnished by brokers without cost to DIA, if any, may
tend to benefit the Fund and other clients of DIA by improving the quality of
advice given; not all such research material furnished may be used by DIA in
connection with the Fund.
B-14
During the fiscal years ended December 31, 1999, 2000 and 2001, the Fund
paid brokerage commissions of $184,000, $434,000 and $300,320, respectively.
The Fund may from time to time purchase securities issued by its regular
broker/dealers (as defined in Rule 10b-1 under the Investment Company Act of
1940, as amended (the "1940 Act") or their parents. As of December 31, 2001, the
Fund held securities of its regular broker/dealers (or their parents) that
derive more than 15% of their gross revenues from securities-related activities.
As of December 31, 2001 the Fund's aggregate holdings of securities of Fidelity
Institutional U.S. Treasury, Class III and Goldman Sachs Financial Square Prime
Obligations Fund was $1,500,000 and $6,768,527, respectively.
TAX STATUS
FEDERAL
The Fund intends to qualify as a "regulated investment company" and to
distribute substantially all of its net income and gains each year. By following
this policy, the Fund expects to eliminate or reduce to a nominal amount the
federal income taxes to which it may be subject. If for any taxable year the
Fund does not qualify for the special federal tax treatment afforded regulated
investment companies, all of the Fund's taxable income would be subject to tax
at regular corporate rates (without any deduction for distributions to
stockholders). In such event, the Fund's dividend distributions to stockholders
would be taxable as ordinary income to the extent of the current and accumulated
earnings and profits of the Fund and would be eligible for the dividends
received deduction in the case of corporate stockholders.
Qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code") requires, among other things, that the
Fund distribute to its stockholders an amount equal to at least the sum of 90%
of its investment company taxable income (if any) and 90% of its tax-exempt
income (if any), net of certain deductions for each taxable year. In general,
the Fund's investment company taxable income will be its taxable income,
including dividends, interest, and short-term capital gains (the excess of net
short-term capital gain over net long-term capital loss), subject to certain
adjustments and excluding the excess of net long-term capital gain, if any, for
the taxable year over the net short-term capital loss (if any), for such year.
The Fund will be taxed on its undistributed investment company taxable income,
if any. As stated, the Fund intends to distribute at least 90% of its investment
company taxable income (if any) for each taxable year. To the extent such income
is distributed by the Fund (whether in cash or additional shares), it will be
taxable to stockholders as ordinary income.
Any distribution of the excess of net long-term capital gain over net
short-term capital losses is taxable to stockholders as long-term capital gain,
regardless of how long the stockholder has held Fund shares and whether such
gains are received in cash or additional Fund shares. The Fund will designate
such a distribution as a capital gain dividend in a written notice mailed to
stockholders after the close of the Fund's taxable year. It should be noted
that, upon the sale of Fund shares, if the stockholder has not held such shares
B-15
for more than six months, any loss on the sale of those shares will be treated
as long-term capital loss to the extent of the capital gain dividends received
with respect to the shares.
Ordinary income of individuals is taxable at a maximum marginal rate of
38.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum nominal rate of 20%. In years after 2003, the rates
applicable to ordinary income of individuals are scheduled to be reduced,
leading to a maximum rate of 35% by 2006, and the limitations on itemized
deductions and the phase-out of personal exemptions are also scheduled to be
phased-out over a number of years. For corporations, long-term capital gains and
ordinary income are both taxable at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specific percentages of their ordinary taxable
income and capital gain net income (excess of capital gains over capital losses)
and any such amounts that were not distributed in the prior year. The Fund
intends to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 30% of taxable dividends or 30% of gross sale proceeds
upon sale paid to stockholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Fund either that they are subject to backup withholding when
required to do so or that they are "exempt recipients." (In years after 2003,
these withholding tax rates are scheduled to be reduced, leading to withholding
tax rates of 28% by 2006.)
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Specific rules govern the federal income tax treatment of certain financial
instruments that may be held by the Fund. These rules may have a particular
impact on the amount of income or gain that the Fund must distribute to its
stockholders.
FUTURES CONTRACTS AND OPTIONS OF FUTURES CONTRACTS. Generally, futures
contracts and options on futures contracts held by the Fund (collectively, the
"Instruments") at the close of its taxable year are treated for federal income
tax purposes as sold for their fair market value on the last business day of
such year, a process known as "marking-to-market." Forty percent of any gain or
loss resulting from such constructive sales will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the period the Fund has held the
Instruments (the "40-60 rule"). The amount of any capital gain or loss actually
realized by the Fund in a subsequent sale or other disposition of those
Instruments is adjusted to reflect any capital gain or loss taken into account
by the Fund in a prior year as a result of the constructive sale of the
B-16
Instruments. With respect to certain Instruments, deductions for interest and
carrying charges may not be allowed. With respect to futures contracts to sell
which are properly identified as such, the Fund may make an election which will
exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Fund would be allowed (in
lieu of the foregoing) to elect to either (1) offset gains or losses from
positions which are part of a mixed straddle to which such treatment applies, or
(2) establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40-60 rule will apply to the net gain or loss attributable to the
futures contracts, but in the case of a mixed straddle account election, not
more than 50% of any net gain may be treated as long-term and no more than 40%
of any net loss may be treated as short-term. Options on futures contracts
generally receive federal tax treatment similar to that described above.
OPTIONS. When the Fund writes an option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included as a deferred
credit in the liability section of the Fund's statement of assets and
liabilities. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale
price, the average of the closing bid and asked prices. If an option expires on
the stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold), and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security from its portfolio and
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired call options
written by the Fund and net gains from closing purchase transactions are treated
as short-term capital gains for federal income tax purposes, and losses on
closing purchase transactions are treated as short-term capital losses.
STATE
Depending upon the extent of activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
Income distributions may be taxable to stockholders under state or local
law as dividend income even though all or a portion of such distributions may be
derived from interest on U.S. government obligations which, if realized
directly, would be exempt from such income taxes. Stockholders are advised to
consult their tax advisers concerning the application of state and local taxes.
B-17
FINANCIAL STATEMENTS
Stockholders receive unaudited semi-annual reports describing the Fund's
investment operations and annual financial statements together with the report
of the independent auditors of the Fund. The audited financial statements and
notes thereto for the Fund contained in its Annual Report to Stockholders dated
December 31, 2001, are incorporated by reference into this Statement of
Additional Information. The financial statements and related notes thereto for
the Fund which appear in the Fund's Annual Report to Stockholders have been
audited by Deloitte & Touche LLP, whose report thereon also appears in such
Annual Report and is also incorporated herein by reference. No other parts of
the Annual Report are incorporated by reference herein. Such audited financial
statements and notes thereto have been incorporated herein in reliance upon such
report of Deloitte & Touche LLP, independent auditors, given upon the authority
of said firm as experts in accounting and auditing. The financial highlights
included in the Annual Report for periods prior to December 31, 2000 were
audited by the Fund's prior auditors. Additional copies of the Annual Report may
be obtained at no charge by telephoning the Fund at (800) 624-4190.
B-18