-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjuSs+Ot00m5AmkYFDDZ12Kw/wODXGS0t67n9sGL+FVvRYv1teHFP7pddkIRDvbR Xe/gPvN6zXmEDajDMo5rzg== 0000804116-95-000007.txt : 19951002 0000804116-95-000007.hdr.sgml : 19951002 ACCESSION NUMBER: 0000804116-95-000007 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950927 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE VALUE TRUST INC CENTRAL INDEX KEY: 0000804116 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133356097 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-78828 FILM NUMBER: 95576594 BUSINESS ADDRESS: STREET 1: 1414 AVE OF THE AMERICAS 9TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123557311 MAIL ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 497 1 ROYCE VALUE TRUST, INC. 1,090,323 Shares of Common Stock Issuable upon Exercise of Rights to Subscribe for such Shares of Common Stock Royce Value Trust, Inc. (the "Fund") is offering to its stockholders of record as of the close of business on September 20, 1995 rights (the "Rights"), entitling the holders thereof to subscribe for an aggregate of 1,090,323 shares of the Fund's Common Stock (the "Offer") at the rate of one (1) share of Common Stock for each twenty (20) Rights held and the additional privilege of subscribing, subject to certain limitations and subject to allotment, for any shares not acquired by exercise of primary subscription rights. The number of Rights to be issued to such stockholders will be rounded up to the nearest number of Rights evenly divisible by twenty. The Rights are non- transferable and will not be admitted for trading on the New York Stock Exchange. See "The Offer". The Subscription Price Per Share will be the lower of (i) $0.25 below the last reported sale price of a share of the Fund's Common Stock on the New York Stock Exchange on November 6, 1995 (the "Pricing Date") or (ii) the net asset value of a share of the Fund's Common Stock on the Pricing Date. The Offer will expire at 5:00 P.M., Eastern time, on November 3, 1995 (the "Expiration Date"). Since the close of the Offer on the Expiration Date is prior to the Pricing Date, holders who choose to exercise their rights will not know the subscription price per share at the time they exercise such rights. The Fund is a closed-end diversified management investment company, whose shares of Common Stock are listed and traded on the New York Stock Exchange under the symbol "RVT". Its primary investment objective is long-term capital appreciation, and current income is a secondary objective. The Fund announced the Offer after the close of trading on the New York Stock Exchange on August 11, 1995. The net asset values per share of Common Stock at the close of business on August 11 and September 20, 1995 were $ 14.19 and $15.06, respectively, and the last reported sale prices of a share of the Fund's Common Stock on such Exchange on those dates were $12.375 and $13.50, respectively. As a result of the terms of the Offer, stockholders who do not fully exercise their rights will, upon the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. In addition, because the Subscription Price per share will probably be less than the current net asset value per share, the Offer will result in a reduction of net asset value per share for all stockholders. _______________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Estimated Proceeds to Subscription Price (1) Sales Load(2) Fund (1)(3) Per Share ..... $13.25 None $13.25 Total ......... $14,446,780 None $14,446,780 (1) Estimated based on an assumed Subscription Price per Share $0.25 below the last reported sale price of a share of the Fund's Common Stock of $13.50 on the New York Stock Exchange on September 20, 1995. The Fund may, pursuant to the Over- Subscription Privilege, increase the number of shares subject to subscription by up to 20% of the shares offered hereby. If the Fund does so, the maximum Estimated Proceeds to the Fund will be $17,336,128. See "The Offer -- Over-Subscription Privilege". (2) In connection with the Offer, Quest Advisory Corp. ("Quest"), the Fund's investment adviser, has agreed to pay certain broker- dealers a fee of 2.5% of the Subscription Price per Share for each Share issued upon the exercise of Rights as a result of their soliciting efforts. Certain other broker-dealers will receive fees from Quest of 0.50% of the Subscription Price per Share for Shares issued upon the exercise of Rights as a result of their soliciting efforts. The Fund and Quest have agreed to indemnify such broker-dealers against certain liabilities under the Securities Act of 1933, as amended. See "The Offer -- Soliciting Fees". (3) Before deduction of expenses payable by the Fund, estimated at $110,000. _______________________________ This Prospectus sets forth concisely the essential information that stockholders should know before exercising their Rights and should be retained for future reference. A Statement of Additional Information dated September 21, 1995 has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The table of contents of the Statement of Additional Information appears on page 26 of this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at 1414 Avenue of the Americas, New York, New York 10019, or calling it toll-free at (800) 221-4268. _______________________________ September 21, 1995 PROSPECTUS SUMMARY The following information is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus. Terms of the Offer The Fund is offering to stockholders of record as of the close of business on September 20, 1995 (the "Record Date") the right to subscribe for an aggregate of 1,090,323 shares of Common Stock (the "Shares") of the Fund. Each such stockholder is being issued one (1) Right for each full share of Common Stock owned on the Record Date. The number of Rights to be issued to each such stockholder will be rounded up to the nearest number of Rights evenly divisible by twenty. In the case of Shares held of record by a broker-dealer, bank or other financial intermediary (each, a "Nominee Holder"), the number of Rights issued to such Nominee Holder will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by twenty) of the Rights to be received by beneficial owners for whom it is the holder of record only if the Nominee Holder provides to the Fund, on or before the close of business on October 20, 1995, a written representation of the number of Rights required for such rounding. The Rights entitle a stockholder to acquire at the Subscription Price (as defined in this Prospectus) one (1) Share for each twenty (20) Rights held. Rights may be exercised at any time during the Subscription Period, which commences on September 27, 1995 and ends as of 5:00 p.m., Eastern time, on November 3, 1995 (the "Expiration Date"). A stockholder's right to acquire one (1) additional Share for each twenty (20) Rights held during the Subscription Period at the Subscription Price is referred to as the "Primary Subscription". In addition, any stockholder who fully exercises all Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for on Primary Subscription (the "Over-Subscription Privilege"). Shares acquired through the Over-Subscription Privilege are subject to allotment or increase, which is more fully discussed below under "The Offer--Over- Subscription Privilege". The Subscription Price per Share will be the lower of (i) $0.25 below the last reported sale price of a share of the Fund's Common Stock on the New York Stock Exchange on November 6, 1995 (the "Pricing Date") or (ii) the net asset value of a share of the Fund's Common Stock on the Pricing Date. Since the time of the close of the Offer on the Expiration Date is prior to the Pricing Date, holders who choose to exercise their Rights will not know the Subscription Price per Share at the time they exercise their Rights. The Rights are non-transferable. Therefore, only the underlying Shares, and not the Rights, will be admitted for trading on the New York Stock Exchange. The information agent and offering coordinator (the "Information Agent and Offering Coordinator") for the Offer is: Shareholder Communications Corporation Toll Free: (800) 733-8481, Extension 319 Stockholders may also call the Fund (toll free) at (800) 221-4268 or contact their brokers or nominees for information with respect to the Offer. Important Dates to Remember Event Date Record Date .............. September 20, 1995 Subscription Period....... September 27 through November 3, 1995 Expiration of the Offer... November 3, 1995 Pricing Date ............. November 6, 1995 Nominee Holder Exercise Form and Payment for Shares Due Pursuant to Notice of Guaranteed Delivery.................. November 9, 1995 Confirmation to Participants... November 14, 1995 Final Payment for Shares....... November 27, 1995 Soliciting Fees In connection with the Offer, Quest Advisory Corp. ("Quest") has agreed to pay to certain broker-dealers fees equal to 2.50% of the Subscription Price per Share for Shares issued upon the exercise of Rights as a result of their soliciting efforts. Certain other broker dealers will receive fees from Quest of 0.50% of the Subscription Price per Share for Shares issued upon the exercise of Rights as a result of their soliciting efforts. Quest will pay to Shareholder Communications Corporation a fee of $5,000 for providing Offering Coordinator services, including coordination among soliciting broker-dealers. See "The Offer -- Soliciting Fees". Information Regarding the Fund The Fund has been engaged in business as a closed-end diversified management investment company since its initial public offering in November 1986. The primary investment objective of the Fund is to obtain long-term capital appreciation by normally investing more than 75% of its assets in common stocks, convertible preferred stocks and convertible debentures. Current income is a secondary investment objective of the Fund, and it may also invest up to 25% of its assets in the non- convertible preferred stocks and non-convertible debt securities of various companies (including up to 5% of its net assets in high yield fixed income securities (commonly known as "junk bonds")). The Fund seeks to achieve its objectives by investing principally in equity securities of small companies, generally with stock market capitalizations ranging from $100 million to $1 billion, selected by a value approach. See "Investment Objectives and Policies". The Fund's outstanding Common Stock, par value $.001 per share (the "Common Stock"), and its 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the "Notes") are listed and traded on the New York Stock Exchange ("NYSE"). The average weekly trading volume of the Common Stock on the NYSE during the year ended December 31, 1994, was 89,687 shares. On June 30, 1995, the net asset value per share of the Fund's Common Stock was $13.99, the closing price of its shares on the NYSE was $12.00 and the net assets of the Fund were $305,359,405. Information Regarding the Investment Adviser Quest has served as the investment adviser to the Fund since its inception. Quest serves as investment adviser or sub-investment adviser to 5 diversified management investment companies, including the Fund, with aggregate net assets of approximately $1.7 billion as of June 30, 1995, and manages other accounts on a pooled basis, primarily for large pension and trust funds and not-for-profit foundations, with aggregate assets of approximately $1.4 billion on such date. As compensation for its services under the Investment Advisory Agreement, Quest receives a fee at a rate ranging from .5% up to 1.5% per annum of the Fund's average net assets, depending upon the investment performance of the Fund relative to the investment record of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), determined by comparisons made over a rolling period of 36 months. This fee may, depending upon the relative investment performance of the Fund, substantially exceed the fee paid by most other investment companies. However, Quest will not receive any fee for any performance period for which the Fund's investment performance, rounded to the nearest whole point, is less than zero. (For a more detailed description of the method by which the advisory fee is determined, see "Investment Advisory and Other Services--Advisory Fee".) The Fund's portfolio is managed by Quest's senior investment staff, including Charles M. Royce, Quest's Chief Investment Officer, who is primarily responsible for supervising Quest's investment management activities. Mr. Royce is also the President, sole director and sole voting shareholder of Quest. See "Investment Advisory and Other Services --Portfolio Management". Charles M. Royce and certain other officers and employees of Quest expect to pay up to $1,000,000 to subscribe for Shares. See "The Offer -- Over-Subscription Privilege". Risk Factors As a result of the terms of the Offer, stockholders who do not exercise their Rights will, at the completion of the Offer, own a smaller proportional interest in the Fund. In addition, because the Subscription Price will probably be less than the then current net asset value per share, the Offer will result in a reduction of net asset value per share, which in turn will dilute the holdings of stockholders who do not exercise their Rights. (The combination of the Over-Subscription Privilege and the Fund's election to issue additional Shares will result in further dilution to those stockholders who exercise their Rights and subscribe for Shares on Primary Subscription but who do not exercise the Over-Subscription Privilege.) Although it is not possible to state precisely the amount of such a decrease in value, because it is not known at this time how many shares will be subscribed for or what the net asset value or market value per share will be at the Pricing Date, the Fund estimates that such dilution should not be substantial. For example, if the Subscription Price per Share is $13.25 and if such price is 10% below the Fund's then net asset value per share, then, assuming that all Rights are exercised and that the Fund increases the number of Shares subject to subscription by 20% in order to satisfy over-subscriptions, the Fund's net asset value per share would be reduced by approximately $0.10. Of course, the actual Subscription Price per Share may be greater or less than the assumed Subscription Price per Share of $13.25. It should be also noted that shares of closed-end investment companies frequently trade at a discount from net asset values. See "Description of Capital Stock -- Net Asset Values and Sales Prices". FUND EXPENSES The following tables are intended to assist investors in understanding the various costs and expenses that a stockholder of the Fund will bear, directly or indirectly. Stockholder Transaction Expenses Sales Load............................ None Distribution Reinvestment Plan Fees... None Annual Expenses (as a percentage of average net assets and estimated for the year ending December 31, 1995)(1) Investment Advisory Fees.............. 1.00% Interest Payments on Borrowed Funds... .78% Other Expenses........................ .30% Total Annual Expenses................. 2.08% (1) See "Investment Advisory and Other Services" for additional information. The investment advisory fees shown in the above table represent only the Basic Fee, which is greater than the advisory fee paid by most funds, and does not reflect the adjustment of up to +/-.50% based on the Fund's relative investment performance. "Interest Payments on Borrowed Funds" assumes that $40,000,000 aggregate principal amount of the Notes remain outstanding through December 31, 1995, and includes amortized costs of the Notes offering. Example The following Example demonstrates the projected dollar amount of total cumulative expense that would be incurred over various periods with respect to a hypothetical investment in the Fund's Common Stock. These amounts are based upon payment by the Fund of investment advisory fees, interest and other expenses at the levels set forth in the above table. An investor would directly or indirectly pay the following expenses on a $1,000 investment in shares of the Fund's Common Stock, assuming (i) the market price at the time of investment was equal to the net asset value per share, (ii) a 5% annual return and (iii) reinvestment of all distributions at net asset value: One Year Three Years Five Years Ten Years $21 $65 $112 $241 This Example assumes that the percentage amounts listed under Annual Expenses remain the same in the years shown. The above tables and the assumption in the Example of a 5% annual return and reinvestment at net asset value are required by regulation of the Securities and Exchange Commission ("SEC") and are applicable to all investment companies, and the assumed 5% annual return is not a prediction of, and does not represent, the projected performance of the Fund's Common Stock. Notes may be converted, purchased, redeemed or replaced, and actual expenses and annual rates of return may be more or less than those allowed for purposes of this Example. In addition, while the Example assumes reinvestment of all distributions at net asset value, the Fund's Distribution Reinvestment Plan contemplates payment of net investment income dividends and capital gain distributions in shares of the Fund's Common Stock based on the market price in effect on the valuation date, which may be at, above or below net asset value. This Example should not be considered a representation of future expenses; the Fund's actual expenses may be more or less than those shown. FINANCIAL HIGHLIGHTS The selected data set forth below is for a share of Common Stock outstanding for the periods presented. The financial information was derived from and should be read in conjunction with the Financial Statements of the Fund incorporated by reference into the Statement of Additional Information and this Prospectus. The financial information for each of the five years ended December 31, 1994 has been audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their report accompanying such Financial Statements. Although the financial information for the years ended prior to December 31, 1990 and for the period from November 26, 1986 (commencement of operations) to December 31, 1986 is not covered by that report, it is covered in prior reports of Coopers & Lybrand L.L.P. upon which unqualified opinions were issued.
Six Months Period Ended Ended June 30, Year ended December 31, Dec. 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 (unaudited) Net Asset Value, Beginning of Period $12.34 $13.47 $12.50 $11.23 $8.58 $10.35 $9.25 $7.98 $9.29 $9.30 Income from Investment Operations Net investment income 0.02 0.04 0.09 0.15 0.17 0.17 0.15 0.13 0.28 0.03 Net gains (losses) on investments (both realized and unrealized) 1.64 0.09 2.12 2.12 3.20 (1.49) 1.59 1.68 (1.04) (0.04) Total from Investment Operations . . . . 1.66 0.13 2.21 2.27 3.37 (1.32) 1.74 1.81 (0.76) (0.01) Less Distributions Dividends (from net investment income) 0.00 (0.01) (0.09) (0.15) (0.17) (0.17) (0.17) (0.06) (0.36) (0.00) Distributions(from capital gains) (0.00) (1.04) (1.06) (0.75) (0.44) (0.15) (0.35) (0.45) (0.16) (0.00) Total Distributions . . . . . (0.00) (1.05) (1.15) (0.90) (0.61) (0.32) (0.52) (0.51) (0.52) (0.00) Capital Stock Transactions Effect of rights offering (0.00) (0.14) (0.08) (0.06) (0.10) (0.08) (0.09) (0.00) (0.00) (0.00) Effect of reinvestment of distributions (0.00) (0.07) (0.01) (0.04) (0.01) (0.05) (0.03) (0.03) (0.03) (0.00) Effect of potential conversion of Notes (1) (0.01) Total Capital Stock Transactions (0.01) (0.21) (0.09) (0.10) (0.11) (0.13) (0.12) (0.03) (0.03) (0.00) Net Asset Value, End of Period (1) $13.99 $12.34 $13.47 $12.50 $11.23 $8.58 $10.35 $9.25 $7.98 $9.29 Market Value, End of Period $12.00 $11.00 $12.875 $12.25 $10.375 $8.125 $9.50 $8.125 $6.75 $9.875 Total Investment Return (2) Net Asset Value (1) 13.4% 1.1% 17.9% 19.9% 39.5% -13.1% 19.2% 22.4% -9.1% 0.1% Market Value. . . . 9.1% -5.6% 14.8% 26.8% 35.3% -10.8% 23.9% 27.4% -26.5% -1.3% Ratios/Supplemental Data Net Assets, End of Period (millions) $305 $269 $247 $202 $167 $118 $131 $107 $90 $100 Ratio of Expenses to Average Net Assets (including management fees and interest expense) 2.14% 2.01% 1.33% 0.81% 0.79% 0.94% 0.95% 1.09% 0.40% 1.79% Ratio of Management Fees to Average Net Assets 1.07% 1.21% 1.09% 0.53% 0.43% 0.44% 0.44% 0.49% 0.00% 1.04% Ratio of Interest Expense to Average Net Assets 0.81% 0.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Ratio of Net Investment Income to Average Net Assets 0.24% 0.30% 0.74% 1.31% 1.52% 1.78% 1.48% 1.42% 2.92% 3.45% Portfolio Turnover Rate 19% 35% 33% 40% 34% 28% 36% 29% 66% 13% (1)For periods ended after June 22, 1994, Net Asset Value and Net Asset Value Total Investment Return are calculated assuming the Notes have been fully converted unless the effect of this would result in a higher net asset value per share than would be calculated without such assumption. (2)Net Asset Value Total Investment Return reflects the Fund's investment performance based on its initial net asset value of $9.30 per share and a valuation of its shares during the periods represented at their net asset value. Market Value Total Investment Return reflects the Fund's investment performance based on the Fund's initial public offering price of $10.00 per share and a valuation of its shares at market value. The Net Asset Value and Market Value Total Investment Returns assume a continuous stockholder who reinvested all net investment income dividends and capital gains distributions and fully exercised all rights issued on primary subscription in the Fund's rights offerings. Annualized
INVESTMENT PERFORMANCE The table below presents average annual total returns of the Fund on two separate bases. The NAV Return is the compound average annual rate of return, using net asset values, on an amount invested in the Fund from the beginning to the end of the stated period and assumes: (i) reinvestment of net investment income dividends and capital gains distributions; (ii) primary participation in rights offerings; and (iii) for periods ended after June 22, 1994, full conversion of the Notes into shares of Common Stock, unless such conversion would result in a higher total return than would otherwise be the case. Stockholders are able to reinvest distributions and purchase shares through rights offerings at prices which have historically been below NAV and without commission costs. NAV Return is provided for information purposes only because a stockholder will be able to purchase and sell shares only at market, and such shares may trade at a premium to or discount from net asset value. Market Value Return presents the same information, but values the Fund at market rather than NAV and, therefore, reflects the actual experience of a stockholder, before commission costs, who bought and sold shares of the Fund at the beginning and ending dates. The record of the S&P 500 Index has been included so that the Fund's results may be compared with those of a group of unmanaged securities widely regarded by investors as representative of the stock market in general, and the record of the Russell 2000 Index has been included so that the Fund's results may be compared with an unmanaged index reflecting the stock market activity of a select group of small companies with a weighted average market capitalization similar to that of the Fund. (The Fund primarily invests in small companies.) The Index figures likewise assume reinvestment of dividend income. Average Annual Total Returns Three Six Twelve Thirty-Six Sixty From Months Months Months Months Months November Ended Ended Ended Ended Ended 28, 1986 June 30, June 30, June 30, June 30, June 30, (Inception) 1995 1995 1995 1995 1995 to June 30, 1995 Fund NAV 7.6% 13.5% 17.4% 15.4% 13.7% 12.0% Fund Market Value 0.0 -4.9 2.0 15.0 12.7 8.9 S&P 500 9.5 20.2 26.1 13.2 10.3 13.0 Russell 2000 9.3 14.3 20.0 16.4 12.8 10.7 It should be noted that the NAV Return for the period from November 28, 1986 through June 30, 1995 is based on the Fund's initial NAV of $9.30 per share, rather than the initial public offering price of $10.00 per share. Accordingly, that figure does not reflect underwriting commissions and discounts or expenses of the offering paid by stockholders who purchased the Fund's shares in the initial public offering. The above results represent past performance and should not be considered an indication of future performance from an investment in the Fund today. They are provided only to give an historical perspective of the Fund. The investment return and net asset and market values will fluctuate, so that shares of Common Stock may be worth more or less than their original cost when sold. THE OFFER Terms of the Offer The Fund hereby offers to the holders of its Common Stock of record on the Record Date the right to subscribe for the Shares. Each such stockholder is being issued one (1) Right for each share of Common Stock owned on the Record Date. The number of Rights to be issued to each such stockholder will be rounded up to the nearest number of Rights evenly divisible by twenty. In the case of shares held of record by a Nominee Holder, the number of Rights issued to such Nominee Holder will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by twenty) of the Rights to be received by beneficial owners for whom it is the holder of record only if the Nominee Holder provides to the Fund, on or before the close of business on October 20, 1995, a written representation of the number of Rights required for such rounding. The Rights entitle a stockholder to acquire on Primary Subscription at the Subscription Price one (1) Share for each twenty (20) Rights held. Rights may be exercised at any time during the Subscription Period, which commences on the date of this Prospectus and ends as of 5:00 p.m., Eastern time, on November 3, 1995 (the "Expiration Date"). In addition, any stockholder who fully exercises all Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for on Primary Subscription. Shares acquired through the Over-Subscription Privilege are subject to allotment or increase, which is more fully discussed below under "Over-Subscription Privilege". The Rights are non-transferable. Therefore, only the underlying Shares, and not the Rights, will be admitted for trading on the New York Stock Exchange. Purposes of the Offer The Board of Directors of the Fund has determined that it would be in the best interests of the Fund to continue to increase the assets of the Fund available for current and future investment opportunities. In addition, the Offer seeks to reward the long-term stockholder by giving existing stockholders the right to purchase additional Shares at a price below market value. Increasing the size of the Fund also might result in lowering the Fund's expenses as a percentage of average net assets. Quest expects to take up to seventy-five (75) days from the Expiration Date to fully invest the proceeds of the Offer in accordance with the Fund's investment objectives and policies. The Subscription Price will be determined the first business day subsequent to the Expiration Date in order to ensure that the Offer will attract the maximum participation of stockholders with the minimum dilution to non-participating stockholders. The Fund's directors voted unanimously to authorize the Offer. Two of the Fund's directors who voted to authorize the Offer are affiliated with Quest and, therefore, could benefit indirectly from the Offer. The other three directors are not "interested persons" of the Fund within the meaning of the Investment Company Act of 1940 (the "1940 Act"). Quest may also benefit from the Offer because its fee is partially based on the net assets of the Fund. See "Investment Advisory and Other Services--Advisory Fee". It is not possible to state precisely the amount of additional compensation Quest might receive as a result of the Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities, which will presumably fluctuate in value. The Fund may, in the future and at its discretion, from time to time, choose to make additional rights offerings for a number of shares and on terms which may or may not be similar to this Offer. Over-Subscription Privilege If some stockholders do not exercise all of the Rights initially issued to them, then any Shares for which subscriptions have not been received from stockholders will be offered by means of the Over-Subscription Privilege to those stockholders who have exercised all of the Rights initially issued to them and who wish to acquire additional Shares. Stockholders who exercise all of the Rights initially issued to them should indicate on the Exercise Form how many Shares they are willing to acquire through this Over-Subscription Privilege. If sufficient Shares remain, then all over-subscriptions will be honored in full. However, if sufficient Shares are not available to honor all over- subscriptions, then the Fund may, in its sole discretion, elect to issue up to an additional 20% of the Shares available through the Offer in order to honor such over-subscriptions. To the extent that there are not sufficient Shares to honor all over- subscriptions, the available Shares will be allocated among those who over-subscribe based on the number of Rights originally issued to them by the Fund, so that the number of Shares issued to stockholders who subscribe through the Over-Subscription Privilege will generally be in proportion to the number of Shares of the Fund owned by them on the Record Date. The percentage of remaining Shares each over-subscribing holder may acquire may be rounded up or down to result in delivery of whole Shares. The allocation process may involve a series of allocations in order to ensure that the total number of Shares available for over- subscriptions are distributed on a pro rata basis. Charles M. Royce and certain accounts of other officers and employees of Quest, who own, in the aggregate, 224,167 shares, intend to exercise all of the Rights initially issued to them. Also, if additional Shares remain after all over- subscriptions other than those submitted by Mr. Royce and such accounts are honored in full, then Mr. Royce and such accounts intend to subscribe for additional Shares, thereby increasing their proportional ownership of the Fund and possibly reducing the Fund's net asset value per share. If additional Shares do not remain after all over-subscriptions by stockholders other than those of Mr. Royce and such accounts are honored, then Mr. Royce and such accounts will not receive Shares through their Over-Subscription Privileges. Mr. Royce and such accounts will pay up to $1,000,000 for their Shares. The Fund will not offer or sell any shares which are not subscribed for through the Primary Subscription or the Over- Subscription Privilege. The combination of the Over-Subscription Privilege and the Fund's election to issue additional Shares may result in additional dilution of interest and voting rights to stockholders, and additional reduction in net asset value per share to the Fund. The Subscription Price The Subscription Price for the Shares to be issued under the Rights will be the lower of (i) $0.25 below the last reported sale price of a share of the Fund's Common Stock on the New York Stock Exchange on November 6, 1995 (the "Pricing Date") or (ii) the net asset value of a share of the Fund's Common Stock on the Pricing Date. For example, if the last reported sale price of a share of the Fund's Common Stock on the New York Stock Exchange on the Pricing Date is $13.50 and the net asset value of a share of the Fund's Common Stock on such date is $15.06, the Subscription Price will be $13.25. However, if the net asset value of a share of the Fund's Common Stock on such date is $13.21, then the Subscription Price will be $13.21. The Fund announced the Offer after the close of trading on the New York Stock Exchange on August 11, 1995. The net asset values per share of the Fund's Common Stock at the close of business on August 11 and September 20, 1995 were $14.19 and $15.06, respectively, and the last reported sales prices of a share of the Fund's Common Stock on such Exchange on those dates were $12.375 and $13.50, respectively. Expiration of the Offer The Offer will expire at 5:00 p.m., Eastern time, on November 3, 1995 (the "Expiration Date"). Rights will expire on the Expiration Date and may not be exercised after that date. Since the close of the Offering on the Expiration Date is prior to the Pricing Date, stockholders will not know the Subscription Price when they decide whether to acquire Shares on Primary Subscription or through the Over-Subscription Privilege. Subscription Agent The Subscription Agent for the Offer is State Street Bank and Trust Company, Two Heritage Drive, North Quincy, Massachusetts 02171, which will receive, for its administrative, processing, invoicing and other services as Subscription Agent, an estimated fee of $15,000 and reimbursement for all out-of- pocket expenses related to the Offer. The Subscription Agent is also the Fund's Transfer Agent. Stockholder inquiries may also be directed to P.O. Box 8200, Boston, Massachusetts 02266-8200 (Tel. No. (800) 426-5523). SIGNED EXERCISE FORMS SHOULD BE SENT TO STATE STREET BANK AND TRUST COMPANY, by one of the following methods: (1) BY FIRST CLASS MAIL: State Street Bank and Trust Company Corporate Reorganization P.O. Box 9061 Boston, MA 02205-8686 (2) BY EXPRESS MAIL OR OVERNIGHT COURIER State Street Bank and Trust Company Corporate Stock Transfer Corporate Reorganization Department Two Heritage Drive, 4th Floor North Quincy, MA 02171 (3) BY HAND State Street Bank and Trust Company 225 Franklin Street -- Concourse Level Boston, MA 02110 or State Street Bank and Trust Company 61 Broadway -- Concourse Level New York, NY 10006 Delivery to an address other than the above does not constitute good delivery. Soliciting Fees In connection with the Offer, Quest has agreed to pay to certain broker-dealers who have executed and delivered a Soliciting Dealer Agreement fees equal to 2.50% of the Subscription Price per Share for Shares issued upon the exercise of Rights as a result of their soliciting efforts. Certain other broker-dealers who also have executed and delivered a Soliciting Dealer Agreement will receive fees from Quest equal to 0.50% of the Subscription Price per Share for Shares issued upon the exercise of Rights as a result of their soliciting efforts. Shareholder Communications Corporation will provide Offering Coordinator services, including coordination among soliciting broker-dealers. Information Agent and Offering Coordinator Any questions or requests for assistance may be directed to the Information Agent and Offering Coordinator at its telephone number and address listed below: Shareholder Communications Corporation Toll Free: (800) 733-8481, Extension 319 Stockholders may also call the Fund (toll free) at (800) 221-4268 or contact their brokers or nominees for information with respect to the Offer. The Fund will pay a fee of $7,500 to Shareholder Communications Corporation and reimbursement for all out-of- pocket expenses related to its services as Information Agent. Quest will pay a fee of $5,000 to Shareholder Communications Corporation for its services as Offering Coordinator. Method of Exercise of Rights Rights may be exercised by stockholders who are record owners by filling in and signing the enclosed Exercise Form and mailing it in the envelope provided or delivering the completed and signed Exercise Form to the Subscription Agent, together with any required payment for the Shares as described below under "Payment for Shares". Rights may also be exercised by a stockholder contacting his broker, bank or trust company, who can arrange, on the stockholder's behalf, to guarantee delivery of a properly completed and executed Exercise Form and payment for the Shares. A fee may be charged for this service. Exercise Forms must be received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date (unless payment is to be effected by means of a notice of guaranteed delivery (see "Payment for Shares")) at the offices of the Subscription Agent. Stockholders who are Record Owners. Stockholders who are record owners can choose between either option set forth below under "Payment for Shares". If time is of the essence, option (1) will permit delivery of the Exercise Form and payment after the Expiration Date. Stockholders who are Residents of Florida. Stockholders who are residents of the State of Florida and whose shares of the Fund's Common Stock are held by a broker may participate in the Offer only if the broker is registered as a dealer with the State of Florida, whether or not the broker will receive any fees from Quest as a result of its soliciting efforts. Investors Whose Shares Are Held Through A Nominee Holder. Stockholders whose shares are held by a Nominee Holder such as a broker, bank or trust company, must contact that Nominee Holder to exercise their Rights. In that case, the Nominee Holder will complete the Exercise Form on behalf of the stockholder and arrange for proper payment by one of the methods set forth below under "Payment for Shares". Nominee Holders. Nominee Holders, who hold shares for the account of others, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the Nominee Holder should complete the Exercise Form and submit it to the Subscription Agent, together with the proper payment described below under "Payment for Shares". Payment for Shares Stockholders who acquire Shares on Primary Subscription or through the Over-Subscription Privilege may choose between the following methods of payment: (1) If, prior to 5:00 p.m., Eastern time, on the Expiration Date, the Subscription Agent has received a notice of guaranteed delivery by telegram or otherwise, from a bank or trust company or a New York Stock Exchange member firm, guaranteeing delivery of (a) payment of the full Subscription Price for the Shares subscribed for on Primary Subscription and any additional Shares subscribed for through the Over-Subscription Privilege and (b) a properly completed and executed Exercise Form, the subscription will be accepted by the Subscription Agent. The Subscription Agent will not honor a notice of guaranteed delivery if a properly completed and executed Exercise Form is not received by the Subscription Agent by the close of business on the third (3rd) business day after the Expiration Date and full payment for the Shares is not received by it by the close of business on the tenth (10th) business day after the Confirmation Date. (2) Alternatively, a record owner can send payment for the Shares acquired on Primary Subscription, together with the Exercise Form, to the Subscription Agent based on an assumed purchase price of $13.25 per Share. To be accepted, such payment, together with the Exercise Form, must be received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date. IF THE SECOND METHOD DESCRIBED ABOVE IS USED, PAYMENT BY CHECK MUST ACCOMPANY ANY EXERCISE FORM FOR THE EXERCISE FORM TO BE ACCEPTED. A confirmation will be sent by the Subscription Agent to each stockholder (or, if the Fund's shares on the Record Date are held by a Nominee Holder, to such Nominee Holder) by November 14, 1995, showing (i) the number of Shares acquired through the Primary Subscription; (ii) the number of Shares, if any, acquired through the Over-Subscription Privilege; (iii) the per Share and total purchase price for the Shares; and (iv) the amount payable by the stockholder to the Fund or any excess to be refunded by the Fund to the stockholder, in each case based on the Subscription Price as determined on the Pricing Date. In the case of any stockholder who exercises his right to acquire Shares through the Over-Subscription Privilege, any excess payment which would otherwise be refunded to him will be applied by the Fund toward payment for Shares acquired through exercise of the Over- Subscription Privilege. Any payment required from a stockholder must be received by the Subscription Agent within ten (10) business days after the Confirmation Date, and any excess payment to be refunded by the Fund to a stockholder will be mailed by the Subscription Agent to him within ten (10) business days after the Confirmation Date. All payments by a stockholder must be made in United States dollars by money order or check drawn on a bank located in the United States of America and payable to Royce Value Trust, Inc. Issuance and delivery of certificates for the Shares subscribed for are subject to collection of checks and actual payment through any notice of guaranteed delivery. If a stockholder who acquires Shares through the Primary Subscription or Over-Subscription Privilege does not make payment of all amounts due, the Fund reserves the right to (i) find other purchasers for such subscribed and unpaid shares; (ii) apply any payment actually received by it toward the purchase of the greatest number of whole Shares which could be acquired by such stockholder upon exercise of the Primary Subscription and/or Over-Subscription Privilege; and/or (iii) exercise any and all other rights and/or remedies to which it may be entitled, including, without limitation, the right to set-off against payments actually received by it with respect to such subscribed Shares. Notice of Net Asset Value Decline The Fund has, as required by the Securities and Exchange Commission's registration form, undertaken to suspend the Offer until it amends this Prospectus if subsequent to September 21, 1995, the effective date of the Fund's Registration Statement, the Fund's net asset value declines more than 10% from its net asset value as of September 20, 1995. Accordingly, the Fund will notify stockholders of any such decline and thereby permit them to cancel their exercise of Rights. Purchase and Sale of Rights The Rights are non-transferable and, therefore, may not be purchased or sold. The Rights will not be admitted to trading on the New York Stock Exchange. However, the Shares to be issued through the Offer will be listed and admitted to trading on the New York Stock Exchange. Delivery of Shares Participants in the Fund's Distribution Reinvestment Plan (the "Plan") will have any Shares acquired on Primary Subscription and pursuant to the Over-Subscription Privilege credited to their accounts in the Plan. Stock certificates will not be issued for Shares credited to Plan accounts. Stockholders whose shares are held of record by a Nominee Holder on their behalf will have the Shares they acquire credited to the account of such Nominee Holder. For all other stockholders, stock certificates for all Shares acquired will be mailed promptly after full payment for the Shares subscribed for has cleared. Tax Consequences For Federal income tax purposes, neither the receipt nor the exercise of the Rights will result in taxable income to holders of Common Stock, and no loss will be realized if the Rights expire without being exercised. A stockholder's holding period for a Share acquired upon exercise of Rights begins with the date of exercise. In the absence of a special election by the stockholder, the stockholder's basis for determining gain or loss upon the sale of a Share acquired upon exercise of Rights will be equal to the per Share Subscription Price. A stockholder's gain or loss recognized upon a sale of that Share will be capital gain or loss if the Share was held as a capital asset at the time of sale, and will be long-term capital gain or loss if it was held at the time of sale for more than one (1) year. The above does not cover the state or local tax consequences of receiving or exercising Rights, as to which stockholders should consult their own tax advisers. Special Consideration As a result of the terms of the Offer, stockholders who do not exercise their Rights will, at the completion of the Offer, own a smaller proportional interest in the Fund. In addition, because the Subscription Price for each Share will probably be less than the then current net asset value per share of the Fund's Common Stock, the Offer will result in a reduction of net asset value, which will dilute the holdings of stockholders who do not exercise their Rights. Other Rights Offerings The Fund also had below net asset value rights offerings during each of the six years ended December 31, 1994, and may have similar rights offerings in 1996 and annually thereafter. Each of the Fund's previous rights offerings has had the effect of reducing the Fund's net asset value by less than 1%. Any such future rights offerings would be separately registered with the SEC and made by means of separate prospectuses. USE OF PROCEEDS Assuming all Shares offered hereby are sold at the estimated Subscription Price of $13.25 per Share, the net proceeds of the Offer are estimated to be $14,336,780 ($17,226,128 if the number of Shares subject to subscription is increased by 20%), after deducting expenses of the Offering, estimated at $110,000, from the gross proceeds. It is anticipated that investment of the net proceeds will take up to 75 days from the Expiration Date, depending on market conditions and the availability of appropriate securities. Pending investment, the proceeds will be held in the types of short-term debt securities and instruments in which the Fund may invest. See "Investment Objectives and Policies--Investment Policies". DESCRIPTION OF COMMON STOCK The Fund, which was incorporated under the laws of the State of Maryland on July 1, 1986, is authorized to issue 150,000,000 shares of Common Stock, par value $.001 per share. Each share of Common Stock has equal voting, dividend, distribution and liquidation rights. The shares of Common Stock outstanding and those Shares offered hereby, when issued and paid for through the terms of the Offer, will be fully paid and non- assessable. The shares of Common Stock are not redeemable and have no preemptive, conversion or cumulative voting rights. As a New York Stock Exchange-listed company, the Fund is required to hold annual meetings of its stockholders. The following table shows, as of June 30, 1995, the amount of shares of Common Stock authorized and outstanding and the amount of shares outstanding as adjusted to give effect to the Offer, assuming that all Shares are sold. Amount Amount Amount Outstanding, Title of Class Authorized Outstanding As Adjusted Common Stock 150,000,000 21,806,476 22,896,799* _______ *If the Fund increases the amount of Shares subject to the Offer by 20% in order to satisfy over-subscriptions, then the amount of shares of Common Stock outstanding as adjusted would be increased by 218,064 to 23,114,863. Net Asset Values and Sales Prices The Fund's shares are publicly held and are listed and traded on the New York Stock Exchange under the symbol "RVT". The following table sets forth for the periods indicated the high and low sales prices on the New York Stock Exchange per share of Common Stock of the Fund, the net asset values per share on the dates of the market highs and lows and the number of shares traded. Net Asset Value Per Share on Date Market Price Per Share of Market High and Related Reported and Low (1) Discount (-)/ Premium (+) (2)(3) NYSE Volume Quarter Ended High Low High Low March 31, 1993 13.28 12.59 13 1/2(+1.66%) 12 (-4.69%) 951,300 shs. June 30, 1993 13.46 13.24 13 1/4(-1.56%) 12 3/8(-6.53%) 693,600 shs. September 30, 1993 14.13 13.43 14 1/8(-0.04%) 13 1/8(-3.78%) 931,700 shs. December 31, 1993 14.43 13.17 14 1/4(-1.25%) 12 3/8(-6.04%) 941,600 shs. March 31, 1994 13.65 13.31 13 3/8(-2.01%) 10 7/8(-18.29%) 1,413,300 shs. June 30, 1994 13.35 13.11 12 7/8(-3.56%) 11 7/8(-9.42%) 856,900 shs. September 30, 1994 13.68 13.62 12 5/8(-7.71%) 11 7/8(-12.81%) 1,213,200 shs. December 31, 1994 13.41 12.34 12 1/4(-8.65%) 11 (-10.86%) 1,180,300 shs. March 31, 1995 12.73 12.72 11 7/8(-6.72%) 11 1/4(-11.56%) 1,174,800 shs. June 30, 1995 13.87 13.01 12 3/8(-10.78%)11 1/4(-13.53%) 1,645,700 shs. (1) Based on the Fund's computations. (2) Highest and lowest market price per share reported on the New York Stock Exchange. (3) "Related Discount (-) / Premium (+)" represents the discount or premium from net asset value of the shares on the date of the high and low market price for the respective quarter. As evidenced by the above table, the Common Stock has generally traded in the market below net asset value. On August 11, 1995, when the Offer was publicly announced, the net asset value per share of Common Stock was $14.19, and the closing price on the New York Stock Exchange was $12.375, representing a discount of (-12.79%) from net asset value. On September 20, 1995, such net asset value was $15.06, and such closing price was $13.50, representing a discount of (-10.36%) from net asset value. The following chart compares the weekly average market price of the Fund's Common Stock to its weekly average per share net asset value from January 1, 1993 through June 30, 1995. It does not represent the total return investment performance of the Fund, which would include the impact of net investment income dividends and capital gain distributions and their reinvestment. See "Investment Performance". [Chart of Fund's market price and net asset value weekly from Jan. 1 1993 to June 30 1995] There can be no assurance that the Common Stock will trade in the future at, above or below net asset value. The Fund calculates the net asset value of its shares daily and makes that information available daily by telephone (800-221-4268) and weekly for publication. Currently, The Wall Street Journal, The New York Times and Barron's publish net asset values for closed-end investment companies weekly. Net asset value per share is determined at the close of regular trading on the New York Stock Exchange (currently 4:00 P.M., Eastern time) on each day on which the Exchange is open. Net asset value is calculated by dividing the current value of the Fund's total assets less all of its liabilities, by the total number of shares of the Fund outstanding, assuming, for periods ended after June 22, 1994, full conversion of the Notes into shares of Common Stock, unless such conversion would result in a higher net asset value per share than would otherwise be the case. INVESTMENT OBJECTIVES AND POLICIES Investment Objectives The Fund's primary investment objective and one of its fundamental policies is long-term capital appreciation, which it seeks to achieve by normally investing more than 75% of its assets in common stocks, convertible preferred stocks and convertible debentures. Portfolio securities are selected primarily with a view to achievement of this objective. Current income is a secondary investment objective of the Fund, but is not one of its fundamental policies. See "Changes in Investment Objectives and Policies". The Fund seeks to achieve this secondary objective by investing in dividend-paying common stocks, convertible preferred stocks and convertible debentures, to the extent that these investments also further its primary objective. It may also invest up to 25% of its assets in the non-convertible preferred stocks and non-convertible debt securities of various companies, including up to 5% of its net assets in below investment-grade debt securities also known as high yield fixed income securities or "junk bonds". Such debt securities may be in the lowest rated categories of recognized ratings agencies (Ca by Moody's Investors Service, Inc. or D by Standard & Poor's Corporation) or unrated, are primarily speculative and involve a high degree of risk. There are market risks inherent in any investment, and there is no assurance that the primary or secondary investment objective of the Fund will be achieved. Investment Policies Quest uses a value approach in managing the Fund's assets. Accordingly, in its selection process, Quest puts primary emphasis on analysis of various internal returns indicative of profitability, balance sheets and cash flows and the relationships that these factors have to the price of a given security. This is in contrast to other investment approaches, such as those that focus on the future earnings prospects of a company and concentrate on high growth or emerging growth companies. Quest's value approach is based on its belief that the securities of certain small companies may sell at a discount from its estimate of such companies' "business worth". Quest attempts to identify and have the Fund invest in such securities, with the expectation that such value "discount" will narrow over time and thus provide capital appreciation for the Fund's portfolio. The securities of the small companies in which Quest invests for the Fund generally have stock market capitalizations ranging from $100 million to $1 billion. (Stock market capitalization is calculated by multiplying the total number of common shares issued and outstanding by the per share market price of the common stock.) Such companies are often not well-known to the investing public, may not have significant institutional ownership and may have cyclical, static or only moderate growth prospects. Their share prices may be volatile, and their shares may have limited trading volumes. Quest's investment approach therefore requires unusual investor patience and a long-term investment horizon. An investment in shares of the Fund should not be used to play short-term swings in the market and may involve more risk than investment companies which invest in the common stocks of larger, more well-known companies. The Fund may invest up to 10% of its assets in securities of foreign issuers. Foreign investments involve certain risks, such as political or economic instability of the issuer or of the country of issue, fluctuating exchange rates and the possibility of imposition of exchange controls. These securities may also be subject to greater fluctuations in price than the securities of U.S. corporations, and there may be less publicly available information about their operations. Foreign companies may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and foreign markets may be less liquid or more volatile than U.S. markets and may offer less protection to investors such as the Fund. The assets of the Fund are normally invested in the common stocks, convertible preferred stocks and convertible debentures of such small companies. However, for temporary defensive purposes (i.e., when Quest determines that market conditions warrant) or when it has uncommitted cash balances, the Fund may also invest in United States Treasury bills, domestic bank certificates of deposit, repurchase agreements with its custodian bank covering U.S. Treasury and agency obligations having a term of not more than one week and high-quality commercial paper, or retain all or part of its assets in cash. Accordingly, the composition of the Fund's portfolio may vary from time to time. The price movements, earnings and other developments of each portfolio security are closely monitored, with a view to selling such securities when price objectives are reached or when a security no longer meets Quest's criteria. Quest does not engage in market timing transactions (i.e., shifting the portfolio or a significant portion of it in or out of the market in anticipation of general market fluctuations). Quest purchases and sells securities for the Fund at such times as it deems to be in the best interest of the Fund's stockholders. Although there may be some short-term portfolio turnover, securities are generally purchased which Quest believes will appreciate in value over the long-term. The Fund has not, however, placed any limit on its rate of portfolio turnover, and securities may be sold without regard to the time they have been held when, in the judgment of Quest, investment considerations warrant such action. For the fiscal years ended December 31, 1993 and 1994, the Fund's portfolio turnover rates were 33% and 35%, respectively. The Fund's investment policies are subject to certain restrictions. See "Investment Restrictions". Senior Securities and Borrowing of Money The 1940 Act and the Fund's fundamental policies (see "Investment Restrictions") permit the Fund to borrow money from banks and certain other lenders and to issue and sell senior securities representing indebtedness or consisting of preferred stock if various requirements are met. Such requirements include initial asset coverage tests of 300% for indebtedness (see "Asset Coverage Test") and 200% for preferred stock and, except for indebtedness to banks and certain other lenders, restrictive provisions concerning Common Stock dividend payments, other Common Stock distributions, stock repurchases and maintenance of asset coverage and giving certain senior security holders the right to elect directors in the event specified asset coverage tests are not met or dividends are not paid. The issuance and sale of senior securities allows the Fund to raise additional cash for investments. It is a speculative investment technique, involving the risk considerations of leverage, potential dilution and increased share price volatility. The following factors could increase the investment risk and the volatility of the price of the Fund's shares of Common Stock: (i) leveraging exaggerates any increase or decrease in the value of the Fund's portfolio (see "Effects of Leverage on Common Stockholders"); (ii) the costs of borrowing may exceed the income from the portfolio securities purchased with the borrowed money (see "Financial Impact of Senior Securities on Common Stockholders"); (iii) a decline in net asset value results if the investment performance of the additional securities purchased fails to cover their cost to the Fund (including any interest paid on the money borrowed or dividend requirements of preferred stock); (iv) a decline in net asset value could affect the ability of the Fund to make Common Stock dividend payments; (v) a failure to pay net investment income dividends or make capital gains distributions could result in the Fund's ceasing to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), or in its having to pay certain entity level taxes even if it maintains its status as a regulated investment company (see "Taxation"); and (vi) if the asset coverage for debt securities or preferred stock declines to less than 300% or 200%, respectively, or the Fund fails to maintain the asset coverage required by Moody's (as a result of market fluctuations or otherwise), the Fund may be required to sell a portion of its investments when it may be disadvantageous to do so. On June 30, 1995, the Fund had total assets of $349,298,192 and total liabilities of $43,935,883, including $40,000,000 of Notes payable. Accordingly, as of such date, the Fund could have issued and sold senior securities representing additional indebtedness of up to $132,681,154 or preferred stock having an involuntary liquidation preference of up to $305,362,309 or various combinations of lesser amounts of both securities representing indebtedness and such preferred stock. Effects of Leverage on Common Stockholders. Interest is payable on the Notes at the rate of 5 3/4% per annum. If the $40,000,000 aggregate principal amount of the Notes remains outstanding for all of 1995, the Fund's portfolio would have to experience a return of .75% for the year ending December 31, 1995 in order to cover that year's interest on the Notes. The table and portions of the discussion of the effects of leverage below are applicable only to the extent that the net asset value of the Fund's shares of Common Stock is less than the price at which the Notes are convertible into such shares. The conversion price prior to adjustment for the Offer was $13.86. The net asset value of the Fund's shares of Common Stock, assuming full conversion of the Notes, was $13.99 at June 30, 1995, $14.19 at August 11, 1995 and $15.06 at September 20, 1995. The table below illustrates the effect at various assumed annual returns on the Fund's portfolio (net of Fund expenses other than interest) on the corresponding net asset value return to a Common Stockholder for the twelve months ending June 30, 1996, of the leverage provided by the Notes. Assumed return on portfolio (net of expenses) -15% -10% -5% 0% 5% 10% 15% Corresponding NAV return to Common Stock- holder -17.60% -11.98% -6.36% -0.74% 4.88% 10.50% 16.12% The purpose of the table is to assist investors in understanding the effects of the leverage provided by the Notes. The figures appearing in it are hypothetical, and actual returns may be greater or less than those appearing in the table. Utilization of leverage involves certain risks to holders of Common Stock. For example, issuance of the Notes may result in higher volatility of the net asset value of the Common Stock and potentially more volatility in the market price of the Common Stock. So long as the Fund, taking into account the costs associated with the Notes and the Fund's operating expenses, is able to realize a higher net return on its investment portfolio than the interest paid on the Notes, the effect of leverage will be to cause holders of Common Stock to realize a higher return than if the Fund were not leveraged. However, to the extent that the interest rate on the Notes approaches the net return on the Fund's investment portfolio, the benefit of leverage to holders of Common Stock will be reduced, and if the interest rate on the Notes were to exceed the net return on the Fund's portfolio, the Fund's leveraged capital structure would result in a lower rate of return to holders of Common Stock than if the Fund were not leveraged. Similarly, since both the costs associated with the issuance of the Notes and any decline in the value of the Fund's investments (including investments purchased with the proceeds from the Notes offering) will be borne entirely by holders of Common Stock, the effect of leverage in a declining market would be a greater decrease in net asset value to holders of Common Sock than if the Fund were not leveraged. Such decrease in net asset value likely would be reflected in a greater decline in the market price for shares of the Fund's Common Stock. In an extreme case, a decline in net asset value could affect the Fund's ability to pay net investment income dividends and net realized capital gains distributions on the Common Stock. Failure to make such payments could adversely affect the Fund's qualification as a regulated investment company under the Code or could result in the Fund's becoming liable for income and excise taxes even if it maintains such qualification. See "Taxation". The Fund presently intends, however, to take measures necessary to continue to make such payments. If the Fund's current investment income were not sufficient to meet interest requirements on the Notes, it could be necessary for the Fund to liquidate certain of its investments. In addition, the Fund has the authority to redeem the Notes for any reason on or after July 1, 1997 and to redeem all or part of the Notes prior to that time if the asset coverage for the Notes declines below 300%. Redemption of the Notes or insufficient investment income to make interest payments may reduce the net asset value of the Common Stock and require the Fund to liquidate a portion of its investments at a time when it may be disadvantageous, in the absence of such extraordinary circumstances, to do so. Financial Impact of Senior Securities on Common Stockholders. The costs related to the issue and sale of senior securities such as the Notes or of preferred stock, including underwriting discount, rating agency fees and offering expenses, will be paid by the Fund and, therefore, borne by its Common Stockholders. Also, the interest and dividend requirements of such senior securities will reduce the amount of and may entirely eliminate any net investment income dividends otherwise payable by the Fund to its Common Stockholders. Asset Coverage Test. Section 18(a)(1) of the 1940 Act permits a registered closed-end company such as the Fund to issue and sell a class of senior securities representing an indebtedness (such as the Notes) only if, immediately after such issuance and sale, the company has an asset coverage of at least 300%. Section 18(g) of the 1940 Act defines a senior security representing an indebtedness to mean any bond, debenture, note or similar obligation or instrument constituting a security and evidencing an indebtedness. Under Section 18(h) of the 1940 Act, asset coverage of a class of senior securities representing an indebtedness of an issuer means the ratio that the value of the issuer's total assets, less all of its liabilities other than indebtedness represented by senior securities, bears to the aggregate amount of the issuer's senior securities representing indebtedness. Section 18(a)(1) of the 1940 Act also prevents a company such as the Fund from declaring any cash or other non- stock dividends or distributions on its common stock or purchasing any shares of its capital stock if, immediately thereafter, asset coverage for its senior securities representing indebtedness would be less than 300%. As of June 30, 1995, the asset coverage for the Notes outstanding was 859% or $8,590 per $1,000 principal amount of the Notes. At this level, a decrease of 67% of the Fund's total assets or 65% of its net assets would be necessary to reduce the asset coverage for the Notes to less than 300%. If the asset coverage for the Notes as of the last day of March, June, September or December in any calendar year should fall below 300%, the Fund would redeem the Notes at 100% of their then unpaid principal amount, together with accrued interest thereon, and/or any other senior securities of the Fund representing indebtedness then outstanding to the extent necessary to restore such asset coverage to at least 300%. See "Description of Other Securities - The Notes - Optional Redemption by the Fund". The Indenture governing the Notes contains more restrictive provisions concerning the Fund's obligation to maintain asset coverage for the Notes subsequent to their issuance and sale than those required by Section 18(a)(1) of the 1940 Act. See "Description of Other Securities - The Notes - Asset Coverage". Changes in Investment Objectives and Policies The Fund's primary investment objective of long-term capital appreciation principally through investment in common stocks and other equity securities is a fundamental policy of the Fund and may not be changed without approval of the holders of a majority of the Fund's outstanding voting securities. As used in this Prospectus, a "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares of the Fund present or represented at a meeting of stockholders, at which the holders of more than 50% of the outstanding shares of the Fund are present or represented, or (ii) more than 50% of the outstanding shares of the Fund. Except as indicated under "Investment Restrictions", the Fund does not consider its other policies, such as its secondary investment objective of current income, to be fundamental, and such policies may be changed by the Board of Directors without stockholder approval or prior notice to stockholders. Investment Restrictions The policies set forth below are fundamental policies of the Fund and may not be changed without the affirmative vote of the holders of a majority of the Fund's outstanding voting securities. The Fund may not: 1. Issue any class of senior security, or sell any such security of which it is the issuer, except aspermitted by the 1940 Act. 2. Purchase securities on margin or write call options on its portfolio securities. 3. Sell securities short. 4. Underwrite the securities of other issuers, or invest in restricted securities. 5. Invest more than 25% of its total assets in any one industry. 6. Purchase or sell real estate or real estate mortgage loans, or invest in the securities of real estate companies unless such securities are publicly-traded. 7. Purchase or sell commodities or commodity contracts. 8. Make loans, except for (a) purchases of portions of issues of publicly-distributed bonds, debentures and other securities, whether or not such purchases are made upon the original issuance of such securities, and (b) repurchase agreements with any bank that is the custodian of its assets covering U.S. Treasury and agency obligations and having a term of not more than one week. 9. Invest in companies for the purpose of exercising control of management. 10. Purchase portfolio securities from or sell such securities directly to any of its officers, directors, employees or investment adviser, as principal for their own accounts. 11. Invest in the securities of any one issuer (other than the United States or any agency or instrumentality of the United States) if, at the time of acquisition, the Fund would own more than 10% of the voting securities of such issuer or, as to 75% of the Fund's total assets, more than 5% of such assets would be invested in the securities of such issuer. 12. Purchase any warrants, rights or options. If a percentage restriction is met at the time of investment, a later increase or decrease in percentage resulting from a change in the value of portfolio securities or amount of total assets will not be considered a violation of any of the above restrictions. In addition to issuing and selling senior securities as set forth in No. 1 above, the Fund may obtain (i) temporary bank borrowings (not in excess of 5% of the value of its total assets) for emergency or extraordinary purposes and (ii) such short-term credits (not in excess of 5% of the value of its total assets) as are necessary for the clearance of securities transactions. Under the 1940 Act and the Indenture, such temporary bank borrowings would be treated as indebtedness in determining whether or not asset coverage was at least 300% for senior securities of the Fund representing indebtedness. Such repurchase transactions are in effect loans by the Fund to its custodian, and the agreements for such transactions require the custodian to maintain securities having a value at least equal to the amount loaned as collateral. Repurchase agreements could involve certain risks if the custodian defaults or becomes insolvent, including possible delays or restrictions upon the Fund's ability to dispose of collateral. Although there are no liquidity restrictions on investments made by the Fund and the Fund may, therefore, invest without limit in illiquid securities, the Fund expects to invest only in securities for which market quotations are readily available. INVESTMENT ADVISORY AND OTHER SERVICES Quest Advisory Corp. ("Quest") is a New York corporation organized in February 1967, with offices at 1414 Avenue of the Americas, New York, New York 10019. It became the investment adviser of the Fund in November 1986, when the Fund commenced operations. Quest serves as investment adviser or sub-investment adviser to 5 diversified management investment companies, including the Fund, with aggregate net assets of approximately $1.7 billion as of June 30, 1995, and manages other accounts on a pooled basis primarily for large pension and trust funds and not- for-profit foundations with aggregate assets of approximately $1.4 billion as of such date. Under the Fund's Articles of Incorporation and the Maryland General Corporation Law, the Fund's business and affairs are managed under the direction of its Board of Directors. Investment decisions for the Fund are made by Quest, subject to any direction it may receive from the Fund's Board of Directors, which periodically reviews the Fund's investment performance. Portfolio Management The Fund's portfolio and the portfolios of Quest's other accounts are managed by Quest's senior investment staff, including Charles M. Royce, Quest's Chief Investment Officer, who is primarily responsible for supervising Quest's investment management activities. Mr. Royce is assisted by Thomas R. Ebright, Jack E. Fockler, Jr. and W. Whitney George, Vice Presidents of Quest, all of whom participate in such activities, with their specific responsibilities varying from time to time. In the event of any significant change in Quest's senior investment staff, the members of the Fund's Board of Directors who are not interested persons of the Fund will consider what action, if any, should be taken in connection with the Fund's management arrangements. Investment Advisory Agreement Under the Investment Advisory Agreement between the Fund and Quest, Quest determines the composition of the Fund's portfolio, the nature and timing of the changes in it and the manner of implementing such changes; provides the Fund with investment advisory, research and related services for the investment of its funds; furnishes, without expense to the Fund, the services of such members of its organization as may be duly elected executive officers or directors of the Fund; pays all executive officers' salaries and executive expenses; and pays all expenses incurred in performing its investment advisory duties under the Agreement. The Fund pays all of its own expenses (except those set forth above), including, without limitation, registrar, transfer agent and custodian fees; legal, administrative and clerical services; rent for its office space and facilities; auditing; preparation, printing and distribution of its proxy statements, stockholder reports and notices; Federal and state registration fees; stock exchange listing fees and expenses; Federal, state and local taxes; non-affiliated directors fees; interest on its borrowings; brokerage commissions; and the cost of issue, sale and repurchase of its shares. Thus, unlike most other investment companies, the Fund is required to pay substantially all of its expenses, and Quest does not incur substantial fixed expenses. There are no applicable state limitations on the Fund's operating expenses. Advisory Fee As compensation for its services under the Investment Advisory Agreement, Quest receives a fee comprised of a basic fee (the "Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 500 for certain prescribed performance periods, as described below. The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the net assets of the Fund at the end of each month included in the applicable performance period, which is a rolling 36 month period ending with the most recent calendar month. The Basic Fee for each such month is subject to increase or decrease, depending on the extent, if any, to which the investment performance of the Fund exceeds by more than 2 percentage points, or is exceeded by more than 1 percentage point by, the percentage change in the investment record of the S&P 500 for such performance period. For each percentage point in excess of 2 that the investment performance of the Fund exceeds the percentage change in the investment record of the S&P 500, such Basic Fee is increased at the rate of 1/12 of .05%. For each percentage point in excess of 1 that the percentage change in the investment record of the S&P 500 exceeds the investment performance of the Fund, such Basic Fee is decreased at the rate of 1/12 of .1%. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum fee rate as adjusted for performance is 1/12 of 1.5% and would be payable if the investment performance of the Fund exceeds the percentage change in the investment record of the S&P 500 by 12 or more percentage points for the performance period, and the minimum fee rate as adjusted for performance is 1/12 of .5% and would be payable if the percentage change in the investment record of the S&P 500 exceeds the investment performance of the Fund by 6 or more percentage points for the performance period. To the extent that Quest receives a fee in excess of .75% per annum of the Fund's average net assets, its compensation may be higher than that paid by most other investment companies with similar investment objectives. The Investment Advisory Agreement also provides that, notwithstanding the foregoing, Quest will not be entitled to receive any fee for any performance period for which the investment performance of the Fund, rounded to the nearest whole point, is less than zero. In the event that the Fund's investment performance for a performance period, rounded to the nearest whole point, is less than zero, Quest will not be required to refund to the Fund any fee earned for any prior performance period. Because the Basic Fee is a function of the Fund's net assets and not of its total assets, Quest will not receive any fee in respect of those assets of the Fund equal to the aggregate unpaid principal amount of the Notes that remain outstanding. DESCRIPTION OF OTHER SECURITIES Preferred Stock The Fund's Board of Directors has authority to cause the Fund to issue and sell up to 50,000,000 shares of Preferred Stock, $.001 par value per share, that may be convertible into shares of the Fund's Common Stock. The terms of such Preferred Stock would be fixed by the Board of Directors and would materially limit and/or qualify the rights of the holders of the Fund's Common Stock. See "Investment Objectives and Policies -- Senior Securities and Borrowing of Money" and "Asset Coverage Test" and "The Notes". The Fund does not presently intend to issue any Preferred Stock while the Notes are outstanding. The Notes On June 22, 1994, the Fund issued and sold $40,000,000 aggregate principal amount of its 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the "Notes"). The Notes, which are listed on the New York Stock Exchange, are unsecured obligations of the Fund. Interest on the Notes at the rate of 5 3/4% per annum is payable semi-annually, on each June 30 and December 31, to holders of record at the close of business on the immediately preceding June 15 and December 15. Interest may be increased on July 1, 1999, as described below. Set forth below is a summary of the material terms of the Notes. Conversion Rights Each Note is convertible into shares of the Common Stock of the Fund, at the option of its holder, at any time prior to maturity, except during the period from the second trading day prior to the ex-dividend date through the record date for distributions to stockholders each year and unless previously redeemed at the option of the Fund. The initial conversion price was $14.00 per share. The conversion price immediately prior to the Record Date was $13.86, entitling the holder to acquire 72.15 shares of Common Stock for each $1,000 principal amount of Notes converted. In order to compensate the Fund's Common Stockholders for the preferential return payable to Noteholders, the Notes provide for an annual escalation of 6.75% in the conversion price. In order to compensate Noteholders for the decline in net asset value attributable to the annual distributions payable to Common Stockholders, the Notes also provide for a reduction in the conversion price in the same proportion that such distributions reduce net asset value per share of Common Stock. The annual escalation of 6.75% and the annual reduction for distributions will be made simultaneously with one another, resulting in a single annual net adjustment to the conversion price then in effect. This annual net adjustment will be made on the trading day in December of each year when the Fund's Common Stock trades without (i.e., "ex-dividend") any distributions of net investment income and capital gains to be paid on the payment date therefor to its Common Stockholders. In order to enable the Fund to compute its net investment income for the year and to fix the per share amounts of its distributions, the Notes are not convertible from the second trading day prior to the Fund's "ex-dividend" date in December of each year through the record date for distributions to stockholders each year. They are again con-vertible at the adjusted conversion price commencing on the first business day following the record date. Shares issued upon conversion of the Notes prior to the date in December of any year when they cease to be convertible will receive any distributions to be paid by the Fund on its Common Stock for such year. Converting Noteholders will not receive any accrued but unpaid interest for the period since the last interest payment date. Notes tendered for conversion during the period in December of each year when they are not convertible will be held for conversion and converted on the first business day following the record date for distributions to stockholders. The conversion price is also subject to customary adjustment in the event of any stock splits or stock dividends and for certain rights offerings and other capital share transactions, and the annual escalation may be reduced or eliminated for certain years. The Fund has reduced the conversion price of $13.86 per share to $13.59 per share because of the Offer and the December 1994 annual net adjustment. Reset of Terms If the average market price per $1,000 principal amount of Notes for the 45 trading days ending May 31, 1999 is less than $950, then on July 1, 1999, the Fund will either call all of the Notes for redemption, as set forth below, or reset one or more terms of the Notes, as described below, in order to increase their market value on such date to or as nearly as possible to par. Such reset terms may include an increase in the rate of interest, an increase or a decrease in the rate at which the conversion price escalates (before reduction for distributions) and/or a decrease in the conversion price then in effect. Asset Coverage The Fund is required to maintain, as of the last day of each March, June, September and December, an asset coverage of not less than 300% for the Notes and for any other senior securities of the Fund representing indebtedness. At June 30, 1995, with $40,000,000 aggregate principal amount of the Notes outstanding, the asset coverage for the Notes was 859% or $8,590 per $1,000 principal amount of the Notes. Also, the Fund is required to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount. The Discount Factors and guidelines for determining the Portfolio Calculation have been established by Moody's Investors Service, Inc. ("Moody's") in connection with the Fund's receipt of a rating on the Notes on their date of original issue of Aaa from Moody's. Optional Redemption by the Fund Commencing July 1, 1997, and any time thereafter prior to maturity, the Fund may, at its option, redeem the Notes in whole or in part for cash at a price equal to 100% of their principal amount, together with accrued interest thereon. Prior to July 1, 1997, the Fund has the option to redeem the Notes for cash at a price equal to 100% of their principal amount, together with accrued interest thereon, to the extent that such a redemption may become necessary for the Fund to maintain an asset coverage of not less than 300% and up to 330% for the Notes and for any other senior securities of the Fund representing indebtedness then outstanding and/or to enable the Fund to continue to qualify for treatment as a regulated investment company under the Internal Revenue Code. Mandatory Redemption by the Fund The Notes are subject to mandatory partial redemption by the Fund if the Fund fails to maintain a Portfolio Calculation equal to or greater than the Basic Maintenance Amount and such failure is not cured on or before the Cure Date. The aggregate principal amount of Notes subject to such mandatory partial redemption will equal the minimum aggregate principal amount of outstanding Notes (rounded to the next higher increment to $1,000) the redemption of which would have caused the Fund to have a Portfolio Calculation equal to or greater than the Basic Maintenance Amount on a pro forma basis at the close of business on the Cure Date, provided that, if there is no such minimum aggregate principal amount of outstanding Notes the redemption of which would have such result, all of the outstanding Notes shall be redeemed. Such mandatory redemption shall be at a redemption price equal to 100% of the principal amount of Notes to be redeemed, together with interest accrued thereon to the date fixed for redemption. Rating Agency Provisions The Indenture governing the Notes contains certain provisions (the "Rating Agency Provisions") which reflect guidelines established by Moody's in order to obtain the Aaa rating on the Notes on the date of their issuance. Under certain circumstances, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Provisions. If the Fund terminates compliance with the Rating Agency Provisions, the rate of interest payable on the Notes will be increased by .25% per annum, provided that if such termination occurs prior to July 1, 1999 and the terms of the Notes are reset on such date, as provided above, in order to increase their market value on such date at or as nearly as possible to par, then such increase in the rate of interest will terminate as of June 30, 1999. If the Fund terminates compliance with the Rating Agency Provisions, Moody's may change its rating on the Notes or withdraw its rating altogether, which may have an adverse effect on the market value of the Notes. It is the Fund's present intention to continue to comply with the Rating Agency Provisions. See "Description of the Notes" in the Statement of Additional Information for further information about the Notes. REPURCHASES OF SECURITIES The Fund is a closed-end diversified management investment company and, as such, its stockholders do not, and will not, have the right to redeem their shares of the Fund. Although the Fund will not offer to repurchase its shares or Notes on a periodic basis, it may repurchase its shares or Notes on such occasions when it is deemed advisable by the Fund. Under the 1940 Act, the Fund may repurchase its securities (i) on a securities exchange or such other open market designated by the SEC (provided that the Fund has, in the case of purchases of its stock, informed holders of the class of stock involved within the preceding six months of its intention to repurchase such stock), (ii) by a tender offer open to all holders of the class of securities involved or (iii) as otherwise permitted by the SEC. Where a repurchase of shares of the Fund is to be made that is not to be effected on a securities exchange or an open market or by the making of a tender offer, the 1940 Act provides that certain conditions must be met regarding, among other things, distribution of net income, identity of the seller, price paid, brokerage commissions, prior notice to holders of the class of its securities involved of an intention to purchase such securities and the purchase not being made in a manner or on a basis which discriminates unfairly against the other holders of such class. The Fund may incur debt, in an amount not exceeding 10% of its total assets, to finance share repurchase transactions. Any related interest charges will be paid by the Fund and borne pro rata by the stockholders indirectly through their interest in the Fund. Under the Indenture, any such debt would have to meet a 500% asset coverage test and would reduce the maximum amount of indebtedness that the Fund could otherwise incur. See "Investment Objectives and Policies--Senior Securities and Borrowing of Money". If the Fund repurchases its shares for a price below their net asset value, the net asset value of those shares that remain outstanding would be enhanced, but this does not necessarily mean that the market price of those outstanding shares would be affected, either positively or negatively. Repurchases of shares by the Fund would also decrease its total assets and accordingly may increase its expenses as a percentage of average net assets. Further, interest on any borrowings to finance any such share repurchase transactions would reduce the Fund's net income. The Board of Directors of the Fund has authorized the Fund to repurchase up to 300,000 of its shares of Common Stock in transactions effected by open market or private purchases through December 31, 1995. Such repurchases will be effected at a price per share which is less than the then current net asset value, but not in excess of the prevailing market price. The Fund has not repurchased any shares of its Common Stock since October 1987. DIVIDENDS, DISTRIBUTIONS AND REINVESTMENT PLAN The Fund declares dividends from any net investment income and distributes any net realized capital gains annually in December. It has adopted a Distribution Reinvestment Plan (the "Plan"), through which all such net investment income dividends and capital gains distributions are paid to stockholders in the form of additional shares of the Fund's Common Stock (plus cash in lieu of any fractional shares which otherwise would have been issuable), unless a stockholder elects to receive cash as provided below. In this way, a stockholder can maintain an undiluted investment in the Fund and still allow the Fund to pay out the required distributable income. No action is required on the part of a registered stockholder to receive a distribution in shares of Common Stock of the Fund. A registered stockholder may elect to receive an entire distribution in cash by notifying State Street Bank and Trust Company, the Plan Agent and the Fund's custodian, transfer agent and registrar ("State Street"), in writing so that such notice is received by State Street no later than 10 days prior to the record date for distributions to stockholders. State Street will set up an account for shares acquired through the Plan for each stockholder who has not elected to receive distributions in cash ("Participant") and hold such shares in non-certificated form. Upon request by a Participant, received in writing not less than 10 days prior to the record date, State Street will, instead of crediting shares to the Participant's account, issue a certificate registered in the Participant's name for the number of whole shares of the Fund's Common Stock and a check for any fractional share. Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary. The Fund uses only newly-issued shares to implement the Plan, whether its shares are trading at a premium or at a discount to net asset value. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the market value per share of the Fund's Common Stock at the close of regular trading on the New York Stock Exchange on the valuation date for such distribution. Market value per share on that date will be the closing price for such shares on such Exchange or, if no sale is reported for such day, at the average of their electronically-reported bid and asked prices. The number of shares of the Fund's Common Stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of the Fund's stockholders have been tabulated. There is no charge to stockholders for receiving their distributions in the form of additional shares of the Fund's Common Stock. State Street's fees for handling distributions in stock are paid by the Fund. There are no brokerage charges with respect to shares issued directly by the Fund as a result of distributions payable in stock. If a Participant elects by written notice to State Street to have State Street sell part or all of the shares held by State Street in the Participant's account and remit the proceeds to the Participant, State Street is authorized to deduct a $2.50 transaction fee plus brokerage commissions from the proceeds. Stockholders who receive distributions in the form of stock are subject to the same Federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. A stockholder's basis for determining gain or loss upon the sale of stock received in a distribution from the Fund will be equal to the total dollar amount of the distribution payable to the stockholder. TAXATION For Federal income tax purposes, distributions by the Fund are taxable when declared, whether received in cash or in additional shares of the Fund. Distributions paid from the Fund's net investment income and short-term capital gains are taxable to stockholders as ordinary income dividends. A portion of the Fund's dividends may qualify for the corporate dividends received deduction. The portion of the Fund's dividends qualifying for such deduction is generally limited to the aggregate taxable dividends received by the Fund from domestic corporations. Distributions paid from long-term capital gains are treated as long-term capital gains, regardless of how long a stockholder has held Fund shares. Stockholders will receive information annually as to the tax status of distributions made by the Fund for the calendar year. Constructive distributions resulting from an increase in the conversion price of the Notes may constitute, in whole or in part, a tax-free return of capital that will reduce a stockholder's adjusted tax basis in his shares in the Fund. See "Description of Other Securities - The Notes -Conversion Rights". Any gain or loss recognized by a stockholder upon a sale or exchange of his shares in the Fund generally will be treated as capital gain or loss, measured by the difference between the stockholder's adjusted tax basis in the shares and his amount realized on the sale or exchange. Such gain or loss generally will be long-term capital gain or loss if the shares disposed of were held for more than one year. Any loss realized on a sale of Fund shares will be disallowed to the extent that the shares disposed of are replaced (including by receiving distributions in shares through the Fund's Distribution Reinvestment Plan) within a period of 61 days, beginning 30 days before and ending 30 days after the sale of the shares. Any loss realized upon the sale or exchange of shares held for 6 months or less will be treated as a long-term capital loss to the extent of any amount reportable by the stockholder as long-term capital gain with respect to such shares. At the time of a stockholder's purchase, the market price of the Fund's shares may reflect undistributed net investment income or capital gains. A subsequent distribution of these amounts by the Fund will be taxable to the stockholder even though the distribution economically is a return of part of the stockholder's investment. Investors should carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution which would nevertheless be taxable to them. The Fund is required to withhold 31% of taxable distributions and repurchase payments made to non-corporate stockholders who have not complied with IRS taxpayer identification regulations. Stockholders may avoid this withholding requirement by certifying on the appropriate form their proper Social Security or Taxpayer Identification Number and certifying that they are not subject to backup withholding or by certifying that they are exempt from such withholding. The above discussion of Federal taxes is for general information only. Stockholders may also be subject to state and local taxes on their investment. Investors should consult their own tax advisers concerning the tax consequences of an investment in the Fund. See "The Offer--Tax Consequences" for a discussion of the tax consequences of an exercise of Rights. CUSTODIAN, TRANSFER AGENT AND REGISTRAR State Street, which is located at 225 Franklin Street, Boston, Massachusetts 02110, acts as custodian of the cash and other assets of the Fund, as transfer agent and registrar for the Fund's shares and as Plan Agent under its Distribution Reinvestment Plan. Stockholder inquiries should be directed to P.O. Box 8200, Boston, Massachusetts 02266-8200 (Tel. No. (800) 426-5523). LEGAL COUNSEL The validity of the Shares offered hereby under applicable Maryland law has been passed upon for the Fund by O'Toole, Rothwell, Nassau & Steinbach, Washington, D.C. A member of such firm owns 1,799 shares of the Fund's Common Stock. EXPERTS The financial statements of the Fund as of December 31, 1994 and for the two years then ended and the financial information appearing under the caption "Financial Highlights", incorporated by reference in the Statement of Additional Information and this Prospectus, have been examined by Coopers & Lybrand L.L.P., independent accountants, for the periods indicated in their reports with respect thereto, and are included in reliance upon their reports and upon the authority of such firm as experts in accounting and auditing. Coopers & Lybrand L.L.P. have an office at One Post Office Square, Boston, Massachusetts 02109. ADDITIONAL INFORMATION A Statement of Additional Information dated September 21, 1995 has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The Table of Contents of the Statement of Additional Information is as follows: Page PRINCIPAL STOCKHOLDERS...............................B--2 DIRECTORS AND OFFICERS.....................B--2 CODE OF ETHICS AND OTHER MATTERS...........B--4 INVESTMENT ADVISORY AND OTHER SERVICES.....B--5 (p. 19 of Prospectus) BROKERAGE ALLOCATION AND OTHER PRACTICES...B--6 NET ASSET VALUE............................B--7 DESCRIPTION OF THE NOTES...................B--7 (p. 21 of Prospectus) TAXATION...................................B--12 (p. 24 of Prospectus) FINANCIAL STATEMENTS.......................B--15 [THIS PAGE INTENTIONALLY LEFT BLANK] No person has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the Offer made by this Prospectus, and, if given or made, such information must not be relied upon as having been authorized by the Fund or Quest. This Prospectus does not constitute an offering by the Fund in any jurisdiction in which such offering may not be lawfully made. TABLE OF CONTENTS Page Prospectus Summary....................... 2 Fund Expenses ........................... 5 Financial Highlights..................... 6 Investment Performance................... 7 The Offer ............................... 8 Use of Proceeds ......................... 13 Description of Common Stock ............. 13 Investment Objectives and Policies....... 15 Investment Advisory and Other Services... 19 Description of Other Securities ......... 21 Repurchases of Securities ............... 23 Dividends, Distributions and Reinvestment Plan........................ 24 Taxation................................. 24 Custodian, Transfer Agent and Registrar ............................. 25 Legal Counsel ........................... 25 Experts.................................. 25 Additional Information................... 26 1,090,323 Shares of Common Stock Issuable Upon Exercise of Rights to Subscribe for such Shares of Common Stock ROYCE VALUE TRUST, INC. ________________ P R O S P E C T U S ________________ September 21, 1995 ROYCE VALUE TRUST, INC. STATEMENT OF ADDITIONAL INFORMATION ROYCE VALUE TRUST, INC. (the "Fund") is a closed-end diversified management investment company, whose shares of Common Stock are listed on the New York Stock Exchange under the symbol "RVT". Its primary investment objective is long-term capital appreciation, with current income as a secondary objective. This Statement of Additional Information is not a prospectus, but should be read in conjunction with the Fund's current Prospectus (dated September 21, 1995). Please retain this document for future reference. To obtain an additional copy of the Prospectus or the Fund's Annual Report to Stockholders for the year ended December 31, 1994 or Semi-Annual Report to Stockholders for the six months ended June 30, 1995, please call Investor Information at 1-800-221-4268. TABLE OF CONTENTS Page PRINCIPAL STOCKHOLDERS .................. B--2 DIRECTORS AND OFFICERS .................. B--2 CODE OF ETHICS AND RELATED MATTERS ...... B--4 INVESTMENT ADVISORY AND OTHER SERVICES... B--5 (p. 19 of Prospectus) BROKERAGE ALLOCATION AND OTHER PRACTICES. B--6 NET ASSET VALUE.......................... B--7 DESCRIPTION OF THE NOTES ................ B--7 (p. 21 of Prospectus) TAXATION ................................ B--12 (p. 24 of Prospectus) FINANCIAL STATEMENTS .................... B--15 September 21, 1995 PRINCIPAL STOCKHOLDERS As of June 30, 1995, the following persons owned of record or were known by the Fund to have owned beneficially 5% or more of the 19,453,875 shares of its Common Stock then outstanding: Name and Address Type and Percentage of Ownership Yale University Beneficial only 8.4% 451 College Street P.O. Box 1074, Yale Station New Haven, CT 06520 Cede & Co., Inc. Of record only 88.6% c/o Depository Trust Company P.O. Box 20, Bowling Green Station New York, New York 10274 All officers and directors of the Fund as a group owned 1.0% of the Fund's outstanding shares of Common Stock as of such date. DIRECTORS AND OFFICERS The following table sets forth the directors and officers of the Fund. The Fund does not have an Advisory Board. Position with Principal Occupations and Other Affiliations Name and Address the Fund During the Last Five Years Charles M. Royce* (56) Director, President, Secretary, Treasurer and sole 1414 Avenue of the President director and sole voting shareholder of Americas and Quest; Trustee, President and Treasurer of New York, NY 10019 Treasurer Pennsylvania Mutual Fund ("PMF") and of The Royce Fund ("TRF"), open-end diversified management investment companies of which Quest is the principal investment adviser; Director, President and Treasurer of the Fund and, since September 1993, of Royce Micro-Cap Trust, Inc. ("RMT"), a closed-end diversified management investment company of which Quest is the investment adviser; Secretary and sole director and sole shareholder of Quest Distributors, Inc. ("QDI"), the distributor of TRF's shares; and managing general partner of Quest Management Company ("QMC"), a registered investment adviser, and its predecessor. Thomas R. Ebright* (51) Director Vice President of Quest; Trustee of PMF; 8 Sound Shore Drive, Director of the Fund and, since September Greenwich, CT 06830 1993, of RMT; President and Treasurer of QDI; general partner of QMC and its predecessor until June 1994; President, Treasurer, a director and principal shareholder of Royce, Ebright & Associates, Inc., investment adviser to a series of TRF, since June 1994; director of Atlantic Pro Sports, Inc. and of the Strasburg RailRoad Co. since March 1993; and President and principal owner of Baltimore Professional Hockey, Inc. until May 1993. Position with Principal Occupations and Other Affiliations Name and Address the Fund During the Last Five Years Jack E. Fockler, Jr.* (37) Vice President of PMF, TRF, the Fund and RMT 1414 Avenue of the Vice President since April 1995; Senior Associate of Quest Americas since October 1989 and Vice President of New York, NY 10019 Quest since August 1993; and general partner of QMC since July 1993. Richard M. Galkin (57) Director Private investor and President of Richard M. 5284 Boca Marina Galkin Associates, Inc., tele-communications Circle South consultants. Boca Raton, FL 33487 W. Whitney George* (37) Vice President of PMF, TRF, the Fund and RMT 1414 Avenue of the Vice President since April 1995; Senior Analyst with Quest Americas since October 1991 and Vice President of New York, NY 10019 Quest since August 1993; general partner of QMC and its predecessor since January 1992; and securities analyst with Dominick and Dominick, Inc. from June 1989 to September 1991. Stephen L. Isaacs (56) Director Attorney; Director of Columbia University 685 Third Avenue Development Law and Policy Program; New York, NY 10022 Professor at Columbia University; President of Stephen L. Isaacs & Associates, consultants; and counsel to Kaplan & Kilsheimer from January 1988 to February 1991. David L. Meister (55) Director Consultant to the communications industry 111 Marquez Place since January 1993; Executive officer of Pacific Palisades, CA Digital Planet Inc. from April 1991 to 90272 December 1992; and consultant to the communications and television industry from August 1990 to April 1991. Daniel A. O'Byrne* (33) Vice President of PMF, TRF, the Fund and RMT 1414 Avenue of the Vice President since July 1994; Employee of Quest since Americas October 1986; and Vice President of Quest New York, NY 10019 since May 1994. Susan I. Grant* (42) Secretary Compliance Officer of Quest and Secretary of 1414 Avenue of the PMF, TRF, the Fund and RMT since August Americas 1994; and Assistant Counsel of First New York, NY 10019 Investors Corporation from July 1989 to July 1994. __________________________ * An "interested person" under Section 2(a)(19) of the 1940 Act. All of the Fund's directors are also trustees of PMF and directors of RMT and, except for Mr. Ebright, trustees of TRF. The Board of Directors of the Fund has an Audit Committee, comprised of Richard M. Galkin, Stephen L. Isaacs and David L. Meister. The Audit Committee is responsible for the selection and nomination of the independent auditors for the Fund and for conducting post-audit reviews of the Fund's financial condition with such auditors. Remuneration of Directors and Officers Set forth below is the compensation paid by the Fund and the three other registered investment companies comprising The Royce Funds to each director for the year ended December 31, 1994. Aggregate Total Compensation Compensation From From the Fund and Director from the Fund Other Royce Funds Richard M. Galkin..... $17,000 $60,000 Stephen L. Isaacs..... 17,000 60,000 David L. Meister ..... 17,000 60,000 No director, officer, other affiliated person of the Fund (except Quest) or any affiliated person of any affiliate of the Fund received from the Fund during the fiscal year ended December 31, 1994, aggregate compensation in excess of $60,000 for services in all capacities. CODE OF ETHICS AND RELATED MATTERS Quest, QDI, QMC and The Royce Funds have adopted a Code of Ethics under which directors, officers, employees and partners of Quest, QDI and QMC ("Quest-related persons") and interested trustees/directors, officers and employees of The Royce Funds are prohibited from personal trading in any security which is then being purchased or sold or considered for purchase or sale by a Royce Fund or any other Quest or QMC account. Such persons are permitted to engage in other personal securities transactions if (i) the securities involved are United States Government debt securities, municipal debt securities, money market instruments, shares of affiliated or non-affiliated registered open-end investment companies or shares acquired from an issuer in a rights offering or under an automatic dividend reinvestment plan or (ii) they first obtain permission to trade from Quest's Compliance Officer and an executive officer of Quest. The Code contains standards for the granting of such permission, and it is expected that permission to trade will be granted only in a limited number of instances. Quest's and QMC's clients include several private investment companies in which Quest or QMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr. and/or W. Whitney George may be deemed to beneficially own) a share of up to 15% of the company's realized and unrealized net capital gains from securities transactions, but less than 5% of the company's equity interests. The Code of Ethics does not restrict transactions effected by Quest or QMC for such private investment company accounts. Transactions for such private investment company accounts are subject to Quest's and QMC's allocation policies and procedures. See "Brokerage Allocation and Other Practices". As of June 30, 1995, Quest-related persons, interested trustees/directors, officers and employees of The Royce Funds and members of their immediate families beneficially owned shares of The Royce Funds having a total value of approximately $16.1 million, and Quest's and QMC's equity interests in such private investment companies totalled approximately $3.9 million. INVESTMENT ADVISORY AND OTHER SERVICES Advisory Fee The following table illustrates, on an annualized basis, the full range of permitted increases or decreases to the Basic Fee, assuming that the investment performance of the Fund, rounded to the nearest whole point, is not less than zero. Difference between Performance of Fund and % Change in S & P 500 Record Adjustment to 1% Basic Fee Fee as Adjusted +12 or more +.5% 1.5% +11 +.45% 1.45% +10 +.4% 1.4% +9 +.35% 1.35% +8 +.3% 1.3% +7 +.25% 1.25% +6 +.2% 1.2% +5 +.15% 1.15% +4 +.1% 1.1% +3 +.05% 1.05% +2 0 1% +1 0 1% 0 0 1% - -1 0 1% - -2 -.1% .9% - -3 -.2% .8% - -4 -.3% .7% - -5 -.4% .6% - -6 or less -.5% .5% In calculating the investment performance of the Fund and the percentage change in the investment record of the S&P 500, all dividends and other distributions during the performance period are treated as having been reinvested and no effect is given to gain or loss resulting from capital share transactions of the Fund. Fractions of a percentage point are rounded to the nearest whole point (to the higher whole point if exactly one- half). For the year ended December 31, 1992, the 1% Basic Fee of $1,887,698 was subject to a downward adjustment of approximately 47% ($887,650) based on the sum of each month's separate performance calculation, with Quest earning a fee of $1,000,048 for such year. For the period from January 1, 1990 to December 31, 1992, the percentage change in the investment record of the S&P 500 exceeded the investment performance of the Fund by 9 percentage points. For the year ended December 31, 1993, the 1% Basic Fee of $1,755,510 was subject to an upward adjustment of approximately 46% ($808,757) based on the sum of each month's separate performance calculation, with Quest earning a fee of $2,564,267 for such year. For the period from January 1, 1991 to December 31, 1993, the investment performance of the Fund exceeded the percentage change in the investment record of the S&P 500 by 42 percentage points. For the year ended December 31, 1994, the 1% Basic Fee of $2,145,080 was subject to an upward adjustment of approximately 50% ($1,062,048) based on the sum of each month's separate performance calculation, with Quest earning a fee of $3,170,118 for such year (net of $37,010 voluntarily waived by Quest). For the period from January 1, 1992 to December 31, 1994, the investment performance of the Fund exceeded the percentage change in the investment record of the S&P 500 by 23 percentage points. For the six months ended June 30, 1995, the 1% Basic Fee of $1,199,618 was subject to an upward adjustment of approximately 32% ($378,652) based on the sum of each month's separate performance calculation, with Quest earning a fee of $1,578,270 for such period (net of $62,622 voluntarily waived by Quest). For the period from July 1, 1992 to June 30, 1995, the investment performance of the Fund exceeded the percentage change in the investment record of the S&P 500 by 9 percentage points. Service Contract with State Street State Street Bank and Trust Company ("State Street"), the custodian of the Fund's assets, provides certain management- related services to the Fund. Such services include keeping books of accounts and rendering such financial and other statements as may be requested by the Fund from time to time, and generally assisting in the preparation of reports to the Fund's stockholders, to the SEC and others, in the auditing of accounts and in other ministerial matters of like nature, as agreed to between the Fund and State Street. During the fiscal years ended December 31, 1994, 1993 and 1992, the Fund paid $98,118, $97,977 and $89,756 in fees to State Street for management-related and custodial services. BROKERAGE ALLOCATION AND OTHER PRACTICES Quest is responsible for selecting the brokers who effect the purchases and sales of the Fund's portfolio securities. No broker is selected to effect a securities transaction for the Fund unless such broker is believed by Quest to be capable of obtaining the best price for the security involved in the transaction. In addition to considering a broker's execution capability, Quest generally considers the brokerage and research services which the broker has provided to it, including any research relating to the security involved in the transaction and/or to other securities. Such services may include general economic research, market and statistical information, industry and technical research, strategy and company research, and may be written or oral. Quest determines the overall reasonableness of brokerage commissions paid, after considering the amount another broker might have charged for effecting the transaction and the value placed by Quest upon the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or Quest's overall responsibilities with respect to its accounts. Quest is authorized, under Section 28(e) of the Securities Exchange Act of 1934 and under its Investment Advisory Agreement with the Fund, to pay a broker a commission in excess of that which another broker might have charged for effecting the same transaction, in recognition of the value of brokerage and research services provided by the broker. Brokerage and research services furnished by brokers through whom the Fund effects securities transactions may be used by Quest in servicing all of its accounts and those of QMC, and not all of such services may be used by Quest in connection with the Fund. Even though investment decisions for the Fund are made independently from those for the other accounts managed by Quest and its affiliate, securities of the same issuer are frequently purchased, held or sold by the Fund and the other accounts because the same security may be suitable for all of them. When the Fund and such other accounts are simultaneously engaged in the purchase or sale of the same security, Quest seeks to average the transactions as to price and allocate them as to amount in a manner believed to be equitable to each. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtainable for the Fund. For the fiscal years ended December 31, 1992, 1993 and 1994 and the six months ended June 30, 1995, the Fund paid brokerage commissions of $296,825, $294,869, $457,376 and $223,342, respectively. During the fiscal years ended December 31, 1992, 1993 and 1994 and the six months ended June 30, 1995, the aggregate amount of brokerage transactions of the Fund having a research component was $58,778,962, $58,974,951, $83,334,820 and $43,889,633, respectively, and the amount of commissions for such transactions was $239,592, $207,356, $331,697 and $156,152, respectively. During the fiscal year ended December 31, 1994, the Fund acquired securities of a "regular broker" (as such term is defined in Rule 10b-1 under the 1940 Act) or of the parent of its "regular broker", and its holding of such security had a market value at December 31, 1994, as follows: Lehman Brothers Holdings Inc. -- $823,050. NET ASSET VALUE In determining net asset value, securities listed on an exchange or on the National Association of Securities Dealers Automated Quotation System are valued on the basis of the last reported sale prior to the time the valuation is made or, if no sale is reported for such day, at their electronically-reported bid price for exchange-listed securities and at the average of their electronically-reported bid and asked prices for Nasdaq securities. Quotations are taken from the market where the security is primarily traded. Other over-the-counter securities for which market quotations are readily available are valued at their electronically-reported bid price or, if there is no such price, then at their representative bid price. Securities for which market quotations are not readily available are valued at their fair value under procedures established and supervised by the Fund's Board of Directors. Notwithstanding the above, bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. Net asset value per share is calculated assuming that the Notes have been converted, unless the effect of doing so is anti- dilutive (i.e., results in a higher net asset value per share than would otherwise be the case), and this value is reported by the Fund by telephone and for publication as its net asset value per share. The costs of the Note offering (including the underwriting discount) are being amortized over the term of the Notes. If the Notes are earlier redeemed or otherwise purchased by the Fund, the unamortized cost attributable to the Notes will be charged against operations. Similarly, upon conversion of any Notes, the unamortized cost attributable to the converted Notes will be charged against operations. DESCRIPTION OF THE NOTES The Fund issued and sold $40,000,000 aggregate principal amount of its 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the "Notes") under an Indenture dated as of June 15, 1994 (the "Indenture") between the Fund and United States Trust Company of New York, as trustee (the "Trustee"). The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Indenture, including the definitions therein of certain terms and those terms made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect on the date of the Indenture. General The Notes are unsecured obligations of the Fund and will mature on June 30, 2004. Interest on the Notes at the rate of 5 3/4% per annum is payable semi-annually, on each June 30 and December 31, to holders of record at the close of business on the immediately preceding December 15 and June 15. Interest is computed on the basis of a year consisting of twelve 30-day months and may be increased on July 1, 1999, as set forth below under "Reset of Terms". The Notes are not entitled to the benefit of a sinking fund. They are subject to redemption by the Fund as set forth below under "Redemption of Notes". Conversion Rights The registered holder of any Note has the right, exercisable at any time prior to the close of business on June 30, 2004, except during the period from the second trading day prior to the ex-dividend date through the record date for distributions to stockholders each year, when no conversions may be effected, and except that, in the case of a redemption at the option of the Fund, such right will expire at the close of business on the redemption date), to convert such Note at the principal amount thereof (or any portion thereof that is an integral multiple of $1,000) into shares of the Fund's Common Stock. The initial conversion price was $14.00 per share. The conversion price has subsequently been adjusted downward to $13.59, entitling the holder to acquire 73.58 shares of Common Stock for each $1,000 principal amount of Notes converted, and is subject to further adjustments as described below. No payment or adjustment will be made on conversion of any Note for interest accrued thereon. No fractional shares will be issued upon conversion of Notes, and, if the conversion results in a fractional interest, the Fund will pay a cash adjustment based upon the closing price of the Common Stock on the New York Stock Exchange on the date of conversion. The conversion price will be adjusted in December 1995 and in December of each year thereafter, on the trading day in December of each year on which shares of the Fund's Common Stock trade without (i.e., "ex-dividend") any net investment income dividend and/or capital gains distribution to be paid by the Fund to its record date Common Stockholders. (If the Fund will not be paying any such dividend or distribution to its Common Stockholders for a year, then the adjustment will be made on December 23 of that year.) On such date in December, except as provided below, the conversion price then in effect will either be increased by (i) .0675 times such conversion price minus (ii) the product of (x) the percentage of the fully-diluted net asset value per share of the Fund's Common Stock at the close of trading on the immediately preceding trading day to be paid by the Fund to its Common Stockholders as a distribution for such year (expressed as a decimal) times (y) such conversion price or, if (ii) exceeds (i), decreased by such excess. This annual net adjustment compensates the Fund's Common Stockholders for the preferential return represented by the interest payable to Noteholders and compensates Noteholders for the decline in net asset value of shares of the Fund's Common Stock attributable to such annual distribution. For example, if (i) the Fund declares a net investment income dividend and capital gains distribution for the year ending December 31, 1995 aggregating $0.75 per share, payable to Common Stockholders of record at the close of business on December 7, 1995, (ii) the "ex-date" for such distributions is December 1, 1995 and (iii) the fully-diluted net asset value per share of the Fund's Common Stock at the close of trading on November 30, 1995 is $15.06, then the conversion price of $13.59 per share would be subject to a net positive adjustment of $0.17 to $13.76, consisting of the 6.75% escalation and a 4.98% decrease (representing the percentage of the fully-diluted net asset value per share of the Fund's Common Stock at the November 30 close to be distributed by the Fund to its Common Stockholders). As indicated above, this annual net adjustment will be made on December 1, 1995, when the Fund's Common Stock trades "ex-dividend" such distributions. The figures in this paragraph are hypothetical, and actual amounts for 1995 may be greater or less than those used. Notwithstanding the foregoing, with respect to the annual adjustment dates occurring in 1997, 1998, 2002 and 2003, the Fund may, at its option, exercisable prior to the related annual adjustment date, reduce or eliminate the annual escalator for the year involved, so that the conversion price then in effect may be adjusted only for the impact on the then fully-diluted net asset value per share of the Fund's Common Stock of that year's distributions to Common Stockholders. For protection against dilution under certain other circumstances, the conversion price is also subject to adjustment with respect to the occurrence of the following events: (i) the issuance of shares of the Fund's Common Stock as a dividend or distribution to its Common Stockholders (other than issuances of shares pursuant to the Fund's Distribution Reinvestment Plan); (ii) issuance by the Fund of rights or warrants to all of its Common Stockholders entitling them to subscribe for shares of the Fund's Common Stock at a price below their net asset value on the record date for such offering; (iii) the sub-division, combination or reclassification of shares of the Fund's Common Stock; and (iv) the distribution to the Fund's Common Stockholders of preferred stock or evidences of indebtedness issued by the Fund or portfolio securities, cash or other assets of the Fund (excluding distributions for which adjustment has been made or is to be made annually in December, as set forth above). (For purposes of clauses (ii) and (iv), the decline in the net asset value per share of the Fund's Common Stock resulting from such offerings and distributions will be calculated by assuming full conversion of the Notes.) The Fund has reduced the conversion price per share of $13.86 to $13.59 per share because of the Offer and the December 1994 annual net adjustment. Conversion price adjustments, or the omission to make such adjustments, may in certain circumstances result in constructive distributions to stockholders. The Fund has adjusted the conversion price of the Notes to reflect the distribution of the Rights, so as to avoid a constructive distribution to stockholders. See "Taxation - Constructive Dividends" below. Reset of Terms If the average "market price" per $1,000 principal amount of Notes for the 45 trading days ending May 31, 1999 is less than $ 950, then on July 1, 1999 (the "Reset Date"), the Fund will, at its option, either (i) call all of the Notes for redemption (as set forth below under "Redemption of Notes - Optional Redemption") or (ii) reset one or more terms of the Notes (as described below) for the period from the Reset Date to June 30, 2004, in order to increase their market value on the Reset Date to or as nearly as possible to 100% of the full principal amount of the Notes (i.e., "par") immediately after such reset. For these purposes, "market price" on a trading day will be determined on the basis of the last reported sale price of the Notes at the close of regular trading on the New York Stock Exchange or, if no sale is reported for a trading day, at their last reported sale price at the close of regular trading on such Exchange on the immediately preceding trading day on which a sale occurred. The only terms of the Notes that may be reset by the Fund on the Reset Date are (i) the rate of interest of 5 3/4 %, which may be increased to a rate not above the then prevailing market rate for similar non-convertible corporate debt (but not decreased), (ii) the conversion price then in effect, which may be decreased to 105% of the net asset value of a share of the Fund's Common Stock at or shortly prior to the Reset Date (but not increased) and/or (iii) the 6.75% rate at which the conversion price escalates (before reductions for distributions) annually in December, which may be increased or decreased. No assurance can be given that the net effect of the reset terms will cause the Notes to trade at par on the Reset Date or thereafter. Redemption of Notes Optional Redemption. Commencing July 1, 1997, and at any time thereafter prior to maturity, the Fund may, at its option, redeem the Notes in whole or in part for cash at a price equal to 100% of their principal amount, together with accrued interest thereon. Prior to July 1, 1997, the Notes will not otherwise be redeemable at the option of the Fund, except that the Fund may redeem the Notes at any time for cash at 100% of their principal amount, together with accrued interest thereon, (i) if asset coverage (as defined in the 1940 Act) as of the last day of March, June, September or December in any calendar year falls below 300% (or such higher percentage as may be required by the 1940 Act) for the Notes and for any other senior securities of the Fund representing indebtedness, to the extent necessary to increase such asset coverage to not less than 300% (or such higher required percentage) and, at the option of the Fund, up to 330% (see "Asset Coverage") or (ii) to the extent necessary to enable the Fund to continue to qualify for tax treatment as a regulated investment company under the Code. See "Taxation" below. Mandatory Redemption. Under the Rating Agency Provisions of the Indenture, the Notes, which have been rated Aaa by Moody's, are subject to mandatory partial redemption by the Fund if the Fund fails to maintain a Portfolio Calculation equal to or greater than the Basic Maintenance Amount and such failure is not cured or otherwise ceases to exist on or before the Cure Date. The aggregate principal amount of Notes subject to such mandatory partial redemption will equal the minimum aggregate principal amount of outstanding Notes (rounded to the next higher increment to $1,000) the redemption of which would have caused the Fund to have a Portfolio Calculation equal to or greater than the Basic Maintenance Amount on a pro forma basis at the close of business on the Cure Date, provided that, if there is no such minimum aggregate principal amount of outstanding Notes the redemption of which would have such result, all of the outstanding Notes shall be redeemed. Any such mandatory redemption shall occur within 63 days after the date of such failure to maintain a Portfolio Calculation equal to or greater than the Basic Maintenance Amount and shall be at a redemption price equal to 100% of the principal amount of Notes to be redeemed, together with interest accrued thereon to the date fixed for redemption (exclusive of installments of interest due and payable on or prior to such date, the payment of which shall have been made or duly provided for). A purchase by the Fund of Notes during the period between the Cure Date and the redemption date is considered to be a mandatory redemption of the Notes purchased. Asset Coverage 1940 Act Asset Coverage. Under the 1940 Act and the Indenture, the Fund cannot declare any cash or other non-stock dividends or distributions on its Common Stock or purchase any shares of its capital stock if, immediately thereafter, asset coverage for senior securities representing indebtedness would be less than 300%. Under the Code, the Fund must, among other things, distribute at least 90% of its investment company taxable income each year in order to maintain its qualification for tax treatment as a regulated investment company and must distribute additional amounts in order to avoid becoming liable for income and excise taxes. See "Taxation" below. Under the Indenture, the Fund has agreed to maintain, as of the last day of March, June, September and December of each calendar year while any Notes are outstanding, asset coverage for senior securities representing indebtedness equal to at least 300% of the amount of any senior securities representing indebtedness, including the Notes. See "Investment Objectives and Policies -- Senior Securities and Borrowing of Money -- Asset Coverage Test" in the Prospectus. If the required asset coverage is not met as of the last day of March, June, September or December in any calendar year while the Notes are outstanding, and is not restored as of the last business day of a month ending within 20 days after notice by the Trustee, an "Event of Default" is deemed to have occurred, entitling the Trustee to accelerate the due date of the Notes (for this purpose, without limitation, the default will be deemed cured if, within the prescribed period, the Fund has notified the Trustee to call for redemption such portion of the Notes as, alone or together with other action taken by the Fund, would cause the Fund to have the requisite asset coverage). Basic Maintenance Amount. For so long as any Notes are outstanding, the Fund will be required pursuant to the Rating Agency Provisions of the Indenture to maintain, as of each Valuation Date, a Portfolio Calculation at least equal to the Basic Maintenance Amount. If the Fund fails to maintain the required Portfolio Calculation, the Rating Agency Provisions provide that the Fund will use its best efforts to reattain a Portfolio Calculation at least equal to the Basic Maintenance Amount on or prior to the Cure Date, by altering the composition of its portfolio or otherwise. The Rating Agency Provisions also prevent the Fund from paying dividends or other distributions on its Common Stock unless, after giving effect to such dividends or other distributions, the Fund continues to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount. Other Restrictive Covenants The Indenture permits the Fund to incur indebtedness in addition to the Notes, provided that (i) if the Fund proposes to use the net proceeds of such additional indebtedness to purchase a portion of the Notes or to prepay, redeem or otherwise refinance a portion of the Notes and/or any other indebtedness of the Fund then outstanding or if such indebtedness constitutes a temporary bank borrowing (not in excess of 5% of the value of the Fund's total assets) for emergency or extraordinary purposes, the Fund immediately thereafter has an asset coverage of at least 300% for the Notes and for all other indebtedness of the Fund then outstanding, or (ii) if the Fund proposes to use such net proceeds for any other purpose, the Fund immediately thereafter has an asset coverage of at least 500% and, in the case of (i) or (ii) above, (iii) no such additional indebtedness has a preference or priority over any other indebtedness of the Fund upon the distribution of the assets of the Fund or in respect of the payment of interest. Such additional indebtedness of the Fund may have different interest rates, maturity dates and/or conversion and other rights than those applicable to the Notes. The Indenture does not otherwise restrict the Fund's incurrence of additional debt or restrict its issuance of preferred stock. Any possible liability resulting from lending and/or borrowing portfolio securities, entering into reverse repurchase agreements, entering into futures contracts and writing options, to the extent such transactions are made in accordance with the investment restrictions of the Fund then in effect, are not treated as indebtedness. The Indenture prohibits the Fund from granting a security interest in any of its portfolio securities or other assets to secure any other indebtedness unless the Notes are equally and ratably secured together with such other indebtedness. Portfolio securities and other assets of the Fund deposited, segregated or delivered in connection with short sales, the writing of options or the lending of portfolio securities, to the extent such transactions are made in accordance with the investment restrictions of the Fund then in effect, are not treated as pledged or otherwise secured for this purpose. The Fund has also agreed in the Indenture (i) to remain a closed-end diversified management investment company as defined in the 1940 Act and (ii) not to change its primary investment objective of long-term capital appreciation by normally investing more than 75% of its assets in common stocks and securities convertible into common stocks of small and medium-sized companies or its secondary investment objective of current income. See "Investment Objectives and Policies" in the Prospectus. The Rating Agency Provisions of the Indenture require that for so long as the Notes are rated by Moody's, the Fund agrees that it will not declare or pay any dividend or other distribution on any shares of the Fund's capital stock or repurchase any shares of such capital stock, unless the Fund shall have confirmed that, after giving effect to such declaration, other distribution or repurchase, the Fund continues to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount. The Rating Agency Provisions of the Indenture also require that for so long as the Notes are rated by Moody's, the Fund shall not (i) acquire or otherwise invest in futures contracts or options on futures contracts, (ii) engage in reverse repurchase agreements, (iii) engage in short sales, (iv) overdraw any bank account, (v) write options on portfolio securities other than call options on securities held in the Fund's portfolio or that the Fund has an immediate right to acquire through conversion or exchange of securities held in its portfolio, (vi) engage in the lending of portfolio securities or (vii) borrow money (other than by issuance of the $40,000,000 aggregate principal amount of the Notes), except for the purpose of clearing and/or settling transactions in portfolio securities (which borrowings shall under any circumstances be limited to the lesser of $10,000,000 and an amount equal to 5% of the market value of the Fund's assets at the time of such borrowings and which borrowings shall be repaid within 60 days and not be extended or renewed), unless in any such case, the Fund shall have received written confirmation from Moody's that such investment activity will not adversely affect Moody's then current rating of the Notes. Termination of Rating Agency Provisions The Indenture provides that the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Provisions, in which case the Fund will no longer be required to comply with any of the Rating Agency Provisions, provided that (i) the Fund has given the Trustee, Moody's and Noteholders at least 20 calendar days written notice of such termination of compliance, (ii) no Event of Default or Default under the Rating Agency Provisions or otherwise under the Indenture exist at the time the notice required in clause (i) above is given or at the time of the termination of compliance with the Rating Agency Provisions, (iii) at the time the notice required in clause (i) above is given and at the time of termination of compliance with the Rating Agency Provisions, the Notes are listed on the New York Stock Exchange or on another exchange registered with the SEC as a national securities exchange and (iv) at the time of termination of compliance with the Rating Agency Provisions, the rate of interest payable on the Notes is increased by .25% per annum. If the Rating Agency Provisions are terminated by the Fund prior to the Reset Date and the terms of the Notes are reset on the Reset Date pursuant to the Indenture, then the increase in the rate of interest provided for in clause (iv) of the preceding sentence shall terminate as of the day immediately prior to the Reset Date. TAXATION The following Federal income tax discussion reflects applicable tax laws as of the date of this Prospectus, which tax laws are subject to being changed retroactively or prospectively. Tax Treatment of the Fund and Stockholders The Fund has qualified and intends to remain qualified each year for the tax treatment applicable to a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must comply with certain requirements of the Code relating to, among other things, the source of its income and the diversification of its assets. The Fund will not be subject to Federal income taxes to the extent that its net investment income and capital gain net income are distributed, so long as the Fund qualifies as a RIC and distributes, as ordinary income dividends, at least 90% of its investment company taxable income. A non-deductible 4% excise tax will be imposed on the Fund to the extent the Fund does not distribute (including by declaration of certain dividends) during each calendar year (i) 98% of its ordinary income for such calendar year, (ii) 98% of its capital gain net income for the one-year period ending on October 31 of such calendar year (or the Fund's actual taxable year ending December 31, if elected) and (iii) certain other amounts not distributed in previous years. In order to avoid the application of this tax, the Fund will endeavor to distribute substantially all of its ordinary income and capital gain net income during the calendar year in which such income is earned and such gains are realized. If the Fund does not meet the asset coverage requirements imposed by the Indenture at any time when the Notes are outstanding, the Fund would be required to suspend distributions to stockholders until the requisite asset coverage is restored. See "Description of the Notes - Asset Coverage" above. Any such suspension might prevent the Fund from satisfying the foregoing 90% distribution requirement, or could expose the Fund to income and excise taxes, as discussed above. The Fund currently intends to purchase Notes in the marketplace or otherwise, or to redeem them in whole or in part, if necessary, in order to maintain or restore the requisite asset coverage and allow the Fund to make distributions necessary to remain qualified as a RIC. The Fund would not qualify as a RIC if, in any year, less than 90% of its gross income were "qualifying income," that is, income derived with respect to the business of investing in stocks, securities or foreign currencies. The Fund would realize cancellation of indebtedness ("COD") income upon purchasing Notes in the marketplace for less than their face amount, which, if such income is not qualifying income, might adversely affect the Fund's status as a RIC. Any COD income recognized by the Fund should be qualifying income. Nevertheless, because there is no authority directly on point with respect to this issue, differing conclusions are possible. The realization of COD income by the Fund and investments of the Fund in securities issued at a discount or providing for deferred interest payments or payments of interest in kind (which investments are subject to special tax rules under the Code) will affect the amount, timing and character of distributions to stockholders. For example, with respect to securities issued at a discount, the Fund will be required to accrue as ordinary income each year a portion of the discount (even though the Fund may not have received cash interest payments equal to the amount included in income) and to distribute such income each year in order to maintain its qualification as a RIC and to avoid income and excise taxes. Similarly, any COD income realized by the Fund would be required to be included in its income and distributed, even though the Fund would not have received cash in respect of such COD income. In order to generate sufficient cash to make distributions necessary to satisfy the 90% distribution requirement and to avoid income and excise taxes, the Fund may have to dispose of securities that it would otherwise have continued to hold. If the Fund were to be unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify as a RIC in any year, the Fund would be subject to tax in such year on all of its taxable income, whether or not the Fund made any distributions to stockholders. To qualify again as a RIC in a subsequent year, the Fund would be required to distribute to stockholders as an ordinary income dividend, its earnings and profits attributable to non-RIC years (less any interest charge hereinafter described), and also would be required to pay to the Internal Revenue Service ("IRS") an interest charge on 50% of such earnings and profits. In addition, if the Fund failed to qualify as a RIC for a period greater than one taxable year, then, except as provided in regulations to be promulgated, the Fund would be required to recognize and pay tax on any net built- in gains (the excess of aggregate gains, including items of income, over aggregate losses that would have been realized if the Fund had been liquidated) in order to qualify as a RIC in a subsequent year. If the Fund invests in stock of a so-called passive foreign investment company ("PFIC"), the Fund may be subject to Federal income tax on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the Fund's holding period for the stock. The amount so allocated to any taxable year of the Fund prior to the taxable year in which the excess distribution or disposition occurs would be taxed to the Fund at the highest marginal income tax rate in effect for such years, and the tax would be further increased by an interest charge. The amount allocated to the taxable year of the distribution or disposition would be included in the Fund's investment company taxable income and, accordingly, would not be taxable to the Fund to the extent distributed by the Fund as a dividend to stockholders. The Fund may be able to make an election, in lieu of being taxable in the manner described above, to include annually in income its pro rata share of the ordinary earnings and net capital gain (whether or not distributed) of the PFIC. In order to make this election, the Fund would be required to obtain annual information from the PFICs in which it invests, which in many cases may be difficult to obtain. Alternatively, if eligible, the Fund may be able to elect to mark to market its PFIC stock, resulting in the stock being treated as sold at fair market value on the last business day of each taxable year. Any resulting gain would be reported as ordinary income, and any resulting loss would not be recognized. The Fund may make either of these elections with respect to its investments (if any) in PFICs. For Federal income tax purposes, distributions by the Fund paid from net investment income and from any net realized short- term capital gain will be taxable to stockholders as ordinary income, whether received in cash or in additional shares. Distributions of net investment income (but not distributions of short-term or long-term capital gain) may qualify in part for the 70% dividends received deduction for corporate stockholders. The amount qualifying for such deduction is generally limited to the aggregate dividends received by the Fund from domestic corporations and to an amount so designated by the Fund (and is subject to other generally applicable statutory limitations). The amount eligible for the dividends received deduction will be reduced to the extent that the Fund has borrowed (including through the issuance of the Notes) to acquire portfolio stock. So long as the Fund qualifies as a RIC and satisfies the 90% distribution requirement, distributions by the Fund paid from net capital gains will be taxable as long-term capital gains, whether received in cash or in additional shares and regardless of how long a stockholder has held his Fund shares. Such distributions will not be eligible for the dividends received deduction. See "Dividends, Distributions and Reinvestment Plan" in the Prospectus for a discussion of certain tax consequences of distributions received in shares through the Fund's Distribution Reinvestment Plan. Long-term capital gains of non-corporate taxpayers, although fully includable in income, currently are taxed at a lower maximum marginal rate than ordinary income. The Fund will send annual written notice to stockholders regarding the amount and Federal income tax status (as ordinary income or capital gain) of all distributions made during each calendar year. As discussed below under "Constructive Dividends," a portion of the Fund's distributions may constitute taxable income and a portion may constitute a tax-free return of capital that will reduce a stockholder's adjusted tax basis in his shares. A distribution will be treated as paid during a calendar year if it is declared by the Fund in December of that year to holders of record in October, November or December and paid by January 31 of the following year. Such distributions will be taxable to stockholders as if received in the prior year even if not received until the subsequent year. In addition, certain other distributions made after the close of a taxable year of the Fund may be "spilled back" and treated as paid by the Fund (other than for purposes of avoiding the 4% excise tax) during such taxable year. Such dividends would be taxable to the stockholders in the taxable year in which the distribution was actually made by the Fund. The market price of shares of the Fund that are acquired prior to a distribution by the Fund may reflect the amount of the forthcoming distribution. Such distribution, when made, would be taxable to a stockholder under the principles discussed above even though the distribution may reduce the market value of the shares below the stockholder's purchase price and thus represent a return of the stockholder's investment in an economic sense. Investors should carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution which would nevertheless be taxable to them. Any gain or loss recognized by a stockholder upon a sale or exchange (including in connection with a repurchase of shares by the Fund) of his shares in the Fund (provided that such shares are held by the stockholder as a capital asset) generally will be treated as capital gain or loss, measured by the difference between the stockholder's adjusted tax basis in the shares and his amount realized on the sale or exchange. Such gain or loss generally will be long-term capital gain or loss if the shares disposed of were held for more than one year. (If a stockholder acquired his shares by conversion of a Note which he acquired at a discount, however, a portion of any gain realized on a sale of such shares may be taxable as ordinary income under the market discount rules.) Any loss realized on a sale of Fund shares will be disallowed to the extent that the shares disposed of are replaced (including by receiving distributions in shares through the Fund's Distribution Reinvestment Plan) within a period of 61 days, beginning 30 days before and ending 30 days after the sale of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Also, any loss realized upon the sale or ex-change of shares held for 6 months or less will be treated as a long-term capital loss to the extent of any amount reportable by the stockholder as long-term capital gain with respect to such shares. Backup Withholding For backup withholding purposes, the Fund may be required to withhold 31% of reportable payments (which, in addition to net investment income dividends, may include capital gain distributions and repurchases) to certain non-corporate stockholders. A non-corporate stockholder, however, may avoid becoming subject to this requirement by filing an appropriate form certifying under penalties of perjury that such stockholder's taxpayer identification number set forth on the form is correct, and that he is not subject to backup withholding, or that he is exempt from backup withholding. Ordinary income distributions paid to stockholders who are non- resident aliens or which are foreign entities will also be subject to 30% United States withholding tax unless a reduced rate of withholding or a withholding exemption is provided under an applicable treaty. Constructive Dividends Section 305 of the Code makes taxable certain actual or constructive distributions of stock with respect to stock and convertible securities. An increase in the conversion price of the Notes pursuant to the annual net adjustment (see "Description of the Notes - Conversion Rights") generally would be deemed to be the payment of a constructive distribution to stockholders. Such constructive distribution would be taxable to stockholders under the rules, discussed above, generally applicable to distributions to stockholders. The amount of such constructive distribution should be the fair market value of a stockholder's increased proportionate interest in the Fund immediately after the conversion price adjustment, although differing conclusions are possible with respect to the appropriate method for calculating such amount, and should increase the stockholder's adjusted tax basis in his shares. Because the Fund intends to distribute substantially all of its net investment income and net realized capital gains, it is possible that the Fund's actual and constructive distributions to stockholders in a particular year may exceed the Fund's earnings and profits for such year allocable thereto. The excess portion of such distributions would first reduce a stockholder's adjusted tax basis in his shares to zero (and, to that extent, would not be taxable), and thereafter would constitute capital gains to such stockholder (assuming such shares are held as a capital asset). The failure to reduce the conversion price of the Notes with respect to the Fund's redemption of Notes or issuance of certain rights or warrants, under certain circumstances, may be deemed to be the payment by the Fund of a constructive distribution to stockholders. Any such constructive distribution would be taxable to stockholders, as described above. * * * The foregoing relates to Federal income taxation. Distributions (actual or constructive) on shares of the Fund's Common Stock, as well as any gains from a sale or exchange of such shares, also may be subject to state and local taxes. Stockholders are urged to consult with their own tax advisers regarding the application to them of Federal, state and local tax laws. FINANCIAL STATEMENTS The audited financial statements included in the Annual Report to the Fund's Stockholders for the fiscal year ended December 31, 1994, together with the report of Coopers & Lybrand L.L.P., and the unaudited financial statements included in the Semi-Annual Report to the Fund's Stockholders for the six months ended June 30, 1995 are incorporated herein by reference. -----END PRIVACY-ENHANCED MESSAGE-----