<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1998
1940 Act File No.811-5003
1933 Act File No. 333-50097
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ___
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1
BLUE CHIP VALUE FUND, INC.
------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1225 Seventeenth Street, 26th Floor, Denver, CO 80202
-----------------------------------------------------
(Address of Principal Executive Offices)
(303) 312-5100
--------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Kenneth V. Penland, Chairman of the Board
1225 Seventeenth Street
26th Floor
Denver, CO 80202
-------------------------------------
(Name and Address of Agent for Service)
___________
With Copies to:
Henry S. Hilles, Jr.
Drinker Biddle & Reath LLP
PNB Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [_]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
If appropriate, check the following boxes:
[_] this [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
[_] this form is filed to register an additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and
the Securities Act registration statement number of the earlier
effective registration statement for the same offering is
______________.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ----------------------------------------------------------------------------------
Proposed Proposed
Title of Amount Maximum Maximum
Securities Being Being Offering Price Aggregate Amount of
Registered Registered/1/ Per Unit/2/ Offering Price Registration Fee
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common 13,620 $11.375 $154,928 $45.70
Stock (par value
$0.01 per share)
</TABLE>
______________________
1. Registrant previously registered 2,282,021 shares on April 14, 1998,
and is registering an additional 13,620 shares necessary for the
offering. The total number of shares registered in connection with
this offering is 2,295,641.
2. As calculated pursuant to Rule 457(c) under the Securities Act of
1933. Based on the average high and low sale prices reported on the
New York Stock Exchange on July 27, 1998.
<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
May 8, 1998 were $11.02 and $10.75, 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 $11.75, 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.
======================================================
PRICE (1) SALES LOAD PROCEEDS TO
FUND (1)(2)
- ------------------------------------------------------
Per Share $ ____ None $ ____
- ------------------------------------------------------
Total $__________ None $__________
======================================================
(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 $__________ and the Total Proceeds will be $__________.
(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
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees 0.61%
Other Expenses 0.33%
-----
Total Annual Expenses 0.94%
- -------------------------------------------------------------
Example 1 year 3 years 5 years 10 years
- -------------------------------------------------------------
You would pay
the following
expenses on a
$1,000
investment,
assuming a 5%
annual return $ 10 $ 30 $ 52 $ 116
- -------------------------------------------------------------
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.
<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 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 8.94 $ 8.47 $ 6.98 $ 7.73 $ 7.63 $ 8.36 $ 6.97 $ 7.83 $ 7.13 $ 6.68
Net Investment Income 0.10 0.13 0.13 0.11 0.20 0.12 0.13 0.14 0.25 0.20
Net Gains or (Losses) on Securities
(both realized and unrealized) 2.56 1.69 2.45 (0.11) 0.76* (0.08) 2.22 (0.25) 1.23 0.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment Operations 2.66 1.82 2.58 0.00 0.96* 0.04 2.35 (0.11) 1.48 0.64
Less Distributions:
Dividends (from net investment
income) 0.10 0.13 0.13 0.11 0.20 0.12 0.13 0.14 0.30 0.19
Distributions (from capital gains) 1.47 1.22 0.95 0.38 0.14 0.00 0.00 0.00 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 0.00 0.48 0.00
Tax Return of Capital/1/ 0.00 0.00 0.01 0.26 0.07 0.17 0.05 0.61 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions 1.57 1.35 1.09 0.75 0.82 0.77 0.96 0.75 0.78 0.19
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 $ 6.97 $ 7.83 $ 7.13
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Market Value,
End of Year $10.9375 $ 9.25 $ 7.625 $ 6.125 $ 7.875 $ 7.75 $ 7.625 $ 6.00
Total Investment Return/2/ 40.5% 39.5% 41.6% (13.2)% 13.7%* 12.4% 44.9% (4.0)%
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 $65,299,686
Ratio of Expenses to Average
Net Assets 0.94% 1.05% 1.15% 1.22% 1.28% 1.42% 1.63% 1.96%
Ratio of Net Investment
Income to Average Net Assets 1.01% 1.39% 1.55% 1.46% 2.55% 1.57% 1.66% 1.96%
Portfolio Turnover Rate 55% 42% 51% 63% 56% 118% 119% 104%
Average Commission Rate Paid/3/ $0.05 $0.05 N/A N/A N/A N/A N/A N/A
1988 1989
------ ------
Per Share Market Value,
End of Year $ 7.00 $ 6.00
Total Investment Return/2/ 30.4% 12.6%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of Year $73,316,564 $66,786,925
Ratio of Expenses to Average
Net Assets 1.98% 2.22%
Ratio of Net Investment
Income to Average Net Assets 3.25% 2.82%
Portfolio Turnover Rate 165% 135%
Average Commission Rate Paid/3/ 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.
/3/ Required for fiscal years beginning on or after September 1, 1995.
* Restated.
-3-
<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.
ASSET COVERAGE PER
DECEMBER TOTAL AMOUNT $1,000 OF
31 OUTSTANDING INDEBTEDNESS
---------- ------------ ------------------
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
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."
-4-
<PAGE>
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.
IMPORTANT DATES TO REMEMBER
EVENT DATE
----- ----
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
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,
-5-
<PAGE>
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.
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 May 8, 1998 were $11.02 and $10.75, 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 $11.75, respectively. As an example, the
Subscription Price would have been $10.47 or $10.21 had the Subscription Price
been determined on those respective dates. The actual Subscription Price will
not be determined until the Pricing Date.
-6-
<PAGE>
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.
-7-
<PAGE>
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
$____ per Share. 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)
-8-
<PAGE>
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.
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.
-9-
<PAGE>
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 $____ per share on August 7, 1998, the Fund's net
asset value per share would be reduced by approximately $____ 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 $____ per share as of that date.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the estimated Subscription
Price of $_____ per Share, the net proceeds of the offer are estimated to be
$__________, after 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 $__________. 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
-10-
<PAGE>
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.
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
-11-
<PAGE>
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.
-12-
<PAGE>
Futures contracts are typically used to reduce risk in a portfolio by
hedging, which involves selecting futures contracts to offset a position in the
portfolio that may experience adverse price movement such that the net effect of
the combined position on investment performance is neutral. The successful use
of futures contracts or options on futures for hedging depends in part on the
degree of correlation between a futures position and the portfolio position.
Because perfect correlation between a futures position and the portfolio
position it was intended to protect is seldom achieved, full protection may not
be obtained and the Fund may still be exposed to risk of some loss. The
profitability of the Fund's trading in futures to seek to increase total return
depends upon the ability of 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.
-13-
<PAGE>
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 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.
-14-
<PAGE>
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 5 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.
-15-
<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
-16-
<PAGE>
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>
PRECEDING NET
ASSET VALUES DISCOUNT (-) OR
HIGH SALES LOW SALES PER SHARE/2/ PREMIUM (+)/3/
QUARTER OR OTHER PRICE PRICE -------------- -----------------
PERIOD ENDED PER SHARE/1/ PER SHARE/1/ HIGH LOW HIGH LOW
- ------------------ ------------ ------------ ------ ------ ------- --------
<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.
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,
-17-
<PAGE>
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 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.
-18-
<PAGE>
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.
-19-
<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
-20-
<PAGE>
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.
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
-21-
<PAGE>
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 investment
income or net capital gain, unless the Fund receives a legal opinion from
independent counsel that the issuance of shares at net
-22-
<PAGE>
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.
-23-
<PAGE>
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),
(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.
-24-
<PAGE>
OUTSTANDING SECURITIES
Set forth below is information with respect to the Fund's outstanding
securities as of August 3, 1998:
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Title of Class Amount Authorized Amount Held by Amount Outstanding
Registrant or for Exclusive of Amount
its Account Shown Under (3)
- --------------------------------------------------------------------------------
Common Stock, 100,000,000 0 14,692,104
par value
$0.01 per share
-25-
<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
-26-
<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
Fee Table..................................................
Financial Highlights.......................................
The Offer..................................................
Use of Proceeds............................................
The Fund...................................................
Management of the Fund.....................................
Distributions and Taxes....................................
Dividend Reinvestment......................................
and Cash Purchase Plan...................................
Statement of Additional....................................
Information..............................................
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
-27-
<PAGE>
BLUE CHIP VALUE FUND, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 14, 1998
TABLE OF CONTENTS PAGE
----------------- ----
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.......................................................
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
-11-
<PAGE>
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.
-12-
<PAGE>
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
-13-
<PAGE>
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.
-14-
<PAGE>
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
-15-
<PAGE>
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%.
-16-
<PAGE>
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
-17-
<PAGE>
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
-18-
<PAGE>
Annual Report may be obtained at no charge by telephoning the Fund at (800) 624-
4190.
-19-
<PAGE>
FORM N-2
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
1. Financial Statements
(a) Included in Part A hereof:
Financial Highlights.
(b) Included in Part B hereof:
The audited financial statements and related notes thereto
as well as the auditor's report thereon for the fiscal year
ended December 31, 1997 are incorporated herein by reference
to the Annual Report to Stockholders as filed with the
Securities and Exchange Commission on February 24, 1998
pursuant to Rule 30b2-1 of the Investment Company Act of
1940 Act (No. 811-5003).
2. Exhibits:
(a) (1) Articles of Incorporation are incorporated herein by
reference to Exhibit 2(a)(1) of Registrant's
Registration Statement on Form N-2 (Nos. 333-50097/811-
5003) filed on April 14, 1998.
(2) Articles of Amendment to the Articles of Incorporation
dated April 2, 1987 are incorporated herein by
reference to Exhibit 2(a)(2) of Registrant's
Registration Statement on Form N-2 (Nos. 333-50097/811-
5003) filed on April 14, 1998.
(3) Articles of Amendment to the Articles of Incorporation
dated July 13, 1989 are incorporated herein by
reference to Exhibit 2(a)(3) of Registrant's
Registration Statement on Form N-2 (Nos. 333-50097/811-
5003) filed on April 14, 1998.
(b) Amended and Restated By-Laws dated March 1, 1990 are
incorporated herein by reference to Exhibit 2(b) of
Registrant's Registration Statement on Form N-2 (Nos. 333-
50097/811-5003) filed on April 14, 1998.
(c) Inapplicable.
(d) (1) See Article VI and Sections 9.1, 9.2 and 9.3 of Article
IX of the Articles of Incorporation which are
incorporated herein by reference as Exhibit 2(a)(1) and
Article Fourth of the Articles Supplementary dated
April 12, 1987 which are incorporated herein by
reference as Exhibit 2(a)(2).
(2) Form of Subscription Certificate is incorporated herein
by reference as Exhibit 2(d)(2) of Registrant's
Registration Statement on Form N-2 (Nos. 333-50097/811-
5003) filed on April 14, 1998.
(e) Dividend Reinvestment and Cash Purchase Plan is incorporated
herein by reference as Exhibit 2(e) of Registrant's
Registration Statement on Form N-2 (Nos. 333-50097/811-5003)
filed on April 14, 1998.
<PAGE>
(f) Inapplicable.
(g) (1) Investment Advisory Agreement dated April 1, 1995
between Registrant and Denver Investment Advisors LLC
is incorporated herein by reference to Exhibit 2(g)(1)
of Registrant's Registration Statement on Form N-2
(Nos. 333-19609/811-5003) filed on December 19, 1996.
(2) Administrative Services Agreement dated January 1, 1989
between Registrant and American Data Services, Inc. is
incorporated herein by reference to Exhibit 2(g)(2) of
Registrant's Registration Statement on Form N-2 (File
Nos. 333-50097/811-5003) filed on April 14, 1998.
(h) Inapplicable.
(i) Inapplicable.
(j) Custody Agreement between the Registrant and The Bank of New
York.
(k) (1) Service Agreement dated March 1, 1990 between the
Registrant and ChaseMellon Shareholder Services, L.L.C.
(formerly known as Mellon Securities Trust Company) as
Transfer Agent, Registrar and Dividend Disbursing Agent
for the Registrant is incorporated herein by reference
to Exhibit 2(k)(1) of Registrant's Registration
Statement on Form N-2 (File Nos. 333-50097/811-5003)
filed on April 14, 1998.
(2) Form of Subscription Agent Agreement between the
Registrant and Chase Mellon Shareholder Services,
L.L.C. is incorporated herein by reference to Exhibit
2(k)(2) of Registrant's Registration Statement on Form
N-2 (File Nos. 333-50097/811-5003) filed on April 14,
1998.
(l) Opinion and Consent of Counsel.
(m) Inapplicable.
(n) Consent of Ernst & Young LLP.
(o) Inapplicable.
(p) Inapplicable.
(q) Inapplicable.
(r) Financial Data Schedule.
-2-
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS
----------------------
Inapplicable.
ITEM 26 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
-------------------------------------------
Inapplicable.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Inapplicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
As of July 29, 1998:
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Stock 4,127
par value $.01
ITEM 29. INDEMNIFICATION
---------------
Section 2-418 of the General Corporation Law of Maryland authorizes
the indemnification of directors and officers of Maryland corporations
under specified circumstances.
Article VII, Section 7.4 of the Articles of Incorporation,
incorporated herein by reference as Exhibit 2(a)(3) hereto, provides
that the Registrant shall indemnify its directors and officers to the
extent permitted by the Maryland General Corporation Law. In no event
will registrant indemnify its directors or officers against any
liability to the Corporation or its security holders to which such
person would otherwise by subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
Section 6.2 of the By-Laws, incorporated herein by reference as
Exhibit 2(b) hereto, provides that the Registrant shall indemnify its
directors and officers to the full extent permissible under applicable
state corporation law, the Securities Act of 1933, or the Investment
Company Act of 1940, provided that such indemnification shall not
protect any such person against any liability to the Corporation or
any stockholder thereof to which such person would otherwise by
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless
-3-
<PAGE>
disregard of the duties involved in the conduct of his office.
Indemnification of the Registrant's Advisor is provided for in Section
8 of the Investment Advisory Agreement, incorporated herein by
reference as Exhibit 2(g)(1).
Registrant has obtained from Gulf Insurance Company, a directors' and
officers' liability policy covering certain types of errors and
omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Registrant's directors,
officers, and controlling persons pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
----------------------------------------------------
Denver Investment Advisors LLC (the "Advisor") performs investment
advisory services for the Registrant and certain other investment
advisory customers. A description of the Advisor is included in Parts
A and B of this Registration Statement. For information regarding the
business, profession, vocation, or employment of a substantial nature
that each director, executive officer, partner or member of the
Advisor has been engaged in for his or her own account or in the
capacity of director, officer, employee, partner, trustee or member,
reference is made to the Form ADV (File #801-47933) filed by the
Advisor under the Investment Advisers Act of 1940.
-4-
<PAGE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
(a) Denver Investment Advisors LLC, 1225 17th Street, Denver,
Colorado 80202 (records relating to its functions as investment
advisor).
(b) The Bank of New York, 48 Wall Street, New York, New York 10286
(records relating to its function as custodian).
(c) ChaseMellon Shareholder Services, L.L.C., 85 Challenger Road,
Overpeck Centre, Ridgefield Park, NJ 07660 (records relating to
its function as transfer agent, dividend disbursing agent,
dividend and cash purchase plan agent, and subscription agent).
(d) American Data Services, Inc., Hauppauge Corporate Center, 150
Motor Parkway, Suite 109, Hauppauge, New York 11788 (records
relating to its function as administrator and accounting agent).
(e) Drinker Biddle & Reath LLP, PNB Building, 1345 Chestnut Street,
Philadelphia, PA 19107 (Registrant's Articles of Incorporation,
By-Laws, and Minute Books).
ITEM 32. MANAGEMENT SERVICES
-------------------
Inapplicable.
ITEM 33. UNDERTAKINGS
------------
Registrant undertakes to suspend the offering of shares until the
Prospectus is amended if (1) subsequent to the effective date of its
Registration Statement, the net asset declines more than ten percent
from its net asset value as of the effective date of the Registration
Statement or (2) the net asset value increases to an amount greater
than its net proceeds as stated in the Prospectus.
Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, a Statement of Additional
Information.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, and State of Colorado, on the 31st day of
July, 1998.
BLUE CHIP VALUE FUND, INC.
By: /s/ Kenneth V. Penland
------------------------
Kenneth V. Penland
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement of Blue Chip Value Fund, Inc. has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Kenneth V. Penland Chairman of the Board
- ---------------------- and Director (Principal July 31, 1998
Kenneth V. Penland Executive Officer)
/s/ Todger Anderson President July 31, 1998
- ----------------------
Todger Anderson
Robert M. Inman* Director July 31, 1998
Roberta M. Wilson* Director July 31, 1998
Richard C. Schulte* Director July 31, 1998
Robert J. Greenebaum* Director July 31, 1998
/s/ Jasper R. Frontz Treasurer (Principal July 31, 1998
- ---------------------- Accounting Officer and
Jasper R. Frontz Principal Financial
Officer)
*By: /s/ Kenneth V. Penland
-----------------------
Kenneth V. Penland
Attorney-in-fact
-6-
<PAGE>
BLUE CHIP VALUE FUND, INC.
Power of Attorney
I hereby appoint Kenneth V. Penland or Steven G. Wine attorney for me and
in my name and on my behalf to sign any Registration Statement or Amendment
thereto of BLUE CHIP VALUE FUND, INC. to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, and generally to do and
perform all things necessary to be done in that connection.
I have signed this Power of Attorney on November 17, 1996.
/s/ Robert M. Inman
-------------------
Robert M. Inman
-7-
<PAGE>
BLUE CHIP VALUE FUND, INC.
Power of Attorney
I hereby appoint Kenneth V. Penland or Steven G. Wine attorney for me and
in my name and on my behalf to sign any Registration Statement or Amendment
thereto of BLUE CHIP VALUE FUND, INC. to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, and generally to do and
perform all things necessary to be done in that connection.
I have signed this Power of Attorney on October 15, 1996.
/s/ Roberta M. Wilson
---------------------
Roberta M. Wilson
-8-
<PAGE>
BLUE CHIP VALUE FUND, INC.
Power of Attorney
I hereby appoint Kenneth V. Penland or Steven G. Wine attorney for me and
in my name and on my behalf to sign any Registration Statement or Amendment
thereto of BLUE CHIP VALUE FUND, INC. to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, and generally to do and
perform all things necessary to be done in that connection.
I have signed this Power of Attorney on October 14, 1996.
/s/ Richard C. Schulte
----------------------
Richard C. Schulte
-9-
<PAGE>
BLUE CHIP VALUE FUND, INC.
Power of Attorney
I hereby appoint Kenneth V. Penland or Steven G. Wine attorney for me and
in my name and on my behalf to sign any Registration Statement or Amendment
thereto of BLUE CHIP VALUE FUND, INC. to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, and generally to do and
perform all things necessary to be done in that connection.
I have signed this Power of Attorney on October 15, 1996.
/s/ Robert J. Greenebaum
------------------------
Robert J. Greenebaum
-10-
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO.
- ----------
2(j) - Custody Agreement between the Registrant and The Bank of New York.
2(1) - Opinion and Consent of Counsel.
2(n) - Consent of Ernst & Young LLP.
2(r) - Financial Data Schedule.
<PAGE>
Exhibit 2(J)
CUSTODY AGREEMENT
-----------------
Agreement made as of this 13th day of May, 1998, between BLUE CHIP VALUE
FUND, INC., a Maryland corporation organized and existing under the laws of the
State of Maryland, having its principal office and place of business at
**(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York
corporation authorized to do a banking business, having its principal office and
place of business at 48 Wall Street, New York, New York 10286 (hereinafter
called the "Custodian").
W I T N E S S E T H:
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "Authorized Persons" shall be deemed to include any person, whether
or not such person is an officer or employee of the Fund, duly authorized by the
Board of Trustees of the Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-
entry system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Authorized Persons, and the term Certificate shall also
include Instructions.
<PAGE>
5. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
6. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit or
any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors specifically approving deposits therein by the
Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
12. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
-2-
<PAGE>
14. "FX Transaction" shall mean any transaction for the purchase by one
party of an agreed amount in one Currency against the sale by it to the other
party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted by
electronic or telecommunications media including S.W.I.F.T., computer-to-
computer interface, dedicated transmission line, facsimile transmission (which
may be signed by an Authorized Person or unsigned) and tested telex.
16. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
17. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually received
by the Custodian from an Authorized Person or from a person reasonably believed
by the Custodian to be an Authorized Person.
-3-
<PAGE>
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund, each of
which is, in the case of a Fund having Series, allocated to a particular Series.
27. "Stock Index Futures contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
-4-
<PAGE>
28. "Stock Index option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and money at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all money owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and money is not
finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of securities collateral. Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by
-5-
<PAGE>
the Custodian to deposit in the Depository all Securities specifically allocated
to such Series eligible for deposit therein, and to utilize the Depository to
the extent possible with respect to such Securities in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities and money deposited
in either the Book-Entry System or the Depository will be represented in
accounts which include only assets held by the Custodian for customers,
including, but not limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically allocated on the
Custodian's books to the separate account for the applicable Series. Prior to
the Custodian's accepting, utilizing and acting with respect to Clearing Member
confirmations for options and transactions in Options for a Series as provided
in this Agreement, the Custodian shall have received a certified resolution of
the Fund's Board of Directors, substantially in the form of Exhibit C hereto,
approving, authorizing and instructing the Custodian on a continuous and on-
going basis, until instructed to the contrary by a Certificate actually received
by the Custodian, to accept, utilize and act in accordance with such
confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all money received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of
the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from the account of the Fund for a Series, either
hereunder or with any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are transferred to the account
of the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the
-6-
<PAGE>
Custodian's account on the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall furnish the Fund with a
detailed statement, on a per Series basis, of the Securities and money held by
the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the Book-
Entry System, shall be held by the Custodian in that form; all other Securities
held hereunder may be registered in the name of the Fund, in the name of any
duly appointed registered nominee of the Custodian as the Custodian may from
time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the Book-
Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) Collect all income, dividends and distributions due or payable;
(b) Give notice to the Fund and present payment and collect the
amount payable upon such Securities which are called, but only if either (i) the
Custodian receives a written notice of such call, or (ii) notice of such call
appears in one or more of the publications listed in Appendix C annexed hereto,
which may be amended at any time by the Custodian without the prior notification
or consent of the Fund;
(c) Present for payment and collect the amount payable upon all
Securities which mature;
(d) Surrender Securities in temporary form for definitive
Securities;
-7-
<PAGE>
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect;
(f) Hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any Securities
held by the Custodian for such Series hereunder; and
(g) Deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise of
any conversion privilege and receive and hold hereunder specifically allocated
to such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger consolidation, recapitalization or sale of assets of any corporation, and
receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
-8-
<PAGE>
(d) Make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) Present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates are
available. The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply with Section
17(f) of the Investment Company Act of 1940, as amended, in connection with the
purchase, sale, settlement, closing-out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing-out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or futures commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in book-
entry form or otherwise, in the name of the Custodian (or any nominee of the
Custodian) as custodian for the Fund, provided, however, that notwithstanding
the foregoing, payments to or deliveries from the Margin Account, and payments
with respect to Securities to which a Margin Account relates, shall be made in
accordance with the terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available, the Custodian
shall, notwithstanding any provision in this Agreement to the contrary, make
payment for any Futures Contract, Option, or Futures Contract Option for which
such instruments or such certificates are available only against the delivery to
the Custodian of such instrument or such certificate, and deliver any Futures
Contract, Option or Futures Contract Option for which such instruments or such
certificates are available only against receipt by the Custodian of payment
therefor. Any such instrument or certificate delivered to the Custodian shall be
held by the Custodian hereunder in accordance with, and subject to, the
provisions of this Agreement.
-9-
<PAGE>
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the money held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale; (g) the name of
the broker through whom or the person to whom the sale was made, and the name of
the clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Certificate
against payment of the total amount payable to the Fund upon such sale, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
-10-
<PAGE>
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
option purchased: (a) the Series to which such Option is specifically allocated;
(b) the type of Option (put or call); (c) the name of the issuer and the title
and number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and (i) the name of the broker to whom payment
is to be made. The Custodian shall pay, upon receipt of a Clearing Member's
statement confirming the purchase of such Option held by such Clearing Member
for the account of the Custodian (or any duly appointed and registered nominee
of the Custodian) as custodian for the Fund, out of money held for the account
of the Series to which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e)
-11-
<PAGE>
the exercise price per share; (f) the total amount to be paid by the Fund upon
such exercise; and (g) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of the Securities
underlying the Call Option which was exercised, pay out of the money held for
the account of the Series to which such Call Option was specifically allocated
the total amount payable to the Clearing Member through whom the Call Option was
exercised, provided that the same conforms to the total amount payable as set
forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Option was exercised.
The Custodian shall, upon receipt of the amount payable upon the exercise of the
Put option, deliver or direct the Depository to deliver the Securities
specifically allocated to such Series, provided the same conforms to the amount
payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon
-12-
<PAGE>
the underlying Securities specified in the Certificate specifically allocated to
such Series such restrictions as may be required by such receipts.
Notwithstanding the foregoing, the Custodian has the right, upon prior written
notification to the Fund, at any time to refuse to issue any receipts for
Securities in the possession of the Custodian and not deposited with the
Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and (i) the amount of cash and/or the amount and kind
of Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
-13-
<PAGE>
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the money held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of Options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among Clearing Members in Stock Index options and
make the deposits into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option:
-14-
<PAGE>
(a) the Series for which such Stock Index Option was written; (b) such
information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the money held for the account of the Series to which
such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with
-15-
<PAGE>
such expiration, exercise, or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contract entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the money specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or
-16-
<PAGE>
received; (c) the broker, dealer, or futures commission merchant to or from whom
payment or delivery is to be made or received; and (d) the amount of cash and/or
Securities to be withdrawn from the Senior Security Account for such Series. The
Custodian shall make the payment or delivery specified in the Certificate, and
delete such Futures Contract from the statements delivered to the Fund pursuant
to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying: (a)
the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act of 1940, as amended.
Each delivery of such a Certificate by the Fund shall constitute (x) a
representation and warranty by the Fund that the Rule 17f-6 agreement has been
duly authorized, executed and delivered by the Fund and the futures commission
merchant and complies with Rule 17f-6, and (y) an agreement by the Fund that the
Custodian shall not be liable for the acts or omissions of any such futures
commission merchant.
-17-
<PAGE>
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price; (f) the dates
of purchase and settlement; (g) the amount of premium to be paid by the Fund
upon such purchase; (h) the name of the broker or futures commission merchant
through whom such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made. The Custodian shall
pay out of the money specifically allocated to such Series, the total amount to
be paid upon such purchase to the broker or futures commissions merchant through
whom the purchase was made, provided that the same conforms to the amount set
forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Futures Contract Option was specifically allocated; (b) the
type of Futures Contract Option (put or call); (c) the type of Futures Contract
and such other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker or futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall
-18-
<PAGE>
make, out of the money and Securities specifically allocated to such Series, the
payments, if any, and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the money and Securities specifically allocated to such
Series the deposits into the Senior Security Account, if any, as specified in
the Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d)
-19-
<PAGE>
the name of the broker or futures commission merchant through whom such Futures
Contract Option is exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account for such Series, if
any. The Custodian shall, upon its receipt of the net total amount payable to
the Fund, if any, specified in the Certificate, make out of the money and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits to and/or withdrawals from the Margin Account, if any,
shall be made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract option identical to
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contact Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article VI
hereof.
-20-
<PAGE>
10. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying: (a)
the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act of 1940, as amended.
Each delivery of such a Certificate by the Fund shall constitute (x) a
representation and warranty by the Fund that the Rule 17f-6 agreement has been
duly authorized, executed and delivered by the Fund and the futures commission
merchant and complies with Rule 17f-6, and (y) an agreement by the Fund that the
Custodian shall not be liable for the acts or omissions of any such futures
commission merchant.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the Series
for which such short sale was made; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing-out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of closing-
out and settlement; (e) the purchase price per unit; (f) the net total amount
payable to the
-21-
<PAGE>
Fund upon such closing-out; (g) the net total amount payable to the broker upon
such closing-out; (h) the amount of cash and the amount and kind of Securities
to be withdrawn, if any, from the Margin Account; (i) the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Senior
Security Account; and (j) the name of the broker through whom the Fund is
effecting such closing-out. The Custodian shall, upon receipt of the net total
amount payable to the Fund upon such closing-out, and the return and/or
cancellation of the receipts, if any, issued by the Custodian with respect to
the short sale being closed-out, pay out of the money held for the account of
the Fund to the broker the net total amount payable to the broker, and make the
withdrawals from the Margin Account and the Senior Security Account, as the same
are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase Agreement
with respect to Securities and money held by the Custodian hereunder, the Fund
shall deliver to the Custodian a Certificate, or in the event such Reverse
Repurchase Agreement is a Money Market Security, a Certificate or Oral
Instructions specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund in connection
with such Reverse Repurchase Agreement and specifically allocated to such
Series; (c) the broker or dealer through or with whom the Reverse Repurchase
Agreement is entered; (d) the amount and kind of Securities to be delivered by
the Fund to such broker or dealer; (e) the date of such Reverse Repurchase
Agreement; and (f) the amount of cash and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in a Senior
Security Account for such Series in connection with such Reverse Repurchase
Agreement. The Custodian shall, upon receipt of the total amount payable to the
Fund specified in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security Account,
specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be
-22-
<PAGE>
terminated; and (f) the amount of cash and/or the amount and kind of Securities
to be withdrawn from the Senior Securities Account for such Series. The
Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate or Oral Instructions, make the
payment to the broker or dealer, and the withdrawals, if ally, from the Senior
Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver or
cause to be delivered to the Custodian a Certificate specifying with respect to
each such loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities, (c) the
number of shares or the principal amount loaned, (d) the date of loan and
delivery, (e) the total amount to be delivered to the Custodian against the loan
of the Securities, including the amount of cash collateral and the premium, if
any, separately identified, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on New York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate), and (f) the name of the broker, or financial
institution from which the Securities will be returned. The Custodian shall
receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the money held for the account of the Fund, the total amount payable
upon such return of Securities as set forth in the Certificate.
-23-
<PAGE>
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a
-24-
<PAGE>
copy of the statement furnished the Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash
and/or Securities are maintained in a Collateral Account for any Series, the
Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate specifying the then market value of the Securities
described in such statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any outstanding Put
Option guarantee letter or similar document, the Fund shall promptly specify in
a Certificate the additional cash and/or Securities to be deposited in such
Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate, as the case may be, the Custodian shall pay out of the money held
for the account of each Series the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.
-25-
<PAGE>
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price;
and
(b) the amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of the
money held by the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the Fund directing
the Transfer Agent to redeem the Shares; and
(b) a Certificate specifying the number and Series of Shares
redeemed; and
(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the money held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
-26-
<PAGE>
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on behalf of
any Series which results in an overdraft because the money held by the Custodian
in the separate account for such Series shall be insufficient to pay the total
amount payable upon a purchase of Securities specifically allocated to such
Series, as set forth in a Certificate or Oral Instructions, or which results in
an overdraft in the separate account of such Series for some other reason, or if
the Fund is for any other reason indebted to the Custodian with respect to a
Series, including any indebtedness to The Bank of New York under the Fund's Cash
Management and Related Services Agreement, if any (except a borrowing for
investment or for temporary or emergency purposes using Securities as collateral
pursuant to a separate agreement and subject to the provisions of paragraph 2 of
this Article), such overdraft or indebtedness shall be deemed to be a loan made
by the Custodian to the Fund for such Series payable on demand and shall bear
interest from the date incurred at a rate per annum (based on a 360-day year for
the actual number of days involved) equal to 1/2% over Custodian's prime
commercial lending rate in effect from time to time, such rate to be adjusted on
the effective date of any change in such prime commercial lending rate but in no
event to be less than 6% per annum. In addition, the Fund hereby agrees that
the Custodian shall have a continuing lien, security interest, and security
entitlement in and to any property including any investment property or any
financial asset specifically allocated to such Series at any time held by it for
the benefit of such Series or in which the Fund may have an interest which is
then in the Custodian's possession or control or in possession or control of any
third party acting in the Custodian's behalf. The Fund authorizes the
Custodian, in its sole discretion, at any time to charge any such overdraft or
indebtedness together with interest due thereon against any balance of account
standing to such Series, credit on the Custodian's books. In addition, the Fund
hereby covenants that on each Business Day on which either it intends to enter a
Reverse Repurchase Agreement and/or otherwise borrow from a third party, or
which next succeeds a Business Day on which at the close of business the Fund
had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall
prior to 9 a.m., New York City time, advise the Custodian, in writing, of each
such borrowing, shall specify the Series to which the same relates, and shall
not incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed
-27-
<PAGE>
by any such bank setting forth the amount which such bank will loan to the Fund
against delivery of a stated amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the Series to which such borrowing relates; (b) the name of the
bank, (c) the amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly endorsed by the
Fund, or other loan agreement,(d) the time and date, if known, on which the loan
is to be entered into, (e) the date on which the loan becomes due and payable,
(f) the total amount payable to the Fund on the borrowing date, (g) the market
value of Securities to be delivered as collateral for such loan, including the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities, and (h) a statement specifying whether such loan
is for investment purposes or for temporary or emergency purposes and that such
loan is in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund in order
for the Fund to transmit Instructions to the Custodian (the "Software"), the
Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund agrees not to sell, reproduce, lease or otherwise provide,
directly or indirectly, the Software or any portion thereof to any third party
without the prior written consent of the Custodian.
-28-
<PAGE>
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made available to
the Fund by utilizing the Software (other than data bases relating solely to the
assets of the Fund and transactions with respect thereto), and any proprietary
data, processes, information and documentation (other than which are or become
part of the public domain or are legally required to be made available to the
public) (collectively, the "Information"), are the exclusive and confidential
property of the Custodian. The Fund shall keep the Information confidential by
using the same care and discretion that the Fund uses with respect to its own
confidential property and trade secrets and shall neither make nor permit any
disclosure without the prior written consent of the Custodian. Upon termination
of this Agreement or the Software license granted hereunder for any reason, the
Fund shall return to the Custodian all copies of the Information which are in
its possession or under its control or which the Fund distributed to third
parties.
4. The Custodian reserves the right to modify the Software from time to time
upon reasonable prior notice and the Fund shall install new releases of the
Software as the Custodian may direct. The Fund agrees not to modify or attempt
to modify the Software without the Custodian's prior written consent. The Fund
acknowledges that any modifications to the Software, whether by the Fund or the
Custodian and whether with or without the Custodian's consent, shall become the
property of the Custodian.
5. The Custodian makes no warranties or representations of any kind with
regard to the Software or the method(s) by which the Fund may transmit
Instructions to the Custodian, express or implied, including but not limited to
any implied warranties of merchantability or fitness for a particular purpose.
6. Where the method for transmitting Instructions by the Fund involves an
automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
-29-
<PAGE>
7. (a) The Fund agrees that where it delivers to the Custodian instructions
hereunder, it shall be the Fund's sole responsibility to ensure that only
persons duly authorized by the Fund transmit such Instructions to the Custodian.
The Fund will cause all persons transmitting Instructions to the Custodian to
treat applicable user and authorization codes, passwords and authentication keys
with extreme care, and irrevocably authorizes the Custodian to act in accordance
with and rely upon Instructions received by it pursuant hereto.
(b) The Fund hereby represents, acknowledges and agrees that it is fully
informed of the protections and risks associated with the various methods of
transmitting Instructions to the Custodian and that there may be more secure
methods of transmitting instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees that the security procedures (if
any) to be followed in connection with the Fund's transmission of Instructions
provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
8. The Fund hereby represents, warrants and covenants to the Custodian that
this Agreement has been duly approved by a resolution of its Board of Directors,
and that its transmission of Instructions pursuant hereto shall at all times
comply with the Investment Company Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the business day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian for
each Series' Securities for which the primary market is outside the United
States ("Foreign Securities") and other assets, the foreign banking institutions
and foreign securities depositories and clearing agencies designated on Schedule
I hereto ("Foreign Sub-Custodians") to carry out their
-30-
<PAGE>
respective responsibilities in accordance with the terms of the sub-custodian
agreement between each such Foreign Sub-Custodian and the Custodian, copies of
which have been previously delivered to the Fund and receipt of which is hereby
acknowledged (each such agreement, a "Foreign Sub-Custodian Agreement"). Upon
receipt of a Certificate, together with a certified resolution acceptable to the
Custodian of the Fund's Board of Directors, the Fund may designate any
additional foreign sub-custodian with which the Custodian has an agreement for
such entity to act as the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to Schedule I. Upon
receipt of a Certificate from the Fund, the Custodian shall cease the employment
of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the form
previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each Series of
the Fund the Foreign Securities of such Series held by each Foreign Sub-
Custodian. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims by the Fund or any
Series against a Foreign sub-custodian as a consequence of any loss, damage,
cost, expense, liability or claim sustained or incurred by the Fund or any
Series if and to the extent that the Fund or such Series has not been made whole
for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms of
the applicable Foreign Sub-Custodian Agreement, use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books and records
relate to the performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices, reports or
other written information received pertaining to the Fund's Foreign Securities,
including without limitation, notices of corporate action, proxies and proxy
-31-
<PAGE>
solicitation materials.
7. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
8. Notwithstanding any other provision in this Agreement to the contrary,
with respect to any losses or damages arising out of or relating to any actions
or omissions of any Foreign Sub-Custodian the sole responsibility and liability
of the Custodian shall be to take appropriate action at the Fund's expense to
recover such loss or damage from the Foreign Sub-Custodian. It is expressly
understood and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX
Transaction is specifically allocated; (b) the type and amount of Currency to be
purchased by the Fund; (c) the type and amount of Currency to be sold by the
Fund; (d) the date on which the Currency to be purchased is to be delivered; (e)
the date on which the Currency to be sold is to be delivered; and (f) the name
of the person from whom or through whom such currencies are to be purchased and
sold. Unless otherwise instructed by a Certificate or Oral Instructions, the
Custodian shall deliver, or shall instruct a Foreign SubCustodian to deliver,
the Currency to be sold on the date on which such delivery is to be made, as set
forth in the Certificate, and shall receive, or instruct a Foreign Sub-Custodian
to receive, the Currency to be purchased on the date as set forth in the
Certificate.
2. Where the Currency to be sold is to be delivered on the same day as the
Currency to be purchased, as specified in the Certificate or Oral Instructions,
the Custodian or a Foreign Sub-Custodian may arrange for such deliveries and
receipts to be made in accordance with the customs prevailing from time to time
among brokers or dealers in Currencies, and such receipt and
-32-
<PAGE>
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue a
standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in Securities
or holding Currency. Without limiting the foregoing, the Fund shall bear the
risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign
depositories, exchange controls, asset freezes or other laws, rules, regulations
or orders shall prohibit or impose burdens or costs on the transfer to, by or
for the account of the Fund of Securities or any cash held outside the Fund's
Jurisdiction or denominated in Currency other than its home jurisdiction or the
conversion of cash from one Currency into another currency. The Custodian shall
not be obligated to substitute another Currency for a Currency (including a
Currency that is a component of a Composite Currency Unit) whose
transferability, convertibility or availability has been affected by such law,
regulation, rule or procedure. Neither the Custodian nor any Foreign Sub-
Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
-33-
<PAGE>
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI, neither the
Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for any such loss or
damage arising out of its own negligence or willful misconduct. In no event
shall the Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of business, arising
under or in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action. The Custodian
may, with respect to questions of law arising hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of counsel to the
Fund at the expense of the Fund, or of its own counsel, at the expense of the
Custodian, and shall be fully protected with respect to anything done or omitted
by it in good faith in conformity with such advice or opinion. The Custodian
shall be liable to the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any negligence or
willful misconduct on the part of the Custodian or any of its employees or
agents.
2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the propriety
of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the
Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
(e) The legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or
-34-
<PAGE>
obligation periodically to check or notify the Fund that the amount of such cash
collateral held by it for the Fund is sufficient collateral for the Fund, but
such duty or obligation shall be the sole responsibility of the Fund. In
addition, the Custodian shall be under no duty or obligation a to see that any
broker, dealer or financial institution to which portfolio Securities of the
Fund are lent pursuant to Article X of this Agreement makes payment to it of any
dividends or interest which are payable to or for the account of the Fund during
the period of such loan or at the termination of such loan, provided, however,
that the Custodian shall promptly notify the Fund in the event that such
dividends or interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of money and/or Securities
held in any Margin Account, Senior Security Account or Collateral Account in
connection with transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer, futures commission
merchant or Clearing Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to see that any
payment received by the Custodian from any broker, dealer, futures commission
merchant or Clearing Member is the amount the Fund is entitled to receive, or to
notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian
of, any money, whether or not represented by any check, draft, or other
instrument for the payment of money, received by it on behalf of the Fund until
the Custodian actually receives and collects such money directly or by the final
crediting of the account representing the Fund's interest at the Book-Entry
System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received timely notice from
the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action, suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or
-35-
<PAGE>
liability, unless indemnity satisfactory to it against all expense and liability
be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take action to
effect collection of any amount due to the Fund from the Transfer Agent of the
Fund nor to take any action to effect payment or distribution by the Transfer
Agent of the Fund of any amount paid by the Custodian to the transfer Agent of
the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action to
effect collection of any amount if the Securities upon which such amount is
payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign Sub-Custodians
pursuant to Article XVI appoint one or more banking institutions as Depository
or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-Custodian or Co-
Custodians including, but not limited to, banking institutions located in
foreign countries, of Securities and money at any time owned by the Fund, upon
such terms and conditions as may be or contained in an agreement executed by the
Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian, for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such Series under the
provisions of its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian all out-of-pocket expenses and such compensation as may be agreed
upon from time to time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses with respect to a Series incurred by
the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series, pro rata share (based on such Series, net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability
-36-
<PAGE>
or expense, including counsel fees, for which it shall be entitled to
reimbursement under the provisions of this Agreement. The expenses for which the
Custodian shall be entitled to reimbursement hereunder shall include, but are
not limited to, the expenses of sub-custodians and foreign branches of the
Custodian incurred in settling outside of New York City transactions involving
the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed by
the Custodian to be a Certificate. The Custodian shall be entitled to rely upon
any Oral Instructions actually received by the Custodian hereinabove provided
for. The Fund agrees to forward to the Custodian a Certificate or facsimile
thereof confirming such Oral Instructions in such manner so that such
Certificate or facsimile thereof is received by the Custodian, whether by hand
delivery, telecopier or other similar device, or otherwise, by the close of
business of the same day that such Oral Instructions are given to the Custodian.
The Fund agrees that the fact that such confirming instructions are not
received, or that contrary instructions are received, by the Custodian shall in
no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral Instructions given to
the Custodian hereunder concerning such transactions provided such instructions
reasonably appear to have been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument, instruction
or notice received by the Custodian and reasonably believed by the Custodian to
be given in accordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing, the Custodian
shall be under no duty to inquire into, and shall not be liable for, the
accuracy of any statements or representations contained in any such instrument
or other notice including, without limitation, any specification of any amount
to be paid to a broker, dealer, futures commission merchant or Clearing Member.
12. The books and records pertaining to the Fund which are in the possession
of the Custodian shall be the property of the Fund. Such books and records
shall be prepared and maintained as required by the Investment Company Act of
1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
-37-
<PAGE>
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry System,
the Depository or O.C.C., and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the Custodian
harmless from all liability, claims, losses and demands whatsoever, including
attorney's fees, howsoever arising or incurred because of or in connection with
this Agreement, except for any such liability, claim, loss and demand arising
out of the Custodian's own negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agreement, including, without
limitation, those contained in Article XVI and XVII the Custodian may deliver
and receive Securities, and receipts with respect to such Securities, and
arrange for payments to be made and received by the Custodian in accordance with
the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever except
such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
-38-
<PAGE>
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than ninety (90) days after the date of giving of such notice.
In the event such notice is given by the Fund, it shall be accompanied by a copy
of a resolution of the Board of Directors of the Fund, certified by the
Secretary or any Assistant Secretary, electing to terminate this Agreement and
designating a successor custodian or custodians, each of which shall be a bank
or trust company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the Custodian, the Fund
shall, on or before the termination date, deliver to the Custodian a copy of a
resolution of the Board of Directors of the Fund, certified by the Secretary or
any Assistant Secretary, designating a successor custodian or custodians. In
the absence of such designation by the Fund, the Custodian may designate a
successor custodian which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits. Upon the date set
forth in such notice this Agreement shall terminate, and the Custodian shall
upon receipt of a notice of acceptance by the successor custodian on that date
deliver directly to the successor custodian all Securities and money then owned
by the Fund and held by it as Custodian, after deducting all fees, expenses and
other amounts for the payment or reimbursement of which it shall then be
entitled.
2. If a successor custodian is not designated by the Fund or the Custodian in
accordance with the preceding paragraph, the Fund shall upon the date specified
in the notice of termination of this Agreement and upon the delivery by the
Custodian of all Securities (other than Securities held in the Book-Entry System
which cannot be delivered to the Fund) and money then owned by the Fund be
deemed to be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other than the duty
with respect to Securities held in the Book Entry System which cannot be
delivered to the Fund to hold such Securities hereunder in accordance with this
Agreement.
-39-
<PAGE>
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the present
Authorized Persons of the Fund under its seal, setting forth the names and the
signatures of the present Authorized Persons of the Fund. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event that any
such present Authorized Person ceases to be an Authorized Person of the Fund, or
in the event that other or additional Authorized Persons are elected or
appointed. Until such new Certificate shall be received, the Custodian shall be
fully protected in acting under the provisions of this Agreement or Oral
Instructions upon the signatures of the Authorized Persons as set forth in the
last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by this
Agreement to be given to the Custodian, shall be sufficiently given if addressed
to the Custodian and mailed or delivered to it at its offices at 90 Washington
Street, New York, New York 10286, or at such other place as the custodian may
from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by this
Agreement to be given to the Fund shall be sufficiently given if addressed to
the Fund and mailed or delivered to it at its office at the address for the Fund
first above written, or at such other place as the Fund may from time to time
designate in writing.
4. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties within the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the State
of New York without giving effect to conflict of laws principles thereof. Each
party hereby consents to the jurisdiction of a state or federal court situated
in New York City, New York in connection with any dispute arising hereunder and
hereby waives its right to trial by jury.
-40-
<PAGE>
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
BLUE CHIP VALUE FUND, INC.
[SEAL] By: /s/ Kenneth V. Penland
--------------------------
Attest:
/s/ Jasper R. Frontz
- -------------------------------
THE BANK OF NEW YORK
[SEAL] By: /s/ Stephen E. Grunston
-------------------------
Name: Stephen E. Grunston
Title: Vice President
Attest:
/s/ Richard Yacovone
- -------------------------------
-41-
<PAGE>
APPENDIX A
I, Kenneth V. Penland, Chairman and CEO and I, Jasper R. Frontz, Treasurer of
BLUE CHIP VALUE FUND, INC., a Maryland corporation (the "Fund"), do hereby
certify that:
The following persons have been duly authorized in conformity with the Fund's
Articles of Incorporation and By-Laws to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
_____________________ __________________ ______________
Kenneth V. Penland Chairman and CEO /s/ Kenneth V. Penland
Todger Anderson President /s/ Todger Anderson
Jasper R. Frontz Treasurer /s/ Jasper R. Frontz
Peggy L. Glenn Asst. Treasurer /s/ Peggy L. Glenn
Sonja Balstad Portfolio Accounting /s/ Sonja Balstad
Karol Taylor Portfolio Accounting /s/ Karol Taylor
Janet Tucker Portfolio Accounting /s/ Janet Tucker
-42-
<PAGE>
APPENDIX B
SERIES
Blue Chip Value Fund
-43-
<PAGE>
APPENDIX C
I, Vincent Blazewicz, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
-44-
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, Kenneth V. Penland, hereby certifies that he or she
is the duly elected and acting Chairman of BLUE CHIP VALUE FUND, INC., a
Maryland corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a meeting duly
held on May 12, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof .
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of May 13th, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the Book-
Entry System, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Book-Entry System
to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of BLUE
CHIP VALUE FUND, INC., as of the 13th day of May, 1998.
/s/ Kenneth V. Penland
________________________
(SEAL]
-45-
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, Kenneth V. Penland, hereby certifies that he or she
is the duly elected and acting Chairman of BLUE CHIP VALUE FUND, INC., a
Maryland corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a meeting duly
held on May 12, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof .
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of May 13, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary to deposit in the Depository, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated, and to
utilize the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of BLUE
CHIP VALUE FUND, INC., as of the 13th day of May, 1998.
/s/ Kenneth V. Penland
-------------------------
[SEAL]
-46-
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, Kenneth V. Penland, hereby certifies that he or she
is the duly elected and acting Chairman of BLUE CHIP VALUE FUND, INC., a
Maryland corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a meeting duly
held on May 12, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of May 13, 1998, the Custody Agreement") is authorized and instructed
on a continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Participants Trust Company as Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically allocated,
and to utilize the Participants Trust Company to the extent possible
in connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of BLUE
CHIP VALUE FUND, INC., as of the 13th day of May, 1998.
/s/ Kenneth V. Penland
-------------------------
[SEAL]
-47-
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, Kenneth V. Penland, hereby certifies that he or she
is the duly elected and acting Chairman of BLUE CHIP VALUE FUND, INC., a
Maryland corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a meeting duly
held on May 12, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect as
of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of May 13, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary, to accept, utilize and act with respect to Clearing Member
confirmations for Options and transaction in Options, regardless of
the Series to which the same are specifically allocated, as such terms
are defined in the Custody Agreement, as provided in the Custody
Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of BLUE
CHIP VALUE FUND, INC., as of the 13th day of May, 1998.
/s/ Kenneth V. Penland
------------------------
[SEAL]
-48-
<PAGE>
EXHIBIT D
The undersigned, Kenneth V. Penland, hereby certifies that he or she
is the duly elected and acting Chairman of BLUE CHIP VALUE FUND, INC., a
Maryland corporation (the "Fund"), and further certifies that the following
resolutions were adopted by the Board of Directors of the Fund at a meeting duly
held on May 12, 1998, at which a quorum was at all times present and that such
resolutions have not been modified or rescinded and are in full force and effect
as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the
Custody Agreement between the Bank of New York and the Fund dated as
of May 13, 1998 (the "Custody Agreement") is authorized and instructed
on a continuous and ongoing basis to act in accordance with, and to
rely on Instructions (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of
such access codes only to Authorized Persons of the Fund as defined in the
Custody Agreement, shall establish internal safekeeping procedures to safeguard
and protect the confidentiality and availability of user and access codes,
passwords and authentication keys, and shall use Instructions only in a manner
that does not contravene the Investment Company Act of 1940, as amended, or the
rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of BLUE
CHIP VALUE FUND, INC., as of the 13th day of May, 1998.
/s/ Kenneth V. Penland
------------------------
[SEAL]
-49-
<PAGE>
EXHIBIT 2(l)
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
July 31, 1998
Blue Chip Value Fund, Inc.
1225 Seventeenth Street
26th Floor
Denver, CO 80202
RE: PRE-EFFECTIVE AMENDMENT NO.1 TO THE REGISTRATION STATEMENT ON
-------------------------------------------------------------
FORM N-2 (FILE NOS. 333-50097/811-5003)
---------------------------------------
Ladies and Gentlemen:
As counsel for Blue Chip Value Fund, Inc., a Maryland corporation (the
"Company"), we have reviewed documents relating to the registration of 13,620
shares of Common Stock, par value $.01 per share (the "Shares"). We have
reviewed the resolutions adopted by the Company's Board of Directors and
stockholders and such other legal and factual matters as we have deemed
appropriate for purposes of this opinion.
This opinion is based exclusively on the General Corporation Law of
the State of Maryland and the federal law of the United States of America.
Based upon the foregoing, we are of the opinion that the Shares will
be, when issued for payment as described in the Company's prospectus, validly
issued, fully paid and non-assessable by the Company.
We note that W. Bruce McConnel, III, a partner of this firm, is the
Secretary of the Company.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as part of the Company's registration statement relating
to the Shares. However, this action does not constitute a consent under Section
7 of the Securities Act of 1933, because we have not otherwise come within the
categories of persons whose consent is required under Section 7 or under the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
------------------------------
DRINKER BIDDLE & REATH LLP
<PAGE>
EXHIBIT 2(n)
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Financial Highlights"
in the Prospectus and under the captions "Financial Statements" and "Investment
Advisory and Other Services -- Independent Auditors" in the Statement of
Additional Information in Pre-Effective Amendment No.1 to the Registration
Statement (Form N-2 Investment Company Act of 1940 No. 811-5003/Securities Act
of 1933 No. 333-50097) and related Prospectus of Blue Chip Value Fund, Inc. to
be filed with the Securities and Exchange Commission on July 31, 1998.
We also consent to the incorporation by reference therein of our report dated
January 14, 1998, with respect to the financial statements of Blue Chip Value
Fund, Inc., included in its Annual Report to Stockholders filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Denver, Colorado
July 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000810439
<NAME> BLUE CHIP VALUE FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 106,221,271
<INVESTMENTS-AT-VALUE> 150,209,220
<RECEIVABLES> 641,148
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,000
<TOTAL-ASSETS> 150,859,368
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,953,962
<TOTAL-LIABILITIES> 11,953,962
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94,291,724
<SHARES-COMMON-STOCK> 14,231,858
<SHARES-COMMON-PRIOR> 10,960,829
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 625,733
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,987,949
<NET-ASSETS> 138,905,406
<DIVIDEND-INCOME> 2,356,751
<INTEREST-INCOME> 283,344
<OTHER-INCOME> 0
<EXPENSES-NET> 1,273,608
<NET-INVESTMENT-INCOME> 1,366,487
<REALIZED-GAINS-CURRENT> 21,526,339
<APPREC-INCREASE-CURRENT> 12,743,904
<NET-CHANGE-FROM-OPS> 35,634,730
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,368,539
<DISTRIBUTIONS-OF-GAINS> 20,917,951
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,843,750
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 427,279
<NET-CHANGE-IN-ASSETS> 40,864,843
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,311)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 825,556
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,273,608
<AVERAGE-NET-ASSETS> 135,237,770
<PER-SHARE-NAV-BEGIN> 8.94
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> 2.29
<PER-SHARE-DIVIDEND> (.10)
<PER-SHARE-DISTRIBUTIONS> (1.47)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> .94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
