UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-5003
BLUE CHIP VALUE FUND, INC.
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(Exact name of registrant as specified in charter)
1225 Seventeenth Street, 26th Floor, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
W. Bruce McConnel
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, Pennsylvania 19103-6996
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(Name and address of agent for service)
Registrant's Telephone Number, including Area Code: (800) 624-4190
Date of fiscal year end: December 31
Date of reporting period: December 31, 2003
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss.3507.
Item 1. Reports to Shareholders
The following is a copy of the report to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1).
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[LOGO] Blue Chip
BlueChip Value Fund
Annual Report
to Stockholders
December 31, 2003
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INVESTMENT ADVISER'S COMMENTARY
Dear Fellow Stockholders: January 5, 2004
Reflecting the ongoing turnaround in economic and stock market
fundamentals, the Blue Chip Value Fund net asset value (NAV) appreciated 12.02%
during the fourth quarter of 2003, in line with the 12.18% return of its
benchmark, S&P 500 Index. For the fiscal year ended December 31, 2003, the
Fund's NAV increased 26.37%, underperforming a 28.68% gain in the S&P 500 Index.
While this annual performance is unsatisfying relative to the broad market
index, we take pleasure in reporting that our disciplined investment process
continued to reward investors across longer, more meaningful time frames. To
illustrate, over the three- and five-year annualized periods ended December 31,
2003, the Fund's NAV has outpaced the S&P 500 Index by 3.16% and 1.26%,
respectively.
In acknowledgement of this noteworthy performance, and the contributions
of those responsible, the investment adviser, effective December 1, 2003,
recognized Mark Adelmann, Troy Dayton, Kris Herrick, and Derek Anguilm as the
portfolio management team of Blue Chip Value Fund. This does not represent a
change in personnel, but rather an evolution of the management team supporting
the Fund.
As you may know, our investment process consistently focuses on a
company's ability to generate sustainable free cash flow from its investment in
the business. We believe that this cash flow can be used, for example, to fund
high-return capital projects, pursue strategic acquisitions, pay dividends, or
reduce outstanding debt. In keeping with our long-term, risk-adjusted approach,
we seek to invest primarily in quality businesses with a proven track record of
using cash flow to build shareholder value. We seek to avoid situations where,
in our opinion, the business is distressed or is dependent on events beyond
management's control to succeed.
During much of 2003, it appears to us that the market displayed a
willingness to 'bet' on economic recovery, and bid up the prices of
lower-quality businesses. In this context, we were delighted to have
outperformed the market in the third quarter, and performed in line with the
market in the fourth quarter. As we move into 2004, we believe this speculative
luster will soon wear off and quality will again rule the day. Thus, in our
opinion, we remain confident in the ability of our
3
carefully selected holdings to generate free cash flow, and to continue to
produce positive growth in both cash flows and returns on capital invested.
Turning to the portfolio, our best performing groups for the fourth
quarter again included technology, along with energy and commercial services.
Within technology, specialty semiconductor company Xilinx Inc. turned in robust
performance as accelerating revenue and order flow appears to have increased
market confidence in its free cash flow prospects. Similarly, power management
supplier American Power Conversion Corp. and value-added reseller Tech Data
Corp. appears to have benefited from improving prospects in corporate capital
spending. Energy rebounded as commodity prices and drilling levels remained
firm, boding well, in our opinion, for continued strength in free cash flow. It
appears to us that integrated oil and gas giant ConocoPhillips continued to
benefit from better commodity prices and refining margins, while offshore
driller Transocean Inc. showed signs of stabilization as rig activity increased
modestly. Meanwhile, commercial services holding Accenture Ltd., a worldwide
leader in business consulting and outsourcing, rallied as new contract wins and
improved economic prospects appear to have lifted the market's expectations for
stronger free cash flow growth.
As for the fiscal year, security selection in the capital goods sector
contributed to relative underperformance. Our holdings were concentrated in
aerospace and defense, where we perceive lingering concerns surrounding the
business jet market and defense spending caused these stocks to fall short of
our expectations. Our performance in the financials sector also lagged relative
to the benchmark with Freddie Mac, a major player in the home loan secondary
market, proving especially disappointing. Although we continue to believe that
the company is undervalued, in our opinion the protracted resolution of its
accounting restatement (in which prior year earnings were understated) weighed
heavily on the stock. Likewise, while the value creation we project from
property and casualty insurance companies such as Travelers Property & Casualty
Corp. and Allstate Corp. exceeds the current market value of their shares, it
appears that near-term pricing and asbestos worries led the group to
underperform. Nevertheless, we remain confident in our theses, and have
maintained these positions heading into 2004.
In contrast, our strongest and most consistent performer during the year
was the healthcare sector. Standouts in this group included Omnicare Inc., a
leading provider of managed pharmacy services, whose revenue growth, margin
stability
4
and cash flow expansion exceeded market expectations. Managed healthcare
provider Aetna Inc. also continued to grow profitably, confirming, in our
opinion, the durability of management's increasingly disciplined approach. At
the same time, strong stock selection in generic and specialty pharmaceuticals,
specifically Watson Pharmaceuticals Inc. and Mylan Laboratories Inc., allowed us
to benefit from the apparent trend toward generic replacements of branded
prescription drugs.
After three years of down markets, 2003 provided a welcome change on all
fronts. Looking at 2004, we remain optimistic that the economic recovery is
headed in a positive, stable direction. Investors appear to be putting money
back into stocks, which we believe provides support for further gains in values.
In our opinion, various conditions exist that point toward improved capital
spending, as well as a resumption of mergers and acquisitions activity. In light
of these factors, not to mention our own rigorous company-by-company research,
we continue to hold a very positive outlook for the stocks held in your
portfolio. Therefore, in December we began to use our line of credit obtained by
the Fund earlier in the year to leverage the portfolio. At the end of the year,
the borrowings equal $5 million at a current annualized interest rate of 2.14%
and we expect to increase this amount during the first quarter of 2004. At this
time, we have no plans for the borrowing to exceed $15 million. More information
about the Fund's borrowing policy is available on page 11. We remain optimistic
about the prospects for the year ahead.
Sincerely,
/s/ Todger Anderson
Todger Anderson, CFA
President, Blue Chip Value Fund, Inc.
Chairman, Denver Investment Advisors LLC
The Investment Adviser's Commentary included in this report contains
certain forward-looking statements about the factors that may affect the
performance of the Fund in the future. These statements are based on Fund
management's predictions and expectations concerning certain future events and
their expected impact on the Fund, such as performance of the economy as a whole
and of specific industry sectors, changes in the levels of interest rates, the
impact of developing world events, and other factors that may influence the
future performance of the Fund. Management believes these forward-looking
statements to be reasonable, although they are inherently uncertain and
difficult to predict. Actual events may cause adjustments in portfolio
management strategies from those currently expected to be employed.
5
PORTFOLIO MANAGEMENT TEAM, BLUE CHIP VALUE FUND
Mark Adelmann, CFA, CPA, Vice President and Portfolio Manager/Research
Analyst, joined Denver Investment Advisors LLC in 1995. He has 23 years of total
professional experience--the last 9 years in the investment industry.
Troy Dayton, CFA, Vice President and Portfolio Manager/ Research Analyst,
joined Denver Investment Advisors LLC in 2002. Prior to joining the firm, he was
an Equity Research Analyst with Jurika and Voyles (since 2001) and Dresdner RCM
Global Investors (since 1998). He has 7 years of total investment experience.
Kris Herrick, CFA, Vice President and Portfolio Manager/ Research Analyst,
joined Denver Investment Advisors LLC in 2000. Prior to joining the firm, he was
an Equity Research Analyst with Jurika and Voyles (since 1997). He has 6 years
of total investment experience.
Derek Anguilm, Vice President and Research Analyst, joined Denver
Investment Advisors LLC in 2000. Prior to joining the firm he was with EVEREN
Securities (since 1999). He has 4 years of total investment experience.
HOW TO OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICIES
A description of the policies and procedures that are used by the Fund's
investment adviser to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling (800) 624-4190; (2) on
the Fund's website at www.blu.com and (3) on the Fund's Form N-CSR which is
available on the U.S. Securities and Exchange Commission website at www.sec.gov.
SEND US YOUR E-MAIL ADDRESS
If you would like to receive monthly portfolio composition and
characteristic updates, press releases and financial reports electronically as
soon as they are available, please send an e-mail to blu@denveria.com and
include your name and e-mail address. You will still receive paper copies of any
required communications and reports in the mail. This service is completely
voluntary and you can cancel at any time by contacting us via e-mail at
blu@denveria.com or toll-free at 1-800-624-4190.
6
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Sector Diversification in Comparison to
S&P 500 as of December 31, 2003*
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Fund S&P 500
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Basic Materials 2.9% 3.0%
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Capital Goods 6.7% 5.3%
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Commercial Services 2.1% 2.1%
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Communications 3.9% 6.4%
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Consumer Cyclical 11.7% 12.3%
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Consumer Staples 5.6% 8.7%
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Energy 7.8% 5.9%
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Financials 22.2% 23.0%
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Medical/Healthcare 18.1% 13.2%
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REITs 0.0% 0.4%
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Technology 15.8% 15.3%
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Transportation 2.0% 1.6%
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Utilities 1.1% 2.8%
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Short-Term Investments 0.1% --
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* Sector diversification percentages are based on the Fund's total
investments at market value. Sector diversification is subject to change
and may not be representative of future investments.
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Average Annual Total Returns
as of December 31, 2003
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Return 1-Year 3-Year 5-Year 10-Year
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Blue Chip
Value Fund NAV 26.37% (0.89%) 0.69% 10.43%
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Blue Chip Market
Value Fund Price 46.93% 4.36% 3.26% 11.10%
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S&P 500
Index 28.68% (4.05%) (0.57%) 11.06%
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Past performance is no guarantee of future results. Share prices will fluctuate,
so that a share may be worth more or less than its original cost when sold.
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.
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7
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Market Price Performance History
Since Inception (04/15/87)
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[The following table was depicted as a Line Graph in the Printed Material]
Annual distribution totals as indicated(3)
Annual Distr.
Qtr Ends Adj. Mkt Price Act. Mkt Price Totals
-------- -------------- -------------- ------
04/01/1987(Inception) $10.00 $10.00
06/87 $9.50 $9.50
09/87 $7.80 $7.75
12/87 $5.58 $5.50 0.11
3/88 $5.87 $5.75
6/88 $6.31 $6.13
9/88 $6.10 $5.88
12/88 $6.28 $6.00 0.19
3/89 $6.73 $6.25
6/89 $7.62 $6.88
9/89 $8.54 $7.50
12/89 $8.20 $7.00 0.78
3/90 $8.13 $6.75
6/90 $8.21 $6.63
9/90 $6.86 $5.38
12/90 $7.86 $6.00 0.75
3/91 $9.28 $6.88
6/91 $9.88 $7.13
9/91 $10.49 $7.38
12/91 $11.40 $7.63 0.96
3/92 $11.77 $7.88
6/92 $12.07 $7.88
9/92 $12.18 $7.75
12/92 $12.81 $7.75 0.77
03/93 $13.64 $8.25
06/93 $13.78 $8.13
09/93 (Rights Offering) $14.51 $8.25
12/93 $14.57 $7.88 0.80
03/94 $14.10 $7.63
06/94 $12.54 $6.75
09/94 $12.83 $6.88
12/94 $12.65 $6.13 0.75
03/95 $13.68 $6.63
06/95 $14.78 $7.13
09/95 $15.88 $7.63
12/95 $17.91 $7.63 1.08
03/96 $19.09 $8.13
06/96 $20.04 $8.50
Sep-96 $21.89 $9.25
Dec-96 $24.98 $9.25 1.35
3/1/1997 (Rights Offering) $22.92 $8.38
Jun-97 $27.37 $9.75
Sep-97 $31.13 $10.81
Dec-97 $35.11 $10.94 1.57
Mar-98 $38.12 $11.88
Jun-98 $37.19 $11.31
Sep-98 $30.52 $9.06
Dec-98 $35.58 $9.75 1.13
Mar-99 $35.12 $9.63
Jun-99 $37.90 $10.13
Sep-99 $35.79 $9.31
Dec-99 $37.95 $8.69 1.68
Mar-00 $36.04 $8.25
Jun-00 $37.62 $8.38
Sep-00 $38.84 $8.44
Dec-00 $36.75 $7.55 0.89
Mar-01 $34.06 $6.79
Jun-01 $41.48 $8.05
Sep-01 $37.75 $7.14
Dec-01 $41.92 $7.56 0.74
03/31/2002 - Rights Offering $39.16 $7.02
Jun-02 $34.89 $6.10
Sep-02 $28.26 $4.80
Dec-02 $28.43 $4.59 0.56
Mar-03 $27.31 $4.41
Jun-03 $36.60 $5.77
Sep-03 $37.59 $5.79
Dec-03 $41.77 $6.14 0.51
Please Note: line graph points are as of the end of each calendar quarter.
Past performance is no guarantee of future results. Share prices will fluctuate,
so that shares may be worth more or less than its original cost when sold.
(1) Reflects the cumulative total return of an investment made by a
stockholder who purchased one share at inception ($10.00 IPO) and then
reinvested all annual distributions as indicated, and fully participated
in primary subscriptions of rights offerings.
(2) Reflects the actual market price of one share as it has traded on the
NYSE.
(3) Annual distribution totals represent actual amounts. The Fund currently
pays 2.5% of its net asset value quarterly; however this policy may be
changed at the discretion of the Fund's Board of Directors.
WHY DIVIDEND REINVESTMENT IS IMPORTANT
A very important component of a stockholder's total return comes from the
reinvestment of distributions as the chart above demonstrates. Please read the
following summary of the Fund's Dividend Reinvestment and Cash Purchase Plan and
call us at (800) 624-4190 or visit www.blu.com to obtain an enrollment form or
if you have any additional questions.
8
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Blue Chip Value Fund, Inc.'s (the "Fund") Dividend Reinvestment and Cash
Purchase Plan offers stockholders the opportunity to reinvest dividends and
capital gain distributions in additional shares of the Fund. A stockholder may
also make additional cash investments under the Plan. There is no service charge
for participation.
Participating stockholders will receive additional shares issued at a
price equal to the net asset value per share as of the close of the New York
Stock Exchange on the record date ("Net Asset Value"), unless at such time the
Net Asset Value is higher than the market price of the Fund's common stock, plus
brokerage commission. In this case, the Fund will attempt, generally over the
next 10 business days (the "Trading Period"), to acquire shares of the Fund's
common stock in the open market at a price plus brokerage commission which is
less than the Net Asset Value. In the event that prior to the time such
acquisition is completed, the market price of such common stock plus commission
equals or exceeds the Net Asset Value, or in the event that such market
purchases are unable to be completed by the end of the Trading Period, then the
balance of the distribution shall be completed by issuing additional shares at
Net Asset Value.
Participating stockholders may also make additional cash investments
(minimum $50 and maximum $10,000 per month) by check or money order (or by wire
for a $10 fee) to acquire additional shares of the Fund. Please note, however,
that these additional shares will be purchased at market value plus brokerage
commission (without regard to net asset value) per share.
A stockholder owning a minimum of 50 shares may join the Plan by sending
an Enrollment Form to the Plan Agent at Mellon Investor Services, LLC, Overpeck
Centre, 85 Challenger Road, Ridgefield Park, NJ, 07660.
The automatic 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, even though the stockholder does not
receive the cash. Participants must own at least 50 shares at all times.
9
A stockholder may elect to withdraw from the Plan at any time on 15-days'
prior written notice, and receive future dividends and distributions in cash.
There is no penalty for withdrawal from the Plan and stockholders who have
withdrawn from the Plan may rejoin in the future.
The Fund may amend the Plan at any time upon 30-days prior notice to
participants.
Additional information about the Plan may be obtained from Blue Chip Value
Fund, Inc. by writing to 1225 17th Street, 26th Floor, Denver, CO 80202, by
telephone at (800) 624-4190 or by visiting us at www.blu.com.
If your shares are registered with a broker, you most likely can still
participate in the Dividend Reinvestment Plan. Please contact your broker about
how to participate and to inquire if there are any fees which may be charged by
the broker to your account.
STOCKHOLDER DISTRIBUTION INFORMATION
Certain tax information regarding Blue Chip Value Fund, Inc. is required
to be provided to stockholders based upon the Fund's income and distributions to
the stockholders for the calendar year ended December 31, 2003.
The Board of Directors of Blue Chip Value Fund, Inc. voted to pay to
stockholders of record on the record date, the following distributions derived
from net investment income as well as return of capital:
Record Pay Ordinary Return of
Date Date Income Capital Total
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4/11/2003 4/25/2003 $0.0029 $0.1071 $ 0.11
7/11/2003 7/25/2003 $0.0035 $0.1265 $ 0.13
10/10/2003 10/24/2003 $0.0035 $0.1265 $ 0.13
12/31/2003 1/16/2004 $0.0037 $0.1363 $ 0.14
$0.0136 $0.4964 $ 0.51
The Fund notified stockholders at the end of January 2004 of amounts for
use in preparing 2003 income tax returns. Please note the return of capital is
non-taxable.
Attention Stockholders:
Of the amount shown in box 1a of Form 1099-DIV, 100% meet the requirements
of "Qualified Dividends."
Attention Corporate Stockholders:
To determine the amount that qualifies for the dividends-received
deduction for corporations, multiply the amount that appears in box 1a of Form
1099-DIV by 100%.
10
IMPLEMENTATION OF BORROWING
Under the Fund's investment policies, which can be changed by the Board,
the Fund is permitted to borrow up to 15% of the value of its total assets,
including the amounts borrowed and use the proceeds for investment purposes,
when DIA believes that the return from securities purchased with the borrowed
funds will be greater than the cost of the borrowing. On March 13, 2003, the
Board unanimously agreed to permit the Fund to enter into secured borrowings so
that the Fund's portfolio securities could be pledged as collateral for loans.
In addition, the Board recently clarified this policy so that the percentage
limitation is measured at the incurrence of the loan, as permitted by the
Investment Company Act of 1940. This means that a later increase or decrease in
percentage resulting from a change in value of portfolio securities or amount of
total assets will not be considered a violation of the 15% percentage
limitation.
In November 2003, the Fund entered into a loan with Custodial Trust
Company that permits the Fund to borrow up to the lesser of $15 million or the
maximum amount permitted under the Investment Company Act of 1940. Interest is
payable at a variable rate that is tied to 30-day LIBOR plus 1.00% and a portion
of the Fund's portfolio securities have been pledged as collateral to secure
this loan.
Borrowing for investment purposes creates an opportunity of increased
return, but at the same time, involves special risk considerations. Borrowing
increases the likelihood of greater volatility of net asset value and market
price of the Fund's common stock. To the extent that the return that the Fund
earns on the securities purchased with borrowed monies exceeds the interest
paid, the net asset value of the Fund's shares (and the return of the Fund) will
increase to a greater extent than would otherwise be the case. Conversely, if
the return that the Fund earns on the additional securities purchased fails to
cover the interest incurred on the monies borrowed, the net asset value of the
Fund (and the return of the Fund) would be lower than if borrowing had not been
used. In addition, when the Fund borrows at a variable interest rate, there is a
risk that fluctuations in the interest rate may adversely affect the return to
the holders of the Fund's common stock. Borrowing on a secured basis results in
certain additional risks. Should securities that are pledged as
11
collateral to secure the loan decline in value, the Fund may be required to
pledge additional funds in the form of cash or securities to the lender to avoid
liquidation of those pledged assets. In the event of a steep drop in the value
of pledged securities, it might not be possible to liquidate assets quickly
enough and this could result in mandatory liquidation of the pledged assets in a
declining market at relatively low prices. Furthermore, the investment adviser's
ability to sell the pledged securities is limited by the terms of the loan,
which may reduce its investment flexibility over the pledged securities. In
addition, the rights of the lender to receive payments of interest on and
repayments of principal will be senior to the rights of the Fund's Stockholders.
Successful use of a borrowing strategy may depend on the investment adviser's
ability to predict correctly interest rates and market movements, and there is
no assurance that a borrowing strategy will be successful during any period in
which it is employed.
12
INFORMATION ON THE DIRECTORS AND OFFICERS OF THE FUND
The list below provides certain information about the identity and
business experience of the directors and officers of the Fund. The Fund's
Statement of Additional Information includes additional information about the
Fund's directors, and may be obtained from the Fund free of charge by calling
1-800-624-4190.
INTERESTED DIRECTORS*
TODGER ANDERSON, CFA(1)
Age: 59
Position(s) Held with the Fund:
President and Director
Term of Office(2) and Length of Time Served:
President since 1987. Director from 1988 to 1995 and since 1998. Term as
Director expires in 2004.
Principal Occupations During the Past Five Years:
President and Executive Manager, Denver Investment Advisors LLC (since 1995);
prior thereto, President and Director of Portfolio Management, Denver Investment
Advisors, Inc.; Portfolio Manager, Westcore MIDCO Growth Fund (since 1986);
Portfolio Co-Manager, Westcore Select Fund (since 2001).
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: Fischer Imaging Corporation
KENNETH V. PENLAND, CFA(1)
Age: 61
Position(s) Held with the Fund:
Chairman of the Board and Director
Term of Office(2) and Length of Time Served:
Chairman of the Board and Director since 1987. Term as Director expires in 2006.
Principal Occupations During the Past Five Years:
Retired; from 1995 until December 2001; Chairman and Executive Manager, Denver
Investment Advisors LLC; prior thereto Chairman of the Board and Director of
Research, Denver Investment Advisors, Inc.; from 1995 until August 2002;
President, Westcore Funds; Trustee, Westcore Funds (since 2001).
Number of Portfolios in Fund Complex(3) Overseen by Director: Eleven
Other Directorships(4) Held by Director: None
13
INDEPENDENT DIRECTORS
ROBERT J. GREENEBAUM(1)
Age: 85
Position(s) Held with the Fund:
Director
Term of Office(2) and Length of Time Served:
Director since 1988. Term expires in 2004.
Principal Occupations During the Past Five Years:
Independent Consultant; Director, United Asset Management Corp., Boston,
Massachusetts (February 1982 - May 2000); until 2001, Consultant, Denver
Investment Advisors LLC, and its predecessor, Denver Investment Advisors, Inc.
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: None
RICHARD C. SCHULTE(1)
Age: 59
Position(s) Held with the Fund:
Director
Term of Office(2) and Length of Time Served:
Director since 1987. Term expires in 2005.
Principal Occupations During the Past Five Years:
Private Investor; from 1993 until 1996, President, Transportation Service
Systems, Inc.; Employee, Southern Pacific Lines, Denver, Colorado (until 1996);
prior thereto, Employee, Rio Grande Industries, Denver, Colorado (holding
company) (1991-1993); Vice President Finance and Treasurer, Rio Grande Holdings,
Inc., Denver, Colorado (1990-1993); and Vice President, Denver & Rio Grande
Western Railroad Company, Denver, Colorado (1990-1993).
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: None
14
ROBERTA M. WILSON, CFA(1)
Age: 60
Position(s) Held with the Fund:
Director
Term of Office(2) and Length of Time Served:
Director since 1987. Term expires in 2006.
Principal Occupations During the Past Five Years:
Retired; from 1985 until July 1998, Director of Finance, Denver Board of Water
Commissioners, Denver, Colorado. Management consultant and coach (since 1998).
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: None
LEE W. MATHER, JR.(1)
Age: 60
Position(s) Held with the Fund:
Director
Term of Office(2) and Length of Time Served:
Director since 2001. Term expires in 2005.
Principal Occupations During the Past Five Years:
Director, American Rivers (conservation organization) (since June 2000);
Investment Banker, Merrill Lynch & Co. (January 1977 - April 2000).
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: None
GARY P. MCDANIEL(1)
Age: 58
Position(s) Held with the Fund:
Director
Term of Office(2) and Length of Time Served:
Director since 2001. Term expires in 2004.
Principal Occupations During the Past Five Years:
Senior Managing Director, BaseCamp Capital LLC (private equity investing) (since
2003); Chief Executive Officer, Chateau Communities, Inc. (REIT/manufactured
housing) (1997-2002).
Number of Portfolios in Fund Complex(3) Overseen by Director: One
Other Directorships(4) Held by Director: None
15
OFFICERS
MARK M. ADELMANN, CFA, CPA
Age: 46
1225 Seventeenth St.
26th Floor
Denver, Colorado 80202
Position(s) Held with the Fund:
Vice President
Term of Office(2) and Length of Time Served:
Vice President since 2002.
Principal Occupations During the Past Five Years:
Vice President, Denver Investment Advisors LLC (since 2000); Research Analyst,
Denver Investment Advisors LLC (since 1995).
W. BRUCE MCCONNEL
Age: 60
One Logan Square
18th and Cherry Sts.
Philadelphia, PA 19103
Position(s) Held with the Fund:
Secretary
Term of Office(2) and Length of Time Served:
Secretary since 1987.
Principal Occupations During the Past Five Years:
Partner of the law firm of Drinker Biddle & Reath LLP, Philadelphia, PA.
16
JASPER R. FRONTZ, CPA, CFA(5)
Age: 35
1225 Seventeenth St.
26th Floor
Denver, Colorado 80202
Position(s) Held with the Fund:
Treasurer
Term of Office(2) and Length of Time Served:
Treasurer since 1997.
Principal Occupations During the Past Five Years:
Vice President, Denver Investment Advisors LLC (since 2000); Director of Mutual
Fund Administration, Denver Investment Advisors LLC (since 1997); prior thereto,
Fund Controller, ALPS Mutual Fund Services, Inc. (1995-1997), Registered
Representative, ALPS Distributors, Inc. (since 1995).
NOTES
* These directors each may be deemed to be an "interested director" of the
Fund within the meaning of the Investment Company Act of 1940 by virtue of
their affiliations with the Fund's investment adviser and their positions
as officers of the Fund.
1. Each director may be contacted by writing to the director, c/o Blue Chip
Value Fund, Inc., 1225 Seventeenth Street, 26th Floor, Denver, Colorado
80202, Attn: Jasper Frontz.
2. The Fund's By-Laws provide that the Board of Directors shall consist of
three classes of members. Directors are chosen for a term of three years,
and the term of one class of directors expires each year. The officers of
the Fund are elected by the Board of Directors and, subject to earlier
termination of office, each officer holds office for one year and until
his or her successor is elected and qualified.
3. Fund complex is comprised of the Fund, consisting of one portfolio and
Westcore Funds, of which there are ten portfolios.
4. Includes only directorships of companies required to report to the
Securities and Exchange Commission under the Securities Exchange Act of
1934 (i.e., "public companies") or other investment companies registered
under the Investment Company Act of 1940.
5. Mr. Frontz also serves as Treasurer of Westcore Funds.
17
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Blue Chip Value Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of the Blue Chip Value Fund, Inc. (the
"Fund") as of December 31, 2003, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
four years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the period from January 1,
1999 to December 31, 1999 were audited by other auditors whose report, dated
January 14, 2000, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Blue Chip Value Fund, Inc. as of December 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
February 17, 2004
18
BLUE CHIP VALUE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
ASSETS
Investments at market value $ 158,783,975
(identified cost $139,143,962)
Dividends receivable 219,589
Interest receivable 1,472
Other assets 13,191
-------------
TOTAL ASSETS 159,018,227
-------------
LIABILITIES
Distributions payable 3,761,771
Loan payable to bank 5,000,000
Interest due on loan payable to bank 2,646
Advisory fee payable 75,847
Administration fee payable 8,030
Accrued expenses and other liabilities 112,910
-------------
TOTAL LIABILITIES 8,961,204
-------------
NET ASSETS $ 150,057,023
=============
COMPOSITION OF NET ASSETS
Capital stock, at par $ 268,698
Paid-in-capital 146,120,843
Accumulated net realized loss (15,972,531)
Net unrealized appreciation on investments 19,640,013
-------------
$ 150,057,023
=============
SHARES OF COMMON STOCK
OUTSTANDING (100,000,000 shares
authorized at $0.01 par value) 26,869,794
=============
Net asset value per share $ 5.58
=============
See accompanying notes to financial statements.
19
BLUE CHIP VALUE FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
INCOME
Dividends $ 1,845,263
Interest 45,716
-----------
TOTAL INCOME $ 1,890,979
-----------
EXPENSES
Investment advisory fee (Note 3) 827,047
Administrative services fee (Note 3) 92,489
Legal fees 203,353
Stockholder reporting 151,254
Transfer agent fees 77,721
Directors' fees 72,000
NYSE listing fees 39,966
Audit and tax preparation fees 24,216
Other 16,129
Insurance and fidelity bond 10,975
Custodian fees 9,651
Interest on outstanding loan payable 2,646
-----------
TOTAL EXPENSES 1,527,447
-----------
NET INVESTMENT INCOME 363,532
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments 417,452
Change in net unrealized appreciation/
depreciation of investments 32,391,284
-----------
NET GAIN ON INVESTMENTS 32,808,736
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $33,172,268
===========
See accompanying notes to financial statements.
20
BLUE CHIP VALUE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
Ended December 31,
---------------------------------
2003 2002
------------- -------------
Increase/(decrease) in net assets
from operations:
Net investment income $ 363,532 $ 930,340
Net realized gain/(loss) from
securities investments 417,452 (16,214,221)
Change in net unrealized
appreciation or depreciation
of investments 32,391,284 (21,320,777)
------------- -------------
33,172,268 (36,604,658)
------------- -------------
Decrease in net assets
from distributions to
stockholders from:
Net investment income (363,532) (930,340)
Return of capital (13,273,611) (13,857,137)
------------- -------------
(13,637,143) (14,787,477)
------------- -------------
Increase in net assets from
common stock transactions:
Proceeds from the sale of
0 and 5,262,771 shares
respectively, net of offering
expenses (Note 4) 0 32,797,247
Net asset value of common
stock issued to stockholders
from reinvestment of
dividends (349,244 and
295,323 shares issued,
respectively) 1,808,988 1,790,086
------------- -------------
1,808,988 34,587,333
------------- -------------
NET INCREASE/(DECREASE)
IN NET ASSETS 21,344,113 (16,804,802)
NET ASSETS
Beginning of year 128,712,910 145,517,712
------------- -------------
End of year $ 150,057,023 $ 128,712,910
============= =============
See accompanying notes to financial statements.
21
BLUE CHIP VALUE FUND, INC.
FINANCIAL HIGHLIGHTS
Per Share Data For the year ended December 31,
-------------------------------------------------------------------------
(for a share outstanding throughout each year) 2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net asset value - beginning of year $ 4.85 $ 6.94 $ 8.17 $ 9.09 $ 10.25
Investment operations
Net investment income 0.01 0.04 0.04 0.05 0.03
Net gain (loss) on investments 1.23 (1.40) (0.29) (0.08) 0.49
-------- -------- -------- -------- --------
Total from investment operations 1.24 (1.36) (0.25) (0.03) 0.52
-------- -------- -------- -------- --------
Distributions
From net investment income (0.01) (0.04) (0.04) (0.05) (0.03)
From net realized gains on investments -- -- (0.36) (0.84) (1.65)
Return of capital (0.50) (0.52) (0.34) -- --
-------- -------- -------- -------- --------
Total distributions (0.51) (0.56) (0.74) (0.89) (1.68)
-------- -------- -------- -------- --------
Capital Share Transactions
Dilutive effects of rights offerings -- (0.16) (0.23) -- --
Offering costs charged to paid in capital -- (0.01) (0.01) -- --
-------- -------- -------- -------- --------
Total capital share transactions -- (0.17) (0.24) -- --
-------- -------- -------- -------- --------
Net asset value, end of year $ 5.58 $ 4.85 $ 6.94 $ 8.17 $ 9.09
======== ======== ======== ======== ========
Per share market value, end of year $ 6.14 $ 4.59 $ 7.56 $ 7.55 $ 8.69
======== ======== ======== ======== ========
Total investment return(1) based on:
Market Value 46.9% (32.2%) 14.1% (3.2%) 6.7%
Net Asset Value 26.4% (20.6%) (3.0%) 0.2% 6.2%
Ratios/Supplemental data:
Ratios of expenses to average net assets 1.13%(3) 0.93% 0.91% 0.88% 0.85%
Ratio of net investment income to average net assets 0.27% 0.64% 0.56% 0.63% 0.32%
Ratio of total distributions to average net assets 10.07% 10.15% 10.21% 10.46% 16.86%
Portfolio turnover rate(2) 52.58% 65.86% 73.30% 127.55% 54.24%
Net assets - end of year (in thousands) $150,057 $128,713 $145,517 $140,863 $153,002
See accompanying notes to financial statements.
(1) Past performance is no guarantee of future results. Share prices will
fluctuate, so that a share may be worth more or less than its original
cost when sold. 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.
(2) 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
year ended December 31, 2003 were $69,222,249 and $69,049,508,
respectively.
(3) The increase in the expense ratio during 2003 was primarily attributable
to certain non-recurring legal and stockholder reporting expenses
associated with management seeking shareholder approval on proposals
related to implementing a leveraging strategy, which ultimately resulted
in the Fund negotiating and entering into a loan agreement.
22 23
BLUE CHIP VALUE FUND, INC.
STATEMENT OF INVESTMENTS
December 31, 2003
Market
Shares Cost Value
------------- ------------- -------------
COMMON STOCKS - 105.75%
BASIC MATERIALS - 3.06%
Forestry & Paper - 3.06%
Bowater Inc. 99,100 $ 4,676,588 $ 4,589,321
TOTAL BASIC MATERIALS 4,676,588 4,589,321
-------------------------------------------------------------------------------------------------------------
CAPITAL GOODS - 7.07%
Aerospace & Defense - 3.08%
General Dynamics Corp. 28,600 2,227,919 2,585,154
Raytheon Co. 67,800 2,340,069 2,036,712
------------- -------------
4,567,988 4,621,866
Industrial Products - 3.99%
Parker Hannifin Corp. 100,500 4,847,686 5,979,750
TOTAL CAPITAL GOODS 9,415,674 10,601,616
-------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES - 2.23%
Business Products & Services - 2.23%
Accenture Ltd.* 127,200 2,607,326 3,347,904
TOTAL COMMERCIAL SERVICES 2,607,326 3,347,904
-------------------------------------------------------------------------------------------------------------
COMMUNICATIONS - 4.13%
Telecomm Service Providers - 4.13%
ALLTEL Corp. 69,600 3,507,230 3,241,968
BellSouth Corp. 104,600 3,853,350 2,960,180
------------- -------------
7,360,580 6,202,148
TOTAL COMMUNICATIONS 7,360,580 6,202,148
-------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL - 12.33%
Clothing & Accessories - 2.65%
TJX Companies Inc. 180,300 2,785,187 3,975,615
General Merchandise - 2.51%
Target Corp.+ 98,200 3,396,619 3,770,880
Hotels & Gaming - 1.51%
Starwood Hotels & Resorts Worldwide Inc. 63,200 1,831,324 2,273,304
Publishing & Media - 5.66%
Dow Jones & Company Inc. 50,700 2,714,743 2,527,395
Viacom Inc. - Class B 61,300 2,993,401 2,720,494
Walt Disney Co. 138,800 2,967,594 3,238,204
------------- -------------
8,675,738 8,486,093
TOTAL CONSUMER CYCLICAL 16,688,868 18,505,892
-------------------------------------------------------------------------------------------------------------
24
Market
Shares Cost Value
------------- ------------- -------------
CONSUMER STAPLES - 5.91%
Food & Agricultural Products - 5.91%
Bunge Ltd. 82,100 $ 1,976,770 $ 2,702,732
Kraft Foods Inc. 87,100 2,741,790 2,806,362
Tyson Foods Inc. 254,000 2,988,679 3,362,960
------------- -------------
7,707,239 8,872,054
TOTAL CONSUMER STAPLES 7,707,239 8,872,054
-------------------------------------------------------------------------------------------------------------
ENERGY - 8.26%
Exploration & Production - 2.66%
Devon Energy Corp. 69,612 3,374,412 3,985,983
Integrated Oils - 3.20%
ConocoPhillips 73,119 4,184,267 4,794,413
Oil Services - 2.40%
Transocean Inc.* 149,800 3,289,625 3,596,698
TOTAL ENERGY 10,848,304 12,377,094
-------------------------------------------------------------------------------------------------------------
FINANCIALS - 23.59%
Insurance - Real Estate Brokers - 2.33%
Willis Group Holdings Ltd. 102,800 2,969,098 3,502,396
Integrated Financial Services - 3.22%
Citigroup Inc.+ 99,400 4,306,929 4,824,876
Property Casualty Insurance - 10.12%
Allstate Corp. 71,900 2,605,775 3,093,138
AMBAC Financial Group Inc. 47,500 2,608,731 3,296,025
American International Group 47,900 3,089,795 3,174,812
Radian Group Inc. 53,500 1,891,929 2,608,125
Travelers Property & Casualty Corp. 179,300 2,601,208 3,008,654
------------- -------------
12,797,438 15,180,754
Securities & Asset Management - 5.54%
Goldman Sachs Group Inc. 31,800 2,630,940 3,139,614
Lehman Brothers Holdings Inc. 35,500 2,215,167 2,741,310
Merrill Lynch & Company Inc. 41,500 2,306,225 2,433,975
------------- -------------
7,152,332 8,314,899
Specialty Finance - 2.38%
Freddie Mac 61,300 3,752,653 3,575,016
TOTAL FINANCIALS 30,978,450 35,397,941
-------------------------------------------------------------------------------------------------------------
25
Market
Shares Cost Value
------------- ------------- -------------
MEDICAL - HEALTHCARE - 19.20%
Healthcare Services - 4.73%
Aetna Inc. 105,100 $ 5,435,271 $ 7,102,658
Pharmaceuticals - 14.47%
Barr Pharmaceuticals Inc.* 42,000 3,064,654 3,231,900
King Pharmaceuticals Inc.* 252,600 3,256,583 3,854,676
Mylan Laboratories Inc. 217,100 4,388,645 5,483,946
Pfizer Inc.+ 166,260 4,713,657 5,873,966
Wyeth 77,000 2,786,350 3,268,650
------------- -------------
18,209,889 21,713,138
TOTAL MEDICAL - HEALTHCARE 23,645,160 28,815,796
-------------------------------------------------------------------------------------------------------------
TECHNOLOGY - 16.67%
Computer Software - 4.96%
Microsoft Corp. 172,400 5,240,231 4,747,896
Verisign Inc.* 165,500 2,749,989 2,697,650
------------- -------------
7,990,220 7,445,546
Electronic Equipment - 1.31%
American Power Conversion 80,700 1,067,339 1,973,115
IT Services - 2.87%
Computer Sciences Corp.* 97,300 3,942,978 4,303,579
Semiconductors - 5.70%
Intel Corp.+ 144,300 3,584,797 4,646,460
National Semiconductor Corp.* 38,300 744,624 1,509,403
Xilinx Inc.* 61,800 1,770,312 2,394,132
------------- -------------
6,099,733 8,549,995
Technology Resellers - Distributors - 1.83%
Tech Data Corp.* 69,200 1,902,298 2,746,548
TOTAL TECHNOLOGY 21,002,568 25,018,783
-------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 2.16%
Railroads - 2.16%
Union Pacific Corp. 46,600 2,728,762 3,237,768
TOTAL TRANSPORTATION 2,728,762 3,237,768
-------------------------------------------------------------------------------------------------------------
UTILITIES - 1.14%
Electric - Gas Utilities - 1.14%
Exelon Corp. 25,800 1,378,873 1,712,088
TOTAL UTILITIES 1,378,873 1,712,088
-------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 139,038,392 158,678,405
-------------------------------------------------------------------------------------------------------------
26
Market
Shares Cost Value
------------- ------------- -------------
SHORT-TERM INVESTMENTS - 0.07%
Goldman Sachs Financial
Square Prime Obligations Fund - FST Shares $ 105,570 $ 105,570
TOTAL SHORT-TERM INVESTMENTS 105,570 105,570
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 105.82% $ 139,143,962 $ 158,783,975
------------- -------------
Liabilities in Excess of Other Assets (5.82%) (8,726,952)
------ -------------
NET ASSETS 100.00% $ 150,057,023
====== =============
* Denotes non-income producing security.
+ A portion of the shares held in this security are pledged as collateral
for the borrowings under the loan agreement.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
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 - All securities of the Fund are valued as of the close of
regular trading on the New York Stock Exchange ("NYSE"), currently 4:00 p.m.
(Eastern Time), on each day that the NYSE is open. Listed securities are
generally valued at the last sales price as of the close of regular trading on
the NYSE. Securities traded on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market are generally valued at the
NASDAQ Official Closing Price ("NOCP"). The Fund started to use the NOCP on May
21, 2003. In the absence of sales and NOCP, such securities are valued at the
mean of the bid and asked prices.
27
Securities having a remaining maturity of 60 days or less are valued at
amortized cost which approximates market value.
When market 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.
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.
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.
As of December 31, 2003, the Fund had available for federal income tax
purposes unused capital loss carryforwards as follows:
Expiring
2010 $ 15,484,833
2011 45,245
------------
Total $ 15,530,078
============
The Fund intends to elect to defer to its fiscal year ending December 31,
2004, approximately $35,000 of losses recognized during the period November 1,
2003 to December 31, 2003, which will expire in 2012 if unutilized.
Classification of Distributions to Stockholders - The Fund adjusts
classifications of distributions to stockholders to reflect the differences
between financial statement amounts and distributions determined in accordance
with income tax regulations. Accordingly, during the year ended December 31,
2003, amounts have been reclassified to reflect a decrease in paid in capital of
$13,273,611 and a decrease in overdistributed net investment income of
$13,273,611. Net assets of the Fund were unaffected by the reclassifications.
28
The tax character of the distributions paid was as follows:
Year Ended December 31,
--------------------------------
2003 2002
----------- -----------
Distributions paid from:
Ordinary income $ 363,532 $ 930,340
Long-term capital gain -- --
Return of capital 13,273,611 13,857,137
----------- -----------
Total $13,637,143 $14,787,477
=========== ===========
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized loss $(15,564,900)
Net unrealized appreciation 19,232,382
------------
Total $ 3,667,482
============
The difference between book basis and tax basis is attributable to the tax
deferral of losses on wash sales.
Distributions to Stockholders - Distributions to stockholders are recorded on
the ex-dividend date.
The Fund currently maintains a "managed distribution policy" which
distributes at least 2.5% of its net asset value quarterly to its stockholders.
These fixed distributions are not related to the amount of the Fund's net
investment income or net realized capital gains or losses and will be classified
to conform to the tax reporting requirements of the Internal Revenue Code. If
the Fund's total distributions required by the fixed quarterly payout policy for
the year exceed the Fund's "current and accumulated earnings and profits," the
excess will be treated as non-taxable return of capital, reducing the
stockholder's adjusted basis in his or her shares. Although capital loss
carryforwards may offset any current year net realized capital gains, such
amounts do not reduce the Fund's "current earnings and profits." Therefore, to
the extent that current year net realized capital gains are offset by capital
loss carryforwards, such excess distributions would be classified as taxable
ordinary income rather than non-taxable return of capital. In this situation,
the Fund's Board of Directors would consider that factor, among others, in
determining whether to retain, alter or eliminate the "managed distribution
policy." The Fund's distribution policy may be changed at the discretion of the
Fund's Board of Directors. At this time, the Board of Directors has no plans to
change the current policy.
29
During the fiscal year ending December 31, 2003, 100% of the dividends
paid by the Fund from net investment income qualify for the corporate dividends
received deduction and the requirements regarding qualified dividend income. The
return of capital distributions in 2002 and 2003 were non-taxable.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 December 31, 2003:
Gross appreciation (excess of value over tax cost) $ 22,831,808
Gross depreciation (excess of tax cost over value) (3,599,426)
-------------
Net unrealized appreciation $ 19,232,382
-------------
Cost of investments for income tax purposes $ 139,551,593
=============
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 a director of the Fund are also officers of DIA.
ALPS Mutual Funds Services, Inc. ("ALPS") and DIA serve as the Fund's
co-administrators. The Administrative Agreement includes the Fund's
administrative and fund accounting services. 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.
30
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 $32,797,247.
5. LOAN OUTSTANDING
On November 12, 2003 an agreement with Custodial Trust Company of Bear
Stearns was reached, in which the Fund may borrow from the Custodial Trust
Company an aggregate amount of up to the lesser of $15,000,000 or the maximum
amount the Fund is permitted to borrow under the Investment Company Act of 1940.
The borrowings under the Custodial Trust Company loan are secured by pledging a
portion of the Fund's portfolio securities as collateral. The initial value of
the portfolio securities pledged must equal twice the amount of the loan
outstanding. As of December 31, 2003, the Fund had a loan payable in the amount
of $5,000,000 with a daily interest rate of 2.1413%, which represents 30-day
LIBOR plus 1.00%. The amount of the loan represented 3.14% of the Fund's total
assets as of December 31, 2003.
31
--------------------------------------------------------------------------------
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.
1625 Broadway, Suite 2200
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
[LOGO] Blue Chip
BlueChip Value Fund
www.blu.com
--------------------------------------------------------------------------------
Item 2. Code of Ethics
The Registrant, as of the end of the period covered by the report, has adopted a
code of ethics that applies to the Registrant's principal executive officer and
principal financial officer. For the year ended December 31, 2003, there were no
amendments to a provision of this code of ethics, nor were there any waivers
granted from a provision of the code of ethics. A copy of the Registrant's code
of ethics is filed under Item 11(a)(1) of this Form N-CSR.
Item 3. Audit Committee Financial Expert
The Board of Directors of the Registrant has determined that the Registrant has
at least one "audit committee financial expert" serving on its audit committee.
The Board of Directors has designated Gary P. McDaniel and Roberta M. Wilson as
the Registrant's "audit committee financial experts." Mr. McDaniel and Ms.
Wilson are "independent" as defined in paragraph (a)(2) of Item 3 to Form N-CSR.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees: For the Registrant's fiscal years ended December 31, 2003
and December 31, 2002, the aggregate fees billed for professional services
rendered by the principal accountant for the audit of the Registrant's annual
financial statements were $16,430 for each year.
(b) Audit-Related Fees: In Registrant's fiscal years ended December 31,
2003 and December 31, 2002, no fees were billed for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item.
(c) Tax Fees: For the Registrant's fiscal years ended December 31, 2003
and December 31, 2002, aggregate fees of $7,786 and $6,070, respectively, were
billed for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning. The fiscal year 2003 tax fees were for
tax return preparation services and assistance with research, advice and
inquiries to taxing authorities concerning certain tax regulations for the
Registrant. The fiscal year 2002 tax fees were for tax return preparation
services for the Registrant.
(d) All Other Fees: For the Registrant's fiscal year ended December 31,
2002, aggregate fees of $1,000 were billed by the principal accountant for a
reading of the Registrant's unaudited semi-annual financial statements. No fees
were billed to Registrant by the principal accountant for services other than
the services reported in paragraph (a) through (c) for the Registrant's fiscal
year ended December 31, 2003.
(e) (1) Audit Committee Pre-Approval Policies and Procedures: The
Registrant's Audit Committee has not adopted pre-approval policies and
procedures. Instead, the Audit Committee approves on a case-by-case basis each
audit or non-audit service before the engagement.
(e) (2) No services described in paragraphs (b) through (d) above were
approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) Aggregate non-audit fees of $31,286 were billed by the Registrant's
principal accountant for services rendered to the Registrant and to Registrant's
investment adviser for the Registrant's fiscal year ended December 31, 2003 and
aggregate non-audit fees of $30,570 were billed by the Registrant's principal
accountant for services rendered to the Registrant and to Registrant's
investment adviser for the Registrant's fiscal year ended December 31, 2002.
(h) The non-audit services rendered to Registrant's investment adviser
disclosed in paragraph (g) above were not required to be pre-approved by the
Registrant's audit committee because they were provided prior to May 6, 2003,
the effective date of Rule 2-01(c)(7) of Regulation S-X. The Audit Committee has
considered whether the provision of non-audit services that were rendered to the
Registrant's investment adviser that were not pre-approved is compatible with
maintaining the principal accountant's independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable to annual reports for the fiscal year ended December 31, 2003.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
The Registrant's Board of Directors, at their May 2003 Board meeting, delegated
to its investment adviser, Denver Investment Advisors, subject to the
supervision of the Board, the authority to vote Registrant's proxies relating to
portfolio securities and directed Denver Investment Advisors to follow and apply
Denver Investment Advisors' proxy voting policies and procedures when voting
such proxies. A copy of Denver Investment Advisors' Proxy Voting Policy which
sets forth the guidelines to be utilized by Denver Investment Advisors in voting
proxies for the Registrant follows.
Denver Investment Advisors Proxy Voting Policy
Denver Investment Advisors LLC, unless otherwise directed by our clients, will
research, vote and record all proxy ballots for the security positions we
maintain on our clients' behalf. To execute this responsibility to the highest
standard, Denver Investment Advisors LLC relies heavily on its subscription to
the ISS Proxy Voting system ("VoteX"). ISS (or Institutional Shareholder
Services) provides proxy research and recommendations, as well as automated
voting and record keeping, and is the world's leader in these services.
We have fully reviewed and approved the ISS Proxy Voting Guidelines and follow
their recommendations on most issues brought to a shareholder vote.
Subcategories within the guidelines include:
1) Operational Items
2) Board of Directors
3) Proxy Contests
4) Anti-takeover Defenses and Voting Related Issues
5) Mergers and Corporate Restructurings
6) State of Incorporation
7) Capital Structure
8) Executive and Director Compensation
9) Social and Environmental Issues
10) Mutual Fund Proxies
11) Global Proxy Voting Matters
In the rare instance where our research or security analyst believes that any
ISS recommendation would be to the detriment of our investment clients, we can
and will override the ISS recommendation through a manual vote. The final
authorization to override an ISS recommendation must be approved by an Executive
Manager of Denver Investment Advisors LLC or a member of its Management
Committee other than the analyst. A written record supporting the decision to
override the ISS recommendation will be maintained.
Special considerations are made for stocks traded on foreign exchanges.
Specifically, if voting will block the liquidity of these stocks, Denver
Investment Advisors LLC will not exercise its voting rights.
For any matters subject to proxy vote for mutual funds in which Denver
Investment Advisors LLC is an affiliated party, Denver Investment Advisors will
vote on behalf of clients invested in such mutual funds in accordance with ISS,
with no exceptions.
Client information is automatically recorded in "VoteX" for record keeping. For
accounts custodied at financial institutions that are not clients of ISS,
physical proxy cards are received, marked and returned for voting. Those votes
are then manually recorded in the ISS Proxy VoteX system. For client accounts
held in an omnibus registration, ballots that are received will be voted, but no
records for individual accounts held in omnibus registration are maintained.
Denver Investment Advisors LLC maintains proxy data showing the voting pattern
on specific issues - either for an individual meeting or for all proxies voted
within a specified time period, in addition to proxy voting on individual client
accounts.
If you have any specific questions or concerns that have not been addressed
here, please do not hesitate to contact your portfolio manager. Upon request we
have available ISS Proxy Voting Guidelines Summary documentation from the ISS
Proxy Voting manual.
Adopted: April 2003
Last Amended: September 2003
ISS Proxy Voting Guidelines
Summary
The following is a condensed version of all proxy voting recommendations
contained in The ISS Proxy Voting Manual.
1. Operational Items
Adjourn Meeting
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Amend Quorum Requirements
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
Amend Minor Bylaws
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
Change Company Name
Vote FOR proposals to change the corporate name.
Change Date, Time, or Location of Annual Meeting
Vote FOR management proposals to change the date/time/location of the annual
meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date/time/location of the
annual meeting unless the current scheduling or location is unreasonable.
Ratifying Auditors
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is
therefore not independent
o Fees for non-audit services are excessive, or
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's financial
position.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account the tenure of the audit firm, the length of rotation
specified in the proposal, any significant audit-related issues at the company,
and whether the company has a periodic renewal process where the auditor is
evaluated for both audit quality and competitive price.
Transact Other Business
Vote AGAINST proposals to approve other business when it appears as a voting
item.
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board. However, there are some actions by directors that
should result in votes being WITHHELD. These instances include directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse
o Implement or renew a dead-hand or modified dead-hand poison pill
o Ignore a shareholder proposal that is approved by a majority of the shares
outstanding
o Ignore a shareholder proposal that is approved by a majority of the votes cast
for two consecutive years
o Failed to act on takeover offers where the majority of the shareholders
tendered their shares
o Are inside directors or affiliated outsiders and sit on the audit,
compensation, or nominating committees
o Are inside directors or affiliated outsiders and the full board serves as the
audit, compensation, or nominating committee or the company does not have one of
these committees
o Are audit committee members and the non-audit fees paid to the auditor are
excessive.
o Are inside directors or affiliated outside directors and the full board is
less than majority independent
o Sit on more than six boards
o Are members of a compensation committee that has allowed a pay-
for-performance disconnect as described in Section 8 (Execut ive and Director
Compensation).
In addition, directors who enacted egregious corporate governance policies or
failed to replace management as appropriate would be subject to recommendations
to WITHHOLD votes.
Age Limits
Vote AGAINST shareholder or mana gement proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
Board Size
Vote FOR proposals seeking to fix the board size or designate a range for the
board size.
Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
Cumulative Voting
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
Director and Officer Indemnification and Liability Protection
Proposals on director and officer indemnification and liability protection
should be evaluated on a CASE-BY-CASE basis, using Delaware law as the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to actions, such as negligence, that are more serious violations
of fiduciary obligation than mere carelessness.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
o The director was found to have acted in good faith and in a manner that he
reasonably believed was in the best interests of the company, and
o Only if the director's legal expenses would be covered.
Establish/Amend Nominee Qualifications
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
Filling Vacancies/Removal of Directors
Vote AGAINST proposals that provide that directors may be removed only for
cause.
Vote FOR proposals to restore shareholder ability to remove directors with or
without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies.
Independent Chairman (Separate Chairman/CEO)
Generally vote FOR shareholder proposals requiring the position of chairman be
filled by an independent director unless there are compelling reasons to
recommend against the proposal, such as a counterbalancing governance structure.
This should include all of the following:
o Designated lead director, elected by and from the independent board members
with clearly delineated and comprehensive duties
o Two-thirds independent board
o All-independent key committees
o Established governance guidelines
Majority of Independent Directors/Establishment of Committees
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
Open Access
Vote CASE-BY-CASE on shareholder proposals asking for open access taking into
account the ownership threshold specified in the proposal and the proponent's
rationale for targeting the company in terms of board and director conduct.
Stock Ownership Requirements
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE shareholder proposals asking that the company adopt a holding
or retention period for its executives (for holding stock after the vesting or
exercise of equity awards), taking into account any stock ownership requirements
or holding period/retention ratio already in place and the actual ownership
level of executives.
Term Limits
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
3. Proxy Contests
Voting for Director Nominees in Contested Elections
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the following factors:
o Long-term financial performance of the target company relative to its industry
o Management's track record
o Background to the proxy contest
o Qualifications of director nominees (both slates)
o Evaluation of what each side is offering shareholders as well as the
likelihood that the proposed objectives and goals can be met; and stock
ownership positions.
Reimbursing Proxy Solicitation Expenses
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BYCASE basis. In cases where ISS recommends in favor of the dissidents, we
also recommend voting for reimbursing proxy solicitation expenses.
Confidential Voting
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows:
In the case of a contested election, management should be permitted to request
that the dissident group honor its confidential voting policy. If the dissidents
agree, the policy remains in place. If the dissidents will not agree, the
confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
4. Antitakeover Defenses and Voting Related Issues
Advance Notice Requirements for Shareholder Proposals/Nominations
Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving
support to those proposals that allow shareholders to submit proposals as close
to the meeting date as reasonably possible and within the broadest window
possible.
Amend Bylaws without Shareholder Consent
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
Poison Pills
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it.
Vote FOR shareholder proposals asking that any future pill be put to a
shareholder vote.
Shareholder Ability to Act by Written Consent
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
Shareholder Ability to Call Special Meetings
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
5. Mergers and Corporate Restructurings
Appraisal Rights
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.
Asset Purchases
Vote CASE-BY-CASE on asset purchase proposals, considering the following
factors:
o Purchase price
o Fairness opinion
o Financial and strategic benefits
o How the deal was negotiated
o Conflicts of interest
o Other alternatives for the business
o Noncompletion risk.
Asset Sales
Votes on asset sales should be determined on a CASE-BY-CASE basis, considering
the following factors:
o Impact on the balance sheet/working capital
o Potential elimination of diseconomies
o Anticipated financial and operating benefits
o Anticipated use of funds
o Value received for the asset
o Fairness opinion
o How the deal was negotiated
o Conflicts of interest.
Bundled Proposals
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals.
In the case of items that are conditioned upon each other, examine the benefits
and costs of the packaged items. In instances when the joint effect of the
conditioned items is not in shareholders' best interests, vote against the
proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
Votes on proposals regarding conversion of securities are determined on a
CASE-BYCASE basis. When evaluating these proposals the investor should review
the dilution to existing shareholders, the conversion price relative to market
value, financial issues, control issues, termination penalties, and conflicts of
interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans
Votes on proposals to increase common and/or preferred shares and to issue
shares as part of a debt restructuring plan are determined on a CASE-BY-CASE
basis, taking into consideration the following:
o Dilution to existing shareholders' position
o Terms of the offer
o Financial issues
o Management's efforts to pursue other alternatives
o Control issues
o Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
Formation of Holding Company
Votes on proposals regarding the formation of a holding company should be
determined on a CASE-BY-CASE basis, taking into consideration the following:
o The reasons for the change
o Any financial or tax benefits
o Regulatory benefits
o Increases in capital structure
o Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST
the formation of a holding company if the transaction would include either of
the following:
o Increases in common or preferred stock in excess of the allowable maximum as
calculated by the ISS Capital Structure model
o Adverse changes in shareholder rights
Going Private Transactions (LBOs and Minority Squeezeouts)
Vote going private transactions on a CASE-BY-CASE basis, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and noncompletion
risk.
Joint Ventures
Votes CASE-BY-CASE on proposals to form joint ventures, taking into account the
following: percentage of assets/business contributed, percentage ownership,
financial and strategic benefits, governance structure, conflicts of interest,
other alternatives, and noncompletion risk.
Liquidations
Votes on liquidations should be made on a CASE-BY-CASE basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
Mergers and Acquisitions/ Issuance of Shares to Facilitate Merger or Acquisition
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis,
determining whether the transaction enhances shareholder value by giving
consideration to the following:
o Prospects of the combined company, anticipated financial and operating
benefits
o Offer price
o Fairness opinion
o How the deal was negotiated
o Changes in corporate governance
o Change in the capital structure
o Conflicts of interest.
Private Placements/Warrants/Convertible Debentures
Votes on proposals regarding private placements should be determined on a
CASE-BYCASE basis. When evaluating these proposals the investor should review:
dilution to existing shareholders' position, terms of the offer, financial
issues, management's efforts to pursue other alternatives, control issues, and
conflicts of interest. Vote FOR the private placement if it is expected that the
company will file for bankruptcy if the transaction is not approved.
Spinoffs
Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on:
o Tax and regulatory advantages
o Planned use of the sale proceeds
o Valuation of spinoff
o Fairness opinion
o Benefits to the parent company
o Conflicts of interest
o Managerial incentives
o Corporate governance changes
o Changes in the capital structure.
Value Maximization Proposals
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors: prolonged poor performance with no turnaround in sight, signs of
entrenched board and management, strategic plan in place for improving value,
likelihood of receiving reasonable value in a sale or dissolution, and whether
company is actively exploring its strategic options, including retaining a
financial advisor.
6. State of Incorporation
Control Share Acquisition Provisions
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.
Vote FOR proposals to restore voting rights to the control shares.
Control Share Cashout Provisions
Vote FOR proposals to opt out of control share cashout statutes.
Disgorgement Provisions
Vote FOR proposals to opt out of state disgorgement provisions.
Fair Price Provisions
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price.
Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
Freezeout Provisions
Vote FOR proposals to opt out of state freezeout provisions.
Greenmail
Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Review on a CASE-BY-CASE basis antigreenmail proposals when they are bundled
with other charter or bylaw amendments.
Reincorporation Proposals
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
Stakeholder Provisions
Vote AGAINST proposals that ask the board to consider nonshareholder
constituencies or other nonfinancial effects when evaluating a merger or
business combination.
State Antitakeover Statutes
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
7. Capital Structure
Adjustments to Par Value of Common Stock
Vote FOR management proposals to reduce the par value of common stock.
Common Stock Authorization
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
Dual-class Stock
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
o It is intended for financing purposes with minimal or no dilution to current
shareholders
o It is not designed to preserve the voting power of an insider or significant
shareholder
Issue Stock for Use with Rights Plan
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a shareholder rights plan (poison pill).
Preemptive Rights
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company, the characteristics of its shareholder base, and the liquidity of the
stock.
Preferred Stock
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
Recapitalization
Votes CASE-BY-CASE on recapitalizations (reclassifications of securities),
taking into account the following: more simplified capital structure, enhanced
liquidity, fairness of conversion terms, impact on voting power and dividends,
reasons for the reclassification, conflicts of interest, and other alternatives
considered.
Reverse Stock Splits
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid
delisting. Votes on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue should be
determined on a CASE-BY-CASE basis using a model developed by ISS.
Share Repurchase Programs
Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.
Stock Distributions: Splits and Dividends
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by ISS.
Tracking Stock
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis,
weighing the strategic value of the transaction against such factors as: adverse
governance changes, excessive increases in authorized capital stock, unfair
method of distribution, diminution of voting rights, adverse conversion
features, negative impact on stock option plans, and other alternatives such as
spinoff.
8. Executive and Director Compensation
Votes with respect to equity-based compensation plans should be determined on a
CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily
focuses on the transfer of shareholder wealth (the dollar cost of pay plans to
shareholders instead of simply focusing on voting power dilution). Using the
expanded compensation data disclosed under the SEC's rules, ISS will value every
award type. ISS will include in its analyses an estimated dollar cost for the
proposed plan and all continuing plans. This cost, dilution to shareholders'
equity, will also be expressed as a percentage figure for the transfer of
shareholder wealth, and will be considered along with dilution to voting power.
Once ISS determines the estimated cost of the plan, we compare it to a
companyspecific dilution cap.
Our model determines a company-specific allowable pool of shareholder wealth
that may be transferred from the company to plan participants, adjusted for:
o Long-term corporate performance (on an absolute basis and relative to a
standard industry peer group and an appropriate market index),
o Cash compensation, and
o Categorization of the company as emerging, growth, or mature.
These adjustments are pegged to market capitalization.
Vote AGAINST plans that expressly permit the repricing of underwater stock
options without shareholder approval. Generally vote AGAINST plans in which the
CEO participates if there is a disconnect between the CEO's pay and company
performance (an increase in pay and a decrease in performance) and the main
source of the pay increase (over half) is equity-based. A decrease in
performance is based on negative one- and three- year total shareholder returns.
An increase in pay is based on the CEO's total direct compensation (salary, cash
bonus, present value of stock options, face value of restricted stock, face
value of longterm incentive plan payouts, and all other compensation) increasing
over the previous year. Also WITHHOLD votes from the Compensation Committee
members.
Director Compensation
Votes on compensation plans for directors are determined on a CASE-BY-CASE
basis, using a proprietary, quantitative model developed by ISS.
Stock Plans in Lieu of Cash
Votes for plans which provide participants with the option of taking all or a
portion of their cash compensation in the form of stock are determined on a
CASE-BY-CASE basis.
Vote FOR plans which provide a dollar- for-dollar cash for stock exchange.
Votes for plans which do not provide a dollar-for-dollar cash for stock exchange
should be determined on a CASE-BY-CASE basis using a proprietary, quantitative
model developed by ISS.
Director Retirement Plans
Vote AGAINST retirement plans for nonemployee directors.
Vote FOR shareholder proposals to eliminate retirement plans for nonemployee
directors.
Management Proposals Seeking Approval to Reprice Options
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
o Historic trading patterns
o Rationale for the repricing
o Value-for-value exchange
o Option vesting
o Term of the option
o Exercise price
o Participation.
Employee Stock Purchase Plans
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis.
Vote FOR employee stock purchase plans where all of the following apply:
o Purchase price is at least 85 percent of fair market value
o Offering period is 27 months or less, and
o The number of shares allocated to the plan is ten percent or less of the
outstanding shares
Vote AGAINST employee stock purchase plans where any of the following apply:
o Purchase price is less than 85 percent of fair market value, or
o Offering period is greater than 27 months, or
o The number of shares allocated to the plan is more than ten percent of the
outstanding shares
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation
Proposals)
Vote FOR proposals that simply amend shareholder-approved compensation plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m).
Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate.
Votes to amend existing plans to increase shares reserved and to qualify for
favorable tax treatment under the provisions of Section 162(m) should be
considered on a CASE-BYCASE basis using a proprietary, quantitative model
developed by ISS.
Generally vote FOR cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes under the
provisions of Section 162(m) if no increase in shares is requested.
Employee Stock Ownership Plans (ESOPs)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares.)
401(k) Employee Benefit Plans
Vote FOR proposals to implement a 401(k) savings plan for employees.
Shareholder Proposals Regarding Executive and Director Pay
Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
Option Expensing
Generally vote FOR shareholder proposals asking the company to expense stock
options, unless the company has already publicly committed to expensing options
by a specific date.
Performance-Based Stock Options
Generally vote FOR shareholder proposals advocating the use of performance-based
stock options (indexed, premium-priced, and performance-vested options), unless:
o The proposal is overly restrictive (e.g., it mandates that awards to all
employees must be performance-based or all awards to top executives must be a
particular type, such as indexed options)
o The company demonstrates that it is using a substantial portion of
performance-based awards for its top executives
Golden Parachutes and Executive Severance Agreements
Vote FOR shareholder proposals to require golden parachutes or executive
severance agreements to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes.
An acceptable parachute should include the following:
o The parachute should be less attractive than an ongoing employment opportunity
with the firm
o The triggering mechanism should be beyond the control of management
o The amount should not exceed three times base salary plus guaranteed benefits
Pension Plan Income Accounting
Generally vote FOR shareholder proposals to exclude pension plan income in the
calculation of earnings used in determining executive bonuses/compensation.
Supplemental Executive Retirement Plans (SERPs)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employeewide plans.
9. Social and Environmental Issues
CONSUMER ISSUES AND PUBLIC SAFETY
Animal Rights
Vote CASE-BY-CASE on proposals to phase out the use of animals in product
testing, taking into account:
o The nature of the product and the degree that animal testing is necessary or
federally mandated (such as medical products),
o The availability and feasibility of alternatives to animal testing to ensure
product safety, and
o The degree that competitors are using animal- free testing. Generally vote FOR
proposals seeking a report on the company's animal welfare standards unless:
o The company has already published a set of animal welfare standards and
monitors compliance
o The company's standards are comparable to or better than those of peer firms,
and
o There are no serious controversies surrounding the company's treatment of
animals
Drug Pricing
Vote CASE-BY-CASE on proposals asking the company to implement price restraints
on pharmaceutical products, taking into account:
o Whether the proposal focuses on a specific drug and region
o Whether the economic benefits of providing subsidized drugs (e.g., public
goodwill) outweigh the costs in terms of reduced profits, lower R&D spending,
and harm to competitiveness
o The extent that reduced prices can be offset through the company's marketing
budget without affecting R&D spending
o Whether the company already limits price increases of its products
o Whether the company already contributes life-saving pharmaceuticals to the
needy and Third World countries
o The extent that peer companies implement price restraints
Genetically Modified Foods
Vote AGAINST proposals asking companies to voluntarily label genetically
engineered (GE) ingredients in their products or alternatively to provide
interim labeling and eventually eliminate GE ingredients due to the costs and
feasibility of labeling and/or phasing out the use of GE ingredients.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on GE product labeling and related
voluntary initiatives and how this disclosure compares with peer company
disclosure
o Company's current disclosure on the feasibility of GE product labeling,
including information on the related costs
o Any voluntary labeling initiatives undertaken or considered by the company.
Vote CASE-BY-CASE on proposals asking for the preparation of a report on the
financial, legal, and environmental impact of continued use of GE
ingredients/seeds.
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on risks related to GE product use and
how this disclosure compares with peer company disclosure
o The percentage of revenue derived from international operations, particularly
in Europe, where GE products are more regulated and consumer backlash is more
pronounced.
Vote AGAINST proposals seeking a report on the health and environmental effects
of genetically modified organisms (GMOs). Health studies of this sort are better
undertaken by regulators and the scientific community.
Vote AGAINST proposals to completely phase out GE ingredients from the company's
products or proposals asking for reports outlining the steps necessary to
eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that outweigh the economic benefits derived from
biotechnology.
Handguns
Generally vote AGAINST requests for reports on a company's policies aimed at
curtailing gun violence in the United States unless the report is confined to
product safety information. Criminal misuse of firearms is beyond company
control and instead falls within the purview of law enforcement agencies.
HIV/AIDS
Vote CASE-BY-CASE on requests for reports outlining the impact of the health
pandemic (HIV/AIDS, malaria and tuberculosis) on the company's Sub-Saharan
operations and how the company is responding to it, taking into account:
o The nature and size of the company's operations in Sub-Saharan Africa and the
number of local employees
o The company's existing healthcare policies, including benefits and healthcare
access for local workers
o Company donations to healthcare providers operating in the region
Vote CASE-BY-CASE on proposals asking companies to establish, implement, and
report on a standard of response to the HIV/AIDS, tuberculosis and malaria
health pandemic in Africa and other developing countries, taking into account:
o The company's actions in developing countries to address HIV/AIDS,
tuberculosis and malaria, including donations of pharmaceuticals and work with
public health organizations
o The company's initiatives in this regard compared to those of peer companies
Predatory Lending
Vote CASE-BY CASE on requests for reports on the company's procedures for
preventing predatory lending, including the establishment of a board committee
for oversight, taking into account:
o Whether the company has adequately disclosed mechanisms in place to prevent
abusive lending practices
o Whether the company has adequately disclosed the financial risks of its
subprime business
o Whether the company has been subject to violations of lending laws or serious
lending controversies
o Peer companies' policies to prevent abusive lending practices.
Tobacco
Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:
Second-hand smoke:
o Whether the company complies with all local ordinances and regulations
o The degree that voluntary restrictions beyond those mandated by law might hurt
the company's competitiveness
o The risk of any health-related liabilities.
Advertising to youth:
o Whether the company complies with federal, state, and local laws on the
marketing of tobacco or if it has been fined for violations
o Whether the company has gone as far as peers in restricting advertising
o Whether the company entered into the Master Settlement Agreement, which
restricts marketing of tobacco to youth
o Whether restrictions on marketing to youth extend to foreign countries Cease
production of tobacco-related products or avoid selling products to tobacco
companies:
o The percentage of the company's business affected
o The economic loss of eliminating the business versus any potential
tobacco-related liabilities. Spinoff tobacco-related businesses:
o The percentage of the company's business affected
o The feasibility of a spinoff
o Potential future liabilities related to the company's tobacco business.
Stronger product warnings:
Vote AGAINST proposals seeking stronger product warnings. Such decisions are
better left to public health authorities.
Investment in tobacco stocks:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.
ENVIRONMENT AND ENERGY
Arctic National Wildlife Refuge
Vote CASE-BY-CASE on reports outlining potential environmental damage from
drilling in the Arctic National Wildlife Refuge (ANWR), taking into account:
o Whether there are publicly available environmental impact reports
o Whether the company has a poor environmental track record, such as violations
of federal and state regulations or accidental spills
o The current status of legislation regarding drilling in ANWR.
CERES Principles
Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account:
o The company's current environmental disclosure beyond legal requirements,
including environmental health and safety (EHS) audits and reports that may
duplicate CERES
o The company's environmental performance record, including violations of
federal and state regulations, level of toxic emissions, and accidental spills
o Environmentally conscious practices of peer companies, including endorsement
of CERES
o Costs of membership and implementation.
Environmental-Economic Risk Report
Vote CASE-BY-CASE on proposals requesting reports assessing economic risks of
environmental pollution or climate change, taking into account whether the
company has clearly disclosed the following in its public documents:
o Approximate costs of complying with current or proposed environmental laws
o Steps company is taking to reduce greenhouse gasses or other environmental
pollutants
o Measurements of the company's emissions levels
o Reduction targets or goals for environmental pollutants including greenhouse
gasses
Environmental Reports
Generally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public.
Global Warming
Generally vote FOR reports on the level of greenhouse gas emissions from the
company's operations and products, unless the report is duplicative of the
company's current environmental disclosure and reporting or is not integral to
the company's line of business. However, additional reporting may be warranted
if:
o The company's level of disclosure lags that of its competitors, or
o The company has a poor environmental track record, such as violations of
federal and state regulations.
Recycling
Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account:
o The nature of the company's business and the percentage affected
o The extent that peer companies are recycling
o The timetable prescribed by the proposal
o The costs and methods of implementation
o Whether the company has a poor environmental track record, such as violations
of federal and state regulations.
Renewable Energy
Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking
into account:
o The nature of the company's business and the percentage affected
o The extent that peer companies are switching from fossil fuels to cleaner
sources
o The timetable and specific action prescribed by the proposal
o The costs of implementation
o The company's initiatives to address climate change
Generally vote FOR requests for reports on the feasibility of developing
renewable energy sources, unless the report is duplicative of the company's
current environmental disclosure and reporting or is not integral to the
company's line of business.
Sustainability Report
Generally vote FOR proposals requesting the company to report on its policies
and practices related to social, environmental, and economic sustainability,
unless the company is already reporting on its sustainability initiatives
through existing reports such as:
o A combination of an EHS or other environmental report, code of conduct, and/or
supplier/vendor standards, and equal opportunity and diversity data and
programs, all of which are publicly available, or
o A report based on Global Reporting Initiative (GRI) or similar guidelines.
Vote FOR shareholder proposals asking companies to provide a sustainability
report applying the GRI guidelines unless:
o The company already has a comprehensive sustainability report or equivalent
addressing the essential elements of the GRI guidelines or
o The company has publicly committed to using the GRI format by a specific date
GENERAL CORPORATE ISSUES
Link Executive Compensation to Social Performance
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities. Such resolutions
should be evaluated in the context of:
o The relevance of the issue to be linked to pay
o The degree that social performance is already included in the company's pay
structure and disclosed
o The degree that social performance is used by peer companies in setting pay
o Violations or complaints filed against the company relating to the particular
social performance measure
o Artificial limits sought by the proposal, such as freezing or capping
executive pay
o Independence of the compensation committee
o Current company pay levels.
Charitable/Political Contributions
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o The company is in compliance with laws governing corporate political
activities, and
o The company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
not coercive.
Vote AGAINST proposals to report or publish in newspapers the company's
political contributions. Federal and state laws restrict the amount of corporate
contributions and include reporting requirements.
Vote AGAINST proposals disallowing the company from making political
contributions. Businesses are affected by legislation at the federal, state, and
local level and barring contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing, or gross negligence, management should determine which
contributions are in the best interests of the company.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR STANDARDS AND HUMAN RIGHTS
China Principles
Vote AGAINST proposals to implement the China Principles unless:
o There are serious controversies surrounding the company's China operations,
and
o The company does not have a code of conduct with standards similar to those
promulgated by the International Labor Organization (ILO).
Country-specific human rights reports
Vote CASE-BY-CASE on requests for reports detailing the company's operations in
a particular country and steps to protect human rights, based on:
o The nature and amount of company business in that country
o The company's workplace code of conduct
o Proprietary and confidential information involved
o Company compliance with U.S. regulations on investing in the country
o Level of peer company involvement in the country.
International Codes of Conduct/Vendor Standards
Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
o The company's current workplace code of conduct or adherence to other global
standards and the degree they meet the standards promulgated by the proponent
o Agreements with foreign suppliers to meet certain workplace standards
o Whether company and vendor facilities are monitored and how
o Company participation in fair labor organizations
o Type of business
o Proportion of business conducted overseas
o Countries of operation with known human rights abuses
o Whether the company has been recently involved in significant labor and human
rights controversies or violations
o Peer company standards and practices
o Union presence in company's international factories
Generally vote FOR reports outlining vendor standards compliance unless any of
the following apply:
o The company does not operate in countries with significant human rights
violations
o The company has no recent human rights controversies or violations, or
o The company already publicly discloses information on its vendor standards
compliance.
MacBride Principles
Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:
o Company compliance with or violations of the Fair Employment Act of 1989
o Company antidiscrimination policies that already exceed the legal requirements
o The cost and feasibility of adopting all nine principles
o The cost of duplicating efforts to follow two sets of standards (Fair
Employment and the MacBride Principles)
o The potential for charges of reverse discrimination
o The potential that any company sales or contracts in the rest of the United
Kingdom could be negatively impacted
o The level of the company's inve stment in Northern Ireland
o The number of company employees in Northern Ireland
o The degree that industry peers have adopted the MacBride Principles
o Applicable state and municipal laws that limit contracts with companies that
have not adopted the MacBride Principles.
MILITARY BUSINESS
Foreign Military Sales/Offsets
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
Landmines and Cluster Bombs
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in antipersonnel landmine production, taking into account:
o Whether the company has in the past manufactured landmine components
o Whether the company's peers have renounced future production
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in cluster bomb production, taking into account:
o What weapons classifications the proponent views as cluster bombs
o Whether the company currently or in the past has manufactured cluster bombs or
their components
o The percentage of revenue derived from cluster bomb manufacturing
o Whether the company's peers have renounced future production
Nuclear Weapons
Vote AGAINST proposals asking a company to cease production of nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Components and delivery systems serve multiple military and non-
military uses, and withdrawal from these contracts could have a negative impact
on the company's business.
Operations in Nations Sponsoring Terrorism (Iran)
Vote CASE-BY-CASE on requests for a board committee review and report outlining
the company's financial and reputational risks from its operations in Iran,
taking into account current disclosure on:
o The nature and purpose of the Iranian operations and the amount of business
involved (direct and indirect revenues and expenses) that could be affected by
political disruption
o Compliance with U.S. sanctions and laws
Spaced-Based Weaponization
Generally vote FOR reports on a company's involvement in spaced-based
weaponization unless:
o The information is already publicly available or
o The disclosures sought could compromise proprietary information.
WORKPLACE DIVERSITY
Board Diversity
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
o The board composition is reasonably inclusive in relation to companies of
similar size and business or
o The board already reports on its nominating procedures and diversity
initiatives.
Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:
o The degree of board diversity
o Comparison with peer companies
o Established process for improving board diversity
o Existence of independent nominating committee
o Use of outside search firm
o History of EEO violations.
Equal Employment Opportunity (EEO)
Generally vote FOR reports outlining the company's affirmative action
initiatives unless all of the following apply:
o The company has well-documented equal opportunity programs
o The company already publicly reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has no recent EEO-related violations or litigation.
Vote AGAINST proposals seeking information on the diversity efforts of suppliers
and service providers, which can pose a significant cost and administration
burden on the company.
Glass Ceiling
Generally vote FOR reports outlining the company's progress towards the Glass
Ceiling Commission's business recommendations, unless:
o The composition of senior management and the board is fairly inclusive
o The company has well-documented programs addressing diversity initiatives and
leadership development
o The company already issues public reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has had no recent, significant EEO-related violations or
litigation
Sexual Orientation
Vote FOR proposals seeking to amend a company's EEO statement in order to
prohibit discrimination based on sexual orientation, unless the change would
result in excessive costs for the company.
Vote AGAINST proposals to extend company benefits to or eliminate benefits from
domestic partners. Benefits decisions should be left to the discretion of the
company.
10. Mutual Fund Proxies
Election of Directors
Vote to elect directors on a case-by-case basis, considering the following
factors:
o Board structure
o Director independence and qualifications
o Attendance at board and committee meetings.
Votes should be withheld from directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse for the absences. Valid reasons include illness or absence
due to company business. Participation via telephone is acceptable. In
addition, if the director missed only one meeting or one day's meetings,
votes should not be withheld even if such absence dropped the director's
attendance below 75 percent.
o Ignore a shareholder proposal that is approved by a majority of shares
outstanding
o Ignore a shareholder proposal that is approved by a majority of the votes
cast for two consecutive years
o Are interested directors and sit on the audit or nominating committee, or
o Are interested directors and the full board serves as the audit or
nominating committee or the company does not have one of these committees.
Convert Closed-end Fund to Open-end Fund
Vote conversion proposals on a case-by-case basis, considering the following
factors:
o Past performance as a closed-end fund
o Market in which the fund invests
o Measures taken by the board to address the discount
o Past shareholder activism, board activity
o Votes on related proposals.
Proxy Contests
Votes on proxy contests should be determined on a CASE-BY-CASE basis,
considering the following factors:
o Past performance relative to its peers
o Market in which fund invests
o Measures taken by the board to address the issues
o Past shareholder activism, board activity, and votes on related proposals
o Strategy of the incumbents versus the dissidents
o Independence of directors
o Experience and skills of director candidates
o Governance profile of the company
o Evidence of management entrenchment
Investment Advisory Agreements
Votes on investment advisory agreements should be determined on a CASE-BY-CASE
basis, considering the following factors:
o Proposed and current fee schedules
o Fund category/investment objective
o Performance benchmarks
o Share price performance compared to peers
o Resulting fees relative to peers
o Assignments (where the advisor undergoes a change of control).
Approve New Classes or Series of Shares
Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
Votes on the authorization for or increase in preferred shares should be
determined on a CASE-BY-CASE basis, considering the following factors:
o Stated specific financing purpose
o Possible dilution for common shares
o Whether the shares can be used for antitakeover purposes.
1940 Act Policies
Votes on 1940 Act policies should be determined on a CASE-BY-CASE basis,
considering the following factors:
o Potential competitiveness
o Regulatory developments
o Current and potential returns
o Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Change Fundamental Restriction to Nonfundamental Restriction
Proposals to change a fundamental restriction to a nonfundamental restriction
should be evaluated on a CASE-BY-CASE basis, considering the following factors:
o The fund's target investments
o The reasons given by the fund for the change
o The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
Vote against proposals to change a fund's fundamental investment objective to
nonfundamental.
Name Change Proposals
Votes on name change proposals should be determined on a CASE-BY-CASE basis,
considering the following factors:
o Political/economic changes in the target market
o Consolidation in the target market
o Current asset composition
Change in Fund's Subclassification
Votes on changes in a fund's subclassification should be determined on a
CASE-BY-CASE basis, considering the following factors:
o Potential competitiveness
o Current and potential returns
o Risk of concentration
o Consolidation in target industry
Disposition of Assets/Termination/Liquidation
Vote these proposals on a case-by-case basis, considering the following factors:
o Strategies employed to salvage the company
o The fund's past performance
o Terms of the liquidation.
Changes to the Charter Document
Votes on changes to the charter document should be determined on a CASE-BY-CASE
basis, considering the following factors:
o The degree of change implied by the proposal
o The efficiencies that could result
o The state of incorporation
o Regulatory standards and implications.
Vote AGAINST any of the following changes:
o Removal of shareholder approval requirement to reorganize or terminate the
trust or any of its series
o Removal of shareholder approval requirement for amendments to the new
declaration of trust
o Removal of shareholder approval requirement to amend the fund's management
contract, allowing the contract to be modified by the investment manager
and the trust management, as permitted by the 1940 Act
o Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales charges and redemption fees
that may be imposed upon redemption of a fund's shares
o Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements
o Removal of shareholder approval requirement to change the domicile of the
fund
Change the Fund's Domicile
Vote reincorporations on a case-by-case basis, considering the following
factors:
o Regulations of both states
o Required fundamental policies of both states
o Increased flexibility available.
Authorize the Board to Hire and Terminate Subadvisors Without Shareholder
Approval
Vote AGAINST proposals authorizing the board to hire/terminate subadvisors
without shareholder approval.
Distribution Agreements
Vote these proposals on a case-by-case basis, considering the following factors:
o Fees charged to comparably sized funds with similar objectives
o The proposed distributor's reputation and past performance
o The competitiveness of the fund in the industry
o Terms of the agreement.
Master-Feeder Structure
Vote for the establishment of a master-feeder structure.
Mergers
Vote merger proposals on a case-by-case basis, considering the following
factors:
o Resulting fee structure
o Performance of both funds
o Continuity of management personnel
o Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals to Establish Director Ownership Requirement
Generally vote against shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board. While ISS favors stock ownership on the part of directors,
the company should determine the appropriate ownership requirement.
Shareholder Proposals to Reimburse Proxy Solicitation Expenses
Voting to reimburse proxy solicitation expenses should be analyzed on a
case-by-case basis. In cases where ISS recommends in favor of the dissidents, we
also recommend voting for reimbursing proxy solicitation expenses.
Shareholder Proposals to Terminate Investment Advisor
Vote to terminate the investment advisor on a case-by-case basis, considering
the following factors:
o Performance of the fund's NAV
o The fund's history of shareholder relations
o The performance of other funds under the advisor's management.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable to annual reports for the fiscal year ended December 31,
2003.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable to annual reports for the fiscal year ended December 31,
2003.
Item 10. Controls and Procedures
(a) The Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940, as amended the ("1940 Act") are effective as of a date within 90
days of the filing of this report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures, required by Rule 30a-3(b) under the 1940 Act and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of
1940, as amended) that occurred during the registrant's most recent second
fiscal half-year that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
Item 11. Exhibits
(a)(1) The code of ethics that applies to the Registrant's principal executive
officer and principal financial officer is attached hereto as
EX-11.A.1.
(a)(2) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002 are attached hereto as Ex-99.Cert and Ex-99.906Cert.
(a)(3) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
BLUE CHIP VALUE FUND, INC.
By: /s/Todger Anderson
---------------------------------
Todger Anderson
President/Chief Executive Officer
Date: March 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/Todger Anderson
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Todger Anderson
President/Chief Executive Officer
Date: March 5, 2004
By: /s/Jasper R. Frontz
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Jasper R. Frontz
Treasurer/Chief Financial Officer
Date: March 5, 2004