<PAGE>
PROSPECTUS
1,836,513 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 August 14, 1998 rights ("Rights"),
entitling the holders thereof to subscribe for an aggregate of 1,836,513
shares of the Fund's Common Stock (the "Offer") at the rate of one share of
Common Stock for each eight (8) 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 THE LAST REPORTED SALE PRICE ON THE NEW YORK
STOCK EXCHANGE OR 95% OF NET ASSET VALUE ON SEPTEMBER 18, 1998 (THE "PRICING
DATE") OF A SHARE OF THE FUND'S COMMON STOCK.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON SEPTEMBER 17, 1998
(THE "EXPIRATION DATE"), THE 34TH 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 (the
"Advisor") 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 the Advisor 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 &
Poors 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."
The Fund announced the proposed Offer on April 20, 1998. The net asset
values per share of Common Stock at the close of business on April 17, 1998
and August 7, 1998 were $11.02 and $10.18, respectively, and the last reported
sale prices of a share of the Fund's Common Stock on such Exchange on those
dates were $11.75 and $10.75, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE(1) SALES LOAD FUND(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $9.67 None $9.67
- --------------------------------------------------------------------------------
Total....................................... $17,759,081 None $17,759,081
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated based on an assumed Price per Share of 95% of the net asset
value of a share of the Fund's Common Stock on August 7, 1998. 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 $22,198,848 and the Total Proceeds will be
$22,198,848.
(2) Before deduction of expenses payable by the Fund, estimated at $145,000.
---------------
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.
---------------
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 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.
---------------
AUGUST 14, 1998
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees......................................................... 0.61%
Other Expenses.......................................................... 0.33%
----
Total Annual Expenses................................................. 0.94%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual
return....................................... $10 $30 $52 $116
</TABLE>
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.
1
<PAGE>
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 each of the five years in the period ended December
31, 1997 have been audited by Ernst & Young 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,
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Year........... $ 8.94 $ 8.47 $ 6.98 $ 7.73 $ 7.63 $ 8.36 $ 6.97
Net Investment
Income......... 0.10 0.13 0.13 0.11 0.20 0.12 0.13
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 2.56 1.69 2.45 (0.11) 0.76* (0.08) 2.22
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total From
Investment
Operations..... 2.66 1.82 2.58 0.00 0.96* 0.04 2.35
Less
Distributions:
Dividends (from
net investment
income)........ 0.10 0.13 0.13 0.11 0.20 0.12 0.13
Distributions
(from capital
gains)......... 1.47 1.22 0.95 0.38 0.14 0.00 0.00
Distributions
in Excess of
Realized
Gains(1)....... 0.00 0.00 0.00 0.00 0.41 0.48 0.78
Tax Return of
Capital(1)..... 0.00 0.00 0.01 0.26 0.07 0.17 0.05
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total
Distributions.. 1.57 1.35 1.09 0.75 0.82 0.77 0.96
Dilutive Effect
of Rights
Offering....... 0.26 -- -- -- 0.03* -- --
Offering Costs
Charged to
Paid-in
Capital........ 0.01 -- -- -- 0.01* -- --
Total Capital
Share
Transactions... 0.27 -- -- -- 0.04* -- --
------------ ----------- ----------- ----------- ----------- ----------- -----------
Net Asset Value,
End of Year.... $ 9.76 $ 8.94 $ 8.47 $ 6.98 $ 7.73 $ 7.63 $ 8.36
============ =========== =========== =========== =========== =========== ===========
Per Share Market
Value, End of
Year........... $ 10.9375 $ 9.25 $ 7.625 $ 6.125 $ 7.875 $ 7.75 $ 7.625
Total Investment Return(2) 40.5% 39.5% 41.6% (13.2)% 13.7%* 12.4% 44.9%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Year........ $138,905,406 $98,040,563 $92,886,640 $76,491,173 $84,168,306 $72,418,811 $78,221,238
Ratio of
Expenses to
Average Net
Assets......... 0.94% 1.05% 1.15% 1.22% 1.28% 1.42% 1.63%
Ratio of Net
Investment
Income to
Average Net
Assets......... 1.01% 1.39% 1.55% 1.46% 2.55% 1.57% 1.66%
Portfolio
Turnover Rate.. 55% 42% 51% 63% 56% 118% 119%
Average
Commission Rate
Paid(3)........ $ 0.05 $ 0.05 N/A N/A N/A N/A N/A
<CAPTION>
1990 1989 1988
------------- ------------ ------------
<S> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Year........... $ 7.83 $ 7.13 $ 6.68
Net Investment
Income......... 0.14 0.25 0.20
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... (0.25) 1.23 0.44
------------- ------------ ------------
Total From
Investment
Operations..... (0.11) 1.48 0.64
Less
Distributions:
Dividends (from
net investment
income)........ 0.14 0.30 0.19
Distributions
(from capital
gains)......... 0.00 0.00 0.00
Distributions
in Excess of
Realized
Gains(1)....... 0.00 0.48 0.00
Tax Return of
Capital(1)..... 0.61 0.00 0.00
------------- ------------ ------------
Total
Distributions.. 0.75 0.78 0.19
Dilutive Effect
of Rights
Offering....... -- -- --
Offering Costs
Charged to
Paid-in
Capital........ -- -- --
Total Capital
Share
Transactions... -- -- --
------------- ------------ ------------
Net Asset Value,
End of Year.... $ 6.97 $ 7.83 $ 7.13
============= ============ ============
Per Share Market
Value, End of
Year........... $ 6.00 $ 7.00 $ 6.00
Total Investment Return(2) (4.0)% 30.4% 12.6%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Year........ $65,299,686 $73,316,564 $66,786,925
Ratio of
Expenses to
Average Net
Assets......... 1.96% 1.98% 2.22%
Ratio of Net
Investment
Income to
Average Net
Assets......... 1.96% 3.25% 2.82%
Portfolio
Turnover Rate.. 104% 165% 135%
Average
Commission Rate
Paid(3)........ N/A N/A N/A
</TABLE>
- -------
(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) tax 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. Total 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 periods covered by the table.
(3) Required for fiscal years beginning on or after September 1, 1995.
* Restated.
2
<PAGE>
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.
<TABLE>
<CAPTION>
ASSET COVERAGE
TOTAL AMOUNT PER $1,000 OF
DECEMBER 31 OUTSTANDING INDEBTEDNESS
----------- ------------ --------------
<S> <C> <C>
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
1991............................................ 2,097,368 38,295
1990............................................ 3,433,466 20,019
1989............................................ 4,661,055 16,730
1988............................................ 5,788,949 12,537
</TABLE>
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 August 14, 1998 (the "Record Date") the right to
subscribe for an aggregate of 1,836,513 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 eight (8) Rights held. Rights may be exercised at any
time during the Subscription Period, which commences on the date of this
Prospectus and ends as of 5:00 p.m. New York time, on September 17, 1998 (the
"Expiration Date"). A stockholder's right to acquire one (1) Share for each
eight (8) Rights held is hereinafter referred to as the "Primary
Subscription."
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 eight (8) Rights will be unable to exercise such
Rights and will not be entitled to receive any cash in lieu of fractional
shares.
3
<PAGE>
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- ----- ----
<S> <C>
Record Date.......................... August 14, 1998
Subscription period.................. August 19, 1998 through September 17, 1998
Expiration of the Offer.............. September 17, 1998
Pricing Date......................... September 18, 1998
Confirmation to participants......... September 25, 1998
Final payment for Shares............. October 9, 1998
</TABLE>
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.
The Advisor 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 the Advisor 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, one of
whom voted to authorize the Offer, are affiliated with the Advisor and,
therefore, could benefit indirectly from the Offer. The other four directors
are not "interested persons" of the Fund within the meaning of the Investment
Company Act of 1940 (the "1940 Act").
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 exercise 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 the last reported sale price on the New
York Stock Exchange or 95% of net asset value on September 18, 1998 (the
"Pricing Date") of a share of the Fund's Common Stock.
4
<PAGE>
The Fund announced the proposed Offer on April 20, 1998. The net asset
values per share of the Fund's Common Stock at the close of business on April
17, 1998 and August 7, 1998 were $11.02 and $10.18, respectively, and the last
reported sale prices of a share of the Fund's Common Stock on such Exchange on
those dates were $11.75 and $10.75, respectively. As an example, the
Subscription Price would have been $10.47 or $9.67 had the Subscription Price
been determined on those respective dates. 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 September 17, 1998,
the 34th 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 ChaseMellon Shareholder Services,
L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield Park, NJ 07660, which
will receive a fee in the amount of $58,000 (estimated) and 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 also 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
eight (8) 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
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 fifth (5th)
business day after the Expiration Date.
(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
$9.67 per Share.
5
<PAGE>
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.
A PAYMENT BY CHECK, 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 Pricing Date, 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. In the case of any
such stockholder who exercises his right to acquire Shares pursuant to the
Over-Subscription Privilege, any such excess payment which would otherwise be
refunded to him will be applied by the Fund toward payment for Shares acquired
pursuant to exercise of the Over-Subscription Privilege. 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 by money order or check drawn on a bank located in
the United States of America and payable to ChaseMellon Shareholder Services,
L.L.C.
Whichever of the above two methods is used, issuance and delivery of
certificates for the Shares subscribed for are subject to collection of checks
and actual payment pursuant to any notice of guaranteed delivery.
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 August 14, 1998, 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 August 14, 1998. Accordingly, the Fund will notify
stockholders of any such decline and thereby permit them to cancel their
exercise of Rights.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. 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.
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.
6
<PAGE>
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 the Fund's net asset value of $10.18 per share on August 7,
1998, the Fund's net asset value per share would be reduced by approximately
$0.08 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 $0.04 per share as of that date.
7
<PAGE>
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the estimated Subscription
Price of $9.67 per Share, the net proceeds of the offer are estimated to be
$17,614,081, after deducting expenses payable by the Fund estimated at
approximately $145,000. If the Fund in its sole discretion increases the
number of Shares subject to the Offer by 25% in order to satisfy over-
subscriptions, the additional net proceeds will be approximately $22,053,848.
It is anticipated that investment of such proceeds in accordance with the
Fund's investment objective and policies will occur promptly, and in any event
within ten business days, after they 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 75% of its total assets 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 & Poors' 500
Composite Stock Price Index. As of June 30, 1998, the market capitalization of
companies included in the Standard & Poors' 500 Composite Stock Price Index
ranged from $668 million to $296 billion. However, approximately 95% of such
companies had market capitalizations greater than $1.3 billion. The Fund
calculates this requirement by adding the market values of common stocks,
securities convertible into common stocks and rights and warrants to acquire
common stocks to the net option premiums on individual common stocks and the
notional principal of net futures positions, and subtracting from that total
the market values of securities sold short. 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 the Advisor believes are undervalued or
mispriced. The Fund remains fully invested during normal market conditions in
approximately 50 common stocks, as well as other equity securities believed by
the Advisor to represent the best values among the investment opportunities
described above. The Advisor executes the investment philosophy by combining
quantitative research and portfolio management experience to select the equity
securities believed to be most attractive.
Quantitative research uses various valuations and financial characteristics
of companies and securities to identify measures that the Advisor believes are
associated with superior performance. It is also used to estimate the relative
importance of those measures. The result is a research-based process that
produces for further evaluation a list of securities that the Advisor believes
have superior return potential. Quantitative research is also used to
establish investment disciplines and to monitor risk. Portfolio management and
analytical experience are then applied to evaluate additional information that
affects securities prices but may not be appropriate for evaluation with
quantitative techniques. Some of these "qualitative" factors include the
impact of regulatory change, a company's competitive environment, product
developments, and review and analysis of information provided in company
financial reports, regulatory filings and news releases.
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<PAGE>
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 the Advisor 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 the Advisor is incorrect in its expectation of the direction or magnitude
of the change in 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 the Advisor 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
9
<PAGE>
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 the Advisor 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.
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 issued senior
securities or borrow money from banks or other lenders in an amount not
exceeding 15% of the value of its total assets when the Advisor believes that
the return from securities purchased with borrowed funds will be greater than
the cost of the borrowing. Such borrowings will be unsecured. The
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<PAGE>
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.
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.
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<PAGE>
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 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.
YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Advisor and the Fund's other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Advisor is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurance that comparable steps
are being taken by the Fund's other major service providers. At this time,
however, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Fund as a result of the Year 2000 Problem.
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:
<TABLE>
<CAPTION>
DISCOUNT (-)
PRECEDING NET OR
ASSET VALUES PREMIUM
HIGH SALES LOW SALES PER SHARE(2) (+)(3)
QUARTER OR OTHER PRICE PRICE ------------- -------------
PERIOD ENDED PER SHARE(1) PER SHARE(1) HIGH LOW HIGH LOW
---------------- ------------ ------------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996........... $ 8.875 $ 7.75 $ 9.19 $ 8.41 -8.87% -7.85%
June 30, 1996............ 8.50 8.125 9.41 9.07 -9.67% -10.42%
September 30, 1996....... 9.25 8.25 9.54 9.41 -3.04% -12.33%
December 31, 1996........ 10.25 9.125 10.29 10.33 -0.39% -11.67%
March 31, 1997........... 10.00 8.375 9.38 9.34 -6.61% -10.33%
June 30, 1997............ 9.75 8.125 10.25 9.06 -5.26% -10.32%
September 30, 1997....... 10.9375 9.50 10.68 10.39 2.41% -8.75%
December 31, 1997........ 11.50 9.875 10.76 10.42 6.88% -5.23%
March 31, 1998........... 11.875 10.00 11.00 9.11 7.95% 9.77%
June 30, 1998............ 12.0625 10.9375 11.23 10.77 7.41% 1.56%
</TABLE>
- --------
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.
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<PAGE>
2. The net asset value per share calculated by the Fund as of the Friday
preceding 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 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.
The Advisor's address is 1225 17th Street, 26th Floor, Denver, Colorado 80202.
The Advisor is a limited liability company owned and operated by the principal
officers and employees of Denver Investment Advisors, Inc., which served as
the Fund's investment advisor from its inception until March 31, 1995. As of
December 31, 1997, the Advisor had approximately $11.1 billion under
management (including approximately $959 million for 8 investment company
portfolios).
Subject to the general supervision of the Board of Directors, the Advisor
manages the Fund's portfolio, makes decisions with respect to and places
orders for all purchases and sales of the Fund's securities, and
13
<PAGE>
maintains records relating to such purchases and sales. The Fund pays the
Advisor 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.
PORTFOLIO MANAGER
Varilyn K. Schock, C.F.A., has been primarily responsible for the day-to-day
management of the Fund's portfolio since October, 1991. She has been a Vice-
President of the Fund and a Vice-President and Member of the Advisor since
1995, and prior thereto was a Vice President and Director of Quantitative
Strategies of Denver Investment Advisors, Inc. since 1991.
ADMINISTRATOR
American Data Services, Inc. (the "Administrator") furnishes the Fund with
clerical, accounting, bookkeeping and related services, and computes the net
asset value and net income of the Fund. The Administrator assists in the
preparation of annual and semi-annual reports to the Securities and Exchange
Commission, prepares federal and state tax returns, maintains the Fund's
financial accounts and records (except stockholders' records) and generally
assists in all aspects of the Fund's operations. The Fund pays the
Administrator 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.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 48 Wall Street, New York, New York 10286, serves as
the Fund's custodian.
ChaseMellon Shareholder Services, L.L.C., 85 Challenger Road, Overpeck
Centre, Ridgefield Park, NJ 07660, serves as the Fund's Transfer Agent,
Dividend Reinvestment and Cash Purchase Plan Agent, and Subscription Agent for
the Offer.
EXPENSES OF THE FUND
The Fund pays all of its expenses other than those expressly assumed by the
Advisor. The expenses payable by the Fund include: expenses of the Offer,
advisory fees payable to the Advisor and administrative fees payable to the
Administrator; 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; membership dues for investment company
industry trade associations; legal fees; stock exchange listing fees and
expenses; fees and expenses of directors who are not officers, employees or
members of the Advisor; insurance and fidelity bond premiums; and any
extraordinary expenses.
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<PAGE>
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. 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. 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.
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 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.
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.
15
<PAGE>
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.
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
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 (the "Net Asset Value") on the record date, the Fund will
issue to the Agent shares of the Fund's Common Stock, valued at the Net Asset
Value on the record date, in the aggregate amount of the distribution. If the
price plus commission is less than the Net Asset Value on the record date, 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
most recently published by the Fund prior to any purchase. If and to the
extent 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
16
<PAGE>
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 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.
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),
17
<PAGE>
(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 August 3, 1998:
<TABLE>
<CAPTION>
(3) (4)
(2) AMOUNT HELD BY AMOUNT OUTSTANDING
(1) AMOUNT REGISTRANT OR FOR EXCLUSIVE OF AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT SHOWN UNDER(3)
-------------- ----------- ----------------- -------------------
<S> <C> <C> <C>
Common Stock, par value $0.01
per share................... 100,000,000 0 14,692,104
</TABLE>
18
<PAGE>
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
19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE ADVISOR. THE
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fee Table................................................................... 1
Financial Highlights........................................................ 2
The Offer................................................................... 3
Use of Proceeds............................................................. 8
The Fund.................................................................... 8
Management of the Fund...................................................... 13
Distributions and Taxes..................................................... 15
Dividend Reinvestment and Cash
Purchase Plan.............................................................. 16
Capital Stock............................................................... 17
Statement of Additional Information......................................... 19
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,836,513 SHARES OF
COMMON STOCK ISSUABLE UPON
EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
OF COMMON STOCK
BLUE CHIP VALUE FUND, INC.
----------------
PROSPECTUS
----------------
AUGUST 14, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
BLUE CHIP VALUE FUND, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 14, 1998
TABLE OF CONTENTS PAGE
----------------- ----
Investment Objectives and Policies......................................... 2
Management................................................................. 9
Control Persons and Principal Holders of Securities........................ 12
Investment Advisory and Other Services..................................... 13
Brokerage Allocation and Other Practices................................... 15
Tax Status................................................................. 15
Financial Statements....................................................... 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
August 14, 1998 (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.
<PAGE>
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 net 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 1997, 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 securi ties indices and
may also purchase and write options on such futures contracts. All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the Commodity Futures Trading
Commission ("CFTC").
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 the Advisor, there is a
sufficient degree of correlation between price trends
-2-
<PAGE>
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 prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Advisor
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 the Advisor
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.
-3-
<PAGE>
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 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
-4-
<PAGE>
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 because no futures contracts based on
individual equity securities are currently available.
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.
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 benefitting 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
-5-
<PAGE>
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.
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
-6-
<PAGE>
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.
-7-
<PAGE>
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 transac tions. The successful use of purchasing
puts for hedging pur poses depends in part on the Advisor'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 the Advisor
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,
1995, 1996 and 1997, the Fund's portfolio turnover rates were 50.84%, 42.31% and
55.15%, respectively.
-8-
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---- ------------------- -------------------------
<S> <C> <C> <C>
*Kenneth V. Penland, 56 Chairman of the Chairman and Executive
C.F.A. Board and Director Manager, Denver
1225 Seventeenth Street Investment Advisors LLC
26th Floor (since 1995); prior
Denver, Colorado 80202 thereto Chairman of the
Board and Director of
Research, Denver
Investment Advisors,
Inc.; President,
Westcore Funds.
Robert J. Greenebaum 81 Director Independent Consultant;
Room 957 former Chairman of the
111 W. Washington Street Board and Director,
Chicago, Illinois 60602 Selected American
Shares, Inc. and
Selected Special Shares,
Inc., Santa Fe, New
Mexico; Director, United
Asset Management Corp.,
Boston, Massachusetts;
former Chairman of the
Board and Trustee,
Selected Capital
Preservation Trust,
Santa Fe, New Mexico.
Consultant, Denver
Investment Advisors LLC,
and its predecessor,
Denver Investment
Advisors, Inc.
Robert M. Inman 57 Director Real Estate Investment
1450 South Clayton Street Advisor and Consultant
Denver, Colorado 80210 (since 1988) (real
estate development and
construction); former
Director, First National
Bank of Parker, N.A.,
Parker, Colorado.
</TABLE>
-9-
<PAGE>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---- ------------------- -------------------------
Richard C. Schulte 53 Director Private Investor; prior
34507 Squaw Pass Road thereto President,
Evergreen, Colorado 80439 Transportation Service
Systems, Inc. (since
1993); 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.
Roberta M. Wilson, 55 Director Director of Finance,
C.F.A. Denver Board of Water
1600 W. Twelfth Avenue Commissioners, Denver,
Denver, Colorado 80254 Colorado.
*Todger Anderson, 54 President and President and Executive
C.F.A. Director Manager, Denver
1225 Seventeenth Street Investment Advisors LLC
26th Floor (since 1995); prior
Denver, Colorado 80202 thereto President and
Director of Portfolio
Management, Denver
Investment Advisors,
Inc.; Portfolio Manager,
Westcore MIDCO Growth
Fund (since 1986).
Varilyn K. Schock, 36 Vice President Vice President and
C.F.A. Member, Denver
1225 Seventeenth Street Investment Advisors LLC
26th Floor (since 1995); prior
Denver, Colorado 80202 thereto Vice President
and Director of
Quantitative Strategies,
Denver Investment
Advisors, Inc. (since
1991); Portfolio
Manager, Westcore Blue
Chip Fund (since 1991)
and Westcore Small-Cap
Opportunity Fund (since
1993).
-10-
<PAGE>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---- ------------------- -------------------------
W. Bruce McConnel, III 55 Secretary Partner of the law firm
Philadelphia National of Drinker Biddle &
Bank Building Reath LLP, Philadelphia,
1345 Chestnut Street PA
Philadelphia, PA 19107
Jasper R. Frontz 29 Treasurer Director of Mutual Fund
1225 Seventeenth Street Administration, Denver
26th Floor Investment Advisors LLC
Denver, Colorado 80202 (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).
_____________________________
* 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 1997. The other directors taken as a group were either paid or
had accrued directors' fees for 1997 from the Fund in the aggregate amount of
$40,000. 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.
On or about May 21, 1997, the occasion of the Fund's tenth anniversary, on
behalf of the Fund, the Advisor purchased for each of the Fund's disinterested
directors 1,000 Shares of Common Stock of the Fund. The cost to the Advisor was
$9,175 for each disinterested director, or a total of $36,700. Although these
Shares might be deemed to represent additional compensation to the disinterested
directors of the Fund, the Fund did not bear the cost of acquiring the
Shares.
For the period January 1, 1997 through June 30, 1997, the directors
received an annual retainer of $4,000 for serving as directors, plus a meeting
fee of $1,000 for each regular Board meeting attended. Effective July 1, 1997,
the basis of the directors' compensation was amended so that 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. The adjustment to the annual
retainer was made on a pro rata yearly
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basis. The Fund expects the basis of such compensation during 1998 will be an
annual retainer of $6,000 for serving as directors, plus a meeting fee of $1,500
for each regular Board meeting attended.
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, 1997:
COMPENSATION TABLE
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM FUND
NAME OF PERSON FROM FUND PAID TO DIRECTORS
-------------- ------------ -----------------
Robert J. Greenebaum $10,000 $10,000
Robert M. Inman $10,000 $10,000
Kenneth V. Penland $ -0- $ -0-
Richard C. Schulte $10,000 $10,000
Roberta M. Wilson $10,000 $10,000
The Fund has a standing Audit Committee of the Board composed of Messrs.
Inman, Greenebaum 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, 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.
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
(the "1940 Act").
As of July 29, 1998, Cede & Co. (as nominee for the Depository Trust
Company), 55 Water Street, New York, New York 10041, held of record 10,879,630
shares of the Common Stock of the Fund.
As of the date of this Statement of Additional Information, the directors
and officers as a group owned 1.7% of the Common Stock of the Fund.
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INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR
Denver Investment Advisors LLC (the "Advisor") serves as investment advisor
for the Fund and is located at 1225 Seventeenth Street, 26th Floor, Denver,
Colorado 80202. Until March 31, 1995, Denver Investment Advisors, Inc. ("DIA,
Inc.") served as investment advisor for the Fund. On March 31, 1995, the
Advisor purchased certain of the assets and assumed certain of the liabilities
and obligations of DIA, Inc., and the principal officers and all of the
employees of DIA, Inc. became employed by the Advisor. This transaction caused
the Fund's previous investment advisory agreement with DIA, Inc. to terminate
automatically under the 1940 Act. The current investment advisory agreement was
approved by the stockholders at a special meeting held on February 8, 1995. The
current investment advisory agreement is substantially the same as the Fund's
previous investment advisory agreement.
Kenneth V. Penland, Chairman and a director of the Fund, is an officer and
executive manager of the Advisor. Todger Anderson, President and a director
of the Fund, is an officer and executive manager of the Advisor. Varilyn K.
Schock, Vice President of the Fund, is a Vice President and member of the
Advisor. Jasper R. Frontz, Treasurer of the Fund, is an employee of the
Advisor.
For the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
the Advisor (and its predecessor DIA, Inc.) $825,556, $661,385 and $587,436,
respectively, for investment advisory services.
The Investment Advisory Agreement dated April 1, 1995 between the Fund and
the Advisor (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, the Advisor 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 securities. The Agreement also requires the Advisor to prepare or
supervise the preparation of reports to the Securities and Exchange Commission
or any other governmental
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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 semiannual 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 the Advisor 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 the Advisor in the performance of its duties or from reckless disregard
of its obligations and duties under the Agreement.
ADMINISTRATOR
For the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
American Data Services, Inc., the Fund's Administrator $103,945, $94,643 and
$94,708, respectively, for administrative services.
CUSTODIAN
The custodian of the Fund's portfolio securities is The Bank of New York
("BONY"). 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 Registrant; (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 Registrant's operations.
INDEPENDENT AUDITORS
Ernst & Young LLP, 370 Seventeenth Street, Suite 4300, Denver, Colorado
80202, 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.
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BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokers are selected by the Advisor on the basis of best price and
execution for the Fund. In assessing best price and execution available to the
Fund, the Advisor 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, the Advisor 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 the Advisor or its affiliates. The
Advisor 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 the Advisor 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 the
Advisor exercises investment discretion.
Research material furnished by brokers without cost to the Advisor, if any,
may tend to benefit Fund and other clients of the Advisor by improving the
quality of advice given; not all such research material furnished may be used by
the Advisor in connection with the Fund.
During the fiscal years ended December 31, 1997, 1996 and 1995, the Fund
paid brokerage commissions of $162,683, $105,430 and $76,627, 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
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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 gains 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
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
39.6%, 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%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of
35%.
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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). 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 31% of taxable dividends or 31% 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."
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
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
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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.
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, 1997, 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 Ernst & Young 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 Ernst & Young LLP, independent auditors, given upon the authority of
said firm as experts in accounting and auditing. Additional copies of the
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Annual Report may be obtained at no charge by telephoning the Fund at (800) 624-
4190.
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