<PAGE>
<PAGE>
PROSPECTUS
2,400,000 SHARES
ROYCE VALUE TRUST, INC.
8% CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
------------------------
The 8% Cumulative Preferred Stock, liquidation preference $25.00 per share
(the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the
'Fund') will be senior securities of the Fund. Prior to this offering, there has
been no public market for the Cumulative Preferred Stock. The Fund is a
closed-end diversified management investment company. The Fund's primary
investment objective is long-term capital appreciation, which it seeks by
normally investing more than 75% of its assets in common stocks and securities
convertible into common stocks of small and medium-sized companies. Quest
Advisory Corp. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of 8% of the liquidation preference of $25.00 per share, are cumulative
from the Date of Original Issue thereof and are payable annually on December 23
in each year, commencing on December 23, 1996.
During the Fund's last three fiscal years, distributions paid by the Fund
on its Common Stock have consisted primarily of long-term capital gains, and it
is currently expected that dividends paid on the Cumulative Preferred Stock
similarly will consist primarily of long-term capital gains. No assurance can be
given, however, as to what percentage, if any, of the dividends paid on the
Cumulative Preferred Stock will consist of long-term capital gains.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with
the receipt of such rating, the composition of the Fund's portfolio must reflect
guidelines established by Moody's, and the Fund will be required to maintain a
certain discounted asset coverage with respect to the Cumulative Preferred
Stock. See 'Investment Objectives and Policies -- Rating Agency Guidelines.'
(continued on next page)
------------------------
THE CUMULATIVE PREFERRED STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK
STOCK EXCHANGE (THE 'NYSE'), SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. TRADING
OF THE CUMULATIVE PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE
WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE 'UNDERWRITING.'
------------------------
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 SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $25 PER SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) FUND(3)
------------ -------------- ------------------
<S> <C> <C> <C>
Per Share........................................................... $25.00 $.7875 $24.2125
Total............................................................... $60,000,000 $1,890,000 $58,110,000
</TABLE>
- ------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the investment adviser have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Before deducting offering expenses payable by the Fund, estimated at
$370,000.
-----------------------------
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected
that delivery of the shares will be made on or about August 23, 1996, at the
offices of Morgan Stanley & Co. Incorporated, New York, New York against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
August 16, 1996
<PAGE>
<PAGE>
(continued from cover page)
The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Fund for cash at a price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) (the
'Redemption Price') if the Fund fails to maintain a quarterly asset coverage of
at least 250% or to maintain the discounted asset coverage required by Moody's.
Commencing August 15, 2001 and thereafter, the Fund at its option may redeem the
Cumulative Preferred Stock in whole or in part for cash at a price equal to the
Redemption Price. Prior to August 15, 2001, the Cumulative Preferred Stock will
be redeemable, at the option of the Fund, for cash at a price equal to the
Redemption Price, only to the extent necessary for the Fund to continue to
qualify for tax treatment as a regulated investment company. See 'Description of
Cumulative Preferred Stock -- Redemption.'
This Prospectus sets forth certain information an investor should know
before investing and should be retained for future reference.
A Statement of Additional Information dated August 16, 1996 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 32 of this Prospectus. A copy of the Statement of
Additional Information may be obtained without charge by writing to the Fund at
its address at 1414 Avenue of the Americas, New York, New York 10019, or calling
the Fund toll-free at (800) 221-4268.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT
ADVISER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CUMULATIVE PREFERRED STOCK TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE CUMULATIVE
PREFERRED STOCK IN ANY JURISDICTION IN ANY CIRCUMSTANCES IN WHICH IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
IT IS EXPECTED THAT DELIVERY OF THE SHARES OF CUMULATIVE PREFERRED STOCK
WILL BE MADE AGAINST PAYMENT THEREFOR ON OR ABOUT THE DATE SPECIFIED IN THE LAST
PARAGRAPH OF THE COVER PAGE OF THIS PROSPECTUS, WHICH IS THE FIFTH BUSINESS DAY
FOLLOWING THE DATE HEREOF (SUCH SETTLEMENT CYCLE BEING HEREIN REFERRED TO AS
'T+5'). PURCHASERS OF THE CUMULATIVE PREFERRED STOCK SHOULD NOTE THAT TRADING OF
THE CUMULATIVE PREFERRED STOCK ON THE DATE HEREOF AND THE NEXT SUCCEEDING
BUSINESS DAY MAY BE AFFECTED BY THE T+5 SETTLEMENT. SEE 'UNDERWRITING'.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary......................................... 3
Ordinary Income Equivalent Yield Tables.................... 8
Financial Highlights....................................... 10
The Fund................................................... 11
Use of Proceeds............................................ 11
Capitalization............................................. 11
Portfolio Composition...................................... 12
Investment Objectives and Policies......................... 12
Investment Objectives.................................. 12
Investment Policies.................................... 12
Rating Agency Guidelines............................... 14
Changes in Investment Objectives and Policies.......... 15
Investment Restrictions................................ 15
Investment Advisory and Other Services..................... 16
Portfolio Management................................... 16
Investment Advisory Agreement.......................... 16
Advisory Fee........................................... 17
Description of Cumulative Preferred Stock.................. 18
General................................................ 18
Dividends.............................................. 18
Asset Maintenance...................................... 19
Redemption............................................. 20
<PAGE>
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PAGE
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<S> <C>
Liquidation Rights..................................... 21
Voting Rights.......................................... 21
Termination of Rating Agency Guidelines................ 22
Limitation on Incurrence of Additional Indebtedness and
Issuance of Additional Preferred Stock............... 23
Repurchase of Cumulative Preferred Stock............... 24
Description of Capital Stock and
Other Securities......................................... 24
Capital Stock.......................................... 24
The Notes.............................................. 24
Taxation................................................... 26
Taxation of Stockholders............................... 26
Taxation of the Fund................................... 28
Other Taxation......................................... 30
Custodian, Transfer Agent and Dividend-Paying Agent........ 30
Underwriting............................................... 30
Legal Matters.............................................. 31
Experts.................................................... 31
Additional Information..................................... 31
Table of Contents of Statement of Additional Information... 32
Glossary................................................... 33
</TABLE>
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S
CUMULATIVE PREFERRED STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the
Statement of Additional Information. Capitalized terms not defined in this
Summary are defined in the Glossary that appears at the end of this Prospectus.
<TABLE>
<S> <C>
The Fund; Investment Objectives and
Policies.......................... Royce Value Trust, Inc. (the 'Fund') has been engaged in business as a
closed-end diversified management investment company since its initial
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 stock, 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. The Fund seeks to achieve its objectives by
investing principally in equity securities of small and medium-sized
companies, generally with stock market capitalizations ranging from $100
million to $1 billion, selected by a value approach. The Fund's average
annual total returns on the net asset values of its Common Stock for the
one year and five year periods ended June 30, 1996, and from inception on
November 26, 1986 to June 30, 1996, were 16.0%, 15.9% and 12.4%,
respectively. Total return figures are based on the Fund's historical
performance, assume reinvestment of distributions and full participation
in primary rights offerings, and are not intended to indicate future
performance. See 'Investment Objectives and Policies.'
The Investment Adviser.............. Quest Advisory Corp. ('Quest') has served as the investment adviser to the
Fund since its inception. Quest also serves as investment adviser to
other management investment companies, with aggregate net assets of
approximately $1.3 billion as of June 30, 1996, and manages other
institutional accounts.
As compensation for its services under the present 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 for the applicable performance
period, depending upon the investment performance of the Fund relative to
the investment record of the Standard & Poor's 600 SmallCap Stock Price
Index (the 'S&P 600'), determined by comparisons made over rolling
periods of up to 60 months. However, Quest will not receive any fee for
any month when the Fund's investment performance, rounded to the nearest
whole point, is negative on an absolute basis for the 36 month period
then ended. The present Investment Advisory Agreement replaced a similar
investment advisory agreement between the Fund and Quest, under which the
Fund's investment performance was measured against the record of the
Standard & Poor's 500 Composite Stock Price Index over a rolling period
of 36 months. For a more detailed description of the methods 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 President and Chief Investment
Officer, who is primarily responsible for supervising Quest's investment
management activities. See 'Investment Advisory and Other
Services -- Portfolio Management' herein and 'Directors and Officers' in
the Statement of Additional Information.
The Offering........................ The Fund is offering 2,400,000 shares of 8% Cumulative Preferred Stock, par
value $.001 per share, liquidation preference $25.00 per share (the
'Cumulative Preferred Stock'), at a purchase price of $25 per share.
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Dividends........................... Dividends on the Cumulative Preferred Stock, at the annual rate of 8% of
the liquidation preference of $25.00 per share, are cumulative from the
Date of Original Issue and are payable, when, as and if declared by the
Board of Directors of the Fund, out of funds legally available therefor,
annually on December 23 in each year, commencing on December 23, 1996, to
the holders of record on the preceeding December 6. See 'Description of
Cumulative Preferred Stock -- Dividends.'
Potential Tax Benefit
to Certain Investors.............. The Fund is required to allocate long-term capital gain distributions, as
well as other types of income, proportionately among holders of shares of
Common Stock, shares of Cumulative Preferred Stock and, to the extent
they receive any 'constructive distributions,' the Fund's 5 3/4%
Investment Company Convertible Notes due June 30, 2004 (the 'Notes'), in
accordance with the current position of the Internal Revenue Service (the
'IRS'). During the Fund's last three fiscal years, distributions paid by
the Fund have consisted primarily of long-term capital gains, and it is
currently expected that dividends paid on the Cumulative Preferred Stock
will likewise consist primarily of long-term capital gains. Accordingly,
certain investors in the Cumulative Preferred Stock may realize a tax
benefit to the extent that dividends paid by the Fund on those shares are
composed of long-term capital gains. See 'Ordinary Income Equivalent
Yield Tables.' Subject to statutory limitations, investors may also be
entitled to offset the net long-term capital gain portion of a Cumulative
Preferred Stock dividend with capital losses incurred by such investors.
See 'Taxation.' No assurance can be given, however, as to what
percentage, if any, of the dividends to be paid on the Cumulative
Preferred Stock will consist of long-term capital gains. To the extent
that dividends on the shares of Cumulative Preferred Stock are not paid
from net long-term capital gains, they will be paid from ordinary income
or net short-term capital gains or will represent a return of capital.
Rating.............................. It is a condition to their issuance that the Cumulative Preferred Stock be
issued with a rating of 'aaa' from Moody's Investors Service, Inc.
('Moody's'). The Articles Supplementary creating and fixing the rights
and preferences of the Cumulative Preferred Stock (the 'Articles
Supplementary') contain certain provisions which reflect guidelines
established by Moody's (the 'Rating Agency Guidelines') in order to
obtain such rating on the Cumulative Preferred Stock on the Date of
Original Issue. Although it is the Fund's present intention to continue
to comply with the Rating Agency Guidelines, 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 Guidelines. If the Fund
voluntarily terminates compliance with the Rating Agency Guidelines, the
dividend rate payable on the Cumulative Preferred Stock will be increased
by .50% per annum. See 'Description of Cumulative Preferred
Stock -- Termination of Rating Agency Guidelines.'
Asset Coverage...................... The Fund will be required to maintain, as of the last Business Day of
March, June, September and December of each year, Asset Coverage of at
least 250% with respect to the Cumulative Preferred Stock. This required
Asset Coverage is greater than the 200% asset coverage required by
Section 18 of the Investment Company Act of 1940, as amended (the '1940
Act'). If the Fund had issued and sold the Cumulative Preferred Stock
offered hereby as of June 30, 1996, the Asset Coverage would have been
461%. See 'Description of Cumulative Preferred Stock -- Asset
Maintenance.'
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Also, the Fund will be required to maintain a Portfolio Calculation for
Moody's at least equal to the Basic Maintenance Amount. The discount
factors and guidelines for determining the Portfolio Calculation have
been established by Moody's in connection with the Fund's receipt of a
rating on the Cumulative Preferred Stock on their Date of Original Issue
of 'aaa' from Moody's. See 'Investment Objectives and Policies -- Rating
Agency Guidelines.'
Voting Rights....................... At all times, holders of shares of Cumulative Preferred Stock and any other
Preferred Stock will elect two members of the Fund's Board of Directors,
and holders of Cumulative Preferred Stock, any other Preferred Stock and
Common Stock, voting as a single class, will elect the remaining
directors. However, upon a failure by the Fund to pay dividends on the
Cumulative Preferred Stock in an amount equal to two full years'
dividends, holders of Cumulative Preferred Stock, voting as a separate
class with any other outstanding shares of Preferred Stock of the Fund,
will have the right to elect the smallest number of directors that would
constitute a majority of the directors until cumulative dividends have
been paid or provided for. Holders of Cumulative Preferred Stock and any
other Preferred Stock will vote separately as a class on certain other
matters, as required under the Fund's Articles Supplementary, the 1940
Act and Maryland law. Except as otherwise indicated in this Prospectus
and as otherwise required by applicable law, holders of Cumulative
Preferred Stock will be entitled to one vote per share on each matter
submitted to a vote of stockholders and will vote together with holders
of shares of Common Stock and any other Preferred Stock as a single
class. See 'Description of Cumulative Preferred Stock -- Voting Rights.'
Mandatory Redemption................ The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Fund in the event that the Fund fails to maintain the
quarterly Asset Coverage or to maintain a Portfolio Calculation at least
equal to the Basic Maintenance Amount required by Moody's and does not
cure such failure by the applicable cure date. Any such redemption will
be made for cash at a price equal to $25 per share plus accumulated and
unpaid dividends (whether or not earned or declared) to the redemption
date (the 'Redemption Price'). In the event that shares are redeemed due
to a failure to maintain the quarterly Asset Coverage, the Fund may
redeem a sufficient number of shares of Cumulative Preferred Stock in
order that the asset coverage, as defined in the 1940 Act, of the
remaining outstanding shares of Cumulative Preferred Stock and any other
Preferred Stock after redemption is up to 275%. In the event that shares
are redeemed due to a failure to maintain a Portfolio Calculation at
least equal to the Basic Maintenance Amount, the Fund may redeem a
sufficient number of shares of Cumulative Preferred Stock in order that
the Portfolio Calculation exceeds the Basic Maintenance Amount of the
remaining outstanding shares of Cumulative Preferred Stock and any other
Preferred Stock by up to 10%. See 'Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption.'
Optional Redemption................. Commencing August 15, 2001 and thereafter, the Fund at its option may
redeem the Cumulative Preferred Stock, in whole or in part, for cash at a
price equal to the Redemption Price. Prior to August 15, 2001, the
Cumulative Preferred Stock will be redeemable at the option of the Fund
at the Redemption Price only to the extent necessary for the Fund to
continue to qualify for tax treatment as a regulated investment company.
See 'Description of Cumulative Preferred Stock -- Redemption -- Optional
Redemption.'
</TABLE>
5
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<PAGE>
<TABLE>
<S> <C>
Liquidation Preference.............. The liquidation preference of each share of Cumulative Preferred Stock is
$25 plus an amount equal to accumulated and unpaid dividends (whether or
not earned or declared) to the date of distribution. See 'Description of
Cumulative Preferred Stock -- Liquidation Rights.'
Use of Proceeds..................... The Fund will use the net proceeds from the offering of the Cumulative
Preferred Stock to purchase additional portfolio securities in accordance
with its investment objectives and policies. See 'Use of Proceeds.'
Listing............................. Prior to this offering, there has been no public market for the Cumulative
Preferred Stock. The shares of Cumulative Preferred Stock have been
approved for listing on the New York Stock Exchange (the 'NYSE'), subject
to official notice of issuance. However, during an initial period which
is not expected to exceed 30 days from the date of this Prospectus, the
Cumulative Preferred Stock will not be listed on any securities exchange.
During such period, the Underwriters intend to make a market in the
Cumulative Preferred Stock; however, they have no obligation to do so.
Consequently, an investment in the Cumulative Preferred Stock may be
illiquid during such period.
Special Considerations and Risk
Factors........................... The market price for the Cumulative Preferred Stock will be influenced by
changes in interest rates.
As indicated above, the Cumulative Preferred Stock is subject to redemption
under specified circumstances. To the extent that the Fund experiences a
substantial decline in the value of its net assets, it may be required to
redeem Cumulative Preferred Stock to restore compliance with the
applicable asset coverage requirements.
The credit rating on the Cumulative Preferred Stock could be reduced or
withdrawn while an investor holds shares either as a result of the Fund's
termination of compliance with the Rating Agency Guidelines or otherwise,
and the credit rating does not eliminate or mitigate the risks of
investing in the Cumulative Preferred Stock. A reduction or withdrawal of
the credit rating may have an adverse effect on the market value of the
Cumulative Preferred Stock.
Payments to the holders of Cumulative Preferred Stock of dividends or upon
redemption or in liquidation will be subject to the prior payments of
interest and repayment of principal then due on the Notes or any other
indebtedness of the Fund. Also, under the Indenture relating to the
Notes, the Fund cannot declare any cash dividends or distributions on the
Cumulative Preferred Stock or purchase or redeem any shares of the
Cumulative Preferred Stock if, immediately thereafter, asset coverage for
senior securities representing indebtedness, as defined under Section 18
of the 1940 Act, would be less than 300%, or if the Fund fails to
maintain a certain discounted asset coverage for the Notes pursuant to
rating agency guidelines relating to the Notes. If the Fund had issued
and sold the Cumulative Preferred Stock offered hereby as of June 30,
1996, the asset coverage for the Notes would have been 1,152%. See
'Description of Capital Stock and Other Securities -- The Notes.'
</TABLE>
6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Federal Income Tax
Considerations.................... The Fund has qualified, and intends to remain qualified, for Federal income
tax purposes, as a regulated investment company. Qualification requires,
among other things, compliance by the Fund with certain distribution
requirements. Limitations on distributions if the Fund failed to satisfy
the asset coverage requirements on the Cumulative Preferred Stock and/or
the Notes could jeopardize the Fund's ability to meet the distribution
requirements. The Fund presently intends, however, to the extent
possible, to purchase or redeem Cumulative Preferred Stock and/or the
Notes if necessary in order to maintain compliance with such asset
coverage requirements. See 'Taxation' for a more complete discussion of
these and other Federal income tax considerations.
Custodian, Transfer and
Dividend-Paying Agent and
Registrar......................... State Street Bank and Trust Company ('State Street') serves as the Fund's
custodian and, with respect to the Cumulative Preferred Stock, as
transfer and dividend paying agent and registrar and as agent to provide
notice of redemption and certain voting rights. See 'Custodian, Transfer
and Dividend-Paying Agent and Registrar.'
</TABLE>
7
<PAGE>
<PAGE>
ORDINARY INCOME EQUIVALENT YIELD TABLES
Over the Fund's last three fiscal years, distributions paid by the Fund on
its Common Stock have consisted, on average, of 75.2% net long-term capital
gains ('L/T Capital Gains') and 24.8% ordinary income/net short-term capital
gains ('Ordinary Income')1. Cumulative Preferred Stock investors who are in a
Federal marginal income tax bracket higher than the current 28.0% maximum
Federal tax rate on long-term capital gains would, under the current position of
the IRS, realize a tax advantage on their investment to the extent that
distributions by the Fund to its stockholders continue to be partially composed
of the less highly taxed net long-term capital gains.
The following table shows examples of the pure Ordinary Income equivalent
yield that would be generated by the indicated dividend rate on the Cumulative
Preferred Stock, assuming distributions consisting of three different
proportions of L/T Capital Gains and Ordinary Income for an investor in the
39.6% Federal marginal tax bracket and assuming no change in the current maximum
Federal long-term capital gains tax rate of 28.0%.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
-----------------------------
<S> <C> <C>
PERCENTAGE OF CUMULATIVE
PREFERRED STOCK
DIVIDEND COMPOSED OF* 8.00%
- -------------------------------
<CAPTION>
ORDINARY IS EQUIVALENT TO AN ORDINARY
L/T CAPITAL GAINS INCOME INCOME YIELD OF
- ----------------- -------- -----------------------------
<S> <C> <C>
75.0% 25.0% 9.15%
50.0% 50.0% 8.77%
25.0% 75.0% 8.38%
</TABLE>
- ------------
1 For the fiscal years of the Fund ended December 31, 1993, 1994 and 1995,
distributions paid by the Fund on its Common Stock consisted of 71.3% L/T
Capital Gains and 28.7% Ordinary Income, 83.8% L/T Capital Gains and 16.2%
Ordinary Income, and 70.5% L/T Capital Gains and 29.5% Ordinary Income,
respectively.
* A number of factors could affect the composition of the Fund's distributions.
Such factors include (i) active management of the Fund's assets, which may
result in varying proportions of L/T Capital Gains, Ordinary Income and/or
return of capital in Fund distributions; (ii) for as long as the Notes or
other indebtedness of the Fund are outstanding, the Fund's distributions
consisting of a larger proportion of L/T Capital Gains than would be the case
in the absence of such indebtedness because interest is normally paid out of
Ordinary Income; and (iii) possible revocation or revision of the IRS revenue
ruling requiring the proportionate allocation of L/T Capital Gains among
holders of various classes of capital stock and, to the extent they receive
constructive distributions, the Notes.
8
<PAGE>
<PAGE>
As illustrated in the table below, the yield advantage of the lower Federal
long-term capital gains tax rate would be diminished for investors in tax
brackets below the 39.6% rate assumed in the table above, and there would be no
effect on the yield for an investor in a Federal marginal income tax bracket of
28.0% or lower. Assuming a Cumulative Preferred Stock dividend composed of 75.0%
L/T Capital Gains and 25.0% Ordinary Income (representing approximately the
average annual composition of distributions paid by the Fund for its last three
fiscal years), the following table shows the pure Ordinary Income equivalent
yields that would be generated at the indicated dividend rate for taxpayers in
the indicated tax brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
----------------------------
<S> <C>
8.00%
<CAPTION>
1996 FEDERAL IS EQUIVALENT TO AN ORDINARY
TAX BRACKET`D' INCOME YIELD OF
- ------------------------------ ----------------------------
<S> <C>
39.6%......................... 9.15%
36.0%......................... 8.75%
31.0%......................... 8.26%
28.0% or lower................ 8.00%
</TABLE>
- ------------
`D' Annual taxable income levels corresponding to the 1996 Federal marginal tax
brackets are as follows: 39.6% -- over $263,750 for both single and joint
returns; 36.0% -- $121,301-$263,750 for single returns, $147,701-$263,750
for joint returns; 31.0% -- $58,151-$121,300 for single returns,
$96,901-$147,700 for joint returns; and 28.0% -- $24,001-$58,150 for single
returns, $40,101-$96,900 for joint returns. An investor's marginal tax
rates may exceed the rates shown in the above table due to the reduction,
or possible elimination, of the personal exemption deduction for
high-income taxpayers and an overall limit on itemized deductions. Income
also may be subject to certain state, local and foreign taxes. For
investors who pay alternative minimum tax, equivalent yields may be lower
than those shown above. The tax rates shown above do not apply to corporate
taxpayers.
------------------------
The tax characteristics of the Fund are described more fully under
'Taxation'. Consult your tax adviser for further details.
The charts above are for illustrative purposes only and cannot be taken as
an indication of the composition of future distributions by the Fund.
9
<PAGE>
<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 this Prospectus and the Statement of Additional
Information. The financial information for the year ended December 31, 1995 has
been audited by Ernst & Young LLP, independent auditors, as stated in their
report accompanying such Financial Statements. The financial information for
each of the four years ended December 31, 1994 has been audited by Coopers &
Lybrand L.L.P., independent auditors. The financial information for the years
ended prior to December 31, 1991 and for the period from November 26, 1986
(commencement of operations) to December 31, 1986 is covered in prior reports of
Coopers & Lybrand L.L.P., upon which unqualified opinions were issued.
<TABLE>
<CAPTION>
SIX-MONTHS PERIOD
ENDED YEAR ENDED DECEMBER 31, ENDED
JUNE 30, ----------------------------------------------------------------------------------- DEC. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $ 9.25 $7.98 $ 9.29 $9.30
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Income from
Investment
Operations(a)
Net investment
income............ 0.07 0.04 0.04 0.09 0.15 0.17 0.17 0.15 0.13 0.28 0.03
Net realized and
unrealized gains
(losses) on
investments....... 0.85 2.70 0.09 2.12 2.12 3.20 (1.49) 1.59 1.68 (1.04) (0.04)
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Total from
Investment
Operations.... 0.92 2.74 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............ -- (0.03) (0.01) (0.09) (0.15) (0.17) (0.17) (0.17) (0.06) (0.36) (0.00)
Distributions from
capital gains..... -- (1.26) (1.04) (1.06) (0.75) (0.44) (0.15) (0.35) (0.45) (0.16) (0.00)
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Total
Distributions. -- (1.29) (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.......... -- (0.12) (0.14) (0.08) (0.06) (0.10) (0.08) (0.09) (0.00) (0.00) (0.00)
Effect of
reinvestment of
distributions..... -- (0.11) (0.07)* (0.01) (0.04) (0.01) (0.05) (0.03) (0.03) (0.03) (0.00)
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Total Capital
Stock
Transactions... -- (0.23) (0.21) (0.09) (0.10) (0.11) (0.13) (0.12) (0.03) (0.03) (0.00)
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Net Asset Value, End
of Period(a)...... $14.48 $13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $9.25 $ 7.98 $9.29
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Market Value, End of
Period............ $12.375 $11.875 $11.00 $12.875 $12.25 $10.375 $ 8.125 $ 9.50 $8.125 $ 6.75 $9.875
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- --------
Total Investment
Return(b)
Net Asset
Value(a)........ 6.8% 22.6% 1.1% 17.9% 19.9% 39.5% -13.1% 19.2% 22.4% -9.1% 0.1%
Market Value...... 4.2% 20.5% -5.6% 14.8% 26.8% 35.3% -10.8% 23.9% 27.4% -26.5% -1.3%
Ratios Based on
Average Net Assets
Total Expenses(c)... 1.29%`D' 2.01% 2.01% 1.33% 0.81% 0.79% 0.94% 0.95% 1.09% 0.40% 1.79%*`D'
Management Fees..... 0.38%`D' 0.97% 1.21% 1.09% 0.53% 0.43% 0.44% 0.44% 0.49% 0.00% 1.04%*`D'
Interest Expense.... 0.70%`D' 0.75% 0.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%*`D'
Other Operating
Expenses.......... 0.21%`D' 0.29% 0.34% 0.24% 0.28% 0.36% 0.50% 0.51% 0.60% 0.40% 0.75%*`D'
Net Investment
Income............ 0.92%`D' 0.34% 0.31% 0.74% 1.31% 1.52% 1.78% 1.48% 1.42% 2.92% 3.45%*`D'
Supplemental Data:
Net Assets, End of
Period
(millions)........ $364 $339 $269 $247 $202 $167 $118 $131 $107 $90 $100
Portfolio Turnover
Rate.............. 13% 32% 35% 33% 40% 34% 28% 36% 29% 66% 13%
Average Commission
Paid#............. $0.0574 -- -- -- -- -- -- -- -- -- --
</TABLE>
- ------------
* Includes distributions paid January 31, 1994 and December 30, 1994.
`D' Annualized.
# For fiscal years beginning on or after October 1, 1995, the Fund is
required to disclose its average commission rate paid per share for
purchases and sales of investments.
(a) Commencing June 21, 1995, Net Asset Value per share, Net Asset Value Total
Investment Return and Income from Investment Operations are calculated
assuming the Notes are fully converted except when the effect of doing so
results in a higher Net Asset Value per share than was calculated without
such assumption. If it were assumed that the Notes had not been converted,
Net Asset Value per share would have been increased by $0.12 at June 30,
1996 and $0.09 at December 31, 1995.
(b) The Net Asset Value and Market Value Total Investment Return assume a
continuous stockholder who reinvested all net investment income dividends
and capital gains distributions and fully participated in primary rights
offerings.
(c) Expense ratios before waiver of fees by the investment adviser would have
been 2.04% and 2.02% for the years ended December 31, 1995 and 1994,
respectively.
10
<PAGE>
<PAGE>
THE FUND
Royce Value Trust, Inc. (the 'Fund') is a closed-end diversified management
investment company, incorporated under the laws of the State of Maryland on July
1, 1986 and registered under the Investment Company Act of 1940, as amended (the
'1940 Act'). The Fund commenced operations in November 1986. As of June 30,
1996, the Fund had 24,836,018 shares of Common Stock issued and outstanding,
with an aggregate net asset value of $364,428,204. The Fund's principal office
is located at 1414 Avenue of the Americas, New York, New York 10019, and its
telephone number is (800) 221-4268.
The Fund seeks to achieve its primary investment objective of long-term
capital appreciation principally through investment in common stocks and fixed
income securities convertible into common stocks of companies, generally with
stock market capitalizations ranging from $100 million to $1 billion. See
'Investment Objectives and Policies.'
USE OF PROCEEDS
The net proceeds of the offering are estimated at $57,740,000, after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. The Fund's investment adviser expects to invest such proceeds in
accordance with the Fund's investment objectives and policies within six months
from the completion of the offering, depending on market conditions for the
types of securities in which the Fund principally invests. Pending such
investment, the proceeds will be held in high quality short-term debt securities
and instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of June
30, 1996, and as adjusted to give effect to this offering.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term debt
5 3/4% Investment Company Convertible Notes due June 30, 2004............... $ 40,000,000 $ 40,000,000
------------ ------------
Total long-term debt.............................................. $ 40,000,000 $ 40,000,000
------------ ------------
------------ ------------
Stockholders' equity:
Preferred Stock, $.001 par value:
Authorized 50,000,000 shares; issued and outstanding 0 shares; as
adjusted, 2,400,000 shares of 8% Cumulative Preferred Stock issued
and outstanding...................................................... $ 0 $ 60,000,000
------------ ------------
------------ ------------
Common Stock, $.001 par value:
Authorized 150,000,000 shares; issued and outstanding
24,836,018 shares.................................................... $ 24,836 $ 24,836
Additional paid-in capital............................................. 254,574,002 252,314,002(1)
Undistributed net investment income.................................... 2,181,080 2,181,080
Accumulated net realized gains on investments.......................... 22,313,646 22,313,646
Unrealized appreciation on investments................................. 85,334,640 85,334,640
------------ ------------
Net assets applicable to outstanding Common Stock................. $364,428,204 $362,168,204
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) After deducting underwriting discounts and estimated costs of this offering
of $2,260,000.
11
<PAGE>
<PAGE>
PORTFOLIO COMPOSITION
The following tables set forth certain information with respect to the
Fund's investment portfolio as of June 30, 1996.
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Common stocks........................................................................ $371,214,067 91.4%
Preferred stocks..................................................................... 175,375 0.0
Corporate bonds...................................................................... 3,049,330 0.8
Repurchase agreements................................................................ 31,500,000 7.8
------------ ----------
Total investments............................................................... $405,938,772 100.0%
------------ ----------
------------ ----------
</TABLE>
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Financial............................................................................ $ 93,226,190 25.1%
Industrial cyclicals................................................................. 88,364,842 23.8
Services............................................................................. 58,552,541 15.8
Consumer durables.................................................................... 41,463,586 11.1
Retail............................................................................... 26,098,348 7.0
Technology........................................................................... 18,365,887 5.0
Consumer staples..................................................................... 15,565,380 4.2
Energy............................................................................... 12,580,388 3.4
Miscellaneous........................................................................ 10,584,705 2.9
Health............................................................................... 6,260,950 1.7
Utilities............................................................................ 151,250 0.0
------------ ----------
Total common stocks............................................................. $371,214,067 100.0%
------------ ----------
------------ ----------
</TABLE>
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS
<TABLE>
<S> <C>
Number of issuers................................................................................. 298
Weighted average market capitalization (total portfolio).......................................... $359,000,000
</TABLE>
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. 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.
Quest's value approach is based on its belief that the securities of
certain small or medium-sized companies may sell at a discount from its estimate
of such companies' 'private worth', that is, what a knowledgeable buyer would
pay for the entire company. 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.
12
<PAGE>
<PAGE>
The securities of the small and medium-sized 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
the Fund's shares should not be used to play short-term swings in the market and
may involve more risk than investment companies which invest in the common
stocks of larger, more well-known companies.
The Fund may invest up to 10% of its assets in securities of foreign
issuers. Foreign investments involve certain additional 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 Fund may also invest up to 25% of its assets in 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. Such debt securities may be in
the lowest rated categories of recognized ratings agencies (Ca by Moody's or CC
by Standard & Poor's Ratings Group ('S&P')) or unrated, are primarily
speculative and involve a high degree of risk.
The Fund may invest up to 5% of its total assets in warrants, rights or
options. A warrant, right or call option entitles the holder to purchase a given
security within a specified period for a specified price and does not represent
an ownership interest. A put option gives the holder the right to sell a
particular security at a specified price during the term of the option. These
securities have no voting rights, pay no dividends and have no liquidation
rights. In addition, market prices of warrants, rights or call options do not
necessarily move parallel to the market prices of the underlying securities;
market prices of put options tend to move inversely to the market prices of the
underlying securities. The securities underlying warrants, rights and options
could include shares of common stock of a single company or securities market
indices representing shares of the common stocks of a group of companies, such
as the S&P 600.
The assets of the Fund are normally invested in the common stocks,
convertible preferred stocks and convertible debentures of small and
medium-sized 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 U.S. 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 Common 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
13
<PAGE>
<PAGE>
considerations warrant such action. For the six month period ended June 30, 1996
and the years ended December 31, 1995 and 1994, the Fund's portfolio turnover
rates were 13%, 32% and 35%, respectively.
The Fund's investment policies are subject to certain restrictions. See
' -- Investment Restrictions.'
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
Moody's has established guidelines in connection with the Fund's receipt of
a rating for the Cumulative Preferred Stock on their date of original issue of
'aaa' by Moody's. Moody's, a nationally-recognized securities rating
organization, issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines have been developed by
Moody's in connection with issuances of asset-backed and similar securities,
including debt obligations and various preferred stocks, generally on a
case-by-case basis through discussions with the issuers of these securities. The
guidelines are designed to ensure that assets underlying outstanding debt or
preferred stock will be sufficiently varied and will be of sufficient quality
and amount to justify investment-grade ratings. The guidelines do not have the
force of law but are being adopted by the Fund in order to satisfy current
requirements necessary for Moody's to issue the above-described rating for the
Cumulative Preferred Stock, which rating is generally relied upon by investors
in purchasing such securities. The guidelines provide a set of tests for
portfolio composition and discounted asset coverage that supplement (and in some
cases are more restrictive than) the applicable requirements of Section 18 of
the 1940 Act. The Moody's guidelines are included in the Articles Supplementary
and are referred to in this Prospectus as the 'Rating Agency Guidelines.'
The Fund intends to maintain a Portfolio Calculation at least equal to the
Basic Maintenance Amount. If the Fund fails to meet such requirement and such
failure is not cured, the Fund will be required to redeem some or all of the
Cumulative Preferred Stock. See 'Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption.' The Rating Agency Guidelines also
exclude from Moody's Eligible Assets and, therefore, from the Portfolio
Calculation, certain types of securities in which the Fund may invest and also
prohibit the Fund's acquisition of futures contracts or options on futures
contracts, prohibit reverse repurchase agreements, limit the writing of options
on portfolio securities and limit the lending of portfolio securities to 5% of
the Fund's total assets. Quest does not believe that compliance with the Rating
Agency Guidelines will have an adverse effect on its management of the Fund's
portfolio or on the achievement of the Fund's investment objectives. For a
further discussion of the Rating Agency Guidelines, see 'Description of
Cumulative Preferred Stock.'
The Fund may, but is not required to, adopt any modifications to the
Moody's guidelines that may hereafter be established by Moody's. Failure to
adopt such modifications, however, may result in a change in the Moody's rating
or a withdrawal of a rating altogether. In addition, Moody's may, at any time,
change or withdraw such rating. As set forth in the Articles Supplementary, the
Board of Directors of the Fund may, without stockholder approval, adjust,
modify, alter or change the Rating Agency Guidelines if Moody's advises the Fund
in writing that such adjustment, modification, alteration or change will not
adversely affect its then current rating on the Cumulative Preferred Stock.
Furthermore, 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 Guidelines. If the Fund terminates compliance with the
Rating Agency Guidelines, it is likely that Moody's will change its rating on
the Cumulative Preferred Stock or withdraw its rating altogether, which may have
an adverse effect on the market value of the Cumulative Preferred Stock. It is
the Fund's present intention to continue to comply with the Rating Agency
Guidelines.
As recently described by Moody's, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Cumulative Preferred Stock is not a recommendation to
purchase, hold or sell such shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. Nor do the Rating
Agency Guidelines address the likelihood that a holder of Cumulative Preferred
Stock will be able to sell such shares. The rating is based on current
information furnished to Moody's by the Fund and Quest and
14
<PAGE>
<PAGE>
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
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 approvals of the
holders of a majority of the Fund's outstanding shares of Common Stock and
outstanding shares of Cumulative Preferred Stock and any other Preferred Stock,
voting as a single class, and a majority of the outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock, voting as a separate class (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
relevant shares of capital stock of the Fund present or represented at a meeting
of stockholders, at which the holders of more than 50% of the outstanding
relevant shares of capital stock are present or represented, or (ii) more than
50% of the outstanding relevant shares of capital stock of the Fund). Except as
indicated under ' -- Investment Restrictions' below, the Fund does not consider
its other policies, such as its secondary investment objective of current
income, to be fundamental, and such policies may be changed by the Board of
Directors without stockholder approval or prior notice to stockholders.
INVESTMENT RESTRICTIONS
The policies set forth below are fundamental policies of the Fund and may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting securities, as indicated above under ' -- Changes in
Investment Objectives and Policies.' The Fund may not:
1. Issue any class of senior security, or sell any such security of
which it is the issuer, except as permitted 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. Invest more than 5% of its total assets in 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
15
<PAGE>
<PAGE>
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, the Indenture relating to the Notes and the
Articles Supplementary, 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 also serves as investment adviser to other
management investment companies, with aggregate net assets of approximately $1.3
billion as of June 30, 1996, and manages other institutional accounts.
Under the Fund's Articles of Incorporation, as amended, and 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
President and Chief Investment Officer, who has been primarily responsible for
supervising Quest's investment management activities for more than 20 years. Mr.
Royce is assisted by Jack E. Fockler, Jr. and W. Whitney George, Vice Presidents
of Quest, both 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 the portfolio 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
those of its executive officers and full-time employees as may be duly elected
executive officers or directors of the Fund and pays their salaries and
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. Unlike
many 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.
16
<PAGE>
<PAGE>
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 600. A rolling period of 60 months
will be utilized for measuring performance and average net assets, as described
below.
Beginning with the month of July 1997 and for each succeeding month, the
Basic Fee will be 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. The performance period for each such month
will be from July 1, 1996 to the most recent month-end, until the Investment
Advisory Agreement has been in effect for 60 full calendar months, when it will
become a rolling 60 month period ending with the most recent calendar month.
The Basic Fee for each such month will be increased or decreased at the
rate of 1/12 of .05% per percentage point, depending on the extent, if any, by
which the investment performance of the Fund exceeds by more than two percentage
points, or is exceeded by more than two percentage points by, the percentage
change in the investment record of the S&P 600 for the performance period. The
maximum increase or decrease in the Basic Fee for any month may not exceed 1/12
of .5%. Accordingly, for each month, commencing with the month of July 1997, the
maximum monthly fee rate as adjusted for performance will be 1/12 of 1.5% and
will be payable if the investment performance of the Fund exceeds the percentage
change in the investment record of the S&P 600 by 12 or more percentage points
for the performance period, and the minimum monthly fee rate as adjusted for
performance will be 1/12 of .5% and will be payable if the percentage change in
the investment record of the S&P 600 exceeds the investment performance of the
Fund by 12 or more percentage points for the performance period.
For the period from July 1, 1996 through June 30, 1997, the Basic Fee will
be a monthly fee equal to 1/12 of 1% of the net assets of the Fund at the end of
each month in such period. The performance period relating to such period will
be from July 1, 1996 through June 30, 1997. The Basic Fee for such period would
also be subject to increase or decrease as set forth in the preceding paragraph,
with the rate of such increase or decrease being applied on an annualized basis.
The maximum increase or decrease in the Basic Fee for such period may not exceed
.5%. Any portion of the fee for such period, as adjusted as set forth above, in
excess of .5% will be paid at the end of such period.
Notwithstanding the foregoing, Quest will not be entitled to receive any
fee for any month when the investment performance of the Fund for the rolling 36
month period ending with such month is negative on an absolute basis. In the
event that the Fund's investment performance for such a performance period is
less than zero, Quest will not be required to refund to the Fund any fee earned
in respect of 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 or any other
indebtedness of the Fund. Quest will receive a fee in respect of any assets of
the Fund equal to the liquidation preference of and any potential redemption
premium for any Preferred Stock that may be issued and sold by the Fund,
including the Cumulative Preferred Stock.
The present Investment Advisory Agreement replaced a similar investment
advisory agreement between the Fund and Quest, under which the Fund's investment
performance was measured against the record of the Standard & Poor's 500
Composite Stock Price Index over a rolling period of 36 months. The present
Investment Advisory Agreement provides that, for the 18 month period from July
1, 1996 to December 31, 1997, the monthly fee payable to Quest will be the lower
of the fee calculated under it or the fee that would have been payable to Quest
for the month involved under the prior investment advisory agreement.
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.
17
<PAGE>
<PAGE>
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Articles Supplementary, the form of which is filed
as an exhibit to the Fund's Registration Statement. Certain of the capitalized
terms used herein are defined in the Glossary that appears at the end of this
Prospectus.
GENERAL
Under the Articles Supplementary, the Fund will be authorized to issue up
to 2,400,000 shares of Cumulative Preferred Stock. No fractional shares of
Cumulative Preferred Stock will be issued. As of the date of this Prospectus,
there were no shares of Cumulative Preferred Stock or any other Preferred Stock
of the Fund outstanding. The Board of Directors reserves the right to issue
additional shares of Preferred Stock, including Cumulative Preferred Stock, from
time to time, subject to the restrictions in the Articles Supplementary. The
shares of Cumulative Preferred Stock will, upon issuance, be fully paid and
nonassessable and will have no preemptive, exchange or conversion rights. Any
shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be
classified as authorized but unissued Preferred Stock. The Board of Directors
may by resolution classify or reclassify any authorized but unissued Preferred
Stock from time to time by setting or changing the preferences, rights, voting
powers, restrictions, limitations or terms of redemption. The Fund will not
issue any class of stock senior to the shares of Cumulative Preferred Stock.
Payments to the holders of Cumulative Preferred Stock of dividends or upon
redemption or in liquidation will be subject to the prior payments of interest
and repayment of principal then due on the Notes or any other indebtedness of
the Fund. Also, under the Indenture relating to the Notes, the Fund cannot
declare any cash dividends or distributions on the Cumulative Preferred Stock or
purchase or redeem any shares of the Cumulative Preferred Stock if, immediately
thereafter, asset coverage for senior securities representing indebtedness, as
defined under Section 18 of the 1940 Act, would be less than 300% or if the Fund
fails to maintain a certain discounted asset coverage for the Notes pursuant to
rating agency guidelines relating to the Notes. See 'Description of Capital
Stock and Other Securities -- The Notes.'
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, cumulative cash dividends at the annual rate
of 8% per share of the liquidation preference of $25.00 per share and no more,
payable annually on December 23 in each year (the 'Dividend Payment Date'),
commencing on December 23, 1996, to the persons in whose names the shares of
Cumulative Preferred Stock are registered at the close of business on the
preceding December 6. Dividends on the shares of Cumulative Preferred Stock will
accumulate from the date on which such shares are originally issued (the 'Date
of Original Issue').
No dividends will be declared or paid or set apart for payment on shares of
Cumulative Preferred Stock for any dividend period or part thereof unless full
cumulative dividends have been or contemporaneously are declared and paid on all
outstanding shares of Cumulative Preferred Stock through the most recent
Dividend Payment Dates thereof. If full cumulative dividends are not declared
and paid on the Cumulative Preferred Stock, all dividends on the shares of
Cumulative Preferred Stock will be declared and paid pro rata to the holders of
the outstanding shares. Holders of Cumulative Preferred Stock will not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of full cumulative dividends. No interest, or sum of money in lieu of interest,
will be payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other stock, if any, ranking junior to the Cumulative Preferred Stock as to
dividends or upon liquidation) in respect of the Common Stock or any other stock
of the Fund ranking junior to or on a
18
<PAGE>
<PAGE>
parity with the Cumulative Preferred Stock as to dividends or upon liquidation,
or call for redemption, redeem, purchase or otherwise acquire for consideration
any shares of its Common Stock or any other junior stock (except by conversion
into or exchange for stock of the Fund ranking junior to or on a parity with the
Cumulative Preferred Stock as to dividends and upon liquidation), unless, in
each case, (i) immediately after such transaction, the Fund will have a
Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount
and the Fund will maintain the Asset Coverage (see ' -- Asset Maintenance' and
' -- Redemption' below), (ii) full cumulative dividends on shares of Cumulative
Preferred Stock due on or prior to the date of the transactions have been
declared and paid (or sufficient Deposit Securities to cover such payment have
been deposited with the Paying Agent) and (iii) the Fund has redeemed the full
number of shares of Cumulative Preferred Stock required to be redeemed by any
provision for mandatory redemption contained in the Articles Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Asset Coverage. The Fund will be required under the Articles Supplementary
to maintain as of the last Business Day of each March, June, September and
December of each year, an asset coverage of at least 250% (or such higher
percentage as may be required under the 1940 Act) with respect to all
outstanding senior securities of the Fund which are stock, including the
Cumulative Preferred Stock (the 'Asset Coverage'). If the Fund fails to maintain
the Asset Coverage on such dates and such failure is not cured in 60 days, the
Fund will be required under certain circumstances to redeem certain of the
shares of Cumulative Preferred Stock. See ' -- Redemption' below.
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold as of June 30, 1996, the Asset Coverage immediately following such
issuance and sale (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $2,260,000), would
have been computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not constituting
senior securities = $460,853,218 = 461%
-------------------------------------------------------------- ------------------
Senior securities $100,000,000
representing indebtedness
plus liquidation
preference of the
Cumulative Preferred
Stock
</TABLE>
Basic Maintenance Amount. The Fund will be required under the Articles
Supplementary to maintain, as of each Valuation Date, portfolio holdings meeting
specified guidelines of Moody's, as described under 'Investment Objectives and
Policies -- Rating Agency Guidelines', having an aggregate discounted value (a
'Portfolio Calculation') at least equal to the Basic Maintenance Amount. If the
Fund fails to meet such requirement as to any Valuation Date and such failure is
not cured within 14 days after such Valuation Date, the Fund will be required to
redeem certain of the shares of Cumulative Preferred Stock. See ' -- Redemption'
below.
Any security not in compliance with the Moody's investment guidelines
described under 'Investment Objectives and Policies -- Rating Agency Guidelines'
will be excluded from the Portfolio Calculation.
The Moody's Discount Factors and guidelines for determining the market
value of the Fund's portfolio holdings have been based on criteria established
in connection with the rating of the Cumulative Preferred Stock. These factors
include, but are not limited to, the sensitivity of the market value of the
relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a corporate debt obligation, the higher the
related discount factor) and the frequency with which the relevant asset is
marked to market. The Moody's Discount Factor relating to any asset of the Fund
and the Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the discounted value of the
19
<PAGE>
<PAGE>
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Board of Directors, provided
that, among other things, such changes will not impair the rating then assigned
to the Cumulative Preferred Stock by Moody's.
On or before the third Business Day after each Quarterly Valuation Date,
the Fund is required to deliver to Moody's a Basic Maintenance Report. Within
ten Business Days after delivery of such report relating to the Quarterly
Valuation Date, the Fund will deliver letters prepared by the Fund's independent
accountants regarding the accuracy of the calculations made by the Fund in its
most recent Basic Maintenance Report. If any such letter prepared by the Fund's
independent accountants shows that an error was made in the most recent Basic
Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price equal to $25 per share plus accumulated and unpaid dividends through the
date of redemption (whether or not earned or declared) (the 'Redemption Price'),
certain of the shares of Cumulative Preferred Stock (to the extent permitted
under the 1940 Act, Maryland law, the Indenture for the Notes and any other
agreement relating to indebtedness of the Fund) in the event that:
(i) the Fund fails to maintain the quarterly Asset Coverage and such
failure is not cured on or before 60 days following such failure (a 'Cure
Date'); or
(ii) the Fund fails to maintain a Portfolio Calculation at least equal
to the Basic Maintenance Amount as of any Valuation Date, and such failure
is not cured on or before the 14th day after such Valuation Date (also, a
'Cure Date').
The amount of such mandatory redemption will equal the minimum number of
outstanding shares of Cumulative Preferred Stock the redemption of which, if
such redemption had occurred immediately prior to the opening of business on a
Cure Date, would have resulted in the Asset Coverage having been satisfied or
the Fund having a Portfolio Calculation equal to or greater than the Basic
Maintenance Amount on such Cure Date or, if the Asset Coverage or a Portfolio
Calculation equal to or greater than the Basic Maintenance Amount, as the case
may be, cannot be so restored, all of the shares of Cumulative Preferred Stock,
at the Redemption Price. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (i) above, the Fund may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred Stock
in order to increase the 'asset coverage' of a class of senior security which is
stock, as defined in the 1940 Act, of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock after redemption up to
275%. In the event that shares of Cumulative Preferred Stock are redeemed due to
the occurrence of (ii) above, the Fund may, but is not required to, redeem a
sufficient number of shares of Cumulative Preferred Stock in order that the
Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining
outstanding shares of Cumulative Preferred Stock and any other Preferred Stock
by up to 10%.
If the Fund does not have funds legally available for the redemption of, or
is otherwise unable to redeem, all the shares of Cumulative Preferred Stock to
be redeemed on any redemption date, the Fund will redeem on such redemption date
that number of shares for which it has legally available funds, or is otherwise
able, to redeem ratably from each holder whose shares are to be redeemed, and
the remainder of the shares required to be redeemed will be redeemed on the
earliest practicable date on which the Fund will have funds legally available
for the redemption of, or is otherwise able to redeem, such shares upon written
notice of redemption ('Notice of Redemption').
If fewer than all shares of Cumulative Preferred Stock are to be redeemed,
such redemption will be made pro rata from each holder of shares in accordance
with the respective number of shares held by each such holder on the record date
for such redemption. If fewer than all shares of Cumulative Preferred Stock held
by any holder are to be redeemed, the Notice of Redemption mailed to such holder
will specify the number of shares to be redeemed from such holder. Unless all
accumulated and unpaid dividends for all past dividend periods will have been or
are contemporaneously paid or
20
<PAGE>
<PAGE>
declared and Deposit Securities for the payment thereof deposited with the
Paying Agent, no redemptions of Cumulative Preferred Stock may be made.
Optional Redemption. Prior to August 15, 2001, the Fund may, at its option,
redeem shares of Cumulative Preferred Stock at the Redemption Price per share
only to the extent that any such redemption is necessary, in the judgment of the
Fund, to maintain the Fund's status as a regulated investment company ('RIC')
under the Internal Revenue Code of 1986, as amended (the 'Code'). Commencing
August 15, 2001, and at any time and from time to time thereafter, the Fund may,
at its option, redeem shares of Cumulative Preferred Stock in whole or in part
at the Redemption Price. Such redemptions are subject to the limitations of the
1940 Act, Maryland law, the Indenture for the Notes and any other agreement
relating to indebtedness of the Fund.
Redemption Procedures. A Notice of Redemption will be given to the holders
of record of Cumulative Preferred Stock selected for redemption not less than 30
or more than 45 days prior to the date fixed for the redemption. Each Notice of
Redemption will state (i) the redemption date, (ii) the number of shares of
Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such
shares, (iv) the Redemption Price, (v) the place or places where such shares are
to be redeemed, (vi) that dividends on the shares to be redeemed will cease to
accrue on such redemption date, and (vii) the provision of the Articles
Supplementary under which the redemption is being made. No defect in the Notice
of Redemption or in the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the Fund
(whether voluntary or involuntary), holders of shares of Cumulative Preferred
Stock then outstanding will be entitled to receive out of the assets of the Fund
available for distribution to stockholders, after satisfying claims of creditors
but before any distribution or payment of assets is made to holders of the
Common Stock or any other class of stock of the Fund ranking junior to the
Cumulative Preferred Stock as to liquidation payments, a liquidation
distribution in the amount of $25 per share plus an amount equal to all unpaid
dividends accumulated thereon to and including the date fixed for such
distribution or payment (whether or not earned or declared by the Fund, but
excluding interest thereon) (the 'Liquidation Preference'), and such holders
will be entitled to no further participation in any distribution payment in
connection with any such liquidation, dissolution or winding up. If, upon any
liquidation, dissolution or winding up of the affairs of the Fund, whether
voluntary or involuntary, the assets of the Fund available for distribution
among the holders of all outstanding shares of Cumulative Preferred Stock and
any other outstanding Preferred Stock of the Fund ranking on a parity with the
Cumulative Preferred Stock as to payment upon liquidation, will be insufficient
to permit the payment in full to such holders of Cumulative Preferred Stock of
the Liquidation Preference and the amounts due upon liquidation with respect to
such other Preferred Stock, then such available assets will be distributed among
the holders of Cumulative Preferred Stock and such other Preferred Stock ratably
in proportion to the respective preferential amounts to which they are entitled.
Unless and until the Liquidation Preference has been paid in full to the holders
of Cumulative Preferred Stock, no dividends or distributions will be made to
holders of the Common Stock or any other stock of the Fund ranking junior to the
Cumulative Preferred Stock as to liquidation.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of Preferred Stock, will be entitled to participate
equally and ratably in the remaining assets of the Fund.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise required by
applicable law, holders of shares of Cumulative Preferred Stock will be entitled
to one vote per share on each matter submitted to a vote of stockholders and
will vote together with holders of shares of Common Stock and of any other
Preferred Stock of the Fund then outstanding as a single class.
In connection with the election of the Fund's directors, holders of shares
of Cumulative Preferred Stock and any other Preferred Stock, voting as a
separate class, will be entitled at all times to elect two
21
<PAGE>
<PAGE>
of the Fund's directors, and the remaining directors will be elected by holders
of shares of Common Stock and holders of shares of Cumulative Preferred Stock
and any other Preferred Stock, voting together as a single class. In addition,
if at any time dividends on outstanding shares of Cumulative Preferred Stock
and/or any other Preferred Stock are unpaid in an amount equal to at least two
full years' dividends thereon or if at any time holders of any shares of
Preferred Stock are entitled, together with the holders of shares of Cumulative
Preferred Stock, to elect a majority of the directors of the Fund under the 1940
Act, then the number of directors constituting the Board of Directors
automatically will be increased by the smallest number that, when added to the
two directors elected exclusively by the holders of shares of Cumulative
Preferred Stock and any other Preferred Stock as described above, would
constitute a majority of the Board of Directors as so increased by such smallest
number. Such additional directors will be elected at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which directors are to be elected, the holders of shares
of Cumulative Preferred Stock and any other Preferred Stock, voting as a
separate class, will be entitled to elect the smallest number of additional
directors that, together with the two directors which such holders in any event
will be entitled to elect, constitutes a majority of the total number of
directors of the Fund as so increased. The terms of office of the persons who
are directors at the time of that election will continue. If the Fund thereafter
pays, or declares and sets apart for payment in full, all dividends payable on
all outstanding shares of Cumulative Preferred Stock and any other Preferred
Stock for all past dividend periods, the additional voting rights of the holders
of shares of Cumulative Preferred Stock and any other Preferred Stock as
described above will cease, and the terms of office of all of the additional
directors elected by the holders of shares of Cumulative Preferred Stock and any
other Preferred Stock (but not of the directors with respect to whose election
the holders of shares of Common Stock were entitled to vote or the two directors
the holders of shares of Cumulative Preferred Stock and any other Preferred
Stock have the right to elect in any event) will terminate automatically.
So long as shares of the Cumulative Preferred Stock are outstanding, the
Fund will not, without the affirmative vote of the holders of two-thirds of the
shares of Cumulative Preferred Stock outstanding at the time, voting separately
as one class, amend, alter or repeal the provisions of the Charter, whether by
merger, consolidation or otherwise, so as to materially adversely affect any of
the contract rights expressly set forth in the Charter of holders of shares of
the Cumulative Preferred Stock. The Board of Directors, however, without
stockholder approval, may amend, alter or repeal the Rating Agency Guidelines in
the event the Fund receives confirmation from Moody's that any such amendment,
alteration or repeal would not impair the rating then assigned to the Cumulative
Preferred Stock. Furthermore, under certain circumstances, without the vote of
stockholders, 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
Guidelines. See ' -- Termination of Rating Agency Guidelines' below. The
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of the Cumulative Preferred Stock and any other Preferred
Stock, voting as a separate class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under 'Investment Objectives and
Policies.' The class vote of holders of shares of the Cumulative Preferred Stock
and any other Preferred Stock described above will be in addition to a separate
vote of the requisite percentage of shares of Common Stock and Cumulative
Preferred Stock and any other Preferred Stock, voting together as a single
class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to any shares of Cumulative
Preferred Stock if, at or prior to the time when the act with respect to which
such vote otherwise would be required will be effected, such shares will have
been (i) redeemed or (ii) called for redemption and sufficient Deposit
Securities provided to the Paying Agent to effect such redemption.
TERMINATION OF RATING AGENCY GUIDELINES
The Articles Supplementary provide 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 Guidelines, in
22
<PAGE>
<PAGE>
which case the Fund will no longer be required to comply with such guidelines,
provided that (i) the Fund has given the Paying Agent, Moody's and holders of
the Cumulative Preferred Stock at least 20 calendar days written notice of such
termination of compliance, (ii) the Fund is in compliance with the Rating Agency
Guidelines at the time the notice required in clause (i) above is given and at
the time of termination of compliance with the Rating Agency Guidelines, (iii)
at the time the notice required in clause (i) above is given and at the time of
termination of compliance with the Rating Agency Guidelines, the Cumulative
Preferred Stock is listed on the New York Stock Exchange or on another exchange
registered with the Securities and Exchange Commission as a national securities
exchange and (iv) at the time of termination of compliance with the Rating
Agency Guidelines, the cumulative cash dividend rate payable on a share of the
Cumulative Preferred Stock is increased by .50% per annum.
If the Fund voluntarily terminates compliance with the Rating Agency
Guidelines, Moody's may change its rating on the Cumulative Preferred Stock or
withdraw its rating altogether, which may have an adverse effect on the market
value of the Cumulative Preferred Stock. It is the Fund's present intention to
continue to comply with the Rating Agency Guidelines.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF ADDITIONAL
PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding, the
Fund may issue and sell one or more series of a class of senior securities of
the Fund representing indebtedness under the 1940 Act and/or otherwise create or
incur indebtedness in addition to the Notes, provided that (i) if the Fund is
using the proceeds (net of all offering expenses payable by the Fund) of such
additional indebtedness to purchase all or a portion of the Notes or any shares
of the Cumulative Preferred Stock or to repay, redeem or otherwise refinance all
or a portion of the Notes or any shares of the Cumulative Preferred Stock and/or
any other indebtedness or Preferred Stock 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, then
the Fund will, immediately after giving effect to the incurrence of such
indebtedness and to its receipt and application of the proceeds thereof, have an
'asset coverage' for all senior securities of the Fund representing
indebtedness, as defined in the 1940 Act, of at least 300% of the amount of all
indebtedness of the Fund then outstanding, or (ii) if the Fund is using the
proceeds (net of all offering expenses payable by the Fund) of such additional
indebtedness for any other purpose, then the Fund will, immediately after giving
effect to the incurrence of such indebtedness and to its receipt and application
of the proceeds thereof, have an 'asset coverage' for all senior securities
representing indebtedness, as defined in the 1940 Act, of at least 500% of the
amount of all indebtedness of the Fund then outstanding. 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, will not be considered to be
indebtedness limited by the Articles Supplementary.
So long as any shares of Cumulative Preferred Stock are outstanding, the
Fund may issue and sell shares of one of more other series of Preferred Stock
constituting a series of a class of senior securities of the Fund representing
stock under the 1940 Act in addition to the shares of Cumulative Preferred
Stock, provided that (i) if the Fund is using the proceeds (net of all offering
expenses payable by the Fund) of such additional Preferred Stock to purchase all
or a portion of the shares of Cumulative Preferred Stock or to redeem or
otherwise refinance all or a portion of the shares of Cumulative Preferred
Stock, any other Preferred Stock and/or any indebtedness of the Fund then
outstanding, then the Fund will, immediately after giving effect to the issuance
of such additional Preferred Stock and to its receipt and application of the
proceeds thereof, have an 'asset coverage' for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 250% of the shares of
Cumulative Preferred Stock and all other Preferred Stock of the Fund then
outstanding, or (ii) if the Fund is using the proceeds (net of all offering
expenses payable by the Fund) of such additional Preferred Stock for any other
purpose, then the Fund will, immediately after giving effect to the issuance of
such additional Preferred Stock and to its receipt and application of the
proceeds thereof, have an 'asset coverage' for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 300% of the shares of
Cumulative Preferred Stock and all other Preferred Stock of the Fund then
outstanding, and,
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<PAGE>
<PAGE>
in the case of either (i) or (ii) above, (iii) no such additional Preferred
Stock will have any preference or priority over any other Preferred Stock of the
Fund upon the distribution of the assets of the Fund or in respect of the
payment of dividends.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem their
shares of the Fund. The Fund, however, may repurchase shares of the Cumulative
Preferred Stock when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and regulations
thereunder.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
Common Stock. The Fund 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 are 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.
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, par value
$.001 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. The Board of Directors has designated 2,400,000 shares of
Preferred Stock as the Cumulative Preferred Stock offered hereby. See
'Description of Cumulative Preferred Stock.'
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund as
of June 30, 1996.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF
BY FUND AMOUNT HELD
AMOUNT FOR ITS OWN BY FUND FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
-------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Common Stock..................................................... 150,000,000 0 24,836,018
Preferred Stock.................................................. 50,000,000 0 0
</TABLE>
THE NOTES
General. 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') under an Indenture dated June 15, 1994 (the 'Indenture')
between the Fund and United States Trust Company of New York, as trustee (the
'Trustee'). 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. The asset coverage
per $1,000 of the Notes as of June 30, 1996, December 31, 1995 and December 31,
1994 was $10,078, $9,439 and $7,687, respectively. The last reported sale price
for the Notes on the NYSE on or about those dates was 101.25%, 101.50% and
94.25%.
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 Common Stockholders (and,
24
<PAGE>
<PAGE>
in certain cases, through December 31 of) each year and unless previously
redeemed at the option of the Fund. The initial conversion price was $14.00 per
share. The conversion price as of June 30, 1996 was $13.30, entitling the holder
to acquire 75.19 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 are made simultaneously with one another, resulting in a
single annual net adjustment to the conversion price then in effect. This annual
net adjustment is 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. 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.
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 or reset
one or more terms of the Notes 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. Under the 1940 Act and the Indenture, the Fund cannot
declare any cash or other non-stock dividends or distributions on shares of the
Cumulative Preferred Stock or any other Preferred Stock or its Common Stock or
purchase any shares of its capital stock if, immediately thereafter, asset
coverage for the Notes and any other senior securities of the Fund 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.'
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. 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 under the Indenture, 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).
For so long as any Notes are outstanding, the Fund will be required
pursuant to the Rating Agency Provisions (as defined below) of the Indenture to
maintain, as of the last business day of each week, a discounted asset coverage
of the Notes for Moody's equal to a basic maintenance amount (currently,
approximately $40,000,000 plus accrued and accruing interest on the Notes). If
the Fund fails to maintain the required discounted asset coverage of the Notes
for Moody's equal to such basic maintenance amount, the Rating Agency Provisions
provide that the Fund will use its best efforts to reattain such asset coverage.
The Rating Agency Provisions also prevent the Fund from paying dividends or
other distributions on shares of the Cumulative Preferred Stock or any other
Preferred Stock or its Common Stock and from repurchasing or redeeming any
shares of capital stock unless, after giving effect to such dividends, other
distributions, and purchases, the Fund continues to maintain the required
discounted asset coverage for Moody's.
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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 Code.
Mandatory Redemption by the Fund. The Notes are subject to mandatory
partial redemption by the Fund if the Fund fails to maintain the discounted
asset coverage of the Notes for Moody's 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 the required asset
coverage 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 will be redeemed. Such mandatory redemption will 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.
TAXATION
The following Federal income tax discussion is based on the advice of Brown
& Wood LLP. The discussion reflects applicable tax laws of the United States as
of the date of this Prospectus, which tax laws are subject to being changed
retroactively or prospectively.
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Code. If it so
qualifies, the Fund (but not its stockholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to stockholders. The Fund intends to distribute
substantially all of such income.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as 'ordinary income dividends') are taxable to
stockholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, rights and options) ('capital gain
dividends') are taxable to stockholders as long-term capital gains, regardless
of the length of time the stockholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the stockholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
The tax rate that can be imposed on the excess of net long-term capital
gains over net short-term capital losses is subject to a ceiling which, for
non-corporate taxpayers, is currently less than the
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maximum tax rate on ordinary income. In recent years, a number of legislative
proposals concerning the tax treatment of capital gains have been introduced in
Congress. The proposals have ranged from eliminating the preferential treatment
of capital gains to eliminating tax on capital gains of individuals, and have
included both restoration of a deduction for capital gains and a 15% maximum tax
rate for capital gains of individuals and corporations. It cannot be predicted
whether any of these proposals may ultimately become law, nor can the effective
date of any legislation be anticipated. Any change in the tax treatment of
capital gains, however, would have an effect on the tax consequences of an
investment in the Cumulative Preferred Stock.
Stockholders may be entitled to offset their capital gain dividends with
capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains and limiting the use of
losses from certain investments and activities. Accordingly, stockholders with
capital losses are urged to consult their own tax advisers.
Dividends are taxable to stockholders whether they are paid in cash or, in
the case of Common Stockholders, paid in additional shares of Common Stock under
the Fund's plan for the automatic investment of dividends. Not later than 60
days after the close of its taxable year, the Fund will provide its stockholders
with a written notice designating the amounts of any ordinary income dividends
or capital gain dividends. Although it is anticipated that most of the Fund's
dividends will continue to be designated as capital gain dividends, for which no
dividends received deduction is available, a portion of the Fund's ordinary
income dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to stockholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its stockholders on December 31 of the year in which such
dividend was declared.
The Code provides that capital gain recognized on the termination of a
position held as part of a 'conversion transaction' will be treated as ordinary
income, to the extent it does not exceed the interest that would have accrued on
the net investment in the conversion transaction at an interest rate prescribed
by the Code. A 'conversion transaction,' for these purposes, is a transaction
substantially all of the return from which is attributable to the time value of
the net investment in the transaction, and which is marketed as producing
capital gains, but having the characteristics of a loan. Although there are no
regulations construing this provision, the conversion transaction rules would
not apply to an investment in the Cumulative Preferred Stock because dividends
paid with respect to the Cumulative Preferred Stock will not constitute gain
which is recognized on the disposition or other termination of any position
which was held as part of a conversion transaction.
Ordinary income dividends (but not long-term capital gains distributions)
paid to stockholders who are nonresident aliens or foreign entities will be
subject to a 30% United States withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Nonresident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). A stockholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form with the payor (i.e., the financial institution or brokerage firm where the
stockholder maintains his or her account), certifying under penalties of perjury
that such stockholder's taxpayer identification number is correct and that such
stockholder (i) has never been notified by the IRS that he or she is subject to
backup withholding, (ii) has been notified by the IRS that he or she is no
longer subject to backup withholding or (iii) is exempt from backup withholding.
Corporate stockholders and certain other stockholders are exempt from backup
withholding. Backup withholding is not an
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additional tax. Any amounts withheld under the backup withholding rules from
payments made to a stockholder may be credited against such stockholder's
Federal income tax liability.
At the time of a stockholder's purchase, the market price of the Fund's
Common Stock or Cumulative Preferred Stock 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 that would nevertheless be
taxable to them.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares of the same class are acquired within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The
IRS has taken the position in Revenue Ruling 89-81 that if a RIC has two classes
of shares, it may designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of particular types
of income, such as long-term capital gain. A class's proportionate share of a
particular type of income is determined according to the percentage of total
dividends paid by the RIC during such year that was paid to such class.
Consequently, the Fund will designate distributions made to the Common Stock and
Cumulative Preferred Stock and any other Preferred Stock and any constructive
distributions with respect to the Notes as consisting of particular types of
income in accordance with the classes' proportionate shares of such income.
Because of this rule, the Fund is required to allocate a portion of its net
capital gains to holders of Common Stock, holders of Cumulative Preferred Stock
and any other Preferred Stock and, to the extent they receive constructive
distributions, holders of the Notes. The amount of net capital gains and other
types of income allocable among holders of the Cumulative Preferred Stock and
any other Preferred Stock, the Common Stock and the Notes will depend upon the
amount of such gains and other income realized by the Fund and the total
dividends or, in the case of the Notes, constructive distributions, paid by the
Fund on shares of Common Stock and Cumulative Preferred Stock and any other
Preferred Stock and on the Notes during a taxable year. In identifying dividends
and other distributions during a taxable year, the Fund will take into account
those paid under Section 855 of the Code, which relates to certain distributions
paid after the close of the Fund's taxable year, but attributable to such
taxable year.
In the opinion of Brown & Wood LLP, special counsel to the Fund, under
current law the manner, as described above, in which the Fund intends to
allocate net capital gains and other taxable income between shares of Common
Stock and Cumulative Preferred Stock and, to the extent that they receive
constructive distributions, holders of the Notes will be respected for Federal
income tax purposes. However, there is currently no direct guidance from the IRS
or other sources specifically addressing whether the Fund's method of allocation
will be respected for Federal income tax purposes, and it is possible that the
IRS could disagree with counsel's opinion and attempt to reallocate the Fund's
net capital gains or other taxable income. Brown & Wood LLP has advised the Fund
that, in its opinion, if the IRS were to challenge in court the Fund's
allocation of income and gain, the IRS would be unlikely to prevail. The opinion
of Brown & Wood LLP, however, represents only its best legal judgment and is not
binding on the IRS or the courts.
TAXATION OF THE FUND
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its ordinary
income and capital gains in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution requirements.
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The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ('high yield securities'). Some of these high yield securities may be
purchased at a discount and may therefore cause the Fund to accrue income before
amounts due under the obligations are paid. In addition, a portion of the
interest payments on such high yield securities may be treated as dividends for
Federal income tax purposes.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Articles Supplementary or the Indenture, the Fund will be required to
suspend distributions to the holders of the Cumulative Preferred Stock and/or
Common Stock until the asset coverage is restored. See 'Description of
Cumulative Preferred Stock -- Dividends' and 'Description of Capital Stock and
Other Securities -- The Notes.' Such a suspension of distributions might prevent
the Fund from distributing 90% of its investment company taxable income, as is
required in order to avoid Fund-level taxation on the Fund's distributions, or
might prevent it from distributing enough income and capital gain to avoid
completely imposition of the excise tax. Upon any failure to meet the asset
coverage requirements of the 1940 Act, the Articles Supplementary or the
Indenture, the Fund may, and in certain circumstances will be required to,
partially redeem shares of the Cumulative Preferred Stock in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its stockholders of failing to qualify as a RIC. If asset coverage
were restored, the Fund would again be able to pay dividends and might be able
to avoid Fund-level taxation on the Fund's distributions.
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. Furthermore, all distributions from the Fund's
earnings and profits would be taxed as ordinary income, regardless of the
character of the underlying income and gain in the Fund's hands; the Fund could
no longer designate capital gain dividends. To qualify again to be taxed as a
RIC in a subsequent year, the Fund would be required to distribute to Cumulative
Preferred Stockholders and Common Stockholders as an ordinary income dividend,
its earnings and profits attributable to non-RIC years reduced by an interest
charge on 50% of such earnings and profits payable by the Fund to the IRS. In
addition, if the Fund failed to qualify as a RIC for a period greater than one
taxable year, then 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. In this
situation, an election to be taxed only to the extent that it realizes such
gains within a ten-year period may be available to the Fund.
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 the year to which it was
allocated, 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.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the
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Treasury regulations are subject to change by legislative, judicial or
administrative action, either prospectively or retroactively.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
OTHER TAXATION
Distributions may also be subject to additional state, local and foreign
taxes, depending on each stockholder's particular situation. Stockholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Cumulative Preferred Stock.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
State Street, which is located at 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian of the securities, cash and other assets
of the Fund, as dividend-paying agent and as transfer agent and registrar for
the Fund's Cumulative Preferred Stock. Stockholder inquiries should be directed
to P.O. Box 8200, Boston, Massachusetts 02266-8200 (Tel. No. (800) 426-5523).
UNDERWRITING
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Fund has agreed to sell to the Underwriters
severally, the respective number of shares of Cumulative Preferred Stock set
forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.......................................................... 480,000
A.G. Edwards & Sons, Inc. ................................................................. 480,000
PaineWebber Incorporated................................................................... 480,000
Prudential Securities Incorporated......................................................... 480,000
Smith Barney Inc. ......................................................................... 480,000
---------
Total............................................................................ 2,400,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The Underwriters are
committed to take and pay for all of the shares of Cumulative Preferred Stock
offered hereby if any are taken.
The Underwriters initially propose to offer part of the shares of
Cumulative Preferred Stock offered hereby directly to the public at the public
offering price set forth on the cover page hereof and part to certain dealers at
a price that represents a concession not in excess of $.50 per share. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $.25 per share to certain other dealers. After the initial offering of the
Cumulative Preferred Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters named on the cover page of this
Prospectus. The underwriting discount of $.7875 per share is equal to 3.15% of
the initial public offering price. Investors must pay for any shares of
Cumulative Preferred Stock purchased on or before August 23, 1996.
The Fund and Quest have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Fund anticipates that the Underwriters may, subsequent to the
completion of the offering of Cumulative Preferred Stock hereunder, from time to
time act as brokers or dealers in connection with the execution of portfolio
transactions for the Fund. The Underwriters may also, during the pendency of
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the offering of Cumulative Preferred Stock hereunder, act as brokers with
respect to such transactions. See 'Brokerage Allocation and Other Practices' in
the Statement of Additional Information.
Prior to this offering, there has been no public market for the Cumulative
Preferred Stock. The shares of Cumulative Preferred Stock have been approved for
listing on the NYSE, subject to official notice of issuance. However, during an
initial period which is not expected to exceed 30 days from the date of this
Prospectus, the Cumulative Preferred Stock will not be listed on any securities
exchange. During such period, the Underwriters intend to make a market in the
Cumulative Preferred Stock; however, they have no obligation to do so.
Consequently, an investment in the Cumulative Preferred Stock may be illiquid
during such period. The Underwriters have undertaken to sell shares to a minimum
of 100 beneficial owners.
It is expected that delivery of the shares of Cumulative Preferred Stock
will be made against payment therefor on or about the date specified in the last
paragraph of the cover page of this Prospectus, which is the fifth business day
following the date hereof. Under Rule 15c6-1 of the Securities Exchange Act of
1934, as amended, trades in the secondary market generally are required to
settle in three business days, unless the parties to any such trade expressly
agree otherwise. Accordingly, purchasers who wish to trade the shares of
Cumulative Preferred Stock on the date hereof or any day prior to the third
business day before the date of delivery of the Cumulative Preferred Stock will
be required, by virtue of the fact that the shares of Cumulative Preferred Stock
will settle in T+5, to agree to a delayed settlement cycle at the time of any
such trade to prevent a failed settlement. Those who purchase the Cumulative
Preferred Stock and wish to trade shares of the Cumulative Preferred Stock on
the date hereof or the next succeeding business day should consult their own
advisor.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Venable, Baetjer and Howard,
LLP, Baltimore, Maryland. Certain legal matters will be passed on by Brown &
Wood LLP, New York, New York, special counsel to the Fund, and by Davis Polk &
Wardwell, New York, New York, counsel to the Underwriters. Brown & Wood LLP and
Davis Polk & Wardwell will each rely as to matters of Maryland law on the
opinion of Venable, Baetjer and Howard, LLP.
EXPERTS
Ernst & Young LLP, independent auditors, are the independent auditors of
the Fund. The audited financial statements of the Fund and certain of the
information appearing under the caption 'Financial Highlights' included in this
Prospectus have been audited by Ernst & Young LLP and Coopers & Lybrand L.L.P.
for the periods indicated in their reports with respect thereto, and are
included in reliance upon such reports and upon the authority of such firms as
experts in accounting and auditing. Ernst & Young LLP has an office at 787
Seventh Avenue, New York, New York 10019, and also performs tax and other
professional services for the Fund. The address of Coopers & Lybrand L.L.P. is 1
Post Office Square, Boston, Massachusetts 02109.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports
and other information with the SEC. Reports, proxy statements and other
information filed by the Fund with the SEC pursuant to the informational
requirements of such Acts can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the SEC: Northeast Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036-3648; and Midwest Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and copies of such material can be obtained from the Public
Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site at
http://www.sec.gov containing reports,
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proxy and information statements and other information regarding registrants,
including the Fund, that file electronically with it.
The Fund's Common Stock is listed on the New York Stock Exchange, and
reports, proxy statements and other information concerning the Fund and filed
with the SEC by the Fund can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the SEC under the Securities Act of 1933 and the 1940 Act. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Fund and the
Cumulative Preferred Stock offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the SEC. Each such
statement is qualified in its entirety by such reference. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by its rules and regulations.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated August 16, 1996 has been filed
with the SEC and is incorporated by reference in this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by writing to
the Fund at its address at 1414 Avenue of the Americas, New York, New York
10019, or calling the Fund toll-free at (800) 221-4268. The Table of Contents of
the Statement of Additional Information is as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders........................................................................... 2
Directors and Officers........................................................................... 2
Code of Ethics and Related Matters............................................................... 4
Investment Advisory and Other Services........................................................... 5
Brokerage Allocation and Other Practices......................................................... 6
Net Asset Value.................................................................................. 7
Financial Statements............................................................................. 7
</TABLE>
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GLOSSARY
'Articles Supplementary' means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
'Asset Coverage' has the meaning set forth on page 19 of this Prospectus.
'Basic Maintenance Amount' means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
Liquidation Preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Cumulative Preferred Stock from the
most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the initial Dividend Payment Date with respect to the Cumulative
Preferred Stock, then from the Date of Original Issue) through the Valuation
Date plus all dividends to accumulate on the Cumulative Preferred Stock then
outstanding during the 70 days following such Valuation Date; (C) the Fund's
other liabilities due and payable as of such Valuation Date (except that
dividends and other distributions payable by the Fund by the issuance of Common
Stock will not be included as a liability) and such liabilities projected to
become due and payable the Fund during the 90 days following such Valuation Date
(excluding liabilities for investments to be purchased and for dividends and
other distributions not declared as of such Valuation Date but including accrued
interest on the Notes); (D) the aggregate outstanding principal amount of Notes;
(E) any current liabilities of the Fund as of such Valuation Date to the extent
not reflected in any of (i)(A) through (i)(D) (including, without limitation,
and immediately upon determination, any amounts due and payable by the Fund
pursuant to reverse repurchase agreements and any payables for assets purchased
as of such Valuation Date) less (ii) (A) the Discounted Value of any of the
Fund's assets and/or (B) the face value of any of the Fund's assets if, in the
case of both (ii)(A) and (ii)(B), such assets are either cash or securities
which mature prior to or on the date of redemption or repurchase of Cumulative
Preferred Stock or payment of another liability and are either U.S. Government
Obligations or securities which have a rating assigned by Moody's of at least
Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, in both
cases irrevocably held by the Fund's custodian bank in a segregated account or
deposited by the Fund with the Paying Agent for the payment of the amounts
needed to redeem or repurchase Cumulative Preferred Stock subject to redemption
or repurchase or any of (i)(B) through (i)(E) and provided that in the event the
Fund has repurchased Cumulative Preferred Stock at a price of less than the
Liquidation Preference thereof and/or Notes at a price of less than the
principal amount thereof plus accrued but unpaid interest thereon and
irrevocably segregated or deposited assets as described above with its custodian
bank or the Paying Agent or the Indenture trustee in the case of the Notes for
the payment of the repurchase price the Fund may deduct 100% of the Liquidation
Preference of such Cumulative Preferred Stock to be repurchased and/or 100% of
the aggregate principal amount and accrued but unpaid interest on the Notes to
be repurchased from (i) above.
'Business Day' means a day on which the New York Stock Exchange is open for
trading and that is neither a Saturday, Sunday nor any other day on which banks
in the City of New York are authorized by law to close.
'Charter' means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Fund on file in the State
Department of Assessments and Taxation of Maryland.
'Common Stock' means the Common Stock, par value $.001 per share, of the
Fund.
'Cumulative Preferred Stock' means the 8% Cumulative Preferred Stock, par
value $.001 per share, of the Fund.
'Date of Original Issue' has the meaning set forth on page 18 of this
Prospectus.
'Deposit Securities' means cash, Short-Term Money Market Instruments and
U.S. Government Obligations. Except for determining whether the Fund has a
Portfolio Calculation equal to or greater than the Basic Maintenance Amount,
each Deposit Security will be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after delivery
of such
33
<PAGE>
<PAGE>
Deposit Security but only if payable on or prior to the applicable payment date
in advance of which the relevant deposit is made.
'Discounted Value' means, with respect to a Moody's Eligible Asset, the
quotient of (A) in the case of non-convertible fixed income securities, the
lower of the principal amount and the market value thereof or (B) in the case of
any other Moody's Eligible Assets, the market value thereof, divided by the
applicable Moody's Discount Factor.
'Dividend Payment Date' has the meaning set forth on page 18 of this
Prospectus.
'Fund' means Royce Value Trust, Inc., a Maryland corporation.
'Indenture' means the Indenture, dated June 15, 1994, between the Fund and
the United States Trust Company of New York, as trustee, relating to the Notes,
as supplemented or otherwise amended from time to time.
'Liquidation Preference' has the meaning set forth on page 21 of this
Prospectus.
'Moody's' means Moody's Investors Service, Inc., or its successor.
'Moody's Discount Factor' means, with respect to a Moody's Eligible Asset
specified below, the following applicable number:
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ------------------------------- ----------------
<S> <C>
Moody's Short Term Money Market Instruments (other than U.S. Government Obligations set
forth below) and other commercial paper:
Demand or time deposits, certificates of deposit and bankers' acceptances
includible in Moody's Short Term Money Market Instruments........................ 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or less................. 1.00
Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270
days or less..................................................................... 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less................... 1.25
Repurchase obligations includible in Moody's Short Term Money Market Instruments
if term is less than 30 days and counterparty is rated at least A2............... 1.00
Discount Factor
applicable
to underlying
Other repurchase obligations...................................................... assets
Common stocks.......................................................................... 3.00
Preferred stocks:
Auction rate preferred stocks..................................................... 3.50
Other preferred stocks issued by issuers in the financial and industrial
industries....................................................................... 2.35
Other preferred stocks issued by issuers in the utilities industry................ 1.60
U.S. Government Obligations (other than U.S. Treasury Securities Strips set forth
below) with remaining terms to maturity of:
1 year or less.................................................................... 1.08
2 years or less................................................................... 1.15
3 years or less................................................................... 1.20
4 years or less................................................................... 1.26
5 years or less................................................................... 1.31
7 years or less................................................................... 1.40
10 years or less.................................................................. 1.48
15 years or less.................................................................. 1.54
20 years or less.................................................................. 1.61
30 years or less.................................................................. 1.63
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less.................................................................... 1.08
</TABLE>
(table continued on next page)
34
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ------------------------------- ----------------
<S> <C>
2 years or less................................................................... 1.16
3 years or less................................................................... 1.23
4 years or less................................................................... 1.30
5 years or less................................................................... 1.37
7 years or less................................................................... 1.51
10 years or less.................................................................. 1.69
15 years or less.................................................................. 1.99
20 years or less.................................................................. 2.28
30 years or less.................................................................. 2.56
Corporate bonds:
Corporate bonds rated Aaa with remaining terms to maturity of:
1 year or less............................................................... 1.14
2 years or less.............................................................. 1.21
3 years or less.............................................................. 1.26
4 years or less.............................................................. 1.32
5 years or less.............................................................. 1.38
7 years or less.............................................................. 1.47
10 years or less............................................................. 1.55
15 years or less............................................................. 1.62
20 years or less............................................................. 1.69
30 years or less............................................................. 1.71
Corporate bonds rated Aa with remaining terms to maturity of:
1 year or less............................................................... 1.19
2 years of less.............................................................. 1.26
3 years or less.............................................................. 1.32
4 years or less.............................................................. 1.38
5 years or less.............................................................. 1.44
7 years or less.............................................................. 1.54
10 years or less............................................................. 1.63
15 years or less............................................................. 1.69
20 years or less............................................................. 1.77
30 years or less............................................................. 1.79
Corporate bonds rated A with remaining terms to maturity of:
1 year or less............................................................... 1.24
2 years or less.............................................................. 1.32
3 years or less.............................................................. 1.38
4 years or less.............................................................. 1.45
5 years or less.............................................................. 1.51
7 years or less.............................................................. 1.61
10 years or less............................................................. 1.70
15 years or less............................................................. 1.77
20 years or less............................................................. 1.85
30 years or less............................................................. 1.87
Convertible corporate bonds with senior debt securities rated Aa issued by the
following type of issuers:
Utility...................................................................... 1.80
Industrial................................................................... 2.97
Financial.................................................................... 2.92
</TABLE>
(table continued on next page)
35
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ------------------------------- ----------------
<S> <C>
Transportation............................................................... 4.27
Convertible corporate bonds with senior debt securities rated A issued by the
following type of issuers:
Utility...................................................................... 1.85
Industrial................................................................... 3.02
Financial.................................................................... 2.97
Transportation............................................................... 4.32
Convertible corporate bonds with senior debt securities rated Baa issued by the
following type of issuers:
Utility...................................................................... 2.01
Industrial................................................................... 3.18
Financial.................................................................... 3.13
Transportation............................................................... 4.48
Convertible corporate bonds with senior debt securities rated Ba issued by the
following type of issuers:
Utility...................................................................... 2.02
Industrial................................................................... 3.19
Financial.................................................................... 3.14
Transportation............................................................... 4.49
Convertible corporate bonds with senior debt securities rated B1 or B2 issued by
the following type of issuers:
Utility...................................................................... 2.12
Industrial................................................................... 3.29
Financial.................................................................... 3.24
Transportation............................................................... 4.59
</TABLE>
'Moody's Eligible Assets' means:
i. cash (including, for this purpose, receivables for investments sold
to a counterparty whose senior debt securities are rated at least Baa3 by
Moody's or a counterparty approved by Moody's and payable within five
Business Days following such Valuation Date and dividends and interest
receivable within 70 days on investments);
ii. Short-Term Money Market Instruments;
iii. commercial paper that is not includible as a Short-Term Money
Market Instrument having on the Valuation Date a rating from Moody's of at
least P-1 and maturing within 270 days;
iv. preferred stocks (A) which either (1) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (2) are rated
at least 'baa3' by Moody's (or in the event an issuer's senior debt
securities or preferred stock is not rated by Moody's, which either (1) are
issued by an issuer whose senior debt securities are rated at least A by
S&P or (2) are rated at least A by S&P and for this purpose have been
assigned a Moody's equivalent rating of at least 'baa3'), (B) of issuers
which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New
York Stock Exchange or the American Stock Exchange, (C) which have a
minimum issue size (when taken together with other of the issuer's issues
of similar tenor) of $50,000,000, (D) which have paid cash dividends
consistently during the preceding three-year period (or, in the case of new
issues without a dividend history, are rated at least 'a1' by Moody's or,
if not rated by Moody's, are rated at least AA by S&P), (E) which pay
cumulative cash dividends in U.S. dollars, (F) which are not convertible
into any other class of stock and do not have warrants attached, (G) which
are not issued by issuers in the transportation industry and (H) in the
case of auction rate preferred stocks, which are rated at least 'aa' by
Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved
in writing by Moody's and have never had a failed auction; provided,
however, that for this purpose the aggregate
36
<PAGE>
<PAGE>
Market Value of the Company's holdings of any issue of preferred stock will
not be less than $500,000 nor more than $5,000,000;
v. common stocks (A) which are traded on the New York Stock Exchange,
the American Stock Exchange or in the over-the-counter market, (B) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which
are not privately placed; provided, however, that (1) common stock which,
while a Moody's Eligible Asset owned by the Fund, ceases paying any regular
cash dividend will no longer be considered a Moody's Eligible Asset until
71 days after the date of the announcement of such cessation, unless the
issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (2) the aggregate Market Value of the Fund's holdings of the
common stock of any issuer will not exceed 4% in the case of utility common
stock and 6% in the case of non-utility common stock of the number of
outstanding shares times the Market Value of such common stock;
vi. U.S. Government Obligations;
vii. corporate bonds (A) which are not privately placed, rated at
least B3 (Caa subordinate) by Moody's (or, in the event the bond is not
rated by Moody's, the bond is rated at least BB- by S&P and which for this
purpose is assigned a Moody's equivalent rating of one full rating category
lower), with such rating confirmed on each Valuation Date, (B) which have a
minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or
(y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated
and pay interest in cash in U.S. dollars, (D) which are not convertible or
exchangeable into equity of the issuing corporation and have a maturity of
not more than 30 years, (E) for which, if rated below Baa3, the aggregate
Market Value of the Company's holdings do not exceed 10% of the aggregate
Market Value of any individual issue of corporate bonds calculated at the
time of original issuance, (F) the cash flow from which must be controlled
by an Indenture trustee and (G) which are not issued in connection with a
reorganization under any bankruptcy law;
viii. convertible corporate bonds (A) which are issued by issuers
whose senior debt securities are rated at least B2 by Moody's (or, in the
event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least BB by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), (B) which are convertible into common
stocks which are traded on the New York Stock Exchange or the American
Stock Exchange or are quoted on the NASDAQ National Market System and (C)
which, if cash dividend paying, pay cash dividends in U.S. dollars;
provided, however, that once convertible corporate bonds have been
converted into common stock, the common stock issued upon conversion must
satisfy the criteria set forth in clause (v) above and other relevant
criteria set forth in this definition in order to be a Moody's Eligible
Asset;
provided, however, that the Fund's investment in preferred stock, common stock,
corporate bonds and convertible corporate bonds described above must be within
the following diversification requirements (utilizing Moody's industry and
sub-industry categories) in order to be included in Moody's Eligible Assets:
ISSUER:
<TABLE>
<CAPTION>
NON-UTILITY
MOODY'S RATING MAXIMUM SINGLE ISSUER UTILITY MAXIMUM SINGLE ISSUER
(1)(2) (3)(4) (3)(4)
-------------- --------------------- -----------------------------
<S> <C> <C>
'aaa', Aaa........................................ 100% 100%
'aa', Aa.......................................... 20% 20%
'a', A............................................ 10% 10%
CS/CB, 'Baa', Baa(5).............................. 6% 4%
Ba................................................ 4% 4%
B1/B2............................................. 3% 3%
B3 (Caa subordinate).............................. 2% 2%
</TABLE>
37
<PAGE>
<PAGE>
INDUSTRY AND STATE:
<TABLE>
<CAPTION>
UTILITY
MAXIMUM SINGLE
NON-UTILITY MAXIMUM SUB-
MOODY'S RATING(1) SINGLE INDUSTRY(3) INDUSTRY(3)(6) UTILITY MAXIMUM SINGLE STATE(3)
----------------- ------------------- -------------- -------------------------------
<S> <C> <C> <C>
'aaa', Aaa..................... 100% 100% 100%
'aa', Aa....................... 60% 60% 20%
'a', A......................... 40% 50% 10%(7)
CS/CB, 'baa', Baa(5)........... 20% 50% 7%(7)
Ba............................. 12% 12% N/A
B1/B2.......................... 8% 8% N/A
B3 (Caa subordinate)........... 5% 5% N/A
</TABLE>
- ------------
(1) The equivalent Moody's rating must be lowered one full rating category for
preferred stocks, corporate bonds and convertible corporate bonds rated by
S&P but not by Moody's.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited
to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate bonds, which are
diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility bonds
and utility convertible bonds, the definition of industry refers to
sub-industries (electric, water, hydro power, gas, diversified). Investments
in other sub-industries are eligible only to the extent that the combined
sum represents a percentage position of the Moody's Eligible Assets less
than or equal to the percentage limits in the diversification tables above.
(7) Such percentage will be 15% in the case of utilities regulated by
California, New York and Texas.
; and provided, further, that the Fund's investments in auction rate preferred
stocks described in clause (iv) above will be included in Moody's Eligible
Assets only to the extent that the aggregate Market Value of such stocks does
not exceed 10% of the aggregate Market Value of all of the Fund's investments
meeting the criteria set forth in clauses (i) through (viii) above less the
aggregate Market Value of those investments excluded from Moody's Eligible
Assets pursuant to the immediately preceding proviso; and
ix. no assets which are subject to any lien or irrevocably deposited
by the Fund for the payment of amounts needed to meet the obligations
described in clauses (i)(A) through (i)(E) of the definition of 'Basic
Maintenance Amount' may be includible in Moody's Eligible Assets.
'1940 Act' means the Investment Company Act of 1940, as amended.
'Notes' means the Fund's $40,000,000 aggregate principal amount of 5 3/4%
Investment Company Convertible Notes due June 30, 2004, as the same may be
modified pursuant to the terms of the Indenture.
'Notice of Redemption' has the meaning set forth on page 20 of this
Prospectus.
'Paying Agent' means State Street Bank and Trust Company and its successors
or any other paying agent appointed by the Fund.
'Portfolio Calculation' means the aggregate Discounted Value of all Moody's
Eligible Assets.
'Preferred Stock' means the preferred stock, par value $.001 per share, of
the Fund, and includes the Cumulative Preferred Stock.
'Redemption Price' has the meaning set forth on page 20 of this Prospectus.
38
<PAGE>
<PAGE>
'Short-Term Money Market Instruments' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the Fund
(or, in the case of an instrument specified by clauses (i) and (ii) below, on
the Valuation Date), the remaining terms to maturity thereof are not in excess
of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by Moody's and is issued by
an issuer (or guaranteed or supported by a person or entity other than the
issuer) whose long-term unsecured debt obligations are rated at least Aa by
Moody's;
(iii) demand or time deposits in or certificates of deposit of or
banker's acceptances issued by (A) a depository institution or trust
company incorporated under the laws of the United States of America or any
state thereof or the District of Columbia or (B) a United States branch
office or agency of a foreign depository institution (provided that such
branch office or agency is subject to banking regulation under the laws of
the United States, any state thereof or the District of Columbia) if, in
each case, the commercial paper, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of which are based on
the credit of a person or entity other than such depository institution or
trust company) of such depository institution or trust company at the time
of purchase or acquisition and the Valuation Date, have (1) credit ratings
from Moody's of at least P-1 in the case of commercial paper and (2) credit
ratings from Moody's of at least Aa in the case of long-term unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase or
other acquisition by the Fund, all of the foregoing requirements will be
applicable except that the required long-term unsecured debt credit rating
of such depository institution or trust company from Moody's will be at
least A2; and provided, further, however, that the foregoing credit rating
requirements will be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or trust
company is the principal depository institution in a holding company
system, (2) the commercial paper, if any, of such depository institution or
trust company is not rated below P-1 by Moody's and (3) the holding company
will meet all of the foregoing credit rating requirements (including the
preceding proviso in the case of investments that mature in no more than
one Business Day from the date of purchase or other acquisition by the
Fund);
(iv) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust company or
securities dealer (acting as principal) which is rated (A) at least Aa3 if
the maturity is three months or less, (B) at least A1 if the maturity is
two months or less and (C) at least A2 if the maturity is one month or
less; and
(v) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or the London branch office of a depository institution
or trust company meeting the credit rating requirements of commercial paper
and long-term unsecured debt obligations specified in clause (iii) above,
provided that the interest receivable by the Fund will be payable in U.S.
dollars and will not be subject to any withholding or similar taxes.
'S&P' means Standard & Poor's Ratings Group, or its successor.
'U.S. Government Obligations' means direct non-callable obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills and U.S. Treasury Securities Strips, provide for
the periodic payment of interest and the full payment of principal at maturity.
'Valuation Date' means every Friday or, if such day is not a Business Day,
the immediately preceding Business Day.
39
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
2,400,000 SHARES
ROYCE VALUE TRUST, INC.
8% CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
The 8% Cumulative Preferred Stock, liquidation preference $25.00 per share
(the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the
'Fund') will be senior securities of the Fund. The Fund will use the net
proceeds of the offering to purchase additional portfolio securities in
accordance with its investment objectives and policies.
The Fund is a closed-end diversified management investment company. The
Fund's primary investment objective is long-term capital appreciation, which it
seeks by normally investing more than 75% of its assets in common stocks and
securities convertible into common stocks of small and medium-sized companies.
The Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and
its telephone number is (212) 355-7311. Quest Advisory Corp. is its investment
adviser.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Fund's Prospectus (dated August 16, 1996). Please
retain this document for future reference. To obtain an additional copy of the
Prospectus, the Fund's Annual Report to Stockholders for the year ended December
31, 1995, or the Fund's Semi-Annual Report to Stockholders for the six months
ended June 30, 1996, please call Investor Information at 1-800-221-4268.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders..................................................................................... 2
Directors and Officers..................................................................................... 2
Code of Ethics and Related Matters......................................................................... 4
Investment Advisory and Other Services..................................................................... 5
Brokerage Allocation and Other Practices................................................................... 6
Net Asset Value............................................................................................ 7
Financial Statements....................................................................................... 7
</TABLE>
Dated August 16, 1996
<PAGE>
<PAGE>
PRINCIPAL STOCKHOLDERS
As of June 30, 1996, the following person owned of record or was known by
the Fund to have owned beneficially 5% or more of the 24,836,016 shares of its
Common Stock then outstanding:
<TABLE>
<CAPTION>
NAME AND ADDRESS TYPE AND PERCENTAGE OF OWNERSHIP
- ----------------------------------------------------------------- ------------------------------------
<S> <C> <C>
Cede & Co., Inc. ............................................... Of record only 90.54%
c/o Depository Trust Company
P.O. Box 20, Bowling Green Station
New York, New York 10274
</TABLE>
All officers and directors of the Fund as a group owned approximately 1% of
the Fund's outstanding shares of Common Stock as of such date.
DIRECTORS AND OFFICERS
The following table sets forth certain information as to each Director and
officer of the Fund.
<TABLE>
<CAPTION>
POSITION HELD WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
NAME, ADDRESS AND AGE THE FUND DURING THE PAST FIVE YEARS
- --------------------------------------- ------------------ ------------------------------------------------
<S> <C> <C>
Charles M. Royce* (56) ................ Director, President, Secretary, Treasurer, sole director
1414 Avenue of the Americas President and and sole voting shareholder of Quest Advisory
New York, NY 10019 Treasurer Corp. ('Quest'), the Fund's investment
adviser; Trustee, President and Treasurer of
The Royce Fund ('TRF'), an open-end
diversified management investment company of
which Quest is the principal investment
adviser, and its predecessors; Director,
President and Treasurer of the Fund and, since
September 1993, of Royce Micro- Cap Trust,
Inc. ('OTCM'), a closed-end diversified
management investment company of which Quest
is the investment adviser (the Fund, TRF and
OTCM collectively, 'The Royce Funds');
Secretary and sole director and 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 predecessors.
Thomas R. Ebright* (52) ............... Director Vice President of Quest; Trustee of TRF and one
50 Portland Pier of its predecessors; Vice President of TRF and
Portland, ME 04101 one of its predecessors; Director of the Fund
and, since September 1993, of OTCM; Vice
President since November 1995 (President until
October 1995) and Treasurer of QDI; general
partner of QMC and its predecessor until June
1994; President, Treasurer and a director and
principal shareholder of Royce, Ebright &
Associates, Inc., the investment adviser for a
series of TRF, since June 1994; director of
Atlantic Pro Sports, Inc. and of the Strasburg
Rail Road Co. since March 1993; and President
and principal owner of Baltimore Professional
Hockey, Inc. until May 1993.
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
NAME, ADDRESS AND AGE THE FUND DURING THE PAST FIVE YEARS
- --------------------------------------- ------------------ ------------------------------------------------
<S> <C> <C>
Richard M. Galkin (58) ................ Director Private investor and President of Richard M.
5284 Boca Marina Galkin Associates, Inc., telecommunications
Boca Raton, FL 33487 consultants.
Stephen L. Isaacs (56) ................ Director Director of Columbia University Development Law
60 Haven Street, Fl. B-2 and Policy Program; Professor at Columbia
New York, NY 10032 University; and President of Stephen L. Isaacs
& Associates, Consultants.
David L. Meister (56) ................. Director Consultant to the communications industry since
111 Marquez Place January 1993; and Executive officer of Digital
Pacific Palisades, CA 90272 Planet Inc. from April 1991 to December 1992.
Jack E. Fockler, Jr.*(37) ............. Vice President Vice President (since August 1993) and senior
1414 Avenue of the Americas associate of Quest, having been employed by
New York, NY 10019 Quest since October 1989; Vice President of
The Royce Funds since April 1995; Vice
President of QDI since November 1995; and
general partner of QMC since July 1993.
W. Whitney George* (38) ............... Vice President Vice President (since August 1993) and senior
1414 Avenue of the Americas analyst of Quest, having been employed by
New York, NY 10019 Quest since October 1991; Vice President of
The Royce Funds since April 1995; general
partner of QMC and its predecessor since
January 1992.
Daniel A. O'Byrne* (34) ............... Vice President Vice President of Quest since May 1994, having
1414 Avenue of the Americas been employed by Quest since October 1986; and
New York, NY 10019 Vice President of The Royce Funds since July
1994.
John E. Denneen* (29) ................. Secretary Associate General Counsel and Chief Compliance
1414 Avenue of the Americas Officer of Quest since May 1996; Secretary of
New York, NY 10019 The Royce Funds since June 1996; and Associate
of Seward & Kissel from September 1992 to May
1996.
</TABLE>
- ------------
* An 'interested person' of the Fund and/or Quest under Section 2(a)(19) of the
1940 Act.
------------------------
Normally, holders of shares of Preferred Stock of the Fund, including the
Cumulative Preferred Stock, voting as a separate class, will elect two members
of the Fund's Board of Directors, and holders of Preferred Stock, including the
Cumulative Preferred Stock, and Common Stock, voting as a single class, will
elect the remaining directors. See 'Description of Cumulative Preferred
Stock -- Voting Rights' in the Prospectus. Messrs. Ebright and Meister have been
designated as the Preferred Stock directors, subject to election at the first
meeting of the Fund's stockholders to be called after issuance of the Cumulative
Preferred Stock.
All of the Fund's directors are also trustees of TRF and directors of OTCM.
The Board of Directors has an Audit Committee, comprised of Richard M.
Galkin, Stephen L. Isaacs and David L. Meister. The Audit Committee is
responsible for recommending the selection and nomination of the independent
auditors of the Fund and for conducting post-audit reviews of its financial
condition with such auditors.
3
<PAGE>
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Set forth below is the compensation paid by the Fund and the other
registered investment companies comprising The Royce Funds to each Director of
the Fund for the year ended December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE FUND AND
DIRECTOR FROM THE FUND OTHER ROYCE FUNDS
- ----------------------------------------------------------------------------- ------------- ------------------
<S> <C> <C>
Charles M. Royce............................................................. $ 0 $ 0
Thomas R. Ebright............................................................ 0 0
Richard M. Galkin............................................................ 16,000 60,000
Stephen L. Isaacs............................................................ 16,000 60,000
David L. Meister............................................................. 16,000 60,000
</TABLE>
For the year ended December 31, 1995, all directors and officers as a group
(six persons) received aggregate remuneration from the Fund of $48,000 for
services in all capacities, and no other affiliated person of the Fund (except
Quest) or any affiliated person of any affiliate of the Fund received from the
Fund during such fiscal year 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
employer-sponsored automatic payroll-deduction cash purchase 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 guidelines and procedures.
See 'Brokerage Allocation and Other Practices.'
As of June 30, 1996, 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 $20.7 million, and Quest's and QMC's equity interests in such
private investment companies totalled approximately $3.4 million.
4
<PAGE>
<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.
<TABLE>
<CAPTION>
DIFFERENCE BETWEEN
PERFORMANCE OF FUND AND % ADJUSTMENT TO
CHANGE IN S&P 600 INDEX 1% BASIC FEE FEE AS ADJUSTED
----------------------------------- ------------- ---------------
<C> <S> <C> <C>
+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 ................................... 0 1
-3 ................................... -.05 .95
- 4 ................................... -.1 .9
-5 ................................... -.15 .85
-6 ................................... -.2 .8
- 7 ................................... -.25 .75
- 8 ................................... -.3 .7
-9 ................................... -.35 .65
-10 ................................... -.4 .6
-11 ................................... -.45 .55
-12 or less............................ -.5 .5
</TABLE>
In calculating the investment performance of the Fund and the percentage
change in the investment record of the Standard & Poor's 600 SmallCap Stock
Price Index (the 'S&P 600'), all dividends and other distributions per share of
Common Stock of realized capital gains and/or of any net investment income and
any capital gains taxes per share of Common Stock paid or payable on
undistributed realized long-term capital gains and all dividends and other
distributions on the securities comprising the S&P 600 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 years ended December 31, 1995, 1994 and 1993, Quest received
investment advisory fees from the Fund of $2,951,325 (net of $104,206
voluntarily waived by Quest), $3,170,118 (net of $37,010 voluntarily waived by
Quest) and $2,564,267, respectively.
OTHER
The Investment Advisory Agreement provides that the Fund may use 'Royce' as
part of its name only for so long as the Investment Advisory Agreement remains
in effect. The name 'Royce' is a property right of Quest, and it may at any time
permit others, including other investment entities, to use such name.
The Investment Advisory Agreement protects and indemnifies Quest against
liability to the Fund, its stockholders or others for any action taken or
omitted to be taken by Quest in connection with the
5
<PAGE>
<PAGE>
performance of any of its duties or obligations under the Investment Advisory
Agreement or otherwise as an investment adviser to the Fund. However, Quest is
not protected or indemnified against liabilities to which it would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its duties
and obligations under the Investment Advisory Agreement.
Quest's services to the Fund are not deemed to be exclusive, and Quest or
any of its affiliates may provide similar services to other investment companies
and other clients or engage in other activities.
The Investment Advisory Agreement will remain in effect until April 30,
1998 and may be continued in effect from year to year thereafter if such
continuance is specifically approved at least annually by the Board of Directors
or by the vote of a majority of the Fund's outstanding voting securities and, in
either case, by a majority of the directors who are not parties to the Agreement
or interested persons of any such party. The Investment Advisory Agreement will
automatically terminate if it is assigned (as defined by the 1940 Act and the
rules thereunder) and may be terminated without penalty by vote of a majority of
the Fund's outstanding voting securities or by either party thereto on not less
than 60 days' written notice.
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
Securities and Exchange Commission 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 years ended December 31, 1995, 1994 and 1993, the Fund
paid $100,010, $98,118 and $97,977 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
security transaction for the Fund unless such broker is believed by Quest to be
capable of obtaining the best price for the securities 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 QMC, securities of the same
issuer are frequently purchased, held or sold by more than one Quest/QMC account
because the same security may be suitable for all of them. When the same
security is being purchased or sold for more than one Quest/QMC account on the
same trading day, Quest seeks to average the transactions as to price and
allocate them as to amount in a manner believed to be equitable to each. Such
purchases and sales of the same security are generally
6
<PAGE>
<PAGE>
effected pursuant to Quest/QMC's Trade Allocation Guidelines and Procedures.
Under such Guidelines and Procedures, unallocated orders are placed with and
executed by broker-dealers during the trading day. The securities purchased or
sold in such transactions are then allocated to one or more of Quest's and QMC's
accounts at or shortly following the close of trading, using the average net
price obtained. Such allocations are done based on a number of judgmental
factors that Quest and QMC believe should result in fair and equitable treatment
to those of their accounts for which the securities may be deemed suitable. In
some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained for the Fund.
During the year ended December 31, 1995, the Fund did not acquire any
securities of any of its regular brokers or dealers (as defined in Rule 10b-1
under the 1940 Act) or of any of their parents.
One or more of the Underwriters have effected purchases and sales of the
portfolio securities of the Fund and of other accounts managed by Quest and QMC
and may be chosen to effect future transactions for the Fund and such other
accounts.
NET ASSET VALUE
The Fund calculates the net asset value of its shares of Common Stock 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 of Common Stock 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. The net asset value of the
Fund's Common Stock is calculated by dividing the current value of the Fund's
total assets less the sum of all of its liabilities and the aggregate
liquidation preference of its outstanding shares of Preferred Stock, by the
total number of shares of the Common Stock outstanding.
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 of Common Stock is calculated assuming that the
Fund's 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the
'Notes') have been converted, except when 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 offering costs of the
Notes (including the underwriting discount) is 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.
The offering costs of the Cumulative Preferred Stock (including the
underwriting discount) will be charged to additional paid-in capital.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Stockholders for the fiscal year ended December 31, 1995, together with
the report of Ernst & Young LLP thereon, and the unaudited financial statements
included in the Semi-Annual Report to the Fund's Stockholders for the six months
ended June 30, 1996 are incorporated herein by reference.
7
STATEMENT OF DIFFERENCES
The dagger footnote symbol shall be expressed as `D'
<PAGE>
