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
<PAGE>
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
<PAGE>
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".
<PAGE>
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".
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months Period
Ended Ended
June 30, Year ended December 31, Dec. 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
(unaudited)
<S>
Net Asset Value, <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% <F1> 2.01% 1.33% 0.81% 0.79% 0.94% 0.95% 1.09% 0.40% 1.79% <F1>
Ratio of Management Fees
to Average Net Assets 1.07% <F1> 1.21% 1.09% 0.53% 0.43% 0.44% 0.44% 0.49% 0.00% 1.04% <F1>
Ratio of Interest Expense
to Average Net Assets 0.81% <F1> 0.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% <F1>
Ratio of Net Investment
Income to Average Net Assets 0.24% <F1> 0.30% 0.74% 1.31% 1.52% 1.78% 1.48% 1.42% 2.92% 3.45% <F1>
Portfolio Turnover Rate 19% 35% 33% 40% 34% 28% 36% 29% 66% 13%
<FN>
(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.
<F1> Annualized
</FN>
</TABLE>
<PAGE>
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.
<PAGE>
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-<PAGE>
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: <PAGE>
(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.
<PAGE>
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 <PAGE>
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.
<PAGE>
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.
<PAGE>
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]
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 <PAGE>
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.
<PAGE>
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. <PAGE>
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. <PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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).
<PAGE>
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.
<PAGE>
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".
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
