[LOGO] BLUE CHIP VALUE FUND
SEMI-ANNUAL REPORT
TO STOCKHOLDERS
JUNE 30, 2002
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PORTFOLIO MANAGER COMMENTARY
Dear Fellow Stockholders:
A convergence of factors created a very challenging market and continued to
test investors' patience during the first half of 2002. While the economy showed
signs of stabilizing, the pace of recovery remained in question. Despite
double-digit losses for the major stock indices, it appears to us that pockets
of irrational valuation persisted. Meanwhile, a media frenzy emerged, as
management integrity, Wall Street credibility and corporate accounting practices
came under intense scrutiny.
While one is never satisfied with negative absolute returns, the Blue Chip
Value Fund held its own during this most difficult six-month period ended June
30, 2002. The Fund's Net Asset Value (NAV) declined 9.45%, while its benchmark,
the S&P 500 Index, fell 13.16%. Although we were able to navigate the seemingly
endless stream of bad news, the Fund ended the period with a smaller premium to
NAV than at the beginning of the year, resulting in a negative market
performance of 16.78%.
Over the past six months, our best performing sector on an absolute basis
was again capital goods. Within that space, the Fund's aerospace and defense
holdings, including Raytheon and General Dynamics, were up on the order of 30%
due to the strength of increased defense and security spending in the wake of
the September 11 attacks. While the near-term outlook for this group, in our
opinion, remains positive, we have begun to add more industrial and cyclical
positions in anticipation of the eventual strengthening of the economy. At the
same time, we expect to gradually reduce our aerospace and defense exposure as
valuations become less compelling.
Another positive for the portfolio was our limited exposure to the
beleaguered telecommunications sector. In addition, strong stock picking among
the companies we owned in the sector resulted in an overall decline that was
nearly half the amount of the decline for the group as a whole. This combination
added significantly to our relative performance. We further reduced our weight
in the group late in the period as recent bankruptcies signaled further
financial trouble ahead. We believe that it may be some time before a more
constructive investment environment becomes evident in terms of rational
capacity and pricing.
1
In contrast, economic, regulatory and credit concerns contributed to a
disappointing showing in the utility group, particularly in the merchant energy
segment. Although our research has identified this sector as one with
considerable intrinsic value, we failed to correctly estimate the depth to which
certain stocks could sink in the face of such pressures. We ultimately cut back
our exposure and await a more favorable environment in which to invest.
While the economy has shown surprising resilience, the scope and
sustainability of the recovery remain unclear. Consumer spending, which has been
bolstered by low interest rates and mortgage refinancings, reveals continued
strength yet carries a relatively high debt burden. In our opinion, the recent
weakness in the dollar, coupled with the eventual prospect of higher interest
rates and the long-overdue resumption of corporate technology spending, bear
close watching. In light of these and other issues, most notably the
well-documented accounting and management scandals, the road ahead is anything
but certain. Nevertheless, our focus is squarely on finding individual companies
whose positive operational and earnings leverage and company-specific
fundamentals (cash flow generation, operational efficiency, balance sheet
strength) are not reflected in their current valuation. We remain optimistic
that the economy will recover, and that positive market returns will resume. As
long-term investors, we believe we are poised to capitalize on these
opportunities.
Sincerely,
/s/ Mark M. Adelmann
Mark M. Adelmann, CFA, CPA
Portfolio Manager and
Vice President
2
SECTOR DIVERSIFICATION
IN COMPARISON TO S&P 500
AS OF JUNE 30, 2002*
Fund S&P 500
----- -------
Basic Materials 3.1% 3.2%
Capital Goods 8.6% 4.8%
Commercial Services 4.7% 2.3%
Communications 3.5% 5.8%
Consumer Cyclical 14.7% 13.0%
Consumer Staples 4.1% 10.1%
Energy 9.0% 7.7%
Financials 23.7% 22.7%
Medical/Healthcare 7.7% 13.2%
REITs 0.0% 0.3%
Technology 10.4% 13.0%
Transportation 3.0% 0.9%
Utilities 3.3% 3.0%
* Sector diversification is subject to change and may not be representative
of future investments.
AVERAGE ANNUAL TOTAL RETURNS
AS OF JUNE 30, 2002
Fund Name Return 1-Year 5-Year 10-Year
--------- ------ ------ ------ -------
Blue Chip Value Fund NAV (14.94%) 4.06% 11.47%
Blue Chip Value Fund Market Price (15.90%) 4.97% 11.19%
S&P 500 Index (17.99%) 3.66% 11.43%
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. Generally, total investment return based on net asset value will be
higher than total investment return based on market value in periods where there
is an increase in the discount or a decrease in the premium of the market value
to the net asset value from the beginning to the end of such periods.
Conversely, total investment return based on the net asset value will be lower
than total investment return based on market value in periods where there is a
decrease in the discount or an increase in the premium of the market value to
the net asset value from the beginning to the end of such periods.
3
2ND QUARTER 2002 DISTRIBUTION INFORMATION
Blue Chip Value Fund, Inc. has declared a quarterly distribution of $.15
per share with a Record Date of July 12, 2002, and a Payable Date of July 26,
2002.
Of the total distribution, $.0095 represents net investment income and the
remaining undesignated portion is paid from capital surplus. If the Fund's total
distributions for the year (exclusive of long-term capital gains dividends)
exceed its net investment income and short-term capital gains for such year, a
portion of such undesignated distributions may constitute a non-taxable return
of capital. The actual determination of the source of the undesignated
distributions can be made only at year end. All shareholders will receive
written notification regarding the components and tax treatment of all
distributions for the 2002 calendar year in early 2003.
If you have elected to receive your distribution in cash, the enclosed
check is in payment of such distribution. If your distributions are
automatically being reinvested, enclosed is your reinvestment confirmation. If
you would like more information on joining our Dividend Reinvestment Plan or if
you have any other questions, please call us at 1-800-624-4190.
BOARD ELECTS VICE PRESIDENT
At the Board meeting May 7, 2002, Mark Adelmann, a Vice President and
Research Analyst of Denver Investment Advisors LLC, was elected a Vice President
of the Fund. He became portfolio manager of the Fund effective June 3, 2002.
Mr. Adelmann has been a research analyst with the Value Strategies Group at
Denver Investment Advisors LLC since 1995. Prior to joining Denver Investment
Advisors LLC he worked with Deloitte & Touche for 15 years in auditing and
financial reporting. His educational background includes a B.S. from Oral
Roberts University.
4
BLUE CHIP VALUE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2002 (Unaudited)
ASSETS
Investments at market value $ 158,081,128
(identified cost $163,854,146)
Dividends receivable 148,003
Interest receivable 13,338
Other assets 20,990
-------------
TOTAL ASSETS 158,263,459
-------------
LIABILITIES
Advisory fee payable 73,261
Administration fee payable 7,970
Accrued expenses and other liabilities 51,363
-------------
TOTAL LIABILITIES 132,594
-------------
NET ASSETS $ 158,130,865
=============
COMPOSITION OF NET ASSETS
Capital stock, at par $ 264,135
Paid-in-capital 170,968,163
Accumulated net realized loss (3,201,033)
Undistributed net investment income 251,243
Undesignated distributions (4,378,625)
Net unrealized depreciation on
investments (5,773,018)
-------------
$ 158,130,865
=============
SHARES OF COMMON STOCK
OUTSTANDING (100,000,000 shares
authorized at $0.01 par value) 26,413,536
=============
Net asset value per share $ 5.99
=============
See accompanying notes to financial statements.
5
BLUE CHIP VALUE FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2002 (Unaudited)
INCOME
Dividends $ 947,952
Interest 86,391
------------
TOTAL INCOME $ 1,034,343
------------
EXPENSES
Investment advisory fee (Note 3) 462,072
Administrative services fee (Note 3) 48,237
Transfer agent fees 38,061
Stockholder reporting 31,584
Legal fees 30,641
Directors' fees 34,471
Insurance and fidelity bond 5,180
Audit and tax preparation fees 11,570
Custodian fees 4,728
NYSE listing fees 17,891
Other 3,935
------------
TOTAL EXPENSES 688,370
------------
NET INVESTMENT INCOME 345,973
------------
REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments (3,025,271)
Change in net unrealized appreciation/
depreciation of investments (14,342,524)
------------
NET LOSS ON INVESTMENTS (17,367,795)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(17,021,822)
============
See accompanying notes to financial statements.
6
BLUE CHIP VALUE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2002 (1) 2001
------------- -------------
DECREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 345,973 $ 852,030
Net realized gain/(loss) from
securities investments (3,025,271) 8,769,357
Change in net unrealized
appreciation or depreciation
of investments (14,342,524) (13,542,885)
------------- -------------
(17,021,822) (3,921,498)
------------- -------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income (94,730) (857,755)
Net realized gain on investments 0 (7,529,781)
Return of capital 0 (7,032,144)
Undesignated (Note 1) (4,378,625) 0
------------- -------------
(4,473,355) (15,419,680)
------------- -------------
INCREASE IN NET ASSETS FROM
COMMON STOCK TRANSACTIONS:
Proceeds from the sale of
5,262,771 and 3,522,591 shares
respectively, net of offering
expenses (Note 4) 32,801,947 22,551,862
Net asset value of common
stock issued to stockholders
from reinvestment of
dividends (188,309 and
197,107 shares issued,
respectively) 1,306,383 1,444,420
------------- -------------
34,108,330 23,996,282
------------- -------------
NET INCREASE IN NET ASSETS 12,613,153 4,655,104
NET ASSETS
Beginning of period 145,517,712 140,862,608
------------- -------------
End of period (including $251,243
and $0 of undistributed net
investment income, respectively) $ 158,130,865 $ 145,517,712
============= =============
See accompanying notes to financial statements.
(1) Unaudited.
7
BLUE CHIP VALUE FUND, INC.
FINANCIAL HIGHLIGHTS
FOR THE SIX
MONTHS ENDED
PER SHARE DATA JUNE 30,
(for a share outstanding throughout each period) 2002 (1)
-----------
Net asset value - beginning of period $ 6.94
INVESTMENT OPERATIONS
Net investment income 0.01
Net gain (loss) on investments (0.62)
-----------
Total from investment operations (0.61)
-----------
DISTRIBUTIONS
From net investment income (0.00)(4)
From net realized gains on investments --
Return of capital --
Undesignated (0.17)
-----------
Total distributions (0.17)
-----------
CAPITAL SHARE TRANSACTIONS
Dilutive effects of rights offerings (0.16)
Offering costs charged to paid in capital (0.01)
-----------
Total capital share transactions (0.17)
-----------
Net asset value, end of period $ 5.99
===========
Per share market value, end of period $ 6.10
===========
Total investment return(2) based on:
Market Value (16.8%)
Net Asset Value (9.5%)
RATIOS/SUPPLEMENTAL DATA:
Ratios of expenses to average net assets 0.88%*
Ratio of net investment income to average net assets 0.44%*
Ratio of total distributions to average net assets 2.82%
Portfolio turnover rate(3) 32.43%
Net assets - end of period (in thousands) $ 158,131
See accompanying notes to financial statements.
* Annualized.
(1) Unaudited.
(2) 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. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease
in the premium of the market value to the net asset value
8
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
$ 8.17 $ 9.09 $ 10.25 $ 9.76 $ 8.94
0.04 0.05 0.03 0.05 0.10
(0.29) (0.08) 0.49 1.62 2.56
----------- ----------- ----------- ----------- -----------
(0.25) (0.03) 0.52 1.67 2.66
----------- ----------- ----------- ----------- -----------
(0.04) (0.05) (0.03) (0.05) (0.10)
(0.36) (0.84) (1.65) (1.08) (1.47)
(0.34) -- -- -- --
-- -- -- -- --
----------- ----------- ----------- ----------- -----------
(0.74) (0.89) (1.68) (1.13) (1.57)
----------- ----------- ----------- ----------- -----------
(0.23) -- -- (0.04) (0.26)
(0.01) -- -- (0.01) (0.01)
----------- ----------- ----------- ----------- -----------
(0.24) -- -- (0.05) (0.27)
----------- ----------- ----------- ----------- -----------
$ 6.94 $ 8.17 $ 9.09 $ 10.25 $ 9.76
=========== =========== =========== =========== ===========
$ 7.56 $ 7.55 $ 8.6875 $ 9.75 $ 10.9375
=========== =========== =========== =========== ===========
14.1% (3.2%) 6.7% 1.3% 40.5%
(3.0%) 0.2% 6.2% 17.6% 31.2%
0.91% 0.88% 0.85% 0.94% 0.94%
0.56% 0.63% 0.32% 0.56% 1.01%
10.21% 10.46% 16.86% 11.62% 16.48%
73.30% 127.55% 54.24% 76.02% 55.15%
$ 145,517 $ 140,863 $ 153,002 $ 171,512 $ 138,905
from the beginning to the end of such periods. Conversely, total investment
return based on the net asset value will be lower than total investment
return based on market value in periods where there is a decrease in the
discount or an increase in the premium of the market value to the net asset
value from the beginning to the end of such periods.
(3) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding short-term
investments) for a year and dividing it by the monthly average of the
market value of the portfolio securities during the year. Purchases and
sales of investment securities (excluding short-term securities) for the
six months ended June 30, 2002 were $76,361,497 and $48,215,776,
respectively.
(4) Less than ($.005) Per share.
9
BLUE CHIP VALUE FUND, INC.
STATEMENT OF INVESTMENTS
June 30, 2002 (Unaudited)
MARKET
SHARES COST VALUE
------- ------------ ------------
COMMON STOCKS - 95.84%
BASIC MATERIALS - 3.07%
FORESTRY AND PAPER - 3.07%
Bowater Inc. 89,100 $ 4,239,317 $ 4,844,367
TOTAL BASIC MATERIALS 4,239,317 4,844,367
-------------------------------------------------------------------------------
CAPITAL GOODS - 8.64%
AEROSPACE & DEFENSE - 5.91%
General Dynamics Corp. 42,400 2,743,339 4,509,240
Raytheon Co. 118,700 4,078,441 4,837,025
------------ ------------
6,821,780 9,346,265
ELECTRICAL EQUIPMENT - 2.73%
Parker Hannifin Corp. 90,400 4,327,184 4,320,216
TOTAL CAPITAL GOODS 11,148,964 13,666,481
-------------------------------------------------------------------------------
COMMERCIAL SERVICES - 4.66%
BUSINESS PRODUCTS & SERVICES - 4.66%
Accenture Ltd.* 219,400 5,158,112 4,168,600
Interpublic Group of Companies Inc. 129,500 3,721,015 3,206,420
------------ ------------
8,879,127 7,375,020
TOTAL COMMERCIAL SERVICES 8,879,127 7,375,020
-------------------------------------------------------------------------------
COMMUNICATIONS - 3.53%
TELECOMMUNICATION SERVICE PROVIDERS - 3.53%
ALLTEL Corp. 59,000 3,037,275 2,773,000
BellSouth Corp. 89,100 3,482,581 2,806,650
------------ ------------
6,519,856 5,579,650
TOTAL COMMUNICATIONS 6,519,856 5,579,650
-------------------------------------------------------------------------------
CONSUMER CYCLICAL - 14.72%
CLOTHING & ACCESSORIES - 2.31%
TJX Companies Inc. 186,000 2,587,775 3,647,460
GENERAL MERCHANDISE - 2.01%
Target Corp. 83,400 2,892,523 3,177,540
HOME BUILDERS & SUPPLIERS - 2.17%
Masco Corp. 126,800 3,512,784 3,437,548
HOTELS & GAMING - 2.09%
Starwood Hotels & Resorts Inc. 100,400 3,289,068 3,302,156
10
MARKET
SHARES COST VALUE
------- ------------ ------------
PUBLISHING & MEDIA - 4.65%
Dow Jones & Company Inc. 63,000 $ 3,512,931 $ 3,052,350
Viacom Inc. - Class B* 97,000 4,722,904 4,303,890
------------ ------------
8,235,835 7,356,240
RESTAURANTS - 1.49%
Yum! Brands Inc.* 80,500 1,607,567 2,354,625
TOTAL CONSUMER CYCLICAL 22,125,552 23,275,569
-------------------------------------------------------------------------------
CONSUMER STAPLES - 4.05%
GROCERY & CONVENIENCE - 1.87%
Safeway Inc.* 101,300 4,529,552 2,956,947
TOBACCO - 2.18%
Phillip Morris Companies Inc. 79,100 3,216,023 3,455,088
TOTAL CONSUMER STAPLES 7,745,575 6,412,035
-------------------------------------------------------------------------------
ENERGY - 9.00%
EXPLORATION & PRODUCTION - 3.58%
Apache Corp. 48,440 2,710,489 2,784,331
Ocean Energy Inc. 132,800 2,591,044 2,877,776
------------ ------------
5,301,533 5,662,107
INTEGRATED OILS - 5.42%
Conoco Inc. 148,400 4,097,169 4,125,520
Royal Dutch Petroleum Co. - ADR 80,400 4,840,909 4,443,708
------------ ------------
8,938,078 8,569,228
TOTAL ENERGY 14,239,611 14,231,335
-------------------------------------------------------------------------------
FINANCIALS - 23.74%
INSURANCE BROKERAGE - 2.29%
AON Corp. 122,800 4,132,832 3,620,144
INTEGRATED FINANCIAL SERVICES - 6.42%
Citigroup Inc. 149,500 6,825,614 5,793,124
JP Morgan Chase & Co. 128,500 5,169,648 4,358,720
------------ ------------
11,995,262 10,151,844
LIFE & HEALTH INSURANCE - 4.09%
Nationwide Financial
Services Inc. - Class A 80,000 3,461,416 3,160,000
Principal Financial Group Inc.* 106,800 2,291,273 3,310,800
------------ ------------
5,752,689 6,470,800
PROPERTY CASUALTY INSURANCE - 7.40%
ACE Ltd. 53,000 2,043,673 1,674,800
Allstate Corp. 83,000 2,938,074 3,069,340
American International Group 54,100 3,516,984 3,691,243
Hartford Financial Services Group Inc. 54,900 3,361,845 3,264,903
------------ ------------
11,860,576 11,700,286
11
MARKET
SHARES COST VALUE
------- ------------ ------------
SECURITIES & ASSET MANAGEMENT - 1.20%
Lehman Brothers Holdings Inc. 30,300 $ 1,991,414 $ 1,894,356
SPECIALTY FINANCE - 2.34%
Federal Home Loan Mortgage Corp. 60,500 3,543,955 3,702,600
TOTAL FINANCIALS 39,276,728 37,540,030
-------------------------------------------------------------------------------
MEDICAL/HEALTHCARE - 7.68%
HEALTHCARE SERVICES - 5.39%
Omnicare Inc. 216,519 4,443,165 5,685,789
Tenet Healthcare Corp.* 39,625 2,445,971 2,835,169
------------ ------------
6,889,136 8,520,958
MEDICAL TECHNOLOGY - 1.04%
Millipore Corp. 51,200 2,026,116 1,637,376
PHARMACEUTICALS - 1.25%
Bristol-Myers Squibb Co. 77,180 3,269,859 1,983,526
TOTAL MEDICAL/HEALTHCARE 12,185,111 12,141,860
-------------------------------------------------------------------------------
TECHNOLOGY - 10.41%
COMPUTER SOFTWARE - 2.54%
Microsoft Corp.* 73,400 4,590,044 4,014,980
ELECTRONIC EQUIPMENT - 2.16%
American Power Conversion * 270,200 3,833,878 3,412,626
PCS AND SERVERS - 2.03%
International Business Machines Corp. 35,000 3,369,444 2,520,000
Sun Microsystems Inc.* 138,800 1,276,222 695,388
-------------------------------------------------------------------------------
4,645,666 3,215,388
SEMICONDUCTORS - 1.23%
Intel Corp. 105,900 3,641,587 1,934,793
TECHNOLOGY RESELLERS/DISTRIBUTORS - 2.45%
Avnet Inc. 176,400 4,145,029 3,879,036
TOTAL TECHNOLOGY 20,856,204 16,456,823
-------------------------------------------------------------------------------
TRANSPORTATION - 3.00%
AIRLINES - 0.82%
Delta Air Lines Inc. 64,600 1,886,682 1,292,000
RAILROADS - 2.18%
Union Pacific Corp. 54,600 3,142,252 3,455,088
TOTAL TRANSPORTATION 5,028,934 4,747,088
-------------------------------------------------------------------------------
12
MARKET
SHARES COST VALUE
------- ------------ ------------
UTILITIES - 3.34%
ELECTRIC/GAS UTILITIES - 3.34%
FPL Group Inc. 62,200 $ 3,608,784 $ 3,731,379
Reliant Energy Inc. 91,600 1,468,932 1,548,040
------------ ------------
5,077,716 5,279,419
TOTAL UTILITIES 5,077,716 5,279,419
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS 157,322,695 151,549,677
-------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 4.13%
Goldman Sachs Financial Square Prime
Obligations Fund - FST Shares 6,531,451 6,531,451
TOTAL SHORT-TERM INVESTMENTS 6,531,451 6,531,451
-------------------------------------------------------------------------------
TOTAL INVESTMENTS 99.97% $163,854,146 $158,081,128
Other Assets in Excess of Liabilities 0.03% 49,737
------ ------------
NET ASSETS 100.00% $158,130,865
====== ============
* Denotes non-income producing security.
13
BLUE CHIP VALUE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002 (Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Blue Chip Value Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATION - Each investment security is generally valued at the last
sale price at period end reported by the principal exchange on which the issue
was traded or, if no sale is reported, at a value based on the average closing
bid and asked price. When marked quotations are not readily available or when
events occur that make established valuation methods unreliable, securities of
the Fund may be valued at fair value determined in good faith by or under the
direction of the Board of Directors. Short-term securities having a remaining
maturity of 60 days or less are valued at amortized cost which approximates
market value.
FEDERAL INCOME TAXES - The Fund intends to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income to its stockholders. Therefore, no
provision has been made for federal income taxes.
INVESTMENT TRANSACTIONS - Investment transactions are accounted for on the date
the investments are purchased or sold (trade date). Realized gains and losses
from investment transactions and unrealized appreciation and depreciation of
investments are determined on the first-in, first-out basis for both financial
statement and federal income tax purposes. Dividend income is recorded on the
ex-dividend date. Interest income, which includes interest earned on money
market funds, is accrued and recorded daily.
DISTRIBUTIONS TO STOCKHOLDERS - Distributions to stockholders are recorded on
the ex-dividend date. Distributions are classified to conform to the tax
reporting requirements of the Internal Revenue Code. If the Fund's total
distributions for the year (exclusive of long-term capital gains dividends)
exceed its net investment income and short-term capital gains for such year, a
portion of such undesignated distributions
14
may constitute a non-taxable return of capital. The actual determination of the
source of the undesignated distributions is made only at year end.
The Fund distributes at least 2.5% of its net asset value quarterly to its
stockholders.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United Stated of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes to the financial statements. Actual results could differ from those
estimates.
2. UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS (TAX BASIS)
AS OF JUNE 30, 2002:
Gross appreciation (excess of value over tax cost) $ 10,626,410
Gross depreciation (excess of tax cost over value) (16,409,196)
-------------
Net unrealized depreciation $ (5,782,786)
-------------
Cost of investments for income tax purposes $ 163,863,914
=============
3. INVESTMENT ADVISORY AND ADMINISTRATION SERVICES
The Fund has an Investment Advisory Agreement with Denver Investment
Advisors LLC ("DIA"), whereby a management fee is paid to DIA based on an annual
rate of 0.65% of the Fund's average weekly net assets up to $100,000,000 and
0.50% of the Fund's average weekly net assets in excess of $100,000,000. The
management fee is paid monthly based on the average of the net assets of the
Fund computed as of the last business day the New York Stock Exchange is open
each week. Certain officers and directors of the Fund are also officers of DIA.
Effective September 1, 1999, ALPS Mutual Funds Services, Inc. ("ALPS") and
DIA entered into an Administrative Agreement to serve as the Fund's
co-administrators. The administrative services fee is based on an annual rate
for ALPS and DIA, respectively, of 0.08% and 0.01% of the Fund's average daily
net assets up to $75,000,000, 0.04% and 0.005% of the Fund's average daily net
assets between $75,000,000 and $125,000,000, and 0.02% and 0.005% of the Fund's
average daily net assets in excess of $125,000,000. The administrative services
fee is paid monthly.
15
4. CAPITAL TRANSACTIONS
In 2002, the Fund completed a rights offering to existing stockholders. The
Fund issued one right to purchase an additional share of the Fund for each five
shares owned as of February 19, 2002. The subscription period began February 22,
2002 and extended through March 21, 2002. The price of the shares issued was
$6.26, which represented 95% of $6.5886, the average of the Volume Weighted
Average Price on the New York Stock Exchange for March 22, 2002, the pricing
day, and the four preceding trading days. The Fund's net asset value on March
22, 2002 was $7.06. There were 5,262,771 shares issued in the rights offering
for proceeds, net of offering expenses, of $32,801,947.
5. ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of the Fund (the "Annual Meeting") was
held on May 7, 2002 pursuant to notice given to all stockholders of record at
the close of business on March 19, 2002. At the Annual Meeting, stockholders
were asked to approve the following:
PROPOSAL 1.
To elect two Class II directors, Lee W. Mather, Jr. and Richard C. Schulte,
to serve until the Annual Meeting in the year 2005. The number of shares voting
for the election of Mr. Mather was 18,836,388 and the number of shares
withholding authority was 357,031. The number of shares voting for the election
of Mr. Schulte was 18,808,036 and the number of shares withholding authority was
385,383.
The name of each other director whose term of office continued after the
Annual Meeting was Kenneth V. Penland, Roberta M. Wilson, Todger Anderson, Gary
P. McDaniel and Robert J. Greenebaum.
6. CHANGE OF INDEPENDENT AUDITORS
On February 8, 2000, Ernst & Young LLP ("Ernst & Young") resigned as the
Fund's independent auditors. During the Fund's fiscal years ended December 31,
1999 and 1998, Ernst & Young's reports on the Fund's financial statements
contained no adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles. During the
Fund's fiscal years ended December 31, 1999 and 1998, there were no
disagreements with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young, would have
caused it to
16
make reference to the subject matter of the disagreement in connection with its
report on the financial statements for such years. During the Fund's fiscal
years ended December 31, 1999 and 1998, there were no events of the kind
described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange
Act of 1934.
On February 8, 2000, after recommendation by the Board's Audit Committee,
the Fund, by action of its Board of Directors, including a majority of the
members of the Board of Directors who are not "interested persons" of the Fund
(as that term is defined in the 1940 Act), selected Deloitte & Touche LLP
("Deloitte & Touche") as the independent auditors to audit the Fund's financial
statements for the fiscal year ended December 31, 2000. During the Fund's fiscal
years ended December 31, 1999 and 1998, neither the Fund nor anyone on its
behalf has consulted Deloitte & Touche on items which (i) concerned the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Fund's financial statements, or (ii) concerned the subject of a disagreement
(as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K) or reportable
events (as described in paragraph (a)(1)(v) of said Item 304).
7. 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
TOTAL AMOUNT PER $1,000 OF
DECEMBER 31 OUTSTANDING INDEBTEDNESS
----------- ----------- ------------
2001 0 N/A
2000 0 N/A
1999 0 N/A
1998 0 N/A
1997 0 N/A
1996 0 N/A
1995 0 N/A
1994 0 N/A
1993 0 N/A
1992 $643,172 $113,596
17
BOARD OF DIRECTORS
Kenneth V. Penland, CHAIRMAN
Todger Anderson, DIRECTOR
Robert J. Greenebaum, DIRECTOR
Lee W. Mather, Jr, DIRECTOR
Gary P. McDaniel, DIRECTOR
Richard C. Schulte, DIRECTOR
Roberta M. Wilson, DIRECTOR
OFFICERS
Kenneth V. Penland, CHAIRMAN
Todger Anderson, PRESIDENT
Mark M. Adelmann, VICE PRESIDENT
W. Bruce McConnel, SECRETARY
Jasper R. Frontz, TREASURER
INVESTMENT ADVISER/CO-ADMINISTRATOR
Denver Investment Advisors LLC
1225 17th Street, 26th Floor
Denver, CO 80202
(303) 312-5100
STOCKHOLDER RELATIONS
Margaret R. Jurado
(800) 624-4190 (303) 312-5100
e-mail: blu@denveria.com
CUSTODIAN
Bank of New York
One Wall Street
New York, NY 10286
CO-ADMINISTRATOR
ALPS Mutual Funds Services, Inc.
370 17th Street, Suite 3100
Denver, CO 80202
TRANSFER AGENT
DIVIDEND REINVESTMENT PLAN AGENT
(QUESTIONS REGARDING YOUR ACCOUNT)
Mellon Investor Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 288-9541
www.melloninvestor.com
NYSE Symbol--BLU
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