<PAGE>
<PAGE>
4,000,000 SHARES
ROYCE VALUE TRUST, INC.
7.30% TAX-ADVANTAGED CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
------------------------
The 7.30% Tax-Advantaged 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 capitalization companies.
Royce & Associates, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of 7.30% of the liquidation preference of $25.00 per share, are cumulative
from the Date of Original Issue thereof and are payable quarterly on March 23,
June 23, September 23 and December 23, commencing on June 23, 1998.
Dividends paid on the Cumulative Preferred Stock may consist of varying
proportions of long-term capital gains, ordinary income (including short-term
capital gains) and/or returns of capital. Long-term capital gains, consisting of
'20% Rate Gain' derived from the sale of assets held longer than 18 months and
'28% Rate Gain' derived from the sale of assets held longer than one year but
not longer than 18 months, are taxable to individual investors at lower rates
than ordinary income. During the Fund's last three fiscal years, approximately
two-thirds of the distributions paid by the Fund on its outstanding Common Stock
and 7.80% Cumulative Preferred Stock have consisted primarily of the less highly
taxed long-term capital gains, and it is currently expected that dividends paid
on the Cumulative Preferred Stock offered hereby similarly will consist
primarily of such capital gains. See 'Tax Attributes of Preferred Stock
Dividends' and 'Taxation'. No assurance can be given, however, as to what
percentage, if any, of such dividends will consist of such capital gains.
(continued on next page)
------------------------
Application has been made to list the Cumulative Preferred Stock on the New
York Stock Exchange (the 'NYSE'). 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.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Fund(3)
<S> <C> <C> <C>
Per Share.......................................... $25.00 $0.7875 $24.2125
Total.............................................. $100,000,000 $3,150,000 $96,850,000
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) See 'Underwriting'.
(3) Before deducting expenses estimated at $366,000, which are payable by the
Fund.
------------------------
The shares of Cumulative Preferred Stock are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to certain conditions. It is expected that delivery of
the Cumulative Preferred Stock will be made in book-entry form through the
facilities of The Depository Trust Company ('DTC') on or about May 22, 1998.
------------------------
PAINEWEBBER INCORPORATED SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS MAY 19, 1998.
<PAGE>
<PAGE>
(continued from cover page)
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
and its outstanding 7.80% Cumulative Preferred Stock. See 'Investment Objectives
and Methods/Policies -- Rating Agency Guidelines'.
The Cumulative Preferred Stock is subject to mandatory redemption, in whole
or in part, by the Fund for cash at a price equal to $25.00 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 200% or to maintain the discounted asset coverage required by Moody's.
Commencing June 22, 2003 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 June 22, 2003, 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'.
If the Fund voluntarily terminates compliance with the Moody's guidelines,
the dividend rate payable on the Cumulative Preferred Stock will be increased
and, among other things, the Fund will no longer be required to maintain the
discounted asset coverage required by Moody's. See 'Investment Objectives and
Methods/Policies -- Rating Agency Guidelines' and 'Description of Cumulative
Preferred Stock -- Termination of Rating Agency Guidelines'.
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 May 19, 1998 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 36 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.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CUMULATIVE
PREFERRED STOCK OF THE FUND AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following 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 otherwise defined in this Summary
are defined in the Glossary that appears at the end of this Prospectus.
THE FUND
<TABLE>
<S> <C>
Investment Objectives and Methods/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 long-term capital appreciation, which
it seeks by normally investing more than 75% of its assets in
common stocks, convertible preferred stocks and convertible
debentures. Current income is a secondary investment objective
of the Fund, and it may also invest up to 25% of its assets in
non-convertible fixed income securities. The Fund seeks to
achieve its objectives by investing principally in equity
securities of small companies, generally with stock market
capitalizations ranging from $100 million to $1 billion,
selected using a value method. The Fund's average annual total
returns on the net asset values of its Common Stock for the one
year, five year and ten year periods ended December 31, 1997,
were 27.5%, 16.6% and 16.4%, respectively. Total return figures
are based on the Fund's historical performance, assume
reinvestment of distributions and full primary participation in
rights offerings, and are not intended to indicate future
performance. See 'Investment Objectives and Methods/Policies'.
Investment Adviser........................... Royce & Associates, Inc. ('Royce') has served as the investment
adviser to the Fund since its inception. It also serves as
investment adviser to other management investment companies and
institutional accounts. As of March 31, 1998, assets under
Royce's management aggregated approximately $3.0 billion.
Charles M. Royce, Royce's President, Chief Investment Officer and
sole voting shareholder, is primarily responsible for managing
the Fund's portfolio. He is assisted by Royce's investment
staff, including W. Whitney George, Senior Portfolio Manager and
Managing Director, Boniface A. Zaino, Senior Portfolio Manager
and Managing Director, and Charles R. Dreifus, Senior Portfolio
Manager and Principal, and by Jack E. Fockler, Jr., Managing
Director. See 'Investment Advisory and Other
Services -- Portfolio Management' herein and 'Directors and
Officers' in the Statement of Additional Information.
As compensation for its services under the Investment Advisory
Agreement, Royce receives a fee at a rate ranging from 0.5% up
to 1.5% per annum of the Fund's average net assets for the
applicable performance period,
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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, Royce
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. For a more detailed description of the methods by which
the advisory fee is determined, see 'Investment Advisory and
Other Services -- Advisory Fee'.
Royce has committed to voluntarily waive the portion of its
investment advisory fee attributable to the 7.80% Cumulative
Preferred Stock (the '7.80% Preferred') and to the Cumulative
Preferred Stock for any month when the Fund's average annual net
asset value total return since issuance of the 7.80% Preferred
fails to exceed the dollar weighted average Preferred Stock
dividend rate during that period.
THE OFFERING
The Issue.................................... The Fund is offering 4,000,000 shares of 7.30% Tax-Advantaged
Cumulative Preferred Stock, par value $.001 per share,
liquidation preference $25.00 per share (the 'Cumulative
Preferred Stock'), at a purchase price of $25.00 per share.
Dividends.................................... Dividends on the Cumulative Preferred Stock, at the annual rate of
7.30% 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, quarterly on March 23,
June 23, September 23, and December 23, commencing on June 23,
1998, to the holders of record on the preceding March 6, June 6,
September 6 and December 6. See 'Description of Cumulative
Preferred Stock -- Dividends'.
Long-Term Capital Gains Rates................ Under legislation enacted in 1997, gains from the sale of capital
assets held for more than one year became taxable at different
rates for individual taxpayers. Net long-term capital gains on
assets held for more than 18 months are now taxed to individual
taxpayers at a maximum rate of 20% ('20% Rate Gains'). Net
long-term capital gains on assets held for more than one year
but not more than 18 months are now taxed at an individual
taxpayer's marginal Federal income tax rate, but not higher than
28% ('28% Rate Gains' and, together with 20% Rate Gains, 'Net
Long-Term Capital Gains'). For individual taxpayers in the 15%
marginal Federal income tax bracket, the tax rate on 20% Rate
Gain is 10% and on 28% Rate Gains is 15%. The different
categories of long-term capital gains included in the capital
gains distributions of a regulated investment company (such as
the Fund) to its stockholders are generally passed
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
through to such stockholders, including preferred stockholders,
and taxed at the related rates. See 'Tax Attributes of Preferred
Stock Dividends' and 'Taxation'.
Tax Attributes of Preferred Stock
Dividends.................................. The Fund is required to allocate Net Long-Term Capital Gains and
other types of income proportionately among holders of shares of
its Common Stock, 7.80% Preferred and the Cumulative Preferred
Stock offered hereby. Accordingly, the cash dividends paid on
the Cumulative Preferred Stock may, for Federal income tax
purposes, consist of varying proportions of 20% Rate Gains, 28%
Rate Gains, ordinary income (including short-term capital gains)
and/or returns of capital. For the Fund's last three fiscal
years, distributions paid by the Fund on its outstanding Common
Stock and 7.80% Preferred have consisted primarily of the less
highly taxed Net Long-Term Capital Gains, and it is currently
expected that the cash dividends paid on the Cumulative
Preferred Stock offered hereby similarly will consist primarily
of such Net Long-Term Capital Gains. Thus, certain investors in
the Cumulative Preferred Stock may realize a tax benefit to the
extent that such dividends are, for Federal income tax purposes,
composed of the less highly taxed Net Long-Term Capital Gains.
See 'Tax Attributes of Preferred Stock Dividends'. Subject to
statutory limitations, investors may also be entitled to offset
the Net Long-Term Capital Gains 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 Net Long-Term
Capital Gains. To the extent that such dividends are not paid
from Net Long-Term Capital Gains, they will be paid from net
short-term capital gains and net investment income and taxed as
ordinary income or will represent a return of capital.
Rating....................................... It is a condition to its issuance that the Cumulative Preferred
Stock be issued with a rating of 'aaa' from Moody's Investors
Services, 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 .375% per annum
and, among other things, the Fund will
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
no longer be required to maintain a Portfolio Calculation at
least equal to the Basic Maintenance Amount. See 'Description of
Cumulative Preferred Stock -- Termination of Rating Agency
Guidelines'.
Asset Maintenance............................ 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 200% with respect to the Cumulative
Preferred Stock. If the Fund had issued and sold the Cumulative
Preferred Stock offered hereby as of March 31, 1998, the Asset
Coverage would have been 458%. See 'Description of Cumulative
Preferred Stock -- Asset Maintenance -- Asset Coverage'.
Also, pursuant to the Rating Agency Guidelines, the Fund will be
required to maintain, as of each Valuation Date, 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 the Date of Original Issue of 'aaa' from
Moody's. See 'Description of Cumulative Preferred Stock -- Asset
Maintenance -- Basic Maintenance Amount' and 'Investment
Objectives and Methods/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 and/or any other 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 Investment Company Act of 1940, as amended
(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
</TABLE>
6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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 $25.00 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 June 22, 2003 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 June
22, 2003, 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'.
Liquidation Preference....................... The liquidation preference of each share of Cumulative Preferred
Stock is $25.00 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. Application has been made to list
the shares of Cumulative Preferred Stock on the New York Stock
Exchange (the 'NYSE'). 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
</TABLE>
7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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, the perceived credit
quality of the Cumulative Preferred Stock and other factors.
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 maintenance
requirements. See 'Description of Cumulative Preferred Stock --
Redemption -- Mandatory Redemption'.
The credit rating on the Cumulative Preferred Stock could be
reduced or withdrawn while an investor holds shares of
Cumulative Preferred Stock, either as a result of the Fund's
termination of compliance with the Rating Agency Guidelines or
otherwise. 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.
See 'Description of Cumulative Preferred Stock -- Termination of
Rating Agency Guidelines'.
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 any outstanding indebtedness of the Fund and the contemporary
payment to holders of outstanding Preferred Stock of dividends
or upon redemption or in liquidation. As of March 31, 1998, the
Fund had no outstanding indebtedness and had 2,400,000 shares of
7.80% Preferred outstanding, with an aggregate liquidation
preference of $60,000,000, and ranking on a parity with the
Cumulative Preferred Stock offered hereby as to dividends and
payment upon liquidation. See 'Investment Objectives and
Methods/Policies -- Senior Securities'.
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
or Portfolio Calculation requirements 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 any other Preferred
Stock if necessary in order to
</TABLE>
8
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<PAGE>
<TABLE>
<S> <C>
maintain compliance with such requirements. See 'Taxation' for a
more complete discussion of these and other Federal income tax
considerations.
Custodian, Dividend-Paying Agent, Transfer
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, Dividend-Paying Agent, Transfer Agent
and Registrar'.
</TABLE>
9
<PAGE>
<PAGE>
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially all of its
Net Long-Term Capital Gains, net short-term capital gains and net investment
income. The Fund is a regulated investment company ('RIC'), and a RIC's
distributions generally retain their character as capital gain or ordinary
income when received by its preferred and common stockholders. Thus, the stated
dividend paid by the Fund to holders of the Cumulative Preferred Stock may, for
Federal income tax purposes, consist of varying proportions of the different
categories of long-term capital gains described below, ordinary income and/or
returns of capital. In contrast, preferred stockholders of corporations that are
not RICs receive stated dividends that are, for Federal income tax purposes,
only ordinary income.
Net long-term capital gains on assets held by the Fund for more than 18
months ('20% Rate Gains') are currently taxable to individual stockholders of
the Fund at a maximum rate of 20%. Net long-term capital gains on assets held by
the Fund for longer than one year but not longer than 18 months ('28% Rate
Gains') are currently taxable to individual stockholders of the Fund at a
maximum rate of 28%. Net short-term capital gains and the Fund's net investment
income ('Ordinary Income') are currently taxable to individual stockholders of
the Fund at a maximum rate of 39.6%. Returns of capital would not be taxable to
stockholders of the Fund in the year of receipt, but instead would reduce the
stockholders' tax basis in the Fund's stock and thereby increase capital gain or
reduce capital loss by the amount of such basis reductions upon the sale of such
stock.
The Fund's distributions to its stockholders have consisted primarily of
the less highly taxed Net Long-Term Capital Gains. For the Fund's last three
fiscal years, Net Long-Term Capital Gains and Ordinary Income comprised an
average of 66.6% and 33.4%, respectively, of the distributions paid by the Fund
on its outstanding Common Stock and 7.80% Preferred. For the fiscal year ended
December 31, 1997, such Net Long-Term Capital Gains and Ordinary Income
comprised 64.3% and 35.7%, respectively, of such distributions.(1)
In 1997, when legislation reducing certain long-term capital gains tax
rates was enacted, the maximum long-term capital gains tax rate for individuals
was 28% or 20%, depending on the length of the holding period and the date of
sale, with the lower 20% maximum rate applying only to assets held for more than
one year that were sold between May 7 and July 28 and to assets held for more
than 18 months that were sold after July 28. If the lower 20% maximum rate had
applied throughout all of 1997, 1996 and 1995, an average of 54.5% of the Fund's
distributions would have been 20% Rate Gains and an average of 12.1% of its
distributions would have been 28% Rate Gains. For all of 1997, 60.2% of the
Fund's distributions would have been 20% Rate Gains and 4.1% of its
distributions would have been 28% Rate Gains.
Although the Fund is not managed utilizing a tax-focused investment
strategy and does not seek to achieve any particular distribution composition,
its primary investment objective is long-term capital appreciation. Accordingly,
individual investors in the Cumulative Preferred Stock would, under current
Federal income tax law, also realize a tax advantage on their investment to the
extent that distributions by the Fund to its stockholders continue to consist
primarily of the less highly taxed Net Long-Term Capital Gains.
The Federal income tax characteristics of the Fund and the taxation of its
stockholders are described more fully under 'Taxation'.
- ------------
(1) Distribution percentages have been retroactively adjusted to reflect
issuances of additional shares of the Fund's Common Stock upon conversions
of the Fund's $40,000,000 aggregate principal amount of 5 3/4% Investment
Company Convertible Notes due June 30, 2004 (the 'Notes'), as if all of the
Notes had been converted before January 1, 1995. (The Notes were called for
redemption in February 1998 and are no longer outstanding, and substantially
all of the Notes were converted prior to the redemption date.) For the
Fund's last three fiscal years, Net Long-Term Capital Gains and Ordinary
Income comprised an average of 71.5% and 28.5%, respectively, of actual
distributions paid by the Fund on its then outstanding capital stock. For
the fiscal year ended December 31, 1997, Net Long- Term Capital Gains and
Ordinary Income comprised 67.9% and 32.1%, respectively, of such
distributions.
10
<PAGE>
<PAGE>
ASSUMPTIONS
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 four different proportions
of 20% Rate Gains, 28% Rate Gains and Ordinary Income for an individual investor
in the 31.0% Federal marginal income tax bracket. Both this table and the table
that follows it assume the indicated proportions of 20% Rate Gains and 28% Rate
Gains. In reading these tables, prospective investors should understand that a
number of factors could affect the actual composition for Federal income tax
purposes of the Fund's distributions each year. Such factors include (i) the
Fund's investment performance for any particular year, which may result in
varying proportions of 20% Rate Gains, 28% Rate Gains, Ordinary Income and/or
return of capital in the year's distribution, (ii) the timing of the realization
of gains and losses during the Fund's taxable year and (iii) revocation or
revision of the Internal Revenue Service ('IRS') revenue ruling requiring the
proportionate allocation of 20% Rate Gains and 28% Rate Gains among holders of
various classes of a closed-end RIC's capital stock.
THESE TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN AS AN
INDICATION OF THE ACTUAL COMPOSITION FOR FEDERAL INCOME TAX PURPOSES OF THE
FUND'S FUTURE DISTRIBUTIONS.
<TABLE>
<CAPTION>
PERCENTAGE OF CUMULATIVE PREFERRED STOCK A CUMULATIVE PREFERRED STOCK STATED
STATED ANNUAL DIVIDEND COMPOSED OF ANNUAL DIVIDEND RATE OF
- --------------------------------------------------- --------------------------------------
<S> <C>
7.30%
</TABLE>
<TABLE>
<CAPTION>
ORDINARY IS EQUIVALENT TO AN
20% RATE GAINS 28% RATE GAINS INCOME ORDINARY INCOME YIELD OF
-------------- -------------- -------- -------------------------
<S> <C> <C> <C>
50% 15% 35% 7.93%
35% 15% 50% 7.76%
20% 15% 65% 7.58%
0% 0% 100% 7.30%
</TABLE>
Assuming that 20% Rate Gains, 28% Rate Gains and Ordinary Income comprise
50%, 15% and 35%, respectively, of a stated Cumulative Preferred Stock dividend,
the following table shows the pure Ordinary Income equivalent yields that would
be generated at the stated dividend rate for taxpayers in the indicated tax
brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK STATED
ANNUAL DIVIDEND RATE OF
-----------------------------------
<S> <C>
7.30%
</TABLE>
<TABLE>
IS EQUIVALENT TO AN
1998 FEDERAL MARGINAL INCOME TAX BRACKET'D' ORDINARY INCOME YIELD OF
- ------------------------------------------- -------------------------------
<S> <C>
39.6%................................... 8.70%
36.0%................................... 8.35%
31.0%................................... 7.93%
28.0%................................... 7.70%
15.0%'D''D'.............................. 7.52%
</TABLE>
- ------------
'D' Annual taxable income levels corresponding to the 1998 Federal marginal tax
brackets are as follows: 39.6% -- over $278,450 for both single and joint
returns; 36.0% -- $128,100 - $278,450 for single returns, $155,950 -
$278,450 for joint returns; 31.0% -- $61,400 - $128,100 for single returns,
$102,300 - $155,950 for joint returns; and 28.0% -- $25,350 - $61,400 for
single returns, $42,350 - $102,300 for joint returns; and 15.0% -- up to
and including $25,350 for single returns and $42,350 for joint returns.
An investor's Federal marginal income 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.
'D''D' Assumes that such individuals are taxed at a 10% rate on gain
attributable to assets held by the Fund more than 18 months and at a 15%
rate on gain attributable to assets held by the Fund for longer than
one year but not longer than 18 months.
11
<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 each of the three years in the period
ended December 31, 1997 has been audited by Ernst & Young LLP, independent
auditors, as stated in their unqualified reports accompanying such financial
statements. Such financial information and the financial information for each of
the seven years in the period ended December 31, 1994 are part of the Fund's
financial statements, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, who issued unqualified reports thereon.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 14.32 $ 13.56 $ 12.34 $ 13.47 $ 12.50 $ 11.23 $ 8.58
-------- -------- -------- -------- -------- -------- --------
Investment Operations(a):
Net investment income................ 0.21 0.26 0.04 0.04 0.09 0.15 0.17
Net realized and unrealized gain
(loss) on investments............... 3.85 1.92 2.70 0.09 2.12 2.12 3.20
-------- -------- -------- -------- -------- -------- --------
Total from investment operations.... 4.06 2.18 2.74 0.13 2.21 2.27 3.37
-------- -------- -------- -------- -------- -------- --------
Dividends and Distributions to Preferred
Stockholders:
Net investment income................ (0.03) (0.01) -- -- -- -- --
Net realized gain on investments..... (0.15) (0.06) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions to
Preferred Stockholders............ (0.18) (0.07) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Dividends and Distributions to Common
Stockholders:
Net investment income................ (0.19) (0.15) (0.03) (0.01) (0.09) (0.15) (0.17)**
Net realized gain on investments..... (1.02) (1.00) (1.26) (1.04) (1.06) (0.75) (0.44)
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions to
Common Stockholders............... (1.21) (1.15) (1.29) (1.05) (1.15) (0.90) (0.61)
-------- -------- -------- -------- -------- -------- --------
Capital Stock Transactions:
Effect of rights offerings or
Preferred Stock offering............ -- (0.09) (0.12) (0.14) (0.08) (0.06) (0.10)
Effect of reinvestment of
distributions by Common
Stockholders........................ (0.08) (0.11) (0.11) (0.07)* (0.01) (0.04) (0.01)
-------- -------- -------- -------- -------- -------- --------
Total from capital stock
transactions...................... (0.08) (0.20) (0.23) (0.21) (0.09) (0.10) (0.11)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period(a)....................... $ 16.91 $ 14.32 $ 13.56 $ 12.34 $ 13.47 $ 12.50 $ 11.23
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Market Value, End of Period....... $ 15.063 $ 12.625 $ 11.875 $ 11.00 $ 12.875 $ 12.25 $ 10.375
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Total Return(b):
Net Asset Value(a)................... 27.5% 15.5% 22.6% 1.1% 17.9% 19.9% 39.5%
Market Value......................... 28.8% 16.3% 20.5% (5.6)% 14.8% 26.8% 35.3%
Ratios Based on Average Net Assets:
Total expenses....................... 0.99% 1.20% 2.01% 2.01% 1.33% 0.81% 0.79%
Net investment income................ 1.35% 1.19% 0.34% 0.31% 0.74% 1.31% 1.52%
Ratios Based on Average Net Assets
Applicable to Common Stockholders:
Total expenses(c).................... 1.12% 1.28% 2.01% 2.01% 1.33% 0.81% 0.79%
Management fee expense............... 0.39% 0.39% 0.97% 1.21% 1.09% 0.53% 0.43%
Interest expense..................... 0.45% 0.64% 0.75% 0.46% -- -- --
Other operating expenses............. 0.28% 0.25% 0.29% 0.34% 0.24% 0.28% 0.36%
Net investment income................ 1.53% 1.27% 0.34% 0.31% 0.74% 1.31% 1.52%
Supplemental Data:
Net Assets, End of Year (in
thousands).......................... $554,231 $441,837 $338,970 $269,032 $246,558 $202,483 $166,550
Portfolio Turnover Rate.............. 29% 34% 32% 35% 33% 40% 34%
Average Commission Rate Paid'D'...... $ 0.0605 $ 0.0574
Notes(d):
Total amount outstanding (in
thousands).......................... $ 27,801 $ 40,000 $ 40,000 $ 40,000
Asset coverage per Note.............. 2,091% 1,202% 944% 769%
Average market value per Note(e)..... $ 107.69 $ 100.68 $ 96.92 $ 95.62
Preferred Stock:
Total shares outstanding............. 2,400,000 2,400,000
Asset coverage per share............. 662% 481%
Liquidation preference per share..... $ 25.00 $ 25.00
Average market value per share(e).... $ 25.70 $ 25.20
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1990 1989 1988
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 10.35 $ 9.25 $ 7.98
-------- -------- --------
Investment Operations(a):
Net investment income................ 0.17 0.15 0.13
Net realized and unrealized gain
(loss) on investments............... (1.49) 1.59 1.68
-------- -------- --------
Total from investment operations.... (1.32) 1.74 1.81
-------- -------- --------
Dividends and Distributions to Preferred
Stockholders:
Net investment income................ -- -- --
Net realized gain on investments..... -- -- --
-------- -------- --------
Total dividends and distributions to
Preferred Stockholders............ -- -- --
-------- -------- --------
Dividends and Distributions to Common
Stockholders:
Net investment income................ (0.17) (0.17) (0.06)
Net realized gain on investments..... (0.15) (0.35) (0.45)
-------- -------- --------
Total dividends and distributions to
Common Stockholders............... (0.32) (0.52) (0.51)
-------- -------- --------
Capital Stock Transactions:
Effect of rights offerings or
Preferred Stock offering............ (0.08) (0.09) (0.00)
Effect of reinvestment of
distributions by Common
Stockholders........................ (0.05) (0.03) (0.03)
-------- -------- --------
Total from capital stock
transactions...................... (0.13) (0.12) (0.03)
-------- -------- --------
Net Asset Value, End of
Period(a)....................... $ 8.58 $ 10.35 $ 9.25
-------- -------- --------
-------- -------- --------
Market Value, End of Period....... $ 8.125 $ 9.50 $ 8.125
-------- -------- --------
-------- -------- --------
Total Return(b):
Net Asset Value(a)................... (13.1)% 19.2% 22.4%
Market Value......................... (10.8)% 23.9% 27.4%
Ratios Based on Average Net Assets:
Total expenses....................... 0.94% 0.95% 1.09%
Net investment income................ 1.78% 1.48% 1.42%
Ratios Based on Average Net Assets
Applicable to Common Stockholders:
Total expenses(c).................... 0.94% 0.95% 1.09%
Management fee expense............... 0.44% 0.44% 0.49%
Interest expense..................... -- -- --
Other operating expenses............. 0.50% 0.51% 0.60%
Net investment income................ 1.78% 1.48% 1.42%
Supplemental Data:
Net Assets, End of Year (in
thousands).......................... $118,308 $130,502 $107,315
Portfolio Turnover Rate.............. 28% 36% 29%
Average Commission Rate Paid'D'......
Notes(d):
Total amount outstanding (in
thousands)..........................
Asset coverage per Note..............
Average market value per Note(e).....
Preferred Stock:
Total shares outstanding.............
Asset coverage per share.............
Liquidation preference per share.....
Average market value per share(e)....
</TABLE>
- ------------
(a) Commencing June 21, 1995, Net Asset Value per share, Net Asset Value Total
Returns and Income from Investment Operations are calculated assuming the
Notes were fully converted except when the effect of doing so resulted in a
higher Net Asset Value per share than would have been calculated without
such assumption. If it were not assumed the Notes had been converted, Net
Asset Value per share would have been increased by $0.31, $0.17 and $0.09
at December 31, 1997, 1996 and 1995, respectively.
(b) The Net Asset Value and Market Value Total Returns assume a continuous
common stockholder who reinvested all net investment income dividends and
capital gain distributions and fully participated in primary rights
offerings.
(c) Expense ratios based on average net assets applicable to Common
Stockholders before waiver of fees by the investment adviser would have
been 1.14%, 1.31%, 2.04% and 2.02% for the years ended December 31, 1997,
1996, 1995 and 1994, respectively.
(d) On December 15, 1997, the Fund called the Notes for redemption on February
5, 1998 (the 'Redemption Date') at a redemption price equal to 100% of the
principal amount of each Note plus accrued and unpaid interest to the
Redemption Date.
(e) The average of all month-end market values during the period.
* Includes distributions paid January 31, 1994 and distributions paid
December 30, 1994.
'D' Beginning in 1996, the Fund is required to disclose its average commission
rate paid per share for purchases and sales of investments.
12
<PAGE>
<PAGE>
THE FUND
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 1940 Act. The Fund commenced operations in November 1986.
As of March 31, 1998, the Fund had 31,228,098 shares of Common Stock issued and
outstanding, with an aggregate net asset value of $576,453,477, and 2,400,000
shares of 7.80% Preferred issued and outstanding, with an aggregate liquidation
preference of $60,000,000. 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 small companies, generally
with stock market capitalizations ranging from $100 million to $1 billion. See
'Investment Objectives and Methods/Policies'.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $96,484,000, after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. Royce 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.
13
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of March
31, 1998, and as adjusted to give effect to this offering.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
------------ ------------
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.001 par value, authorized 50,000,000 shares:
7.80% Cumulative Preferred Stock, authorized 10,000,000 shares, issued
and outstanding 2,400,000 shares..................................... $ 60,000,000 $ 60,000,000
7.30% Tax-Advantaged Cumulative Preferred Stock, as adjusted,
authorized 10,000,000 shares, issued and outstanding 4,000,000
shares............................................................... -- 100,000,000
------------ ------------
$ 60,000,000 $160,000,000
------------ ------------
------------ ------------
Common stock, $.001 par value:
Authorized 150,000,000 shares, issued and outstanding 31,228,098
shares............................................................... $ 31,228 $ 31,228
Additional paid-in capital............................................. 340,114,273 336,598,273(1)
Undistributed net investment income.................................... (9,502,998) (9,502,998)
Accumulated net realized gains on investments.......................... 17,138,295 17,138,295
Net unrealized appreciation on investments............................. 228,672,679 228,672,679
------------ ------------
Net assets applicable to outstanding common stock...................... $576,453,477 $572,937,477
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) After deducting underwriting discounts and estimated costs of this offering
of $3,516,000.
14
<PAGE>
<PAGE>
PORTFOLIO COMPOSITION
The following tables set forth certain information with respect to the
Fund's investment portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Common stock......................................................................... $549,967,538 99.2%
Preferred stock...................................................................... 368,125 0.1
Corporate bonds...................................................................... 9,668,070 1.7
U.S. Treasury obligations............................................................ 20,409,400 3.7
Repurchase agreements................................................................ 2,200,000 0.4
Liabilities less cash and other assets............................................... (28,382,209) (5.1)
------------ ----------
Total investments............................................................... $554,230,924 100.00%
------------ ----------
------------ ----------
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
Industrial Products.................................................................. $122,707,612 22.1%
Financial Intermediaries............................................................. 97,173,240 17.5
Industrial Services.................................................................. 76,883,326 13.9
Consumer Products.................................................................... 72,778,300 13.1
Technology........................................................................... 46,394,311 8.4
Financial Services................................................................... 44,370,431 8.0
Miscellaneous........................................................................ 27,167,414 4.9
Natural Resources.................................................................... 24,132,237 4.4
Retail............................................................................... 16,401,091 3.0
Consumer Services.................................................................... 11,789,980 2.1
Health............................................................................... 8,581,550 1.5
Utilities............................................................................ 1,588,046 0.3
------------ ----------
Total common stock.............................................................. $549,967,538 99.2%
------------ ----------
------------ ----------
</TABLE>
<TABLE>
<S> <C>
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS
Number of issuers................................................................................. 354
Median market capitalization...................................................................... $376 million
</TABLE>
15
<PAGE>
<PAGE>
INVESTMENT OBJECTIVES AND METHODS/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 Methods/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 METHODS/POLICIES
Royce uses a 'value' method in managing the Fund's assets. Royce's value
method is based on its belief that the securities of certain small-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.
Royce attempts to identify and invest in these securities for the Fund, with the
expectation that this 'value discount' will narrow over time and thus provide
capital appreciation for the Fund's portfolio.
The securities of the small-sized companies in which Royce invests for the
Fund generally have stock market capitializations ranging from $100 million to
$1 billion. (Stock market capitalization is calculated by multiplying the total
number of common shares issued 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. In addition, the securities of such companies may be
more volatile in price, have wider spreads between their bid and ask prices and
have significantly lower trading volumes than those of larger capitalization
stocks. Royce's investment approach therefore requires unusual investor patience
and a long-term investment horizon. The Fund may involve more risk than
investment companies which invest in the common stocks of larger, more
well-known companies.
Because the Fund invests primarily in small capitalization securities, it
may not be able to purchase or sell more than a limited number of shares of a
portfolio security at the then quoted market prices, and may require a
considerable time to acquire or dispose of a position in the security. This risk
will increase to the extent other Royce-managed accounts or other investors are
also seeking to purchase or sell a security held by the Fund.
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 Royce's
criteria. Royce 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 Royce 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 Royce, investment considerations warrant such action. For the
years ended December 31, 1997, 1996 and 1995, the Fund's portfolio turnover
rates were 29%, 34% and 32%, respectively.
The Fund's investment policies are subject to certain restrictions. See
' -- Investment Restrictions'.
Foreign Investments. 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.
16
<PAGE>
<PAGE>
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.
Fixed Income Securities. The Fund may invest up to 25% of its assets in
direct obligations of the Government of the United States or its agencies and/or
in non-convertible preferred stocks and non-convertible debt securities of
various issuers, including up to 5% of its net assets in below investment-grade
debt securities, also known as high-yield fixed income securities. Such below
investment-grade debt securities may be in the lowest-grade categories of
recognized ratings agencies (C in the case of Moody's or D in the case of
Standard & Poor's ('S&P')) or may be unrated. High-yield/high-risk investments
are primarily speculative and may entail substantial risk of loss of principal
and non-payment of interest, but may also produce above-average returns for the
Fund. Debt securities rated C or D may be in default as to the payment of
interest or repayment of principal.
Warrants, Rights or Options. 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 in the underlying
security. 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.
Temporary Investments. The assets of the Fund are normally invested in the
common stocks, convertible preferred stocks and convertible debentures of
small-sized companies. However, for temporary defensive purposes (i.e., when
Royce 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,
high-quality commercial paper and money market funds registered under the 1940
Act, or retain all or part of its assets in cash. Accordingly, the composition
of the Fund's portfolio may vary from time to time.
Repurchase transactions with its custodian bank 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.
Senior Securities. The 1940 Act and the Fund's fundamental investment
policies and restrictions (see ' -- Investment Restrictions') permit the Fund to
issue and sell senior securities representing indebtedness or consisting of
Preferred Stock if various requirements are met. Such requirements include
initial asset coverage tests of 300% for indebtedness and 200% for Preferred
Stock and restrictive provisions concerning Common Stock dividend payments and
other distributions, Preferred Stock dividend payments and other distributions
(if indebtedness is incurred), stock repurchases and maintenance of asset
coverage and giving senior securityholders the right to elect directors in the
event specified asset coverage tests are not met or dividends are not paid.
While the issuance and sale of senior securities allows the Fund to raise
additional cash for investments, it is a speculative investment technique,
involving the risk considerations of leverage, potential dilution and increased
share price volatility for the Fund's Common Stock. In addition, the Fund may be
required to sell investments in order to make required payments to senior
securityholders when it may be disadvantageous to do so.
The Cumulative Preferred Stock offered hereby is a senior security of the
Fund. See 'Description 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 payment of interest and repayment of principal then
due on any outstanding indebtedness of the Fund.
As of March 31, 1998, the Fund had 31,228,098 shares of Common Stock issued
and outstanding, with an aggregate net asset value of $576,453,477, 2,400,000
shares of 7.80% Preferred issued and
17
<PAGE>
<PAGE>
outstanding, with an aggregate liquidation preference of $60,000,000, and no
outstanding indebtedness. Accordingly, as of such date, the Fund could have,
under such policies and restrictions, issued and sold senior securities
representing indebtedness of up to $318,226,738 or additional shares of
Preferred Stock having an aggregate involuntary liquidation preference of up to
$516,453,477 or various combinations of lesser amounts of both securities
representing indebtedness and such Preferred Stock.
The terms of the Cumulative Preferred Stock and 7.80% Preferred also
require that the Fund maintain asset coverage tests as described under
'Description of Cumulative Preferred Stock' and 'Description of Capital
Stock -- Preferred Stock.'
The Fund's investment policies are subject to certain restrictions. See
' -- Investment Restrictions'.
RATINGS 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 auction rate 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. 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 Rating Agency Guidelines are substantially the
same as the Moody's guidelines applicable to the outstanding 7.80% Preferred.
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 certain types of securities in which the Fund may invest from Moody's
Eligible Assets and, therefore, from the Portfolio Calculation, and 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. Royce 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
18
<PAGE>
<PAGE>
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. Moreover, the Rating
Agency Guidelines do not 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 Royce and 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
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 together 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%
or more 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 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 unless such securities are redeemable shares issued
by money market funds registered under the 1940 Act.
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 on the original issuance of such securities, (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 and (c) except that the Fund may loan up to 25% of its assets
to qualified brokers, dealers or institutions for their use relating to
short sales or other security transactions (provided that such loans are
secured by collateral equal at all times to at least 100% of the value of
the securities loaned).
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.
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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 values of
portfolio securities or amount of total assets is not considered a violation of
any of the above restrictions.
In addition to issuing and selling senior securities as set forth in No. 1
above, the Fund may obtain (i) temporary bank borrowings (not in excess of 5% of
the value of its total assets) for emergency or extraordinary purposes and (ii)
such short-term credits (not in excess of 5% of the value of its total assets)
as are necessary for the clearance of securities transactions. Under the 1940
Act and the 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.
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
Royce & Associates, Inc. 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. Royce also serves as investment adviser to other
management investment companies and institutional accounts. As of March 31,
1998, net assets under Royce's management aggregated approximately $3.0 billion.
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 Royce, subject to any direction it may receive from the Fund's Board of
Directors, which periodically reviews the Fund's investment performance.
PORTFOLIO MANAGEMENT
Charles M. Royce, Royce's President, Chief Investment Officer and sole
voting shareholder since 1972, is primarily responsible for managing the Fund's
portfolio. He is assisted by Royce's investment staff, including W. Whitney
George, Boniface A. Zaino, Charles R. Dreifus and by Jack E. Fockler, Jr. Mr.
George is a Managing Director and Senior Portfolio Manager (since April 1997),
Vice President (since August 1993) and Senior Analyst (since 1991) of Royce. Mr.
Zaino has been a Managing Director and Senior Portfolio Manager since he joined
Royce in April 1998. Prior thereto, he was Group Managing Director of Trust
Company of the West. Mr. Dreifus has been a Senior Portfolio Manager and
Principal since he joined Royce in February 1998. Prior thereto, he was a
Managing Director (since June 1995) and a General Partner (until June 1995) of
Lazard Freres & Co. LLC. Mr. Fockler is a Managing Director (since April 1997),
Vice President (since August 1993) and Senior Associate (since 1989) of Royce.
See 'Directors and Officers' in the Statement of Additional Information. In the
event of any significant change in Royce'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 Royce, Royce
determines the composition of the Fund's portfolio, the nature and timing of the
changes in it and the manner of implementing such changes; provides the Fund
with investment advisory, research and related services for the investment of
its assets; furnishes, without expense to the Fund, the services of those of its
20
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<PAGE>
executive officers and full-time employees who may be duly elected directors or
executive officers of the Fund and pays their compensation and expenses; and
pays all expenses incurred in performing its investment advisory duties under
the Agreement.
The Fund pays all of its own administrative and other costs and expenses
attributable to its operations and transactions (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; listing fees and expenses; Federal, state and local taxes; non-affiliated
directors fees; interest on its borrowings; brokerage commissions; and the cost
of issue, sale and repurchase of its shares. Thus, unlike most other investment
companies, the Fund is required to pay substantially all of its expenses, and
Royce does not incur substantial fixed expenses.
ADVISORY FEE
As compensation for its services under the Investment Advisory Agreement,
Royce is entitled to receive a fee comprised of a Basic Fee (the 'Basic Fee') at
the rate of 1% per annum of the Fund's average net assets 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 is utilized for
measuring performance and average net assets, as described below.
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 is 1/12 of 0.5%.
Accordingly, for each month 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 0.5%
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.
Notwithstanding the foregoing, Royce 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, Royce 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, Royce will not receive any fee in respect of those assets of the
Fund equal to the aggregate unpaid principal amount of any indebtedness of the
Fund. Royce will receive a fee in respect of any assets of the Fund equal to the
liquidation preference of and any potential redemption premium for the
outstanding 7.80% Preferred and for any other Preferred Stock that may be issued
and sold by the Fund, including the Cumulative Preferred Stock offered hereby.
21
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<PAGE>
The following table illustrates, on an annualized basis, the full range of
permitted increases or decreases to the Basic Fee.
<TABLE>
<CAPTION>
DIFFERENCE BETWEEN
PERFORMANCE OF FUND AND %
CHANGE IN S&P 600 INDEX ADJUSTMENT TO 1% BASIC FEE FEE AS ADJUSTED
- --------------------------------------------------------- -------------------------- ---------------
<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%
- -3....................................................... -0.5% .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 S&P 600, all dividends and other
distributions during the performance period are treated as having been
reinvested, and no effect is given to gain or loss resulting from capital share
transactions of the Fund. Fractions of a percentage point are rounded to the
nearest whole point (to the higher whole point if exactly one-half).
Royce has committed to voluntarily waive the portion of its investment
advisory fee attributable to the 7.80% Preferred and to the Cumulative Preferred
Stock for any month when the Fund's average annual net asset value total return
since issuance of the 7.80% Preferred fails to exceed the dollar weighted
average Preferred Stock dividend rate during that period.
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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 Article 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 is authorized to issue up to
10,000,000 shares of Cumulative Preferred Stock. No fractional shares of
Cumulative Preferred Stock will be issued. As of the date of this Prospectus,
there were 2,400,000 shares of 7.80% Preferred issued and outstanding,
constituting the only other authorized series of Preferred Stock. The 7.80%
Preferred will rank on a parity with the Cumulative Preferred Stock as to
dividends and payment upon liquidation. The Board of Directors reserves the
right to issue additional shares of Cumulative Preferred Stock or other
Preferred Stock from time to time, subject to the restrictions in the Articles
Supplementary and the 1940 Act. 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 by 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.
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 7.30% per share of the liquidation preference of $25.00 per share, payable
quarterly on March 23, June 23, September 23 and December 23 (each, a 'Dividend
Payment Date'), commencing on June 23, 1998, to the persons in whose names the
shares of Cumulative Preferred Stock are registered at the close of business on
the preceding March 6, June 6, September 6 and December 6, respectively.
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 Date thereof. If full cumulative dividends are not paid on the
Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred
Stock will be paid pro rata to the holders of the shares of Cumulative Preferred
Stock. 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 payment upon liquidation) in respect of the Common Stock, the 7.80%
Preferred or any other stock of the Fund ranking junior to or on a parity with
the Cumulative Preferred Stock as to dividends or payment 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 or payment 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
23
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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 transaction 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.
If the Fund fails to pay dividends for two years or more, holders of the
Cumulative Preferred Stock will acquire certain additional voting rights. See
' -- Voting Rights'. Such rights will be their exclusive remedy for any such
failure.
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' (as defined by the 1940 Act) of at
least 200% (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 -- Mandatory Redemption' below.
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold as of March 31, 1998, 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 $3,516,000), would
have been computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less liabilities
not constituting senior securities $732,937,477
--------------------------------------------- = ------------ = 458%
Senior securities representing indebtedness $160,000,000
plus aggregate liquidation preference of
the Cumulative Preferred Stock
and the 7.80% Preferred
</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
Methods/Policies -- Rating Agency Guidelines', having an aggregate discounted
value (a 'Portfolio Calculation') at least equal to the Basic Maintenance
Amount, which is in general the sum of the aggregate liquidation preferences of
the Cumulative Preferred Stock and the 7.80% Preferred, any indebtedness for
borrowed money and current liabilities and dividends. 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 -- Mandatory
Redemption' below.
Any security not in compliance with the 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 Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed
24
<PAGE>
<PAGE>
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 a letter 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 $25.00 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 and Maryland law) 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) for so long as the Fund is complying with the Rating Agency
Guidelines, 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 and/or any other 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 for
Moody's equal to or greater than the Basic Maintenance Amount on such Cure Date
or, if the Asset Coverage or a Portfolio Calculation for Moody's 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', 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
so that the Portfolio Calculation exceeds the Basic Maintenance Amount of the
remaining outstanding shares of Cumulative Preferred Stock and any other
Preferred Stock remaining after redemption 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 is required to redeem on such
redemption date that number of shares for which it has legally available funds
and is otherwise able to redeem, pro rata 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 declared and Deposit Securities for the payment
thereof deposited with the Paying Agent, no redemptions of Cumulative Preferred
Stock or any other Preferred Stock may be made.
25
<PAGE>
<PAGE>
Optional Redemption. Prior to June 22, 2003, the shares of Cumulative
Preferred Stock are not subject to any optional redemption by the Fund unless
such redemption is necessary, in the judgment of the Fund, to maintain the
Fund's status as a RIC under the Code. Commencing June 22, 2003 and thereafter,
the Fund may at any time 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 and Maryland law.
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
accumulate 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 $25.00 per share plus an amount equal to all
unpaid dividends accumulated 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, 7.80%
Preferred and any other outstanding class or series of 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 and any other
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 as a single class. Also, except as otherwise required by the 1940
Act, (i) holders of outstanding shares of the Cumulative Preferred Stock will be
entitled as a series, to the exclusion of the holders of all other securities,
including other Preferred Stock, Common Stock and other classes of capital stock
of the Fund, to vote on matters affecting the Cumulative Preferred Stock that do
not materially adversely affect any of the contract rights of holders of such
other securities, including other Preferred Stock, Common Stock and other
classes of capital stock, as expressly set forth in the Fund's Charter, and (ii)
holders of outstanding shares of Cumulative Preferred Stock will not be entitled
to vote on matters affecting any other Preferred Stock that do not materially
adversely affect any of the
26
<PAGE>
<PAGE>
contract rights of holders of the Cumulative Preferred Stock, as expressly set
forth in the Charter. 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.
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 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 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 and sufficient Deposit Securities shall not have been
deposited with the Paying Agent for the payment of such accumulated dividends;
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 primary investment objective or changes in the
investment restrictions described as fundamental policies under 'Investment
Objectives and Methods/Policies'. The class vote of holders of shares of the
Cumulative Preferred Stock and any other Preferred Stock described above in each
case 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. See 'Description of Capital Stock -- Certain Voting Requirements'.
27
<PAGE>
<PAGE>
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 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 NYSE or on another exchange registered with the 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 .375% 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 ISSUANCE OF ADDITIONAL PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding, the
Articles Supplementary provide that the Fund may issue and sell up to 6,000,000
additional shares of the Cumulative Preferred Stock and/or shares of one or more
other series of Preferred Stock, provided that (i) immediately after giving
effect to the issuance and sale of such additional Preferred Stock and to the
Fund's receipt and application of the proceeds thereof, the Fund will maintain
the Asset Coverage of the shares of Cumulative Preferred Stock and all other
Preferred Stock of the Fund then outstanding, and (ii) 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.
BOARD'S ABILITY TO MODIFY ARTICLES SUPPLEMENTARY
The Articles Supplementary provide that, to the extent permitted by law,
the Board of Directors may, without the vote of the holders of the Cumulative
Preferred Stock or any other capital stock of the Fund, amend the provisions of
the Articles Supplementary to resolve any inconsistency or ambiguity or remedy
any formal defect, so long as the amendment does not materially adversely affect
any of the contract rights expressly set forth in the Charter of holders of
shares of the Cumulative Preferred Stock or any other capital stock of the Fund
or, if the Fund has not previously terminated compliance with the Rating Agency
Guidelines, adversely affect the then current rating on the Cumulative Preferred
Stock by Moody's.
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 may, however, repurchase shares of the Cumulative
Preferred Stock and/or any other 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.
BOOK-ENTRY
Shares of Cumulative Preferred Stock will initially be held in the name of
Cede & Co. ('Cede'), as nominee for The Depository Trust Company ('DTC'). The
Fund will treat Cede as the holder of record of the Cumulative Preferred Stock
for all purposes. In accordance with the procedures of DTC, however, purchasers
of Cumulative Preferred Stock will be deemed the beneficial owners of shares
purchased for purposes of dividends, voting and liquidation rights. Purchasers
of Cumulative Preferred Stock may obtain registered certificates by contacting
the Transfer Agent (as defined below).
28
<PAGE>
<PAGE>
DESCRIPTION OF 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, exchange, conversion or cumulative voting rights. As a NYSE-
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,
including shares 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 10,000,000 shares of
Preferred Stock as the Cumulative Preferred Stock, 4,000,000 of which are being
offered hereby. See 'Description of Cumulative Preferred Stock'.
The Board of Directors has designated 10,000,000 shares of Preferred Stock
as the 7.80% Preferred, 2,400,000 shares of which are issued and outstanding.
The terms of the 7.80% Preferred are similar to the terms of the Cumulative
Preferred Stock offered hereby. The terms of the 7.80% Preferred primarily
differ from those of the Cumulative Preferred Stock in that they require a
Preferred Stock asset coverage of 250%, the 7.80% Preferred generally cannot be
redeemed at the option of the Fund until August 31, 2003 and the annual dividend
rate is 7.80% and increases by .50% if the Fund voluntarily terminates
compliance with the Moody's rating agency guidelines applicable to the 7.80%
Preferred. The terms of the 7.80% Preferred also differ in that they provide
that if the Fund incurs indebtedness to redeem Preferred Stock or refinance
other indebtedness, the Fund must have an indebtedness asset coverage of at
least 300% after the incurrence of such indebtedness, and if the Fund incurs
indebtedness for any other reason, it must have an indebtedness asset coverage
of at least 500% after the incurrence of such indebtedness. The terms of the
7.80% Preferred also differ in that they provide that if the Fund issues
additional Preferred Stock to redeem outstanding Preferred Stock or refinance
indebtedness, it must have a Preferred Stock asset coverage of at least 250%
after the issuance of such additional Preferred Stock, and if the Fund issues
additional Preferred Stock for any other reason, it must have a Preferred Stock
asset coverage of at least 300% after the issuance of such additional Preferred
Stock. 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 March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
(EXCLUSIVE
OF
AMOUNT HELD AMOUNT HELD
BY FUND FOR BY FUND FOR
AMOUNT ITS OWN ITS OWN
TITLE OF CLASS AUTHORIZED ACCOUNT ACCOUNT)
- ------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Common Stock....................................................... 150,000,000 0 31,228,098
Preferred Stock.................................................... 50,000,000 0 2,400,000
7.80% Preferred............................................... 10,000,000 0 2,400,000
Cumulative Preferred Stock.................................... 10,000,000 0 0
</TABLE>
TAXATION
The following Federal income tax discussion is based on the advice of Brown
& Wood LLP, special counsel to the Fund. 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.
29
<PAGE>
<PAGE>
The Fund intends to continue to qualify for the special tax treatment
afforded RICs under Subchapter M of 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 investment income (i.e., its investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and net capital gains (i.e., the excess of the Fund's net
realized long-term capital gains over its net realized short-term capital
losses), if any, that it distributes to its stockholders in each taxable year,
provided that it distributes at least 90% of its net investment income for such
taxable year to them. The Fund intends to distribute substantially all of such
income.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund from its net investment income and net
short-term capital gains (such dividends referred to hereafter as 'ordinary
income dividends') are taxable to stockholders as ordinary income. Distributions
made from net capital gains (including gains or losses from certain transactions
in warrants, rights and options) and properly designated by the Fund ('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 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).
Capital gain dividends may be taxed at a lower rate than ordinary income
dividends for certain non-corporate taxpayers. Net capital gains on securities
held longer than 18 months are taxed to individual taxpayers at a maximum rate
of 20% ('20% Rate Gains'). Net capital gains on securities held longer than one
year but not longer than 18 months are taxed at an individual taxpayer's
marginal Federal income tax rate, but not higher than 28% ('28% Rate Gains').
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 as well as the portions of
its capital gain dividends that constitute 20% Rate Gains and 28% Rate Gains. 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.
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 tax advisers.
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 capital gain dividends) paid to
stockholders who are non-resident 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.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
30
<PAGE>
<PAGE>
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 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 net 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.
Gain or loss, if any, recognized on the sale or other disposition of shares
of the Fund will be taxed as a capital gain or loss if the shares are capital
assets in the stockholder's hands. 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 more than
one class 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 gains. 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 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 and to
holders of Cumulative Preferred Stock and other Preferred Stock. The amount of
net capital gains (including the new categories of capital gain) and other types
of income allocable among the Cumulative Preferred Stock, other Preferred Stock
and the Common Stock will depend upon the amount of such net capital gains and
other income realized by the Fund and the total dividends paid by the Fund on
shares of Common Stock, Cumulative Preferred Stock and other Preferred Stock
during a taxable year.
In the opinion of Brown & Wood LLP, under current law, the manner in which
the Fund intends to allocate net capital gains and other taxable income among
shares of Common Stock, Cumulative Preferred Stock and other Preferred Stock
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 courts.
31
<PAGE>
<PAGE>
TAXATION OF THE FUND
Qualifications as a RIC requires, among other things, that at least 90% of
the Fund's gross income in each taxable year consist of certain types of income,
including dividends, interest, gains from the disposition of stocks and
securities, and other investment-type income. In addition, the Fund's
investments must meet certain diversification standards.
The Code requires a RIC to pay a non-deductible 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 100% of 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
ordinary 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.
If the Fund does not meet the asset coverage requirements of the 1940 Act
or the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the Common Stock until the asset coverage is
restored. See 'Description of Cumulative Preferred Stock -- Dividends'. Such a
suspension of distributions might prevent the Fund from distributing 90% of its
net investment income, as is required in order to avoid Fund-level taxation of
such income, or might prevent it from distributing enough ordinary income and
capital gains to avoid completely imposition of the excise tax. Upon any failure
to meet the asset coverage requirements of the 1940 Act or the Articles
Supplementary, the Fund may, and in certain circumstances will be required to,
partially redeem the shares of 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 of its income.
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. 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, except as provided in regulations to be promulgated, the
Fund would be required to recognize and pay tax on any net built-in gains (the
excess of aggregate gains, including items of income, over aggregate losses that
would have been realized if the Fund had been liquidated) in order to qualify as
a RIC in a subsequent year.
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 (and
to be required to distribute such 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 rather than capital gains for
Federal income tax purposes.
Foreign currency gains or losses from certain debt instruments or arising
from delays between accrual and receipt of investment income will generally be
treated as ordinary income or loss, and will therefore generally increase or
decrease the amount of the Fund's net investment income available for
distribution as ordinary income dividends. If substantial in relation to net
investment income, such foreign currency losses could affect the ability of the
Fund to distribute ordinary income dividends in a taxable year, and could
require all or a portion of distributions made before the losses were realized,
but in the same taxable year, to be recharacterized as a return of capital.
If the Fund invests in stock of a passive foreign investment company
('PFIC'), it may be subject to Federal income tax at ordinary rates, and to an
additional charge in the nature of interest, on a portion of its distributions
from the PFIC and on gain from the disposition of the shares of the PFIC, even
if
32
<PAGE>
<PAGE>
such distributions and gain are paid by the Fund as a dividend to its
stockholders. In some cases, the Fund may be able to elect to include annually
in income its pro rata share of the ordinary earnings and capital gains (whether
or not distributed) of the PFIC. Alternatively, under recent legislation, the
Fund could elect to mark to market at the end of each taxable year its shares in
PFICs; in this case, the Fund would recognize as ordinary income any increase in
the value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Fund might be required to recognize in a year income in excess of
its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year.
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 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, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR
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 8100, Boston, Massachusetts 02266-8100 (Tel. No. (800) 426-5523).
33
<PAGE>
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, among the Fund, Royce and the Underwriters (the
'Underwriting Agreement'), the Underwriters named below have agreed to purchase
from the Fund, and the Fund has agreed to sell to each such Underwriter, the
number of shares of Cumulative Preferred Stock set forth opposite the name of
each such Underwriter:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated......................................................... 1,333,334
Smith Barney Inc................................................................. 1,333,333
Prudential Securities Incorporated............................................... 1,333,333
---------
Total....................................................................... 4,000,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase and accept delivery of the shares of Cumulative Preferred Stock
offered hereby is subject to the approval of certain legal matters by counsel
and to certain other conditions, including that the Cumulative Preferred Stock
be rated 'aaa' by Moody's as of the Date of Original Issue. The Underwriters are
obligated to purchase all shares of Cumulative Preferred Stock offered hereby if
any are purchased.
The Underwriters propose to offer part of the shares of Cumulative
Preferred Stock offered hereby to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $0.50 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.40 per share to
certain other dealers. After the initial offering of the shares of Cumulative
Preferred Stock, the public offering price and such concessions may be changed
by the Underwriters. The underwriting discount of $0.7875 per share is equal to
3.15% of the initial offering price. Investors must pay for any shares of
Cumulative Preferred Stock purchased on or before May 22, 1998.
The Fund and Royce have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, and to contribute to payments which the Underwriters may be required to
make in respect thereof.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Cumulative Preferred Stock at
a level above that which might otherwise prevail in the open market. A
'stabilizing bid' is a bid for or the purchase of the Cumulative Preferred Stock
on behalf of the Underwriters for the purpose of fixing or maintaining the price
of the Cumulative Preferred Stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the Cumulative Preferred stock. A
'covering transaction' is a bid for or purchase of the Cumulative Preferred
Stock on behalf of the Underwriter to reduce a short position incurred by the
underwriters in connection with the offering. A 'penalty bid' is an arrangement
permitting the Underwriters to reclaim the selling concession otherwise accruing
to an Underwriter in connection with the offering if any of the Cumulative
Preferred Stock originally sold by the Underwriter is purchased in a covering
transaction and has therefore not been effectively placed by the Underwriter.
The Underwriters have advised the Fund that such transactions may be effected on
the NYSE or otherwise and, if commenced, may be discontinued at any time.
The Underwriters have acted in the past and may continue to act from time
to time, during and subsequent to the completion of the offering of Cumulative
Preferred Stock hereunder, as brokers or dealers in connection with the
execution of portfolio transactions for the Fund. The Underwriters may also,
during the pendency of 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. Application has been made to list the shares of Cumulative
Preferred Stock on the NYSE. However,
34
<PAGE>
<PAGE>
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.
The Fund has agreed that it will not sell or otherwise dispose of any
senior securities of the Fund, or grant any options or warrants to purchase
senior securities of the Fund, for a period of 60 days after the date of this
Prospectus, without the prior written consent of the Underwriters.
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 Simpson
Thacher & Bartlett, counsel to the Underwriters. Brown & Wood LLP and Simpson
Thacher & Barlett will each rely as to matters of Maryland law on the opinion of
Venable, Baetjer and Howard, LLP.
EXPERTS
Tait, Weller & Baker, 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. Tait, Weller & Baker has an office at 8 Penn
Center Plaza, Suite 800, Philadelphia, Pennsylvania 19103, and also performs tax
and other professional services for the Fund. Ernst & Young LLP has an office at
787 Seventh Avenue, New York, New York 10019. 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, as amended, and the 1940 Act and, in accordance therewith,
files reports and other information with the Commission. Reports, proxy
statements and other information filed by the Fund with the Commission pursuant
to the informational requirements of such Acts may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 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 Commission, Judiciary
Plaza 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site at http://www.sec.gov. containing reports, proxy
and information statements and other information regarding registrants,
including the Fund, that file electronically with the Commission.
The Fund's Common Stock and 7.80% Preferred are listed on the NYSE, and
reports, proxy statements and other information concerning the Fund and filed
with the Commission by the Fund can be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the Commission under the Securities Act of 1933, as amended, 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 Commission.
35
<PAGE>
<PAGE>
Each such statement is qualified in its entirety by such reference. The complete
Registration Statement may be obtained from the Commission upon payment of the
fee prescribed by its rules and regulations.
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by the Fund or any of its major service providers fail
to process this type of information properly, that could have a negative impact
on the Fund's operations and the services provided to the Fund's stockholders.
The Fund and Royce are reviewing all of their own computer systems with the goal
of modifying or replacing such systems to the extent necessary to prepare for
the Year 2000. In addition, Royce has been advised by the Fund's major service
providers that they are also in the process of reviewing their systems with the
same goal. As of the date of this Prospectus, the Fund and Royce have no reason
to believe that these goals will not be achieved.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated May 19, 1998 has been filed
with the Commission and is incorporated by reference in this Prospectus. 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........................................................................ 6
Financial Statements................................................................... 7
</TABLE>
36
<PAGE>
<PAGE>
GLOSSARY
'Articles Supplementary' means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
'Asset Coverage' means asset coverage, as defined in Section 18(h) of the
1940 Act, of at least 200%, or such higher percentage as may be required under
the 1940 Act, with respect to all outstanding securities of the Fund which are
stock, including all outstanding shares of Cumulative Preferred Stock.
'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 amount
referred to in clauses (i)(A) plus (i)(B) of the definition of 'Basic
Maintenance Amount' in Article I of the 7.80% Preferred Articles; (D) 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 shall not be included as a liability) and such liabilities projected to
become due and payable by 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); (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 and/or 7.80%
Preferred 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 and/or 7.80% Preferred
subject to redemption or repurchase or, without duplication, 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 7.80% Preferred at a price of less than the Liquidation
Preference thereof as defined in the 7.80% Preferred Articles and irrevocably
segregated or deposited assets as described above with its custodian bank or the
Paying Agent 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 Liquidation Preference of such 7.80% Preferred 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 the Articles Supplementary and the 7.80% Preferred Articles), 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 7.30% Tax-Advantaged Cumulative
Preferred Stock, par value $.001 per share, of the Fund.
'Date of Original Issue' means the date on which shares of Cumulative
Preferred Stock are originally issued.
37
<PAGE>
<PAGE>
'Deposit Securities' means cash, Short-Term Money 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
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' means each March 23, June 23, September 23 and
December 23.
'Fund' means Royce Value Trust, Inc., a Maryland corporation.
'Liquidation Preference' means $25.00 per share plus an amount equal to all
unpaid dividends accumulated to and including the date fixed for such
distribution or payment (whether or not earned or declared by the Fund, but
excluding interest thereon).
'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
Other repurchase obligations........................................................... Discount Factor
Applicable
to Underlying
Assets
Common stocks................................................................... 3.00
Preferred stocks
Auction rate preferred stocks................................................... 3.50
Other preferred stocks issued by issuers in the financial and industrial........ 2.35
Other preferred stocks issued by issuers in the utilities industry.............. 1.60
U.S. Government Obligations (other than the 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
</TABLE>
(table continued on next page)
38
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
- --------------------------------------------------------------------------------------- ----------------
<S> <C>
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
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 or 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
</TABLE>
(table continued on next page)
39
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
- --------------------------------------------------------------------------------------- ----------------
<S> <C>
Convertible corporate bonds with senior debt securities rated Aa issued by the
following types of issuers:
Utility...................................................................... 1.80
Industrial................................................................... 2.97
Financial.................................................................... 2.92
Transportation............................................................... 4.27
Convertible corporate bonds with senior debt securities rated A issued by the
following types 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 types 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 types 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 types of issuers:
Utility...................................................................... 2.12
Industrial................................................................... 3.90
Financial.................................................................... 3.24
Transportation............................................................... 4.59
</TABLE>
'Moody's Eligible Asset' 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 a
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
40
<PAGE>
<PAGE>
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 market value of the Fund's holdings of any issue
of preferred stock will not be less than $500,000 nor more than $5,000,000;
notwithstanding the foregoing, preferred stock which is currently
convertible into common stock which is a Moody's Eligible Asset pursuant to
clause (v) below is a Moody's Eligible Asset to the extent of the aggregate
market value of the number of shares of common stock into which the
preferred stock is convertible;
(v) common stocks (A) (i) which are traded in the United States on a
national securities exchange or in the over-the-counter market, (ii) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (iii)
which may be sold without restriction by the Fund; provided, however, that
(1) common stock which, while a Moody's eligible Asset owned by the Fund,
ceases paying any regular cash dividend will not 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 shall 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 stocks, and (B) which are securities denominated in any
currency other than the U.S. dollar or securities of issuers formed under
the laws of jurisdictions other than the United States, its states,
commonwealths, territories and possessions, including the District of
Columbia, for which there are dollar denominated American Depository
Receipts ('ADRs') which are traded in the United States on a national
securities exchange or in the over-the-counter market and are issued by
banks formed under the laws of the United States, its states,
commonwealths, territories and possessions, including the District of
Columbia; provided, however, that the aggregate market value of the Fund's
holdings of securities denominated in currencies other than the U.S. dollar
and ADRs in excess of (i) 6% of the aggregate market value of the
outstanding shares of common stock of the issuer thereof or (ii) 10% of the
market value of Moody's Eligible Assets with respect to issuers formed
under the laws of any single such non-U.S. jurisdiction, other than
Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, new Zealand, Norway, Spain, Sweden,
Switzerland and the United Kingdom, shall not be a Moody's Eligible Asset;
(vi) U.S. Government Obligations;
(vii) corporate bonds (A) which [may be sold without restriction by
the Fund and are] 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 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 Fund's holdings does 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
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<PAGE>
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 UTILITY
MAXIMUM SINGLE MAXIMUM SINGLE
MOODY'S RATING(1)(2) ISSUER(3)(4) ISSUER(3)(4)
- ---------------------------------------------------------- -------------- --------------
<S> <C> <C>
'aaa', Aaa................................................ 100% 100%
'aa', Aa.................................................. 20% 20%
'aaa', Aaa................................................ 100% 100%
'a', A.................................................... 10% 10%
CS/CB, 'baa', Baa(5)...................................... 6% 4%
Ba........................................................ 4% 4%
B1/B2..................................................... 3% 3%
B3 (Caa subordinate)...................................... 2% 2%
</TABLE>
Industry and State:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY UTILITY
MAXIMUM MAXIMUM SINGLE MAXIMUM
MOODY'S RATING(1) SINGLE INDUSTRY(3) SUB-INDUSTRY(3)(6) 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 from $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
stock 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 provision; and (ix) no assets which
are subject to any lien or irrevocably deposited by the Fund for the payment of
42
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<PAGE>
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.
'Notice of Redemption' means written notice by the Fund to holders of
Cumulative Preferred Stock in compliance with the provisions of the Articles
Supplementary of the Fund's intention to redeem shares of Cumulative Preferred
Stock.
'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 and 7.80% Preferred.
'Redemption Price' means $25.00 per share plus accumulated and unpaid
dividends through the date of redemption (whether or not earned or declared).
'7.80% Preferred' means, so long as any shares of such series are issued
and outstanding, the 7.80% Cumulative Preferred Stock, par value $.001 per
share, of the Fund.
'7.80% Preferred Articles' means, so long as any shares of the 7.80%
Preferred are issued and outstanding, the Articles Supplementary, dated August
19, 1996, as amended and supplemented from time to time, creating and fixing the
rights of the 7.80% Preferred.
'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:
(iii) U.S. Government Obligations;
(iv) 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 by supported by a person or entity other than the
issuer) whose long-term unsecured debt obligations are rated at least Aa by
Moody's.
(v) 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
form 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 provision in the case of investments that mature in no more that
one Business Day from the date of purchase or other acquisition by the
Fund);
(vi) 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
43
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<PAGE>
least Aa3 if the maturity is three months or less, (B) at least 1 if the
maturity is two months or less and (C) at least A2 if the maturity is one
month or less; and
(vii) 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, a division of The McGraw-Hill Companies,
Inc., 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.
44
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_____________________________________ ____________________________________
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 SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH
IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary....................................................................................................... 3
Tax Attributes of Preferred Stock Dividends.............................................................................. 10
Financial Highlights..................................................................................................... 12
The Fund................................................................................................................. 13
Use of Proceeds.......................................................................................................... 13
Capitalization........................................................................................................... 14
Portfolio Composition.................................................................................................... 15
Investment Objectives and Methods/Policies............................................................................... 16
Investment Advisory and Other Services................................................................................... 20
Description of Cumulative Preferred Stock................................................................................ 23
Description of Capital Stock............................................................................................. 29
Taxation................................................................................................................. 29
Custodian, Dividend-Paying Agent, Transfer Agent and Registrar........................................................... 33
Underwriting............................................................................................................. 34
Legal Matters............................................................................................................ 35
Experts.................................................................................................................. 35
Additional Information................................................................................................... 35
Table of Contents of Statement of Additional Information................................................................. 36
Glossary................................................................................................................. 37
</TABLE>
4,000,000 SHARES
ROYCE VALUE
TRUST, INC.
7.30% TAX-ADVANTAGED CUMULATIVE
PREFERRED STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
------------------------
MAY 19, 1998
_____________________________________ ____________________________________
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STATEMENT OF ADDITIONAL INFORMATION
4,000,000 SHARES
ROYCE VALUE TRUST, INC.
7.30% TAX-ADVANTAGED CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
The 7.30% Tax-Advantaged 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 methods/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 capitalization companies. The
Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and its
telephone number is (212) 355-7311. Royce & Associates, Inc. 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 May 19, 1998). Please
retain this document for future reference. To obtain an additional copy of the
Prospectus or the Fund's Annual Report to Stockholders for the year ended
December 31, 1997, please call Investor Information at 1-800-221-4268. Defined
terms used herein have the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
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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............................................................................................ 6
Financial Statements....................................................................................... 7
</TABLE>
Date: May 19, 1998
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PRINCIPAL STOCKHOLDERS
As of March 31, 1998, the following persons owned of record or were known
by the Fund to have owned beneficially 5% or more of the 31,228,098 shares of
its Common Stock and 2,400,000 shares of its 7.80% Preferred then outstanding:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF OWNER CLASS OF STOCK AMOUNT AND NATURE OF OWNERSHIP CLASS
- ---------------------------------- --------------- ---------------------------------------------- -------------
<S> <C> <C> <C>
Yale University .................. Common 2,758,709 shares -- Beneficial (sole voting 10.5%
451 College Street and investment power)
P.O. Box 1074 Yale Station
New Haven, CT 06520
Cede & Co. FAST .................. Common 29,098,964 shares -- Record 93.2%
P.O. Box 20 Preferred 2,368,565 shares -- Record 91.1%
Bowling Green Station
New York, NY 10274
</TABLE>
All directors and officers of the Fund as a group owned approximately 0.9%
of the Fund's outstanding shares of Common Stock as of such date.
DIRECTORS AND OFFICERS
The following tables set forth certain information as to each director and
officer of the Fund.
<TABLE>
<CAPTION>
POSITION HELD WITH PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
NAME, ADDRESS AND AGE THE FUND DURING THE PAST FIVE YEARS
- ---------------------------------------- ------------------ ------------------------------------------------
<S> <C> <C>
Charles M. Royce* (58) ................. Director, President, Managing Director (since April 1997),
1414 Avenue of the Americas President and Secretary, Treasurer, sole director and sole
New York, NY 10019 Treasurer voting shareholder of Royce & Associates, Inc.
('Royce'), formerly named Quest Advisory
Corp., the Fund's investment adviser; Trustee,
President and Treasurer of the Royce Fund
('TRF'), an open-end diversified management
investment company of which Royce is the
principal investment adviser, and its
predecessors; Director, President and
Treasurer of the Fund, Royce Micro-Cap Trust,
Inc. ('RMCT') (since September 1993) and Royce
Global Trust, Inc. ('RGT') (since October
1996), closed-end diversified management
investment companies of which Royce is the
investment adviser; Trustee, President and
Treasurer of Royce Capital Fund ('RCF') (since
December 1996), an open-end diversified
management investment company of which Royce
is the investment adviser (the Fund, TRF, RCF,
RGT and RMCT, collectively, 'The Royce
Funds'); Secretary and sole director and
shareholder of Royce Fund Services, Inc.
('RFS'), formerly named Quest Distributors,
Inc., the distributor of TRF's shares; and
managing general partner of Royce Management
Company ('RMC'), formerly named Quest
Management Company, a registered investment
adviser, and its predecessor.
</TABLE>
2
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<TABLE>
<S> <C> <C>
Richard M. Galkin (59) ................. Director Private investor and President of Richard M.
5284 Boca Marina Galkin Associates, Inc., tele- communications
Boca Raton, FL 33487 consultants.
Stephen L. Isaacs (58) ................. Director President of the Center for Health and Social
60 Harmon Avenue Policy since September 1996; President of
Pelham, NY 10803 Stephen L. Isaacs & Associates, Consultants;
Director of Columbia University Development
Law and Policy Program and Professor at
Columbia University until August 1996.
David L. Meister (58) .................. Director Consultant to the communications industry.
111 Marquez Place
Pacific Palisades, CA 90272
John D. Diederich* (46) ................ Vice President Director of Administration of The Royce Funds
1414 Avenue of the Americas since April 1993; Vice President of RGT (since
New York, NY 10019 October 1996), of RCF (since December 1996)
and of the Fund and RMCT (since April 1997);
Director of the Fund and RMCT (since July
1997); Trustee of RCF (since April 1998); and
President of RFS (since November 1995).
Jack E. Fockler, Jr.* (39) ............. Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce, having
New York, NY 10019 been employed by Royce since October 1989;
Vice President of RGT (since October 1996) and
of the other Royce Funds (since April 1995);
and General Partner of RMC and its
predecessor.
W. Whitney George* (39) ................ Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce, having
New York, NY 10019 been employed by Royce since October 1991;
Vice President of RGT (since October 1996) and
of the other Royce Funds (since April 1995);
and General Partner of RMC and its
predecessor.
Daniel A. O'Byrne* (36) ................ Vice President Vice President of Royce (since May 1994), having
1414 Avenue of the Americas been employed by Royce (since October 1986);
New York, NY 10019 and Vice President of RGT (since October 1996)
and of the other Royce Funds (since July
1994).
John E. Denneen* (31) .................. Secretary Associate General Counsel and Chief Compliance
1414 Avenue of the Americas Officer of Royce (since May 1996); Secretary
New York, NY 10019 of RGT (since October 1996) and of the other
Royce Funds (since June 1996); and Associate
of Seward & Kissel prior to May 1996.
</TABLE>
- ------------
* An 'interested person' of the Fund and/or Royce under Section 2(a)(19) of the
1940 Act.
3
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Normally, holders of shares of the Preferred Stock of the Fund, including
the Cumulative Preferred Stock, voting as a separate class, will elect two of
the Fund's directors, and holders of the Preferred Stock, including the
Cumulative Preferred Stock, and the Common Stock, voting as a single class, will
elect the remaining directors. See 'Description of Cumulative Preferred
Stock -- Voting Rights' in the Prospectus. Messrs. Diederich and Meister have
been elected as directors by holders of the Preferred Stock.
All of the Fund's directors are also trustees of TRF and RCF and directors
of RMCT and RGT, except for John D. Diederich who is not a trustee of TRF or a
director of RGT.
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 for the Fund and for conducting post-audit reviews of its financial
condition with such auditors.
REMUNERATION OF DIRECTORS
Set forth below is the compensation paid by the Fund and the four other
registered investment companies comprising The Royce Funds to each director of
the Fund (in his capacity as a director) for the year ended December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM THE FROM THE FUND AND
DIRECTOR FUND OTHER ROYCE FUNDS
- --------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Charles M. Royce......................................... $ -- $ --
John D. Diederich(1)..................................... -- --
Richard M. Galkin........................................ 16,000 65,000
Stephen L. Isaacs........................................ 16,000 65,000
David L. Meister......................................... 16,000 65,000
</TABLE>
- ------------
(1) Mr. Diederich received compensation aggregating less than $60,000 from the
Fund in his capacity as the Fund's Director of Administration.
------------------------
Each of the Fund's non-affiliated directors receives a base fee of $10,000
per year plus $1,000 for each meeting of the Board of Directors attended. No
director of the Fund received remuneration for services as a director for the
year ended December 31, 1997 in addition to or in lieu of this standard
arrangement.
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS, RMC
('Royce-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 Royce or RMC account. Such persons are
permitted to engage in other personal securities transactions if (i) the
securities involved are U.S. 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 Royce's Compliance Officer and an
executive officer of Royce. 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.
Royce's and RMC's clients include several private investment companies in
which Royce or RMC 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
4
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from securities transactions, but less than 5% of the company's equity
interests. The Code of Ethics does not restrict transactions effected by Royce
or RMC for such private investment company accounts. Transactions for such
private investment company accounts are subject to Royce's and RMC's allocation
guidelines and procedures. See 'Brokerage Allocation and Other Practices'.
As of March 31, 1998, Royce-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
over $37 million, and their equity interests in Royce-related private investment
companies totaled approximately $3.1 million.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY FEE
For the years ended December 31, 1997, 1996 and 1995, Royce received
investment advisory fees from the Fund of $1,714,688, $1,384,644 and $2,951,325
(net of $76,186, $86,240 and $104,206 voluntarily waived by Royce),
respectively.
OTHER
The Investment Advisory Agreement provides that the Fund may use 'Royce' as
part of its name only for as long as the Investment Advisory Agreement remains
in effect. The name 'Royce' is a property right of Royce, and it may at any time
permit others, including other investment entities, to use such name.
The Investment Advisory Agreement protects and indemnifies Royce against
liability to the Fund, its stockholders or others for any action taken or
omitted to be taken by Royce in connection with the performance of any of its
duties or obligations under Investment Advisory Agreement or otherwise as an
investment adviser to the Fund. However, Royce is not protected or indemnified
against liabilities to which it would otherwise be subject by reason of willful
malfeasance, 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.
Royce's services to the Fund are not deemed to be exclusive, and Royce 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,
1999 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, 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 Commission and others,
and in the auditing of accounts and in other ministerial matters of like nature,
as agreed to between the Fund and the Bank. For the fiscal years ended December
31, 1997, 1996 and 1995, the Fund paid $158,726, $126,751 and $129,940,
respectively, in fees to the Fund's custodian and transfer agent.
5
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BROKERAGE ALLOCATION AND OTHER PRACTICES
Royce is responsible for selecting the brokers who effect the purchases and
sales of the Fund's portfolio securities. No broker is selected to effect a
securities transaction for the Fund unless such broker is believed by Royce to
be capable of obtaining the best price for the security involved in the
transaction. Best price and execution is comprised of several factors, including
the liquidity of the security, the commission charged, the promptness and
reliability of execution, priority accorded the order and other factors
affecting the overall benefit obtained. In addition to considering a broker's
execution capability, Royce 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
performance measurement, and may be written or oral. Brokers that provide both
research and execution services are generally paid higher commissions than those
paid to brokers who do not provide such research and execution services. Royce
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 Royce upon the brokerage and/or research
services provided by such broker, viewed in terms of either that particular
transaction or Royce's overall responsibilities with respect to its accounts.
Royce 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 Royce in servicing all of its
accounts and those of RMC, and not all of such services may be used by Royce in
connection with the Fund.
Even though investment decisions for the Fund are made independently from
those for the other accounts managed by Royce and RMC, securities of the same
issuer are frequently purchased, held or sold by more than one Royce/RMC 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 Royce/RMC account on the
same trading day, Royce 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 effected pursuant to
Royce/RMC'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 Royce's and RMC'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 Royce and
RMC believe should result in fair and equitable treatment to those of its
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, 1997, the Fund did not acquire any
securities of any of its regular brokers (as defined in Rule 10b-1 under the
1940 Act) or of any of their parents.
During each of the three years ended December 31, 1997, 1996 and 1995, the
Fund paid brokerage commissions of approximately $463,000, $414,000 and
$364,000, respectively.
One or more of the Underwriters has effected purchases and/or sales of the
portfolio securities of the Fund and of other accounts managed by Royce and RMC
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
6
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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 preferences 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
Nasdaq National Market 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.
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, 1997, together with
the report of Ernst & Young LLP thereon, are incorporated herein by reference.
7
STATEMENT OF DIFFERENCE
The dagger symbol shall be expressed as....................................'D'
