-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CV5oqOp8bYOeZK0zsxe5NQH3Jsq+Ub1AUw2cl3h9d24NeOWwiRodgo04XsWROxJH iEcw8W618CjWjqHsMYdZfA== 0000949377-03-000766.txt : 20031002 0000949377-03-000766.hdr.sgml : 20031002 20031001195718 ACCESSION NUMBER: 0000949377-03-000766 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20031002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE VALUE TRUST INC CENTRAL INDEX KEY: 0000804116 IRS NUMBER: 133356097 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04875 FILM NUMBER: 03922044 BUSINESS ADDRESS: STREET 1: 1414 AVE OF THE AMERICAS 9TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123557311 MAIL ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE VALUE TRUST INC CENTRAL INDEX KEY: 0000804116 IRS NUMBER: 133356097 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-107578 FILM NUMBER: 03922045 BUSINESS ADDRESS: STREET 1: 1414 AVE OF THE AMERICAS 9TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123557311 MAIL ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 N-2/A 1 rvt_63005-n2a.txt REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on October 2, 2003 Securities Act File No. 333-107578 Investment Company Act File No. 811-04875 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM N-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. 1 [X] Post-Effective Amendment No. [ ] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 27 [X] ---------------------- Royce Value Trust, Inc. (Exact Name of Registrant as Specified In Charter) ---------------------- 1414 Avenue of the Americas, New York, New York 10019 (Address of Principal Executive Offices) (800) 221-4268 (Registrant's Telephone Number, including Area Code) Charles M. Royce, President Royce Value Trust, Inc. 1414 Avenue of the Americas New York, New York 10019 (Name and Address of Agent for Service) ---------------------- Copies to:
Frank P. Bruno, Esq. John E. Denneen, Esq. Cynthia G. Cobden, Esq. Sidley Austin Brown & Wood LLP Royce Value Trust, Inc. Simpson Thacher & Bartlett LLP 787 Seventh Avenue 1414 Avenue of the Americas 425 Lexington Avenue New York, New York 10019 New York, New York 10019 New York, New York 10017
---------------------- Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. ---------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 ======================================================================================================================
Proposed Proposed Maximum Maximum Amount Amount Offering Aggregate of Being Price Per Offering Registration Title of Securities Being Registered Registered (1) Unit (1) Price(1) Fee(2) - ---------------------------------------------------------------------------------------------------------------------- 8,800,000 $25.00 $220,000,000 $17,798 % Cumulative Preferred Stock ($.001 par value)...... shares ======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. (2) $81 was previously paid in connection with the Registrant's initial registration statement filed with the Securities and Exchange Commission (the "Commission") on August 1, 2003. $17,717 was transmitted to the Commission's designated lockbox at Mellon Bank in Pittsburgh, PA in connection with this filing. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 The information in this Prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdictions where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 2, 2003 PROSPECTUS 8,800,000 SHARES ROYCE VALUE TRUST, INC. % CUMULATIVE PREFERRED STOCK LIQUIDATION PREFERENCE $25.00 PER SHARE ----------------- The % Cumulative Preferred Stock, initial liquidation preference $25.00 per share (the "Cumulative Preferred Stock") is being offered by Royce Value Trust, Inc. (the "Fund"). The Fund is a closed-end diversified management investment company. The Fund's primary investment goal is long-term capital growth. The Fund normally invests at least 75% of its assets in the equity securities of small- and micro-cap 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, LLC ("Royce") is the Fund's investment adviser. Dividends on the Cumulative Preferred Stock offered hereby, at the annual rate of % of the initial 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 December 23, 2003. (Continued on following page) ----------------- INVESTING IN THE CUMULATIVE PREFERRED STOCK INVOLVES RISKS. SEE "PROSPECTUS SUMMARY -- SPECIAL CONSIDERATIONS AND RISK FACTORS" BEGINNING ON PAGE 9 AND "INVESTMENT GOAL, POLICIES AND RISKS" BEGINNING ON PAGE 22. ----------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------------
Cumulative Preferred Stock -------------------------- Per Share Total --------- ----- Public Offering Price (1).................................... $25.00 $220,000,000 Underwriting Discount (2).................................... $ $ Proceeds to the Fund (before expenses)(3).................... $ $
------------------- (1) Plus accumulated dividends, if any, from October , 2003. (2) The Fund and Royce have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (3) Offering expenses payable by the Fund are estimated at $281,800. ----------------- The Underwriters are offering the Cumulative Preferred Stock subject to various 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 October , 2003. ----------------- Joint Book-Running Managers Citigroup UBS Investment Bank ----------------- Merrill Lynch & Co. Wachovia Securities ----------------- Legg Mason Wood Walker Incorporated October , 2003 (Continued from cover page) Application will be made to list the Cumulative Preferred Stock on the New York Stock Exchange (the "NYSE"). If offered, trading of the Cumulative Preferred Stock on the NYSE is expected to commence within 30 days of the date of this Prospectus. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. See "Underwriting". Distributions paid on the Cumulative Preferred Stock will consist of: (i) long-term capital gains, (ii) qualified dividend income, (iii) other ordinary income and/or (iv) returns of capital. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act") reduced the individual Federal income tax rate on long-term capital gains and qualified dividend income to a maximum of 15%. Under the 2003 Tax Act, the maximum individual Federal income tax rate on other ordinary income is 35%. These tax rates are scheduled to apply through 2008. Assuming the 2003 Tax Act had been in effect during the past one, three and five years ended December 31, 2002, approximately 100%, 86% and 88% of the distributions paid by the Fund would have consisted of less highly taxed long-term capital gains and qualified dividend income. It is currently expected that dividends paid on the Cumulative Preferred Stock will consist primarily of such long-term capital gains and qualified dividend income, which are taxed at lower rates for individuals than other ordinary income. See "Tax Attributes of Preferred Stock Dividends" and "Taxation". No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of long-term capital gains and qualified dividend income. It is a condition to the issuance of the Cumulative Preferred Stock that it be rated Aaa by Moody's Investors Service, Inc. ("Moody's"). In connection with the receipt of such rating, the Fund will be required to maintain a discounted asset coverage with respect to the Cumulative Preferred Stock reflecting guidelines established by Moody's. See "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) through the date of redemption (the "Redemption Price") if the Fund fails to maintain a quarterly asset coverage of at least 200% or fails to maintain the discounted asset coverage required by Moody's. Commencing October , 2008 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 October , 2008, 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 Fund will no longer be required to maintain the discounted asset coverage required by Moody's. However, at the time of such termination, the Cumulative Preferred Stock must have received a rating from at least one nationally recognized statistical rating organization that is at least comparable to the then current rating from Moody's. The Fund will then be required to comply with the guidelines established by such successor rating organization. See "Rating Agency Guidelines" and "Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines". This Prospectus concisely sets forth certain information an investor should know before investing and should be retained for future reference. A Statement of Additional Information dated October , 2003 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 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 by calling the Fund toll-free at (800) 221-4268. 2 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE PREFERRED STOCK, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". YOU SHOULD RELY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. ---------------------- TABLE OF CONTENTS PAGE ---- PROSPECTUS SUMMARY............................................................ 4 FINANCIAL HIGHLIGHTS..........................................................15 TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS...................................18 THE FUND......................................................................20 USE OF PROCEEDS...............................................................20 CAPITALIZATION................................................................21 PORTFOLIO COMPOSITION.........................................................22 INVESTMENT GOAL, POLICIES AND RISKS...........................................22 RATINGS AGENCY GUIDELINES.....................................................28 INVESTMENT ADVISORY AND OTHER SERVICES........................................29 DESCRIPTION OF CUMULATIVE PREFERRED STOCK.....................................32 DESCRIPTION OF CAPITAL STOCK..................................................40 TAXATION......................................................................42 CUSTODIAN, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR................44 UNDERWRITING..................................................................44 LEGAL MATTERS.................................................................46 EXPERTS.......................................................................46 ADDITIONAL INFORMATION........................................................46 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................47 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................47 GLOSSARY......................................................................48 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY This is only a summary. You should review 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........... 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 Fund's primary investment goal is long-term capital growth. Royce & Associates, LLC ("Royce"), the Fund's investment adviser, normally invests at least 75% of the Fund's assets in the equity securities of small- and micro-cap companies, generally with stock market capitalizations ranging from $100 million to $2 billion, that Royce believes are trading significantly below its estimate of their current worth. The Fund may also invest up to 25% of its assets in non-convertible fixed income securities. See "Investment Goal, Policies and Risks". THE OFFERING....... The Fund is offering 8,800,000 shares of % Cumulative Preferred Stock, par value $.001 per share, initial liquidation preference $25.00 per share (the "Cumulative Preferred Stock"), at a purchase price of $25.00 per share. USE OF PROCEEDS.... The Fund will use a substantial portion of the net proceeds from the offering of the Cumulative Preferred Stock to redeem the issued and outstanding shares of 7.80% Cumulative Preferred Stock, par value $.001 per share, of the Fund (the "7.80% Preferred"), and the issued and outstanding shares of 7.30% Tax-Advantaged Cumulative Preferred Stock, par value $.001 per share, of the Fund (the "7.30% Preferred"). In order for the Fund to redeem the 7.80% Preferred and the 7.30% Preferred, the Fund must pay the 7.80% Preferred's aggregate initial liquidation preference of $60,000,000 and the 7.30% Preferred's aggregate initial liquidation preference of $100,000,000, plus an amount equal to accumulated and unpaid dividends (whether or not earned or declared) on the 7.80% Preferred and the 7.30% Preferred through the applicable redemption date. Royce expects to use any proceeds remaining after the redemption of the 7.80% Preferred and the 7.30% Preferred to purchase additional - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- portfolio securities in accordance with the Fund's investment goal and policies. See "Use of Proceeds". DIVIDENDS.......... Dividends on the Cumulative Preferred Stock, at the annual rate of % of the initial liquidation preference of $25.00 per share, are cumulative from the Date of Original Issue and are payable, when, as and if authorized by the Board of Directors and declared by the Fund, out of funds legally available therefor, quarterly on March 23, June 23, September 23, and December 23, commencing on December 23, 2003, to the holders of record on the preceding March 6, June 6, September 6 and December 6, respectively. See "Description of Cumulative Preferred Stock-- Dividends". LONG-TERM CAPITAL GAINS AND QUALIFIED DIVIDEND INCOME .. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act") reduced the individual Federal income tax rate on long-term capital gains and qualified dividend income to a maximum of 15%. Long-term capital gains and qualified dividend income included in distributions of a regulated investment company (such as the Fund) to its stockholders are generally passed through to such stockholders, including preferred stockholders, and taxed at the related rates. See "Tax Attributes of Preferred Stock Dividends" and "Taxation". The 15% income tax rate applicable to capital gains and qualified dividend income is scheduled to expire after December 31, 2008. After this date, absent extension or modification of the relevant legislative provisions, long-term capital gains distributions paid by the Fund generally will be taxable at the previously applicable maximum 20% rate, and distributions attributable to qualified dividend income will be taxed to the stockholder at his or her marginal Federal income tax rate (which generally will be higher than 15%). TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS........ The distributions paid on the Cumulative Preferred Stock will, for Federal income tax purposes, consist of varying proportions of long-term capital gains, qualified dividend income, other ordinary income (including short-term capital gain and interest income and non-qualified dividend income), and/or returns of capital. Ordinary - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- income, other than qualified dividend income but including short-term capital gains, interest income and non-qualified dividend income, is referred to in this Prospectus as "Other Ordinary Income". The Fund is required to allocate long-term capital gains, qualified dividend income and/or Other Ordinary Income proportionately among holders of shares of its Common Stock and the Cumulative Preferred Stock offered hereby. Assuming the 2003 Tax Act had been in effect during the past one, three and five years ended December 31, 2002, the distributions of taxable income by the Fund would have consisted of approximately 100%, 86% and 88% long-term capital gains and qualified dividend income and approximately 0%, 14% and 12% Other Ordinary Income. Certain investors in the Cumulative Preferred Stock may realize a tax benefit to the extent that Fund distributions are composed of long-term capital gains and qualified dividend income rather than more highly taxed Other Ordinary Income. See "Tax Attributes of Preferred Stock Dividends". No assurance can be given, however, as to what percentage, if any, of the distributions to be paid on the Cumulative Preferred Stock will consist of long-term capital gains and/or qualified dividend income. To the extent that such distributions do not consist of long-term capital gains and qualified dividend income, they will be paid from Other Ordinary Income taxable at higher Federal income tax rates, or will represent a return of capital. Subject to statutory limitations, investors may also be entitled to offset the long-term capital gains portion of a Cumulative Preferred Stock dividend with capital losses incurred by such investors. See "Taxation". RATING............. It is a condition to its issuance that the Cumulative Preferred Stock be issued with a rating of Aaa from Moody's Investors Service, Inc. ("Moody's"). The Articles Supplementary creating and fixing the rights and preferences of the Cumulative Preferred Stock (the "Articles Supplementary") contain certain provisions which reflect guidelines established by Moody's (the "Rating Agency Guidelines") in order to obtain such rating on the Cumulative Preferred Stock on the Date of Original Issue. Although it is the Fund's present intention to continue to comply with the Rating Agency Guidelines, the Board of Directors of the Fund may - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- determine that it is not in the best interest of the Fund to continue to comply with the Rating Agency Guidelines. If the Fund voluntarily terminates compliance with the Rating Agency Guidelines, the Fund will no longer be required to maintain the discounted asset coverage required by Moody's. However, at the time of such termination, the Cumulative Preferred Stock must have received a rating from at least one nationally recognized statistical rating organization ("NRSRO") that is at least comparable to the then current rating from Moody's. The Fund will then be required to comply with the guidelines established by such successor NRSRO. 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. Assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the Asset Coverage would have been 415%. 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 from Moody's of a rating on the Cumulative Preferred Stock on the Date of Original Issue of Aaa. See "Description of Cumulative Preferred Stock -- Asset Maintenance -- Basic Maintenance Amount" and "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 shares 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 - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- amount equal to two full years' dividends, holders of Cumulative Preferred Stock, voting as a separate class together with the holders of any other Preferred Stock, 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 Articles Supplementary and the Investment Company Act of 1940, as amended (the "1940 Act"). Except as otherwise indicated in this Prospectus and as otherwise required by applicable law, holders of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of Common Stock and any other Preferred Stock as a single class. See "Description of Cumulative Preferred Stock -- Voting Rights". MANDATORY REDEMPTION....... The Cumulative Preferred Stock is subject to mandatory redemption, in whole or in part, by the Fund in the event that the Fund fails to: (i) maintain the quarterly Asset Coverage, or (ii) 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) through the redemption date (the "Redemption Price"). In the event that shares of Cumulative Preferred Stock 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 so 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 such redemption is up to 275%. In the event that shares of Cumulative Preferred Stock 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 and any other Preferred Stock so that the Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining outstanding shares of Cumulative Preferred - -------------------------------------------------------------------------------- 8 Stock and any other Preferred Stock by up to 10%. See "Description of Cumulative Preferred Stock-- Redemption-- Mandatory Redemption". OPTIONAL REDEMPTION....... Commencing October , 2008 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 October , 2008, 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 all unpaid dividends accumulated to and including the date fixed for such distribution or payment (whether or not earned or declared but excluding interest thereon). The initial liquidation preference is $25.00 per share. See "Description of Cumulative Preferred Stock -- Liquidation Rights". LISTING............ Prior to this offering, there has been no public market for the Cumulative Preferred Stock. Application will be 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 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..General. 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. Liquidity. During an initial period which is not expected to exceed 30 days after the date of issuance, the Cumulative Preferred Stock will not be listed on any - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- 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, the Cumulative Preferred Stock may be illiquid during such period. No assurance can be provided that listing on any securities exchange or market making by the Underwriters will result in the market for Cumulative Preferred Stock being liquid at any time. Credit Rating. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn by Moody's or a successor NRSRO, if any, 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 by Moody's or a successor NRSRO, if any, may have an adverse effect on the liquidity and market value of the Cumulative Preferred Stock. See "Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines". Market, Selection and Style Risk. As with any investment company that invests in common stocks, the value of the Fund's portfolio may decline. For example, if an issuer of a common stock in which the Fund invests experiences financial difficulties, defaults on its senior securities, has the credit rating on its senior securities reduced or withdrawn, or otherwise is affected by adverse market factors, the Fund's portfolio will be negatively impacted. In particular, the prices of small- and micro-cap companies are generally more volatile and their markets are generally less liquid relative to larger-cap companies. Therefore, an investment in the Fund may involve more risk of loss than funds investing in larger-cap companies or other asset classes. See "Investment Goal, Policies and Risks -- Risk Factors -- Investing in Small- and Micro-Cap Companies". In addition, different types of investment styles tend to shift into and out of favor with stock market investors, depending on market and economic conditions. The performance of funds that invest in value-style stocks may at times be better or worse than the performance of stock funds that focus on other types of stocks or have a broader investment style. - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- Declines in the value of the Fund's portfolio may reduce the asset coverage for the Cumulative Preferred Stock or the Fund's income. 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". Sufficiently sharp declines in the value of the Fund's assets could leave the Fund with insufficient assets to redeem all of the Cumulative Preferred Stock for the full redemption price. Indebtedness and Other Preferred Stock. Payments to the holders of Cumulative Preferred Stock of dividends or upon redemption or in liquidation will be subject to the prior payments of interest and repayment of principal then due on any outstanding indebtedness of the Fund and the contemporaneous payment to holders of any other outstanding Preferred Stock of dividends, upon redemption or in liquidation. Assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the Fund would have had no outstanding indebtedness and no Preferred Stock ranking on parity with the Cumulative Preferred Stock offered hereby as to dividends and payment upon liquidation. See "Investment Goal, Policies and Risks -- Borrowing Money and Issuing Senior Securities". The Fund may issue additional Preferred Stock under the circumstances set forth under "Description of Cumulative Preferred Stock -- Limitations on Issuance of Additional Preferred Stock". Leverage and Borrowing. The Fund is authorized to borrow money. So long as the Cumulative Preferred Stock is rated by Moody's, however, the Fund cannot borrow for investment leverage purposes. Borrowings create an opportunity for greater capital appreciation with respect to the Fund's investment portfolio, but at the same time such borrowing is speculative in that it will increase the Fund's exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds. - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- Restrictions on Dividends and Other Distributions. 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. If the Fund does not meet the asset coverage requirements set forth in the 1940 Act or the Articles Supplementary, the Fund will be required to suspend distributions to holders of its Common Stock until such asset coverage is restored. See "Description of Cumulative Preferred Stock -- Dividends". Such a limitation on distributions could jeopardize the Fund's ability to meet the above-referenced distribution requirements. Although the Fund presently intends, to the extent possible, to purchase or redeem Cumulative Preferred Stock and/or any other Preferred Stock to maintain its qualification as a regulated investment company, no assurance can be given that such actions can be effected in time to meet the above-referenced distribution requirements. Redemption. As set forth above, the Cumulative Preferred Stock is subject to both mandatory and optional redemption under specified circumstances at a redemption price equal to $25.00 per share plus accumulated and unpaid dividends (whether or not earned or declared) through the redemption date. Upon redemption, stockholders may not be able to reinvest the proceeds received from the redemption in an investment providing the same or a better rate than that of the Cumulative Preferred Stock. Certain Corporate Governance Provisions. Certain provisions of the Fund's Charter and Bylaws may have the effect of maintaining the continuity of management and may make it more difficult for the Fund's stockholders to change the majority of the Board of Directors. See "Description of Capital Stock -- Certain Corporate Governance Provisions". FEDERAL INCOME TAX CONSIDERATIONS... As set forth above, 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 - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- ability to meet tax-related 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 maintain compliance with such distribution requirements. See "Taxation" for a more complete discussion of these and other Federal income tax considerations. INVESTMENT ADVISER.......... Royce has served as the investment adviser to the Fund since its inception. Royce also serves as investment adviser to other registered management investment companies, privately offered funds and institutional accounts. As of June 30, 2003, Royce managed approximately $10.7 billion in assets for the Fund and other client accounts. Charles M. Royce, Royce's President and Chief Investment Officer, is primarily responsible for managing the Fund's portfolio. He is assisted by Royce's investment staff, including W. Whitney George, Senior Portfolio Manager, Managing Director and Vice President, 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 and Vice President. 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, depending upon the investment performance of the Fund relative to the investment record of the Standard & Poor's SmallCap 600 Index (the "S&P 600"), determined by comparisons made over rolling periods of 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". - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- Royce has volunteered to waive the portion of its investment advisory fee attributable to the liquidation preference of the 7.80% Preferred, the 7.30% Preferred and the Cumulative Preferred Stock (net of the liquidation preference of the 7.80% Preferred and the 7.30% Preferred) for any month when the Fund's net asset value average annual total return since the initial issuance of the 7.80% Preferred, the 7.30% Preferred or the Cumulative Preferred Stock fails to exceed the blended dividend rate on those assets. CUSTODIAN, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR........ State Street Bank and Trust Company, acts as custodian of the cash and other assets of the Fund. Equiserve Trust Company, N.A. acts as transfer agent, dividend-paying agent and registrar for the Fund's shares and as agent to provide notice of redemption and certain voting rights for the Cumulative Preferred Stock. See "Custodian, Dividend-Paying Agent, Transfer Agent and Registrar". - -------------------------------------------------------------------------------- 14 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the periods presented and reflects financial results for a single share of the Fund's Common Stock. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund's Common Stock (assuming reinvestment of all dividends and distributions). The information for the six months ended June 30, 2003 has not been audited and is included in the Statement of Additional Information, which is available upon request. The information for each of the five years in the period ended December 31, 2002 has been audited by Tait, Weller & Baker, whose report, along with the Fund's financial statements, is included in the Statement of Additional Information, which is available upon request. 15
Six months ended June 30, Years ended December 31, 2003 ------------------------------------------------------------------------------ (unaudited) 2002 2001 2000 1999 1998 1997 1996 1995 ----------- ------ ------ ------ ------ ------ ------ ------ ------ NET ASSET VALUE, BEGINNING OF PERIOD.................. $13.22 $17.31 $16.56 $15.77 $15.72 $16.91 $14.32 $13.56 $12.34 INVESTMENT OPERATIONS(a): Net investment income (loss).................. (0.02) (0.02) 0.05 0.18 0.26 0.17 0.21 0.26 0.04 Net realized and unrealized gain (loss) on investments.......... 1.97 (2.25) 2.58 2.58 1.65 0.67 3.85 1.92 2.70 ------------------------------------------------------------------------------------------ Total investment operations............. 1.95 (2.27) 2.63 2.76 1.91 0.84 4.06 2.18 2.74 ------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income... - (0.01) (0.01) (0.03) (0.04) (0.03) (0.03) (0.01) - Net realized gain on investments.......... - (0.28) (0.30) (0.30) (0.32) (0.26) (0.15) (0.06) - Quarterly distributions* (0.13) - - - - - - - - ------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders........... (0.13) (0.29) (0.31) (0.33) (0.36) (0.29) (0.18) (0.07) - ------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS................. 1.82 (2.56) 2.32 2.43 1.55 0.55 3.88 2.11 2.74 DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income... - (0.07) (0.05) (0.13) (0.15) (0.16) (0.19) (0.15) (0.03) Net realized gain on investments............. - (1.44) (1.44) (1.35) (1.22) (1.38) (1.02) (1.00) (1.26) Quarterly distributions* (0.65) - - - - - - - - ------------------------------------------------------------------------------------------ Total distributions to Common Stockholders.... (0.65) (1.51) (1.49) (1.48) (1.37) (1.54) (1.21) (1.15) (1.29) ------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders..... (0.00) (0.02) (0.08) (0.16) (0.13) (0.09) (0.08) (0.11) (0.11) Effect of Common Stock Rights offering or Preferred Stock offering (0.07) - - - - (0.11) - (0.09) (0.12) ------------------------------------------------------------------------------------------ Total capital stock transactions........... (0.07) (0.02) (0.08) (0.16) (0.13) (0.20) (0.08) (0.20) (0.23) ========================================================================================== NET ASSET VALUE, END OF PERIOD(a) $14.32 $13.22 $17.31 $16.56 $15.77 $15.72 $16.91 $14.32 $13.56 ========================================================================================== MARKET VALUE, END OF PERIOD $14.94 $13.25 $15.72 $14.438 $13.063 $13.75 $15.063 $12.625 $11.875 ========================================================================================== TOTAL RETURN(b): Market Value............... 18.4%*** (6.9)% 20.0% 22.7% 5.7% 1.5% 28.8% 16.3% 19.5% Net Asset Value(a)......... 13.8%*** (15.6)% 15.2% 16.6% 11.7% 3.3% 27.5% 15.5% 21.1% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c, d)...... 1.47%** 1.72% 1.61% 1.43% 1.39% 1.31% 1.12% 1.28% 2.01% Management fee expense.. 1.30%** 1.56% 1.45% 1.25% 1.18% 1.10% 0.39% 0.39% 0.97% Interest expense........ - - - - - - 0.45% 0.64% 0.75% Other operating expenses 0.17%** 0.16% 0.16% 0.18% 0.21% 0.21% 0.28% 0.25% 0.29% Net investment income (loss) (0.30)%** (0.09)% 0.35% 1.18% 1.47% 1.11% 1.53% 1.27% 0.34% SUPPLEMENTAL DATA: Net Assets Applicable to Common Stockholders; End of Period (in thousands)...... $699,221 $560,776 $689,141 $623,262 $552,928 $516,963 $494,231 $381,837 $338,970 Liquidation Value of Preferred Stock; End of Period (in thousands)................. $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 $60,000 $60,000 - Portfolio Turnover Rate.... 12% 35% 30% 36% 41% 43% 29% 34% 32% Average Commission Rate Paid (e)................... .0447 .0473 .0515 .0590 .0610 .0632 .0605 .0574 PREFERRED STOCK: Total shares outstanding... 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 2,400,000 2,400,000 - Asset coverage per share... $134.25 $112.62 $132.68 $122.38 $111.40 $105.78 $165.51 $120.15 - Liquidation preference per share...................... $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 - Average market value per share: 7.80% Cumulative Preferred Stock (f)..... $26.09 $26.37 $25.70 $23.44 $24.98 $25.91 $25.70 $25.20 - 7.30% Tax-Advantaged Cumulative Preferred Stock(f)................ $25.60 $25.82 $25.37 $22.35 $24.24 $25.43 - - - NOTES: Total amount outstanding (in thousands)............. - - - - - - $27,801 $40,000 $40,000 Asset coverage per note.... - - - - - - $2,090.89 $1,201.51 $943.93 Average market value per note (f)................... - - - - - - $107.69 $100.68 $96.92 Years ended December 31, ------------------------ 1994 1993 ------ ------ NET ASSET VALUE, BEGINNING OF PERIOD.................. $13.47 $12.50 INVESTMENT OPERATIONS(a): Net investment income (loss).................. 0.04 0.09 Net realized and unrealized gain (loss) on investments............. 0.09 2.12 ------------------- Total investment operations............. 0.13 2.21 ------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income... - - Net realized gain (loss) on investments.......... - - Quarterly distributions* - - ------------------- Total distributions to Preferred Stockholders........... - - ------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS................. 0.13 2.21 DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income... (0.01) (0.09) Net realized gain on investments............. (1.04) (1.06) Quarterly distributions* - - ------------------- Total distributions to Common Stockholders.... (1.05) (1.15) ------------------- CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders..... (0.07)+ (0.01) Effect of Common Stock Rights offering or Preferred Stock offering (0.14) (0.08) ------------------- Total capital stock transactions........... (0.21) (0.09) =================== NET ASSET VALUE, END OF PERIOD(a) $12.34 $13.47 =================== MARKET VALUE, END OF PERIOD $11.00 $12.875 =================== TOTAL RETURN(b): Market Value............... (6.7)% 14.9% Net Asset Value(a)......... 0.1% 17.3% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c, d)...... 2.01% 1.33% Management fee expense.. 1.21% 1.09% Interest expense........ 0.46% - Other operating expenses 0.34% 0.24% Net investment income (loss) 0.31% 0.74% SUPPLEMENTAL DATA: Net Assets Applicable to Common Stockholders; End of Period (in thousands)...... $269,032 $246,558 Liquidation Value of Preferred Stock; End of Period (in thousands)................. - - Portfolio Turnover Rate.... 35% 33% Average Commission Rate Paid (e)................... PREFERRED STOCK: Total shares outstanding... - - Asset coverage per share... - - Liquidation preference per share...................... - - Average market value per share 7.80% Cumulative Preferred Stock (f)..... - - 7.30% Tax-Advantaged Cumulative Preferred Stock(f)................ - - NOTES: Total amount outstanding (in thousands)............. $40,000 - Asset coverage per note.... $768.67 - Average market value per note (f)................... $95.62 -
16 - --------------------------- (a) Commencing June 21, 1995 through December 31, 1997, Net Asset Value per share, Net Asset Value Total Returns and Income from Investment Operations were calculated assuming that the then outstanding convertible notes had been 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, the Net Asset Value per share would have been increased by $0.31 at December 31, 1997, $0.17 at December 31, 1996 and $0.09 at December 31, 1995. (b) The Market Value Total Return is calculated assuming a purchase of Common Stock on the opening of the first business day and a sale on the closing of the last business day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund's Distribution Reinvestment and Cash Purchase Plan. Net Asset Value Total Return is calculated on the same basis, except that the Fund's net asset value is used on the purchase and sale dates instead of market value. Net Asset Value and Market Value Total Return, assuming a continuous stockholder who fully participated in the primary rights offerings, were 14.22% and 18.90%, 22.42% and 19.55%, 0.94% and -6.53%, and 17.82% and 14.60%, for the six months ended June 30, 2003 and the years ended December 31, 1995, 1994, and 1993, respectively. These returns include the positive impact to a stockholder from participation in the primary subscription of these rights offerings resulting from the purchase of shares in each such offering at a discount to the market price and net asset value of the Fund. (c) Expense ratios based on total average net assets including liquidation value of Preferred Stock were 1.16%, 1.38%, 1.30%, 1.12%, 1.06%, 1.06%, 0.99%, 1.20%, 2.01%, 2.01% and 1.33% for the six months ended June 30, 2003 and the years ended December 31, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993, respectively. (d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by Royce would have been 1.67%, 1.82%, 1.65%, 1.51%, 1.48%, 1.34%, 1.14%, 1.31%, 2.04% and 2.02% for the six months ended June 30, 2003 and the years ended December 31, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995 and 1994, respectively. (e) For fiscal years beginning after October 1, 1995, the Fund is required to disclose its average commission rate paid per share for purchases and sales of investments. (f) The average of month-end market values during the period. * To be allocated to net investment income and capital gains at year-end. ** Annualized. *** Not annualized. + Includes distributions paid January 31, 1994 and December 30, 1994. 17 TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS The Fund intends to distribute to its stockholders substantially all of its long-term capital gains, qualified dividend income, and Other Ordinary Income. The Fund is a regulated investment company ("RIC"), and a RIC's distributions generally retain their character as long-term capital gains, qualified dividend income, or Other Ordinary Income when received by its preferred and common stockholders. Thus, distributions paid by the Fund to holders of the Cumulative Preferred Stock will, for Federal income tax purposes, consist of varying proportions of long-term capital gains, qualified dividend income, described below, Other Ordinary Income, and/or returns of capital. The 2003 Tax Act reduced the individual Federal income tax rate on long-term capital gains and qualified dividend income to a maximum of 15%. Qualified dividend income consists of dividends paid by domestic corporations and certain foreign corporations. Under the 2003 Tax Act, the maximum individual Federal income tax rate on Other Ordinary Income is 35%. These tax rates are scheduled to apply through 2008. Assuming the 2003 Tax Act had been in effect during the past one, three and five years ended December 31, 2002, the distributions of taxable income by the Fund would have consisted of approximately 100%, 86% and 88% long-term capital gains and qualified dividend income and approximately 0%, 14% and 12% Other Ordinary Income. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of long-term capital gains and qualified dividend income, which are taxed at lower rates for individuals than Other Ordinary Income. 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 goal is long-term capital growth. Accordingly, certain 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 Fund distributions continue to consist primarily of long-term capital gains and qualified dividend income rather than more highly taxed Other Ordinary Income. The Federal income tax characteristics of the Fund and the taxation of its stockholders are described more fully under "Taxation". ASSUMPTIONS The following table shows examples of the pure Other Ordinary Income equivalent yield that would be generated by the indicated dividend rate on the Cumulative Preferred Stock, assuming distributions consisting of three different proportions of long-term capital gains, qualified dividend income and Other Ordinary Income for an individual investor in the 35% Federal marginal income tax bracket. 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 long-term capital gains, qualified dividend income, Other Ordinary Income and/or return of capital in the year's distribution and (ii) the timing of the realization of gains and losses during the Fund's taxable year. 18 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.
PERCENTAGE OF CUMULATIVE PREFERRED STOCK A CUMULATIVE PREFERRED STOCK ANNUAL DIVIDEND COMPOSED OF ANNUAL DIVIDEND RATE OF - ------------------------------------------------------- ---------------------------------------------------- 5.50% 5.75% 6.00% LONG-TERM CAPITAL GAINS AND QUALIFIED DIVIDEND INCOME** OTHER ORDINARY INCOME IS EQUIVALENT TO AN OTHER ORDINARY INCOME YIELD OF - ----------------------------- ------------------------- ---------------------------------------------------- 90% 10% 7.02% 7.34% 7.66% 75% 25% 6.77% 7.08% 7.38% 50% 50% 6.35% 6.63% 6.92%
Assuming that long-term capital gains and qualified dividend income comprise 90% of a stated Cumulative Preferred Stock dividend and that Other Ordinary Income comprises the remaining 10% of that Cumulative Preferred Stock dividend, the following table shows the pure Other Ordinary Income equivalent yields that would be generated at the stated dividend rate for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK ANNUAL DIVIDEND RATE OF -------------------------------------------------------- 5.50% 5.75% 6.00% 2003 FEDERAL MARGINAL INCOME TAX BRACKET* IS EQUIVALENT TO AN OTHER ORDINARY INCOME YIELD OF - --------------------------------------------------------- -------------------------------------------------------- 35.0%................................................... 7.02% 7.34% 7.66% 33.0%................................................... 6.83% 7.14% 7.45% 28.0%................................................... 6.39% 6.68% 6.98% 25.0%**................................................. 6.16% 6.44% 6.72%
- -------------- * Annual taxable income levels corresponding to the 2003 Federal marginal tax brackets are as follows: 35.0% -- over $311,950 for both single and joint returns; 33.0% -- $143,501 - $311,950 for single returns, $174,701 - $311,950 for joint returns; 28.0% -- $68,801 - $143,500 for single returns, $114,651 - $174,700 for joint returns; and 25.0% -- $28,401 - $68,800 for single returns, $56,801 - $114,650 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. ** Assumes that such individuals are taxed at a 15% rate on long-term capital gains and qualified dividend income received from the Fund. 19 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. Assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the Fund would have had 48,820,755 shares of Common Stock issued and outstanding, with an aggregate net asset value of $692,009,396, and 8,800,000 shares of Cumulative Preferred Stock issued and outstanding, with an aggregate initial liquidation preference of $220,000,000. 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's primary investment goal is long-term capital growth. Royce normally invests at least 75% of the Fund's assets in the equity securities of small- and micro-cap companies, generally with stock market capitalizations ranging from $100 million to $2 billion, that Royce believes are trading significantly below its estimate of their current worth. The Fund may also invest up to 25% of its assets in non-convertible fixed income securities. An investment in the Fund is not appropriate for all investors. No assurance can be given that the Fund's investment goal will be realized. See "Investment Goal, Policies and Risks". USE OF PROCEEDS The net proceeds from the offering of the Cumulative Preferred Stock are estimated at $212,788,200, after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Fund will use a substantial portion of the net proceeds from the offering of the Cumulative Preferred Stock to redeem the 7.80% Preferred and the 7.30% Preferred. In order for the Fund to redeem the 7.80% Preferred and the 7.30% Preferred, the Fund must pay the 7.80% Preferred's aggregate initial liquidation preference of $60,000,000 and the 7.30% Preferred's aggregate initial liquidation preference of $100,000,000, plus an amount equal to accumulated and unpaid dividends (whether or not earned or declared) on the 7.80% Preferred and the 7.30% Preferred through the applicable redemption date. Royce expects to invest any proceeds remaining after the redemption of the 7.80% Preferred and the 7.30% Preferred in accordance with the Fund's investment goal and policies within approximately six months from the completion of the offering, depending on market conditions for the types of securities in which the Fund principally invests. Pending any such investment, the proceeds will be held in high quality short-term debt securities and instruments and money market mutual funds. Any delay by Royce in investing such remaining proceeds may hinder the Fund's ability to achieve its investment goal. 20 CAPITALIZATION The following table sets forth the capitalization of the Fund as of June 30, 2003, and as adjusted to give effect to the issuance of the Cumulative Preferred Stock and the redemption of the 7.80% Preferred and the 7.30% Preferred.
OUTSTANDING AS ADJUSTED ----------- ----------- Preferred stock, $.001 par value per share, authorized 50,000,000 shares of which the following series have been classified and designated: 7.80% Cumulative Preferred Stock, authorized 10,000,000 shares, issued and outstanding 2,400,000 shares........................... $ 60,000,000 $ - 7.30% Tax-Advantaged Cumulative Preferred Stock, authorized 10,000,000 shares, issued and outstanding 4,000,000 shares........ 100,000,000 - % Cumulative Preferred Stock, as adjusted, authorized 8,800,000 shares, issued and outstanding 8,800,000 shares......... - 220,000,000 -------------- -------------- $160,000,000 $220,000,000 ============== ============== Common stock, $.001 par value per share: Authorized 150,000,000 shares, issued and outstanding 48,820,755 shares.......................................... $ 48,821 $ 48,821 Additional paid-in capital...................................... 566,557,501 559,345,701(1) Accumulated net investment loss................................. (895,291) (895,291) Accumulated net realized gain on investments.................... 15,009,715 15,009,715 Net unrealized appreciation on investments...................... 154,131,809 154,131,809 Quarterly and accrued distributions............................. (35,631,359) (35,631,359) -------------- -------------- Net assets applicable to outstanding common stock............... $699,221,196 $692,009,396 ============== ============== - ------------- (1) After deducting underwriting discounts and estimated costs of this offering of $7,211,800.
21 PORTFOLIO COMPOSITION The following tables set forth certain information with respect to the Fund's investment portfolio as of June 30, 2003. VALUE PERCENTAGE ------------- ------------- Common stocks................................................................... $ 783,631,546 91.1% Preferred stocks................................................................ 533,868 0.1% Corporate bonds................................................................. 1,403,780 0.2% U.S. Treasury obligations....................................................... 27,649,425 3.2% Repurchase agreement............................................................ 46,399,000 5.4% ------------- ------------- Total investments........................................................ $ 859,617,619 100.0% ============= ============= SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO Technology...................................................................... $173,613,750 20.2% Industrial Products............................................................. 115,236,150 13.4% Industrial Services............................................................. 115,056,767 13.4% Financial Intermediaries........................................................ 80,390,768 9.3% Health.......................................................................... 70,104,985 8.1% Consumer Products............................................................... 60,162,248 7.0% Natural Resources............................................................... 56,991,877 6.6% Financial Services.............................................................. 53,549,518 6.2% Consumer Services............................................................... 44,174,133 5.1% Miscellaneous................................................................... 14,181,950 1.7% Utilities....................................................................... 169,400 0.1% ------------- ------------- Total common stocks...................................................... $783,631,546 91.1% ============= ============= OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS Number of issuers............................................................... 452 Median market capitalization.................................................... $821 million
INVESTMENT GOAL, POLICIES AND RISKS INVESTMENT GOAL The Fund's primary investment goal and one of its fundamental policies is long-term capital growth. Royce normally invests at least 75% of the Fund's assets in the equity securities of small- and micro-cap companies, with stock market capitalizations ranging from $100 million to $2 billion. Stock market capitalization is calculated by multiplying the total number of common shares issued and outstanding by the per share market price of the common stock. See "--Changes in Investment Goal and Policies" below. There are market risks inherent in any investment, and no assurance can be given that the Fund's primary investment goal will be achieved. Although the Fund may seek current income by investing in dividend-paying equity securities of small- and micro-cap companies, this is not the Fund's primary investment goal. INVESTMENT POLICIES Royce uses a value method in managing the Fund's assets. In selecting securities for the Fund, Royce evaluates the quality of a company's balance sheet, the level of its cash flows and various measures of a company's profitability. Royce then uses these factors to assess the 22 company's current worth, basing this assessment on either what it believes a knowledgeable buyer might pay to acquire the entire company or what it thinks the value of the company should be in the stock market. This analysis takes a number of factors into consideration, including the company's future growth prospects and current financial condition. Royce invests in securities of companies that are trading significantly below its estimate of the company's "current worth" in an attempt to reduce the risk of overpaying for such companies. Royce's value approach strives to reduce some of the other risks of investing in small- and micro-cap companies (for the Fund's portfolio taken as a whole) by evaluating various other risk factors. Royce attempts to lessen financial risk by buying companies that combine strong balance sheets with low leverage. While no assurance can be given that this risk-averse value approach will be successful, Royce believes that it can reduce some of the risks of investing in the securities of small- and micro-cap companies, which are inherently fragile in nature and whose securities have substantially greater market price volatility. Although Royce's approach to security selection seeks to reduce downside risk to the Fund's portfolio, especially during periods of broad small-cap market declines, it may also potentially have the effect of limiting gains in strong small-cap up markets. 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, less government regulation of foreign securities markets and the possibility of imposition of exchange controls, nationalization or expropriation of assets and more difficulty obtaining information on the foreign companies. 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. There are no limits on the maturity or duration of the fixed income securities in which the Fund may invest. Two of the main risks of investing in fixed income securities are credit risk and interest rate risk. 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) 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. As of the date of this Prospectus, interest rates are near historical lows which makes it more likely that they will increase in the future which could, in turn, result in a decline in the market value of the fixed income securities held by the Fund. Warrants, Rights or Options. The Fund may invest up to 5% of its 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 23 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. Securities Lending. The Fund may lend up to 25% of its assets to brokers, dealers and other financial institutions. However, under the Rating Agency Guidelines, the Fund may not lend portfolio securities in excess of 15% of its total assets. The Rating Agency Guidelines may in the future be amended to permit the Fund to lend a greater percentage of its total assets. Securities lending allows the Fund to retain ownership of the securities loaned and, at the same time, to earn additional income. Since there may be delays in the recovery of loaned securities or even a loss of rights in collateral supplied should the borrower fail financially, loans will be made only to parties that participate in a global securities lending program organized and monitored by the Fund's custodian and who are deemed by it to be of good standing. Furthermore, such loans will be made only if, in Royce's judgment, the consideration to be earned from such loans would justify the risk. The current view of the staff of the Securities and Exchange Commission (the "Commission") is that a fund may engage in such loan transactions only under the following conditions: (i) the fund must receive 100% collateral in the form of cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (ii) the borrower must increase the collateral whenever the market value of the securities loaned (determined on a daily basis at the close of regular trading) rises above the value of the collateral; (iii) after giving notice, the fund must be able to terminate the loan at any time; (iv) the fund must receive reasonable interest on the loan or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest or other distributions on the securities loaned; (v) the fund may pay only reasonable custodian fees in connection with the loan; and (vi) the fund must be able to vote proxies on the securities loaned, either by terminating the loan or by entering into an alternative arrangement with the borrower. Temporary Investments. The assets of the Fund are normally invested in the equity securities of small- and micro-cap 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 agreements 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. 24 CHANGES IN INVESTMENT GOAL AND POLICIES The Fund's primary investment goal of long-term capital growth 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 Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class, and a majority of the 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" in the Statement of Additional Information, the Fund does not consider its other policies, such as seeking current income, to be fundamental, and such policies may be changed by the Board of Directors without stockholder approval or prior notice to stockholders. The Fund's investment policies are subject to certain restrictions. See "Investment Restrictions" in the Statement of Additional Information. RISK FACTORS - INVESTING IN SMALL- AND MICRO-CAP COMPANIES Royce views the large and diverse universe of small-cap companies as having two investment segments or tiers. Royce defines small-cap as those companies with market capitalizations between $400 million and $2 billion; it refers to the segment with market capitalizations less than $400 million as micro-cap. The securities of small- and micro-cap companies offer investment opportunities and additional risks. They may not be well known to the investing public, may not be significantly owned by institutional investors, and may not have steady earnings growth. 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 larger capitalization stocks. As a result, the purchase or sale of more than a limited number of shares of a small- or micro-cap security may affect its market price. Royce may need a considerable amount of time to purchase or sell its positions in these securities, particularly when other accounts managed by Royce or other investors are also seeking to purchase or sell them. Accordingly, Royce's investment focus on small- and micro-cap companies generally requires it to have a long-term (at least three years) investment outlook for a portfolio security. The micro-cap segment consists of more than 5,900 companies. These companies are followed by relatively few, if any, securities analysts, and there tends to be less publicly available information about them. Their securities generally have even more limited trading volumes and are subject to even more abrupt or erratic market price movements than are the securities in the upper tier, and Royce may be able to deal with only a few market-makers when purchasing and selling these securities. Such companies may also have limited markets, financial resources or product lines, may lack management depth and may be more vulnerable to adverse business or market developments. These conditions, which create greater opportunities to find securities trading well below Royce's estimate of the company's current worth, also involve increased risk. This leads Royce to more broadly diversify most of the Fund's assets invested in micro-cap stocks by holding proportionately smaller positions in more companies. 25 The upper tier of the small-cap universe of securities consists of approximately 1,500 companies. In this segment, there is a relatively higher level of ownership by institutional investors and more research coverage by securities analysts than generally exists for micro-cap companies. This greater attention makes the market for these securities more efficient than that of micro-cap companies because they have somewhat greater trading volumes and narrower bid/ask spreads. As a result, Royce normally employs a more concentrated approach when investing in the upper tier of small-caps, holding proportionately larger positions in a relatively limited number of securities. RISK FACTORS - LIQUIDITY RISK During an initial period which is not expected to exceed 30 days after the date of issuance, 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, the Cumulative Preferred Stock may be illiquid during such period. No assurance can be provided that listing on any securities exchange or market making by the Underwriters will result in the market for Cumulative Preferred Stock being liquid at any time. RISK FACTORS - CREDIT RATING RISK The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn by Moody's or a successor NRSRO, if any, 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 by Moody's or a successor NRSRO, if any, may have an adverse effect on the liquidity and market value of the Cumulative Preferred Stock. See "Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines". RISK FACTORS - LEVERAGE AND BORROWING The Fund is authorized to borrow money. So long as the Cumulative Preferred Stock is rated by Moody's, however, the Fund cannot borrow for investment leverage purposes. Borrowings create an opportunity for greater capital appreciation with respect to the Fund's investment portfolio, but at the same time such borrowing is speculative in that it will increase the Fund's exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds. RISK FACTORS - RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS 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. If the Fund does not meet the asset coverage requirements set forth in the 1940 Act or the Articles Supplementary, the Fund will be required to suspend distributions to holders of its Common Stock until such asset coverage is restored. See "Description of Cumulative Preferred Stock -- Dividends". Such a limitation on distributions could jeopardize the Fund's ability to meet the above-referenced distribution requirements. Although the Fund presently intends, to the extent possible, to purchase or redeem 26 Cumulative Preferred Stock and/or any other Preferred Stock to maintain its qualification as a regulated investment company, no assurance can be given that such actions can be effected in time to meet the above-referenced distribution requirements. See "Taxation" in this Prospectus and the Statement of Additional Information. RISK FACTORS - REDEMPTION The Cumulative Preferred Stock is subject to both mandatory and optional redemption under specified circumstances at a redemption price equal to $25.00 per share plus accumulated and unpaid dividends (whether or not earned or declared) through the redemption date. Upon redemption, stockholders may not be able to reinvest the proceeds received from the redemption in an investment providing the same or a better rate than that of the Cumulative Preferred Stock. For a description of the circumstances in which shares of Cumulative Preferred Stock may be redeemed, see "Description of Cumulative Preferred Stock -- Redemption" in this Prospectus. BORROWING MONEY AND ISSUING SENIOR SECURITIES The 1940 Act and the Fund's fundamental investment policies and restrictions (see "Investment Restrictions" in the Statement of Additional Information) permit the Fund to borrow money from banks and certain other lenders and to issue and sell senior securities (as defined by the 1940 Act) representing other forms of 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, as defined by the 1940 Act, of the Fund, which means, among other things, it is senior in priority to the Fund's Common Stock; however, it will rank junior to any future indebtedness 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. Assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the Fund would have had 48,820,755 shares of Common Stock issued and outstanding, with an aggregate net asset value of $692,009,396, and 8,800,000 shares of Cumulative Preferred Stock, par value $.001 per share, with an aggregate initial liquidation preference of $220,000,000, issued and outstanding, and no outstanding indebtedness. Accordingly, assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of such date, the Fund could have, under its investment policies and restrictions, issued and sold senior securities 27 representing indebtedness of up to approximately $456 million or additional shares of Preferred Stock having an aggregate involuntary liquidation preference of up to approximately $472 million or various combinations of lesser amounts of both securities representing indebtedness and Preferred Stock. 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 from Moody's of a rating of Aaa for the Cumulative Preferred Stock on the Date of Original Issue. Moody's, an NRSRO, 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 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 by the applicable cure date, 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: (i) exclude certain types of securities in which the Fund may invest from Moody's Eligible Assets and, therefore, from the Portfolio Calculation, (ii) prohibit the Fund's acquisition of futures contracts or options on futures contracts, (iii) prohibit reverse repurchase agreements, (iv) limit the writing of options on portfolio securities and (v) limit the lending of portfolio securities to 15% 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 goal. 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 Rating Agency 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. The terms of the Cumulative Preferred Stock provide that the interpretation or applicability of any or all of the Rating Agency Guidelines may from time to time be modified by the Board of Directors of the Fund in its sole discretion based on a determination by the Board of Directors that such action is necessary or appropriate with respect to the Cumulative Preferred Stock; provided, however, that 28 the Board of Directors receives written confirmation from Moody's that any such modification would not impair the then current rating assigned to the Cumulative Preferred Stock by Moody's. 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. However, at the time of such termination, the Cumulative Preferred Stock must have received a rating from at least one NRSRO that is at least comparable to the then current rating from Moody's. The Fund will then be required to comply with the guidelines established by such successor NRSRO. 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. INVESTMENT ADVISORY AND OTHER SERVICES Royce & Associates, LLC (which term as used in this Prospectus includes its corporate predecessor) ("Royce"), a Delaware limited liability company, is an investment advisory firm whose predecessor was organized in February 1967. Royce is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Royce became 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 June 30, 2003, Royce managed approximately $10.7 billion in assets for the Fund and other client accounts. Royce's principal business address is 1414 Avenue of the Americas, New York, New York 10019. On October 1, 2001, Royce became an indirect wholly-owned subsidiary of Legg Mason, Inc. ("Legg Mason"). On March 31, 2002, Royce's corporate predecessor was merged into Royce Holdings, LLC (a wholly-owned subsidiary of Legg Mason), which then changed its name to Royce & Associates, LLC. As a result of this merger, Royce & Associates, LLC became the Fund's investment adviser and a direct wholly-owned subsidiary of Legg Mason. Founded in 1899, Legg Mason is a publicly-held financial services company primarily engaged in providing asset management, securities brokerage, investment banking and related financial services through its subsidiaries. As of June 30, 2003, Legg Mason's asset management subsidiaries had aggregate assets under management of approximately $215.4 billion. Under the Fund's Articles of Incorporation, as amended and supplemented (the "Charter"), and Maryland 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 29 direction it may receive from the Fund's Board of Directors, which periodically reviews the Fund's investment performance. PORTFOLIO MANAGEMENT Royce is responsible for the management of the Fund's assets. Royce has been investing in small-cap companies with a value approach for more than 25 years. Its offices are located at 1414 Avenue of the Americas, New York, NY 10019. Charles M. Royce has been the firm's President and Chief Investment Officer during this period. He is also the primary portfolio manager of the Fund. Royce's investment staff also includes three other Senior Portfolio Managers: W. Whitney George, Managing Director and Vice President; Boniface A. Zaino, Managing Director; and Charles R. Dreifus, Principal. Royce's investment staff is assisted by Jack E. Fockler, Jr., Managing Director and Vice President. Mr. George has been a Portfolio Manager at Royce since 2000, and prior thereto was a Senior Analyst. He has been employed by Royce since 1991. Mr. Zaino joined Royce in April 1998 as a Senior Portfolio Manager and previously was a Portfolio Manager and Group Managing Director at Trust Company of the West (since 1984). Mr. Dreifus joined Royce in February 1998 as a Senior Portfolio Manager and previously was a Portfolio Manager and Managing Director (since June 1995) and General Partner (from 1983 until June 1995) of Lazard Freres & Co. LLC. Mr. Fockler has been employed by Royce since 1989 as its Director of Marketing. INVESTMENT ADVISORY AGREEMENT Under the Investment Advisory Agreement between the Fund and Royce dated October 1, 2001 (the "Investment Advisory Agreement"), 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; and pays all expenses incurred in performing its investment advisory duties under the Investment Advisory 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 (including assets obtained from the sale of Preferred Stock) and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to 30 the investment record of the S&P 600. A rolling period of 60 months ending with the most recent calendar month is utilized for measuring performance and average net assets, as described below. 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. As a result, the actual investment advisory fee rate may at times be greater than the fee rate paid by many other funds. 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 the outstanding Cumulative Preferred Stock and for any other Preferred Stock that may be issued and sold by the Fund. The following table illustrates, on an annualized basis, the full range of permitted increases or decreases to the Basic Fee.
DIFFERENCE BETWEEN PERFORMANCE ADJUSTMENT TO 1% OF FUND AND % CHANGE IN S&P 600 RECORD BASIC FEE FEES AS ADJUSTED - -------------------------------------- ---------------- ----------------- +12 or more +0.50% 1.50% +11 +0.45% 1.45% +10 +0.40% 1.40% +9 +0.35% 1.35% +8 +0.30% 1.30% +7 +0.25% 1.25% +6 +0.20% 1.20% +5 +0.15% 1.15% +4 +0.10% 1.10% +3 +0.05% 1.05% +/-2 0.00% 1.00% -3 -0.05% 0.95% -4 -0.10% 0.90% -5 -0.15% 0.85% -6 -0.20% 0.80% -7 -0.25% 0.75% -8 -0.30% 0.70% -9 -0.35% 0.65% -10 -0.40% 0.60% -11 -0.45% 0.55% -12 or less -0.50% 0.50%
31 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 at net asset value on the record date, 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). 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. Royce has volunteered to waive the portion of its investment advisory fee attributable to the liquidation preference of the 7.80% Preferred, the 7.30% Preferred and the Cumulative Preferred Stock (net of the liquidation preference of the 7.80% Preferred and the 7.30% Preferred) for any month when the Fund's net asset value average annual total return since the initial issuance of the 7.80% Preferred, the 7.30% Preferred or the Cumulative Preferred Stock fails to exceed the blended dividend rate on those assets. Because Royce's fee is partially based on the average net assets of the Fund (including assets obtained from the sale of the Cumulative Preferred Stock and other Preferred Stock), Royce has generally benefited from the Fund's issuance of Preferred Stock. CODE OF ETHICS The Fund's Board of Directors approved a Code of Ethics under Rule 17j-1 of the 1940 Act that covers the Fund and Royce. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including, in certain cases, securities that may be purchased or held by the Fund. See "Code of Ethics and Related Matters" in the Statement of Additional Information. 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 Charter, including the Articles Supplementary, the form of which is filed as an exhibit to the Fund's Registration Statement, and the Bylaws. Certain of the capitalized terms used herein are defined in the Glossary that appears at the end of this Prospectus. GENERAL The Cumulative Preferred Stock offered hereby is a senior security, as defined by the 1940 Act, of the Fund, which means, among other things, it is senior in priority to the Fund's Common Stock; however, it will rank junior to any future indebtedness of the Fund. Under the terms of the Cumulative Preferred Stock, the Fund is initially authorized to issue up to 8,800,000 shares of Cumulative Preferred Stock. No fractional shares of Cumulative Preferred Stock will be issued. The Board of Directors reserves the right to issue additional shares of Cumulative 32 Preferred Stock or other Preferred Stock from time to time, subject to the restrictions in the Charter and the 1940 Act. The shares of Cumulative Preferred Stock will, upon issuance, be fully paid and nonassessable and will have no appraisal, preemptive, exchange or conversion rights. Any shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be returned to the status of authorized but unissued shares of Preferred Stock, without designation as to series. The Board of Directors may by resolution classify or reclassify any authorized but unissued Preferred Stock from time to time by setting or changing the preferences, rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions 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 authorized by the Board of Directors and declared by the Fund out of funds legally available therefor, cumulative cash dividends at the annual rate of % per share (computed on the basis of a 360-day year consisting of twelve 30-day months) of the initial 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 December 23, 2003 (or, if any such day is not a Business Day, then on the next succeeding Business Day), 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 (or, if any such day is not a Business Day, then on the next succeeding Business Day), 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 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 33 least equal to the Basic Maintenance Amount and the Fund will maintain the Asset Coverage (see "-- Asset Maintenance" and "-- Redemption" below), (ii) full cumulative dividends on shares of Cumulative Preferred Stock due on or prior to the date of the 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 Charter. 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" below. 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 Cumulative Preferred Stock. These requirements are summarized below. Asset Coverage. For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will be required 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. Assuming the Fund had issued and sold the Cumulative Preferred Stock and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the Asset Coverage immediately following such issuance and sale of the Cumulative Preferred Stock and such redemption of the 7.80% Preferred and the 7.30% Preferred (after giving effect to the deduction of the underwriting discounts and estimated offering expenses for such shares) would have been computed as follows: Value of Fund assets less liabilities not constituting senior securities $912,009,396 - -------------------------------------------------- = ------------ = 415% Senior securities representing indebtedness plus $220,000,000 aggregate liquidation preference of the Cumulative Preferred Stock Basic Maintenance Amount. For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will be required to maintain, as of each Valuation Date, portfolio holdings meeting specified guidelines of Moody's, as described under "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 any other Preferred Stock, 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. 34 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 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 ("Basic Maintenance Report"). Within ten Business Days after delivery of such report relating to the last Quarterly Valuation Date of the Fund's fiscal year, the Fund will deliver a letter prepared by the Fund's independent accountants regarding the accuracy of the calculations made by the Fund in such a 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, Maryland law and any agreement in respect of indebtedness of the Fund to which it may be a party or by which it may be bound) 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 35 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 and/or any other 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. Optional Redemption. Prior to October , 2008, 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 Board of Directors of the Fund, to maintain the Fund's status as a RIC under the Code. Commencing October , 2008 and thereafter, the Fund may at its option redeem shares of Cumulative Preferred Stock at any time in whole or in part at the Redemption Price. Such redemptions are subject to the limitations of the 1940 Act, Maryland law and any agreement in respect of indebtedness of the Fund to which it may be a party or by which it may be bound. Redemption Procedures. A Notice of Redemption will be given to the holders of record of Cumulative Preferred Stock to be redeemed 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) that dividends on the shares to be redeemed will cease to accumulate on such redemption date and (vi) the provision of the Charter under which the redemption is being made. No defect in the Notice of Redemption or in the 36 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 or payment in connection with any such liquidation, dissolution or winding up. If, upon any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock and any other outstanding 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 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, 37 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 will automatically increase 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 and the number of directors constituting the Board of Directors will automatically decrease accordingly. So long as shares of the Cumulative Preferred Stock are outstanding, the Fund will not, without the affirmative vote of the holders of a majority 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. Under Maryland law, the terms of stock may be made dependent on facts ascertainable outside of the charter of a corporation, including an action or determination of the board of directors. Accordingly, the interpretation or applicability of any or all of the Rating Agency Guidelines may from time to time be modified by the Board of Directors in its sole discretion based on a determination by the Board of Directors that such action is necessary or appropriate with respect to the Cumulative Preferred Stock; provided, however, that the Board of Directors receives written confirmation from Moody's that any such modification would not impair the then current rating assigned to the Cumulative Preferred Stock 38 by Moody's. 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 goal or changes in the investment restrictions described as fundamental policies under "Investment Restrictions" in the Statement of Additional Information. 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 Corporate Governance Provisions". TERMINATION OF RATING AGENCY GUIDELINES The terms of the Cumulative Preferred Stock provide that if the Board of Directors of the Fund determines that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines, 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 Preferred Stock must have received a rating from at least one NRSRO that is at least comparable to the then current rating from Moody's. 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. However, the Fund will then be required to comply with the guidelines established by the successor NRSRO. 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 Charter provides that the Fund may issue and sell up to 41,200,000 additional shares of one or more other series of Preferred Stock (assuming redemption of the 7.80% Preferred and the 7.30% Preferred as discussed under "Use of Proceeds"), 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 39 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 terms of the Cumulative Preferred Stock provide that, to the extent permitted by law, the Board of Directors may modify or interpret the terms of the Cumulative Preferred Stock to resolve any inconsistency or ambiguity or remedy any formal defect so long as such modification or interpretation 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 adversely affect the then current rating on the Cumulative Preferred Stock by Moody's or any successor NRSRO. 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. Redemption of the Cumulative Preferred Stock is subject to the terms of the Articles Supplementary. 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 and Maryland law. 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. The Cumulative Preferred Stock will be held in book-entry only form. Shares of Cumulative Preferred Stock will not be delivered in certificated form to individual purchasers thereof. The laws of some jurisdictions require that certain purchasers of Cumulative Preferred Stock take physical delivery of such securities in certificated form. Such limits and laws may impair the ability to transfer beneficial interests in shares of Cumulative Preferred Stock. See "Book-Entry System" in the Statement of Additional Information for more information about DTC and its procedures. 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. Under Maryland law and the rules of the NYSE, the Fund generally is required to hold annual meetings of its stockholders. 40 PREFERRED STOCK Under the Charter, the Fund's Board of Directors has authority to classify and reclassify any authorized but unissued shares of stock into other classes or series of stock, including Preferred Stock, and to cause the Fund to issue such shares. The Fund's Board of Directors currently 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 8,800,000 shares of Preferred Stock as the Cumulative Preferred Stock, all of which are being offered hereby. See "Description of Cumulative Preferred Stock". The Board of Directors previously classified and designated 10,000,000 shares of Preferred Stock as 7.80% Preferred, 2,400,000 of which are issued and outstanding, and 10,000,000 shares of Preferred Stock as 7.30% Preferred, 4,000,000 of which are issued and outstanding. The terms of the 7.80% Preferred and the 7.30% Preferred are substantially similar to the terms of the Cumulative Preferred Stock. The Fund will use a substantial portion of the net proceeds from the issuance and sale of the Cumulative Preferred Stock to redeem the 7.80% Preferred and the 7.30% Preferred. So long as any shares of Cumulative Preferred Stock are outstanding, the Charter provides that the Fund may issue and sell up to 41,200,000 additional shares of one or more other series of Preferred Stock (assuming redemption of the 7.80% Preferred and the 7.30% Preferred as discussed under "Use of Proceeds"). ------------------------ The following table shows as of June 30, 2003 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.
AMOUNT OUTSTANDING (EXCLUSIVE OF AMOUNT HELD BY FUND AMOUNT HELD BY FUND TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS OWN ACCOUNT FOR ITS OWN ACCOUNT) - -------------- ----------------- ------------------- -------------------- Common Stock..................................... 150,000,000 0 48,820,755 Preferred Stock.................................. 50,000,000 0 6,400,000 7.80% Preferred Stock....................... 10,000,000 0 2,400,000 7.30% Preferred Stock....................... 10,000,000 0 4,000,000
CERTAIN CORPORATE GOVERNANCE PROVISIONS The six Fund Directors who are elected by the holders of Common Stock and Preferred Stock voting together are divided into three classes, each serving a staggered term of three years and until a successor is elected and qualifies. The two Directors elected only by the holders of Preferred Stock stand for election at each annual meeting of stockholders. Accordingly, it likely would take a number of years for stockholders to change a majority of the Board of Directors. Vacancies on the Board of Directors for one or more of the six classified positions may be filled 41 by the remaining Directors for the balance of the term of the class and until a successor is elected and qualifies. The Fund's Bylaws permit stockholders to call a special meeting of stockholders only if certain procedural requirements are met and the request is made by stockholders entitled to cast at least a majority of the votes entitled to be cast at such a meeting. The Bylaws also require that advance notice be given to the Fund in the event a stockholder desires to nominate a person for election to the Board of Directors or to transact any other business at an annual meeting of stockholders. With respect to an annual meeting of stockholders, notice of any such nomination or business must be delivered to or received at the principal executive offices of the Fund not less than 90 calendar days nor more than 120 calendar days prior to the anniversary of the date of mailing of the notice for the preceding year's annual meeting (subject to certain exceptions). Any advance notice by a stockholder must be accompanied by certain information as provided in the Bylaws. The Bylaws contain similar advance notice provisions with respect to special meetings of stockholders. Certain provisions of the 1940 Act and the Charter require a separate additional vote of the holders of Preferred Stock to approve certain transactions, including certain mergers, asset dispositions and conversion of the Fund to open-end status. These provisions may have the effect of maintaining the continuity of management and thus may make it more difficult for the Fund's stockholders to change the majority of Directors. TAXATION The Fund intends to continue to qualify for the special tax treatment afforded RICs under the Internal Revenue Code of 1986, as amended (the "Code"). As long as it so qualifies, in any taxable year in which it distributes at least 90% of its investment company taxable income ("ICTI") (as that term is defined in the Code without regard to the deduction for dividends paid) for such taxable year, the Fund will not be subject to Federal income tax on the part of its ICTI 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. The Fund intends to distribute substantially all of such income. Under the 2003 Tax Act, Fund distributions comprised of dividends from domestic corporations and certain foreign corporations (generally, corporations incorporated in a possession of the United States, some corporations eligible for treaty benefits under a treaty with the United States and corporations whose stock is readily tradable on an established securities market in the United States) are eligible for taxation at a maximum tax rate of 15% also applicable to capital gains in the hands of individual shareholders. Capital gain dividends likewise, are taxed at the reduced maximum rate of 15% for non-corporate taxpayers. These tax rates are scheduled to apply through 2008. 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 long-term capital gains, qualified dividend income and Other Ordinary Income. 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 holders of its Common Stock until the asset coverage is restored. See "Description of Cumulative Preferred Stock -- 42 Dividends". Such a suspension of distributions might prevent the Fund from distributing 90% of its ICTI, as is required in order to avoid Fund-level taxation of such income. Upon any failure to meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fundmay, and in certain circumstances will be required to, partially redeem shares of its 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. The Internal Revenue Service (the "IRS") currently requires that a RIC that has two or more classes of stock allocate to each class proportionate amounts of each type of its income (e.g., capital gains, qualified dividend income and Other Ordinary Income). Accordingly, the Fund intends to designate dividends paid to holders of Cumulative Preferred Stock as comprised of capital gains, qualified dividend income and/or Other Ordinary Income, as applicable, in proportion to the Cumulative Preferred Stock's share of total dividends paid during the year. 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. In the opinion of Sidley Austin Brown & Wood LLP, the shares of Cumulative Preferred Stock will be treated as stock of the Fund for Federal income tax purposes and distributions with respect to such shares (other than distributions in redemption of the Cumulative Preferred Stock under section 302(b) of the Code) will constitute dividends to the extent of the Fund's current and accumulated earnings and profits, as calculated for Federal income tax purposes. Nevertheless, the IRS might take a contrary position, asserting, for example, that the shares of Cumulative Preferred Stock constitute debt of the Fund. The Fund believes this position, if asserted, would be unlikely to prevail. If this position were upheld, however, the discussion of the treatment of distributions herein, and in the Statement of Additional Information, would not apply. Instead, distributions by the Fund to holders of shares of Cumulative Preferred Stock would constitute taxable interest income, whether or not they exceeded the earnings and profits of the Fund. In such event, the designations of particular types of income, such as capital gains and qualified dividend income, would not be effective. Ordinary income dividends (but not capital gain dividends) paid to stockholders who are non-resident aliens or foreign entities generally will be subject to a 30% United States withholding tax unless a lower treaty rate applies. 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. Stockholders generally will not be entitled to claim a credit or deduction with respect to such taxes paid by the Fund. 43 By law, unless you qualify for an exemption from backup withholding (for instance, if you are a corporation), your dividends and redemption proceeds will be subject to a backupwithholding tax (currently 28%) if you have not provided a tax identification number or social security number or if the number you have provided is incorrect. This section summarizes some of the consequences under Federal tax law of an investment in Cumulative Preferred Stock of the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of purchasing and holding Cumulative Preferred Stock in the Fund under all applicable tax laws. For additional tax discussion, see "Taxation" in the Statement of Additional Information. CUSTODIAN, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR State Street Bank and Trust Company, Two Heritage Drive, North Quincy, Massachusetts 02171, acts as custodian of the cash and other assets of the Fund. Equiserve Trust Company, N.A., PO Box 43011, Providence, RI 02940-3011, acts as transfer agent, dividend-paying agent and registrar for the Fund's shares and as agent to provide notice of redemption and certain voting rights for the Cumulative Preferred Stock. Stockholder inquiries should be directed to P.O. Box 8200, Boston, Massachusetts 02266-8200 (Tel. No. (800) 426-5523). UNDERWRITING Citigroup Global Markets Inc. and UBS Securities LLC are acting as Underwriters in this offering. Subject to the terms and conditions stated in the Fund's underwriting agreement dated October , 2003 (the "Underwriting Agreement"), each Underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of shares of Cumulative Preferred Stock set forth opposite the name of such Underwriter. NUMBER OF SHARES OF UNDERWRITER CUMULATIVE PREFERRED STOCK - ----------- -------------------------- Citigroup Global Markets Inc...................... UBS Securities LLC................................ Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................... Wachovia Capital Markets, LLC..................... Legg Mason Wood Walker, Incorporated.............. ------------- Total.................................... 8,800,000 ============= The Underwriting Agreement provides that the obligations of the Underwriters to purchase the Cumulative Preferred Stock included in this offering are subject to approval of legal matters by counsel and to other conditions. The Underwriters are obligated to purchase all the Cumulative Preferred Stock if they purchase any such shares. The Underwriters propose to offer some of the Cumulative Preferred Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and some of the Cumulative Preferred Stock to dealers at the public offering price less a concession not to exceed $ per share of Cumulative Preferred Stock. The sales load or underwriting discount the Fund will pay of $ per share of Cumulative Preferred Stock is equal to % of the initial offering price. The Underwriters may allow, and such dealers may reallow, a concession not to exceed $ per share on sales to certain other dealers. After the initial public offering, the Underwriters 44 may change the public offering price and other selling terms. Investors must pay for any Cumulative Preferred Stock purchased on or before October , 2003. In the Underwriting Agreement, the Fund and Royce have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Fund anticipates that from time to time the representatives of the Underwriters and certain other Underwriters may act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters. Citigroup Global Markets Inc. and UBS Securities LLC acted as financial advisers to Royce in connection with its acquisition by Legg Mason on October 1, 2001. Royce and Legg Mason Wood Walker, Incorporated, one of the Underwriters in this offering, are affiliates because they are under the common control of Legg Mason. In addition, certain of the Underwriters have in the past and may in the future act as financial advisers to Royce or have other investment banking relationships with Royce. Prior to the offering, there has been no public market for the Cumulative Preferred Stock. Application will be made to list the Cumulative Preferred Stock on the NYSE. However, during an initial period which is not expected to exceed 30 days after 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. In connection with the offering, the Underwriters may purchase and sell shares of Cumulative Preferred Stock in the open market. These transactions may include short sales and stabilizing transactions. Short sales involve syndicate sales of shares in excess of the number of shares to be purchased by the Underwriters in the offering, which creates a syndicate short position. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress. The Underwriters may also impose a penalty bid. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate member when the Underwriters repurchase shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases. Any of these activities may have the effect of preventing or retarding a decline in the market price of the stock. They may also cause the price of the Cumulative Preferred Stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The Underwriters may conduct these transactions on the NYSE or in the over-the-counter market, or otherwise. If the Underwriters commence any of these transactions, they may discontinue them at any time. The principal business address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, NY 10013. The principal business address of UBS Securities LLC is 299 Park Avenue, New York, NY 10171. 45 LEGAL MATTERS Certain matters concerning the legality under Maryland law of the Cumulative Preferred Stock will be passed on by Venable LLP, Baltimore, Maryland. Certain legal matters will be passed on by Sidley Austin Brown & Wood LLP, New York, New York, special counsel to the Fund, and by Simpson Thacher & Bartlett LLP, counsel to the Underwriters. Sidley Austin Brown & Wood LLP and Simpson Thacher & Bartlett LLP will each rely as to matters of Maryland law on the opinion of Venable 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 and under the caption "Financial Statements" included in the Statement of Additional Information have been audited by Tait, Weller & Baker for the periods indicated in its report with respect thereto which is included in the Statement of Additional Information. Such financial statements and information is included in this Prospectus and in the Statement of Additional Information in reliance upon such report and upon the authority of such firm as experts in accounting and auditing. Tait, Weller & Baker has an office at 1818 Market Street, Suite 2400, Philadelphia, Pennsylvania 19103, and also performs tax and other professional services for the Fund. ADDITIONAL INFORMATION The Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") 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 can be inspected and copied at the public reference facilities maintained by the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 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. This Prospectus constitutes part of a Registration Statement filed by the Fund with the Commission under the Securities Act 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. 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 or free of charge through the Commission's web site (http://www.sec.gov). 46 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Fund to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those listed under "Risk Factors and Special Considerations" in the Statement of Additional Information and elsewhere in this Prospectus. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity or achievements, and neither the Fund nor any other person assumes responsibility for the accuracy and completeness of such statements. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION A Statement of Additional Information dated October , 2003 has been filed with the Commission and is incorporated by reference in this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York, New York 10019, or by calling the Fund toll-free at (800) 221-4268. The Table of Contents of the Statement of Additional Information is as follows: PAGE ---- Risk Factors and Special Considerations......................................2 Investment Restrictions......................................................6 Taxation.....................................................................7 Principal Stockholders......................................................13 Directors and Officers......................................................14 Code of Ethics and Related Matters..........................................20 Investment Advisory and Other Services......................................21 Brokerage Allocation and Other Practices....................................22 Proxy Voting Policies and Procedures........................................23 Net Asset Value.............................................................24 Book-Entry System...........................................................24 Financial Statements........................................................25 No person has been authorized to give any information or to make any representation in connection with this offering other than those contained in this Prospectus in connection with the offer contained herein, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Fund, Royce or the Underwriters. Neither the delivery of this Prospectus nor any sale made hereunder will, 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 the solicitation of an offer to buy such securities in any circumstance in which such an offer or solicitation is unlawful. 47 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 senior securities (as defined by the 1940 Act) 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 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); (D) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Fund pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Discounted Value of any of the Fund's assets and/or (B) the face value of any of the Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or securities which mature prior to or on the date of redemption or repurchase of Cumulative Preferred Stock or payment of another liability and are either U.S. Government Obligations or securities which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, in both cases irrevocably held by the Fund's custodian bank in a segregated account or deposited by the Fund with the Paying Agent for the payment of the amounts needed to redeem or repurchase Cumulative Preferred Stock subject to redemption or repurchase or, without duplication, any of (i)(B) through (i)(D) and provided that in the event the Fund has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof 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 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. 48 "Charter" means the Articles of Incorporation, as amended and supplemented (including the Articles Supplementary), of the Fund on file in the State Department of Assessments and Taxation of Maryland. "Common Stock" means the Common Stock, par value $.001 per share, of the Fund. "Cumulative Preferred Stock" means the % 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. "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. "Fitch" means Fitch Ratings or its successor. "Fund" means Royce Value Trust, Inc., a Maryland corporation. "Lien" means any material lien, mortgage, pledge, security interest or security agreement of any kind. "Liquidation Preference" means $25.00 per share of Cumulative Preferred Stock 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, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows: (i) Preferred securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to whether such asset pays cumulative or non-cumulative dividends, in accordance with the table set forth below. 49 Rating Category (1) Cumulative Non-Cumulative Aaa 150% 165% Aa 155% 171% A 160% 176% Baa 165% 182% Ba 196% 216% B 216% 238% Below B and Unrated 250% 275% - -------------------------- (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Fund's assets can be derived from other sources as well as combined with a number of sources as presented by the Fund to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a non-convertible preferred security is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set forth opposite "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. The Moody's Discount Factor applied to non-convertible preferred securities that are Rule 144A Securities will equal the sum of the Moody's Discount Factor which would apply if such securities were registered under the Securities Act plus 20%. (ii) Corporate debt securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
Terms To Maturity of Rating Category Below B Corporate Debt Security -------------------------------------------------- and ----------------------- Aaa Aa A Baa Ba B Unrated(1) --- --- --- --- -- --- ---------- 1 year or less................................. 109% 112% 115% 118% 137% 150% 250% 2 years or less (but longer than 1 year) ...... 115 118 122 125 146 160 250% 3 years or less (but longer than 2 years) ..... 120 123 127 131 153 168 250% 4 years or less (but longer than 3 years) ..... 126 129 133 138 161 176 250% 5 years or less (but longer than 4 years) ..... 132 135 139 144 168 185 250% 7 years or less (but longer than 5 years) ..... 139 143 147 152 179 197 250% 10 years or less (but longer than 7 years) .... 145 150 155 160 189 208 250% 15 years or less (but longer than 10 years) ... 150 155 160 165 196 216 250% 20 years or less (but longer than 15 years) ... 150 155 160 165 196 228 250% 30 years or less (but longer than 20 years) ... 150 155 160 165 196 229 250% Greater than 30 years ......................... 165 173 181 189 205 240 250%
- ------------ (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Fund's assets can be derived from other sources as well as combined with a number of sources as presented by the Fund to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate debt security is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set forth under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. 50 The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of such securities. (iii) U.S. Government Obligations and U.S. Treasury Strips:
U.S. Government Obligations U.S. Treasury Strips Remaining Term To Maturity Discount Factor Discount Factor - ------------------------------------------------------- -------------------------------- ------------------------- 1 year or less........................................ 107% 107% 2 years or less (but longer than 1 year).............. 113 115 3 years or less (but longer than 2 years)............. 118 121 4 years or less (but longer than 3 years)............. 123 128 5 years or less (but longer than 4 years)............. 128 135 7 years or less (but longer than 5 years)............. 135 147 10 years or less (but longer than 7 years)............ 141 163 15 years or less (but longer than 10 years)........... 146 191 20 years or less (but longer than 15 years)........... 154 218 30 years or less (but longer than 20 years)........... 154 244
(iv) Short term instruments and cash: The Moody's Discount Factor applied to short term portfolio securities, including without limitation short term corporate debt securities, Short Term Money Market Instruments and short term municipal debt obligations, will be (A) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (B) 115%, so long as such portfolio securities mature or have a demand feature at par not exercisable within the Moody's Exposure Period; (C) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period; and (D) 148%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable greater than the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. A Moody's Discount Factor of 100% will also apply to money market funds rated by a NRSRO that comply with Rule 2a-7 under the 1940 Act. (v) Rule 144A Securities: Except as set forth in clause (i) above with respect to non-convertible preferred securities, the Moody's Discount Factor applied to Rule 144A Securities will be 130% of the Moody's Discount Factor which would apply if the securities were registered under the Securities Act. 51 (vi) Convertible securities (including convertible preferred securities):
Rating Category ---------------------------------------------------------------------------------------- Below B and Industry Category Aaa Aa A Baa Ba B Unrated(1) - ------------------------- --- -- - --- -- - ---------- Utility 162% 167% 172% 188% 195% 199% 300% Industrial 256% 261% 266% 282% 290% 293% 300% Financial 233% 238% 243% 259% 265% 270% 300% Transportation 250% 265% 275% 285% 290% 295% 300%
- ------------ (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Fund's assets can be derived from other sources as well as combined with a number of sources as presented by the Fund to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a convertible security is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set forth under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. (vii) U.S. Common Stock and Common Stock of foreign issuers for which ADRs are traded. Utility................................................................. 170% Industrial.............................................................. 264% Financial............................................................... 241% Other................................................................... 300% (viii) The Moody's Discount Factor applied to Common Stock of foreign issuers (in existence for at least five years) for which no ADRs are traded will be 400%. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth above will be the percentage provided in writing by Moody's. For purposes of this definition, ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. "Moody's Eligible Assets" means: (i) Cash (including interest and dividends due on assets rated (A) Baa3 or higher by Moody's if the payment date is within five Business Days of the Valuation Date, (B) A2 or higher if the payment date is within thirty days of the Valuation Date, and (C) A1 or higher if the payment date is within the Moody's Exposure Period) and receivables for assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such 52 receivables are (A) settled through clearing house firms with respect to which the Fund has received prior written authorization from Moody's or (B)(1) with counterparties having a Moody's long term debt rating of at least Baa3 or the equivalent from S&P or Fitch or (2) with counterparties having a Moody's Short Term Money Market Instrument rating of at least P-1 or the equivalent from S&P or Fitch. (ii) Short Term Money Market Instruments, so long as (A) such securities are rated at least P-1 or if not rated by Moody's, rated at least A-1+/AA or SP-1+/AA by S&P or the equivalent by Fitch, (B) in the case of demand deposits, time deposits and overnight funds, the supporting entity is rated at least A2 by Moody's or the equivalent by S&P or Fitch, or (C) in all other cases, the supporting entity (1) is rated A2 by Moody's or the equivalent by S&P or Fitch and the security matures within one month, (2) is rated A1 by Moody's or the equivalent by S&P or Fitch and the security matures within three months or (3) is rated at least Aa3 by Moody's or the equivalent by S&P or Fitch and the security matures within six months. In addition, money market funds that comply with Rule 2a-7 under the 1940 Act are Moody's Eligible Assets; (iii) U.S. Government Obligations and U.S. Treasury Strips; (iv) Rule 144A Securities; (v) Corporate debt securities, except as noted below, if (A)(1) such securities are rated B3 or higher by Moody's or the equivalent by S&P or Fitch; (2) for securities, which provide for conversion or exchange at the option of the issuer into equity capital at some time over their lives, the issuer must be rated at least B3 by Moody's or the equivalent by S&P or Fitch; or (3) for debt securities rated Ba1 and below by Moody's or the equivalent by S&P or Fitch, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (B) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's, S&P or Fitch; and (C) such securities have been registered under the Securities Act or are restricted as to resale under Federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act, except that such securities that are not subject to U.S. Federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded. In order to merit consideration as Moody's Eligible Asset, debt securities are issued by entities which have not filed for bankruptcy within the past three years, are current on all principal and interest in their fixed income obligations, are current on all preferred security dividends and possess a current, unqualified auditor's report without qualified, explanatory language. Corporate debt securities not rated at least B3 by Moody's or the equivalent by S&P or Fitch or not rated by Moody's, S&P or Fitch shall be considered to be 53 Moody's Eligible Assets only to the extent the market value of such corporate debt securities does not exceed 10% of the aggregate market value of all Moody's Eligible Assets. (vi) Preferred securities if (A) such preferred securities pay cumulative or non-cumulative dividends, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros, (C) the issuer or the parent company of the issuer of such a preferred security has common stock listed on either the New York Stock Exchange, the American Stock Exchange or Nasdaq or is a U.S. Government Agency, (D) the issuer or the parent company of the issuer of such a preferred security has a senior debt rating or a preferred security rating from Moody's of Baa3 or higher or the equivalent from S&P or Fitch and (E) such preferred security has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 from Moody's or the equivalent from S&P or Fitch (if the issuer of such preferred security or the parent company of the issuer has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred security without such a dividend history would also be eligible). In addition, the preferred securities must have the diversification requirements set forth in the table below and the preferred securities issue must be greater than $50 million. Diversification Table: - ---------------------- The table below establishes maximum limits for inclusion as Moody's Eligible Assets (other than common stock as set forth below) prior to applying Moody's Discount Factors to Moody's Eligible Assets.
Minimum Maximum Maximum Maximum Single Issue Size Single Single Industry Industry Ratings(1) ($ in Million)(2) Issuer (3)(4) Non-Utility (4)(5) Utility(4)(5) - ---------- ----------------- ------------- ------------------ ------------- Aaa.................. $100 100% 100% 100% Aa................... 100 20 60 30 A.................... 100 10 40 25 Baa.................. 100 6 20 20 Ba................... 50(6) 4 12 12 B1-B2................ 50(6) 3 8 8 B3 or below.......... 50(6) 2 5 5
- ------------ (1) Refers to the preferred security and senior debt rating of the portfolio holding. (2) Except for preferred security, which has a minimum issue size of $50 million. (3) Companies subject to common ownership of 25% or more are considered as one issuer. (4) Percentages represent a portion of the aggregate market value of the Fund's total assets. (5) Industries are determined according to Moody's Industry Classifications, as defined herein. (6) Portfolio holdings from issues ranging from $50 million to $100 million are limited to 20% of the Fund's total assets. (vii) 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 common stock which, while a Moody's Eligible Asset owned by the Fund, ceases paying any regular cash dividend will no longer be considered a Moody's Eligible Asset until 71 days 54 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 or the equivalent by S&P or Fitch, (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 (i) sponsored ADR programs or (ii) Level II or Level III ADRs, and (C) which are 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 (and in existence for at least five years), for which no ADRs are traded; Common Stock Diversification Table: - ----------------------------------- Maximum Single Maximum Single Maximum Single Industry Category Issuer (%)(1) Industry (%)(1) State (%)(1) ----------------- ------------- --------------- ------------- Utility 4 50 7(2) Industrial 4 45 7 Financial 5 40 6 Other 6 20 N/A ------------ (1)Percentages represent both a portion of the aggregate market value and the number of outstanding shares of the common stock portfolio. (2)Utility companies operating in more than one state should be diversified according to the state of incorporation. (viii) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition but only upon receipt by the Fund of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Fund that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the AMPS. When the Fund sells a portfolio security and agrees to repurchase it at a future date, the Discounted Value of such security will constitute a Moody's Eligible Asset and the amount the Fund is required to pay upon repurchase of such security will count as a liability for purposes of calculating the Basic Maintenance Amount. When the Fund purchases a security and agrees to sell it at a future date to another party, cash receivable by the Fund thereby will constitute a Moody's Eligible Asset if the long term debt of such other party is rated at least A2 by Moody's or the equivalent by S&P or Fitch and such agreement has a term of 30 days or less; otherwise the Discounted Value of such security will constitute a Moody's Eligible Asset. For the purpose of calculation of Moody's Eligible Assets, portfolio securities which have been called for redemption by the issuer thereof shall be valued at the lower of market value or the call price of such portfolio securities. 55 Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent that it has been irrevocably deposited for the payment of (i)(A) through (i)(D) under the definition of Basic Maintenance Amount or to the extent it is subject to any Liens, including assets segregated under margin account requirements in connection with the engagement in hedging transactions, except for (A) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Fund will not affect the status of such assets as a Moody's Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Fund by Royce, the Fund's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement. For purposes of this definition, ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. "Moody's Exposure Period" means the sum of (i) that number of calendar days from the last Valuation Date on which the Portfolio Calculation was at least equal to the Basic Maintenance Amount to the Valuation Date on which the Portfolio Calculation was not at least equal to the Basic Maintenance Amount, (ii) that number of calendar days following a Valuation Date that the Fund has under the terms of the Cumulative Preferred Stock to cure any failure to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount, and (iii) the maximum number of calendar days the Fund has to effect a redemption under the terms of the Cumulative Preferred Stock. "Moody's Industry Classifications" means, for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Cumulative Preferred Stock): Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil 56 Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting, Engineering, Construction, Hardware, Forest Products (building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land Development Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers, Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass Personal and Non Durable Consumer Products (Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies Diversified/Conglomerate Manufacturing Diversified/Conglomerate Service Diversified Natural Resources, Precious Metals and Minerals: Fabricating, Distribution Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste Disposal Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, Televisions, Tape Machines, Speakers, Printers, Drivers, Technology Finance: Investment Brokerage, Leasing, Syndication, Securities Farming and Agriculture: Livestock, Grains, Produce; Agricultural Chemicals, Agricultural Equipment, Fertilizers Grocery: Grocery Stores, Convenience Food Stores Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges Hotels, Motels, Inns and Gaming Insurance: Life, Property and Casualty, Broker, Agent, Surety Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy Manufacturing, Motion Picture Production Theaters, Motion Picture Distribution 57 Machinery (Non-Agriculture, Non-Construction, Non-Electronic): Industrial, Machine Tools, Steam Generators Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales of the foregoing Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, Television, Cable Broadcasting Equipment Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes Personal Transportation: Air, Bus, Rail, Car Rental Utilities: Electric, Water, Hydro Power, Gas Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national agencies The Fund will use its discretion in determining which industry classification is applicable to a particular investment in consultation with the Fund's independent accountants and Moody's, to the extent the Fund considers necessary. "Nasdaq" means the Nasdaq Stock Market, Inc. "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. "NRSRO" means any nationally recognized statistical rating organization, as that term is used in Rule 15a3-1 under the Securities Exchange Act or any successor provisions. "Other Ordinary Income" means ordinary income other than qualified dividend income but including short-term capital gains, interest income and non-qualified dividend income. 58 "Paying Agent" means Equiserve Trust Company, N.A. 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 issued and outstanding shares of preferred stock, par value $.001 per share, of the Fund, and includes the Cumulative Preferred Stock. "Quarterly Valuation Date" means the last Valuation Date of March, June, September and December, commencing December 26, 2003. "Redemption Price" means $25.00 per share plus accumulated and unpaid dividends through the date of redemption (whether or not earned or declared). "Rule 144A Securities" means securities that are restricted as to resale under U.S. Federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act or successor provisions. "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. "7.30% Preferred" means, so long as any shares of such series are issued and outstanding, the 7.30% Tax-Advantaged Cumulative Preferred Stock, par value $.001 per share, of the Fund. "Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Fund, the remaining term to maturity thereof is not in excess of 180 days: (i) Commercial paper rated P-1 by Moody's, F1 by Fitch or A-1 by S&P if such commercial paper matures in 30 days or less, or P-1 by Moody's and either F1 by Fitch or A-1+ by S&P if such commercial paper matures in over 30 days; (ii) Demand or time deposits in, and banker's acceptances and certificates of deposit of (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); (iii) Overnight funds; (iv) U.S. Government Obligations; and (v) Eurodollar demand or time deposits in, or certificates of deposit of, the head office or the London branch office of a depository institution or trust company if the certificates of deposit, 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 59 than such depository institution or trust company) of such depository institution or trust company that have (1) credit ratings on such Valuation Date of at least P-1 from Moody's and either F1+ from Fitch or A-1+ from S&P, in the case of commercial paper or certificates of deposit, and (2) credit ratings on each Valuation Date of at least Aa3 from Moody's and either AA- from Fitch or AA- from S&P, 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 shall be applicable except that the required long-term unsecured debt credit rating of such depository institution or trust company from Moody's, Fitch and S&P shall be at least A2, A and A, respectively; and provided further, however, that the foregoing credit rating requirements shall 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 certificates of deposit, if any, of such depository institution or trust company are not rated on any Valuation Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and there is no long-term rating, and (3) the holding company shall meet all of the foregoing credit rating requirements (including the preceding proviso in the case of investments that mature in no more than one Business Day from the date of purchase or other acquisition by the Fund); and provided further, that the interest receivable by the Fund shall not be subject to any withholding or similar taxes. "S&P" means Standard & Poor's or its successor. "2003 Tax Act" means the Jobs and Growth Tax Relief Reconciliation Act of 2003, Public Law 108-27. "U.S. Government Agency" means any agency, sponsored enterprise or instrumentality of the United States of America. "U.S. Government Obligations" means direct obligations of the United States or U.S. Government Agencies that are entitled to the full faith and credit of the United States and that, other than United States Treasury Bills and U.S. Treasury Strips, provide for the periodic payment of interest and the full payment of principal at maturity. "U.S. Treasury Strips" means securities based on direct obligations of the United States Treasury created through the Separate Trading of Registered Interest and Principal of Securities program. "Valuation Date" means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. 60 [THIS PAGE INTENTIONALLY LEFT BLANK] ================================================================================ $220,000,000 ROYCE VALUE TRUST, INC. 8,800,000 SHARES % CUMULATIVE PREFERRED STOCK ------------------- PROSPECTUS October , 2003 ------------------- Citigroup UBS Investment Bank Merrill Lynch & Co. Wachovia Securities Legg Mason Wood Walker Incorporated ------------------- ================================================================================ The information in this Statement of Additional Information is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 2, 2003 STATEMENT OF ADDITIONAL INFORMATION 8,800,000 SHARES ROYCE VALUE TRUST, INC. % CUMULATIVE PREFERRED STOCK LIQUIDATION PREFERENCE $25.00 PER SHARE The % Cumulative Preferred Stock, initial 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 a substantial portion of the net proceeds from the offering of the Cumulative Preferred Stock to redeem the issued and outstanding shares of 7.80% Cumulative Preferred Stock, par value $.001 per share, of the Fund, and the issued and outstanding shares of 7.30% Tax-Advantaged Cumulative Preferred Stock, par value $.001 per share, of the Fund. Royce & Associates, LLC ("Royce"), the Fund's investment adviser, expects to use any proceeds remaining after the redemption of the 7.80% Preferred and the 7.30% Preferred to purchase additional portfolio securities in accordance with the Fund's investment goal and policies. The Fund is a closed-end diversified management investment company. The Fund's primary investment goal is long-term capital growth, which it seeks by normally investing at least 75% of its assets in equity securities of small- and micro-cap companies. The Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (212) 355-7311. This Statement of Additional Information is not a prospectus, but should be read in conjunction with the Fund's Prospectus (dated October , 2003). Please retain this document for future reference. To obtain an additional copy of the Prospectus, the Fund's Annual Report to Stockholders for the year ended December 31, 2002, or the Fund's Semi-Annual Report to Stockholders for the six months ended June 30, 2003 please call Investor Information at 1-800-221-4268. Defined terms used in this Statement of Additional Information have the meanings given to them in the Prospectus. TABLE OF CONTENTS PAGE Risk Factors and Special Considerations....................................... 2 Investment Restrictions....................................................... 6 Taxation...................................................................... 7 Principal Stockholders....................................................... 13 Directors and Officers....................................................... 14 Code of Ethics and Related Matters........................................... 20 Investment Advisory and Other Services....................................... 21 Brokerage Allocation and Other Practices..................................... 22 Proxy Voting Policies and Procedures......................................... 23 Net Asset Value.............................................................. 24 Book-Entry System............................................................ 24 Financial Statements......................................................... 25 Date: October , 2003 RISK FACTORS AND SPECIAL CONSIDERATIONS FUND'S RIGHTS AS STOCKHOLDER The Fund may not invest in a company for the purpose of exercising control of management. However, the Fund may exercise its rights as a stockholder and communicate its views on important matters of policy to management, the board of directors and/or stockholders if Royce or the Board of Directors determines that such matters could have a significant effect on the value of the Fund's investment in the company. The activities that the Fund may engage in, either individually or in conjunction with others, may include, among others, supporting or opposing proposed changes in a company's corporate structure or business activities; seeking changes in a company's board of directors or management; seeking changes in a company's direction or policies; seeking the sale or reorganization of a company or a portion of its assets; or supporting or opposing third party takeover attempts. This area of corporate activity is increasingly prone to litigation, and it is possible that the Fund could be involved in lawsuits related to such activities. Royce will monitor such activities with a view to mitigating, to the extent possible, the risk of litigation against the Fund and the risk of actual liability if the Fund is involved in litigation. However, no assurance can be given that litigation against the Fund will not be undertaken or liabilities incurred. The Fund may, at its expense or in conjunction with others, pursue litigation or otherwise exercise its rights as a security holder to seek to protect the interests of security holders if Royce and the Board of Directors determine this to be in the best interests of the Fund's stockholders. HIGH-YIELD AND INVESTMENT GRADE DEBT SECURITIES The Fund may invest up to 5% of its assets in high-yield, non-convertible debt securities. They may be rated from Ba to Ca by Moody's or from BB to D by S&P or may be unrated. These securities have poor protection with respect to the payment of interest and repayment of principal and may be in default as to the payment of principal or interest. These securities are often speculative and involve greater risk of loss or price changes due to changes in the issuer's capacity to pay. The market prices of high-yield debt securities may fluctuate more than those of higher-rated debt securities and may decline significantly in periods of general economic difficulty, which may follow periods of rising interest rates. The market for high-yield debt securities may be thinner and less active than that for higher-rated debt securities, which can adversely affect the prices at which the former are sold. If market quotations cease to be readily available for a high-yield debt security in which the Fund has invested, the security will then be valued in accordance with procedures established by the Board of Directors. Judgment may play a greater role in valuing high-yield debt securities than is the case for securities for which more external sources for quotations and last sale information are available. Adverse publicity and changing investor perceptions may affect the Fund's ability to dispose of high-yield debt securities. 2 Since the risk of default is higher for high-yield debt securities, Royce's research and credit analysis may play an important part in managing securities of this type for the Fund. In considering such investments for the Fund, Royce will attempt to identify those issuers of high-yield debt securities whose financial condition is adequate to meet future obligations, has improved or is expected to improve in the future. Royce's analysis may focus on relative values based on such factors as interest or dividend coverage, asset coverage, earnings prospects and the experience and managerial strength of the issuer. The Fund may also invest in non-convertible debt securities in the lowest rated category of investment grade debt. Such securities may have speculative characteristics, and adverse changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade securities. The Fund may also invest in higher rated investment grade non-convertible debt securities. Such securities include those rated Aaa by Moody's or AAA by S&P (which are considered to be of the highest credit quality and where the capacity to pay interest and repay principal is extremely strong), those rated Aa by Moody's or AA by S&P (where the capacity to repay principal is considered very strong, although elements may exist that make risks appear somewhat larger than expected with securities rated Aaa or AAA), securities rated A by Moody's or A by S&P (which are considered to possess adequate factors giving security to principal and interest) and securities rated Baa by Moody's or BBB by S&P (which are considered to have an adequate capacity to pay interest and repay principal, but may have some speculative characteristics). FOREIGN INVESTMENTS The Fund may invest up to 10% of its assets in the securities of foreign issuers. (For purposes of this restriction, securities issued by a foreign domiciled company that are registered with the Commission under Section 12(b) or (g) of the Securities Exchange Act are not treated as securities of foreign issuers.) Foreign investments involve certain risks which typically are not present in securities of domestic issuers. There may be less information publicly available about a foreign company than a domestic company; foreign companies may not be subject to accounting, auditing and reporting standards and requirements comparable to those applicable to domestic companies; and foreign markets, brokers and issuers are generally subject to less extensive government regulation than their domestic counterparts. Markets for foreign securities may be less liquid and may be subject to greater price volatility than those for domestic securities. Foreign brokerage commissions and custodial fees are generally higher than those in the United States. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, thereby making it difficult to conduct such transactions. Delays or problems with settlements might affect the liquidity of the Fund's portfolio. Foreign investments may also be subject to local economic and political risks, political, economic and social instability, military action or unrest or adverse diplomatic developments, and possible nationalization of issuers or expropriation of their assets, which might adversely affect the Fund's ability to realize on its investment in such securities. Royce may not be able to anticipate these potential events or counter their effects. Furthermore, some foreign securities are subject to brokerage taxes levied by foreign governments, which have the effect of increasing the cost of such investment and reducing the realized gain or increasing the realized loss on such securities at the time of sale. Foreign markets may also give less protection to investors such as the Fund. 3 Although changes in foreign currency rates may adversely affect the Fund's foreign investments, Royce does not expect to purchase or sell foreign currencies for the Fund to hedge against declines in the U.S. dollar or to lock in the value of any foreign securities it purchases for the Fund. Consequently, the risks associated with such investments may be greater than if the Fund were to engage in foreign currency transactions for hedging purposes. Exchange control regulations in such foreign markets may also adversely affect the Fund's foreign investments, and the Fund's ability to make certain distributions necessary to maintain its eligibility as a regulated investment company and avoid the imposition of income and excise taxes may, to that extent, be limited. The considerations noted above are generally intensified for investments in developing countries. Developing countries may have relatively unstable governments, economies based on only a few industries and securities markets that trade a small number of securities. The Fund may purchase the securities of foreign companies in the form of American Depositary Receipts ("ADRs"). ADRs are certificates held in trust by a bank or similar financial institution evidencing ownership of securities of a foreign-based issuer. Designed for use in U.S. securities markets, ADRs are alternatives to the purchase of the underlying foreign securities in their national markets and currencies. Depositories may establish either unsponsored or sponsored ADR facilities. While ADRs issued under these two types of facilities are in some respects similar, there are distinctions between them relating to the rights and obligations of ADR holders and the practices of market participants. A depository may establish an unsponsored facility without participation by (or even necessarily the acquiescence of) the issuer of the deposited securities, although typically the depository requests a letter of non-objection from such issuer prior to the establishment of the facility. Holders of unsponsored ADRs generally bear all the costs of such facilities. The depository usually charges fees upon the deposit and withdrawal of the deposited securities, the conversion of dividends into U.S. dollars, the disposition of non-cash distributions and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute stockholder communications received from the issuer of the deposited securities or to pass through voting rights to ADR holders in respect of the deposited securities. Depositories create sponsored ADR facilities in generally the same manner as unsponsored facilities, except that the issuer of the deposited securities enters into a deposit agreement with the depository. The deposit agreement sets out the rights and responsibilities of the issuer, the depository and the ADR holders. With sponsored facilities, the issuer of the deposited securities generally will bear some of the costs relating to the facility (such as deposit and withdrawal fees). Under the terms of most sponsored arrangements, depositories agree to distribute notices of stockholder meetings and voting instructions and to provide stockholder communications and other information to the ADR holders at the request of the issuer of the deposited securities. REPURCHASE AGREEMENTS In a repurchase agreement, the Fund in effect makes a loan by purchasing a security and simultaneously committing to resell that security to the seller at an agreed upon price on an agreed upon date within a number of days (usually not more than seven) from the date of purchase. The resale price reflects the purchase price plus an agreed upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. A repurchase 4 agreement requires or obligates the seller to pay the agreed upon price, which obligation is in effect secured by the value (at least equal to the amount of the agreed upon resale price and marked to market daily) of the underlying security. The Fund may engage in repurchase agreements, provided that such agreements are collateralized by cash or securities issued by the U.S. Government or its agencies having a value at least equal to the amount loaned. 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. While it does not presently appear possible to eliminate all risks from these transactions (particularly the possibility of a decline in the market value of the underlying securities, as well as delays and costs to the Fund in connection with bankruptcy proceedings), it is the policy of the Fund to enter into repurchase agreements only with its custodian, State Street Bank and Trust Company, and having a term of seven days or less. WARRANTS, RIGHTS AND OPTIONS The Fund may invest up to 5% of its assets in warrants, rights and options. A warrant, right or call option entitles the holder to purchase a given security within a specified period for a specified price and does not represent an ownership interest. A put option gives the holder the right to sell a particular security at a specified price during the term of the option. These securities have no voting rights, pay no dividends and have no liquidation rights. In addition, their market prices do not necessarily move parallel to the market prices of the underlying securities. The sale of warrants, rights or options held for more than one year generally results in a long-term capital gain or loss to the Fund, and the sale of warrants, rights or options held for one year or less generally results in a short term capital gain or loss to the Fund. The holding period for securities acquired upon exercise of a warrant, right or call option, however, generally begins on the day after the date of exercise, regardless of how long the warrant, right or option was held. 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. Investing in warrants, rights and call options on a given security allows the Fund to hold an interest in that security without having to commit assets equal to the market price of the underlying security and, in the case of securities market indices, to participate in a market without having to purchase all of the securities comprising the index. Put options, whether on shares of common stock of a single company or on a securities market index, would permit the Fund to protect the value of a portfolio security against a decline in its market price and/or to benefit from an anticipated decline in the market price of a given security or of a market. Thus, investing in warrants, rights and options permits the Fund to incur additional risk and/or to hedge against risk. INVESTMENT IN OTHER INVESTMENT COMPANIES The Fund may invest in other investment companies whose investment goals and policies are consistent with those of the Fund. In accordance with the 1940 Act, the Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the 1940 Act the Fund may not own more than 3% of the total outstanding voting stock of any investment 5 company and not more than 5% of the value of the Fund's total assets may be invested in securities of any one investment company. If the Fund acquires shares in investment companies, stockholders would bear both their proportionate share of expenses in the Fund (including advisory fees) and, indirectly, the expenses of such investment companies (including management and advisory fees). 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 in the Prospectus under "Investment Goal, Policies and Risks -- Changes in Investment Goal 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. 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 6 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 terms of the Cumulative Preferred Stock and the 1940 Act, 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. TAXATION The Fund has elected to be treated as a RIC, and has qualified and intends to continue to qualify for the special tax treatment afforded RICs under the Code. As long as it so qualifies, in any taxable year in which it distributes at least 90% of its investment company taxable income ("ICTI") (as that term is defined in the Code without regard to the deduction for dividends paid) for such taxable year, the Fund will not be subject to Federal income tax on the part of its ICTI 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. The Fund intends to distribute substantially all of such income. The Code requires 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. For these purposes, the Fund will be deemed to have distributed any income or gains on which it paid corporate income tax. 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. In the opinion of Sidley Austin Brown & Wood LLP, the shares of Cumulative Preferred Stock will be treated as stock of the Fund for Federal income tax purposes and distributions with respect to such shares (other than distributions in redemption of the Cumulative Preferred Stock under section 302(b) of the Code) will constitute dividends to the extent of the Fund's current and accumulated earnings and profits, as calculated for Federal income tax purposes. 7 Nevertheless, the IRS might take a contrary position, asserting, for example, that the shares of Cumulative Preferred Stock constitute debt of the Fund. The Fund believes this position, if asserted, would be unlikely to prevail. If this position were upheld, however, the discussion of the treatment of distributions below would not apply. Instead, distributions by the Fund to holders of shares of Cumulative Preferred Stock would constitute taxable interest income, whether or not they exceeded the earnings and profits of the Fund. In such event, the designations of particular types of income, such as capital gains and qualified dividend income, as discussed below, would not be effective. Dividends paid by the Fund from its ICTI (such dividends are referred to in this section as "ordinary income dividends") are taxable to stockholders as ordinary income (some of which may represent qualified dividend income, taxable at a reduced rate, as discussed below) to the extent of the Fund's earnings and profits. Earnings and profits are treated as first being used to pay distributions on the Cumulative Preferred Stock and any other Preferred Stock, and only the earnings and profits remaining after the distribution preference of the Fund's Preferred Stock has been satisfied are treated as being used to pay distributions on the Fund's Common Stock. Distributions made from net capital gains (including gains or losses from certain transactions in warrants, rights and options) and properly designated by the Fund (such distributions are referred to in this section as "capital gain dividends") are taxable to stockholders as long-term capital gains, regardless of the length of time the stockholder has owned Fund shares. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). The Fund may elect to retain its net capital gains or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate the retained amount as undistributed capital gains in a notice to its stockholders, who will be treated as if each received a distribution of his pro rata share of such gains, with the result that each stockholder will (i) be required to report his pro rata share of such gains on his tax return as long-term capital gain, (ii) receive a refundable tax credit for his pro rata share of tax paid by the Fund on the gains and (iii) increase the tax basis for his shares by an amount equal to the deemed distributions less the tax credit. 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. Such gain or loss will be long-term or short-term, depending upon the stockholder's holding period for the shares. Generally, a stockholder's gain or loss will be a long-term gain or loss if the shares have been held for more than one year. Any loss realized upon the sale or exchange of Fund shares will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after disposition of the original shares. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized 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 (or amounts credited to the stockholder as undistributed capital gains) with respect to such shares. Under the 2003 Tax Act, Fund distributions comprised of dividends from domestic corporations and certain foreign corporations (generally, corporations incorporated in a possession of the United States, some corporations eligible for treaty benefits under a treaty with 8 the United States and corporations whose stock is readily tradable on an established securities market in the United States) are eligible for taxation at a maximum tax rate of 15% also applicable to capital gains in the hands of individual stockholders, provided holding period and other requirements are satisfied. Capital gain dividends likewise, are taxed at the reduced maximum rate of 15% for non-corporate taxpayers. The 15% income tax rate applicable to capital gains and qualified dividend income is scheduled to expire after December 31, 2008. After this date, absent extension or modification of the relevant legislative provisions, long-term capital gain dividends paid by the Fund generally will be taxable at the previously applicable maximum 20% rate and distributions attributable to qualified dividend income will be taxed to the stockholder at his or her marginal Federal income tax rate (which generally will be higher than 15%). A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction ("DRD") allowed to corporations under the Code, if certain requirements are met. For these purposes, the Fund will allocate any dividends eligible and any other Preferred Stock for the DRD between the holders of Common Stock, Cumulative Preferred Stock and any other Preferred Stock in proportion to the total dividends paid to each class during the taxable year, or otherwise as required by applicable law. A holder of shares of Cumulative Preferred stock (a) that is taxed as a corporation for Federal income tax purposes, (b) meets applicable holding period and taxable income requirements of section 246 of the Code, (c) is not subject to the "debt-financed portfolio stock" rules of section 246A of the Code with respect to an investment in the Fund and (d) is otherwise entitled to the DRD can claim a deduction equal to 70% of the dividends received on the Cumulative Preferred Stock which are designated by the Fund as qualifying for the DRD. 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 and qualified dividend income. 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. The amount of long-term capital gains, qualified dividend income, and Other Ordinary Income allocable among the Cumulative Preferred Stock, other Preferred Stock, and the Common Stock will depend upon the amount of such long-term capital gains, qualified dividend income, and Other Ordinary 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 Sidley Austin Brown & Wood LLP, under current law, the manner in which the Fund intends to allocate long-term capital gains, qualified dividend income and Other Ordinary 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 long-term capital gains, qualified dividend income or Other Ordinary Income. Sidley Austin Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS were to challenge in court the Fund's 9 allocations, the IRS would be unlikely to prevail. The opinion of Sidley Austin Brown & Wood LLP, however, represents only its best legal judgment and is not binding on the IRS or courts. 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" in the Prospectus. Such a suspension of distributions might prevent the Fund from distributing 90% of its ICTI, 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. Qualification 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. 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, 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) or, alternatively, to elect to be subject to taxation on such built-in-gains recognized for a period of 10 years, in order to qualify as a RIC in a subsequent year. The Fund may invest in debt obligations purchased at a discount with the result that the Fund may be required to accrue income (and to distribute such income in accordance with the distribution requirements of the Code) for Federal income tax purposes before amounts due under the obligations are paid. The Fund may also invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities ("high yield securities"). A portion of the interest payments on such high yield securities may be treated as dividends for Federal income tax purposes. Certain transactions of the Fund are subject to complex federal income tax provisions that may, among other things, a) affect the character of gains and losses realized, b) disallow, suspend or otherwise limit the allowance of certain losses or deductions, and c) accelerate the recognition of income. Operation of these rules could, therefore, affect the character, amount and timing of distributions to stockholders. The Fund will monitor its transactions and may make certain tax elections in order to mitigate the effect of these provisions. 10 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 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 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, 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. Dividends paid by PFICs will not qualify as qualified dividend income eligible for taxation at reduced rates under the 2003 Tax Act. Under certain provisions of the Code, some stockholders may be subject to a withholding tax (28% for 2003) 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 refunded or credited against such stockholder's Federal income tax liability, provided the required information is furnished to the IRS. Ordinary income dividends (but not capital gain dividends) paid to stockholders who are non-resident aliens or foreign entities generally 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. However, if ordinary income dividends or capital gain dividends received by a non-resident stockholder are effectively connected with the conduct by such stockholder of a trade or business in the United States, the dividends will be subject to United States federal income tax at regular income tax rates. Non-resident stockholders are urged to consult their own tax advisers concerning the applicability of the United States withholding and income taxes. 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 11 may reduce or eliminate such taxes. Stockholders generally will not be entitled to claim a credit or deduction with respect to such taxes paid by the Fund. Under recently promulgated Treasury regulations, if a stockholder recognizes a loss on the disposition of shares of Cumulative Preferred Stock of $2 million or more for an individual stockholder or $10 million or more for a corporate stockholder in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Stockholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect and discusses some of the consequences under Federal tax law of an investment in Cumulative Preferred Stock of the Fund. 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. The discussion above is not a substitute for personal tax advice. 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. 12 PRINCIPAL STOCKHOLDERS As of September 2, 2003, there were 48,820,752.5593 shares of Common Stock and 6,400,000 shares of Preferred Stock of the Fund outstanding. The following persons were known to the Fund to be beneficial owners or owners of record of 5% or more of its outstanding shares of Common Stock or Preferred Stock as of the date above:
AMOUNT AND NATURE PERCENT OF NAME AND ADDRESS OF OWNER CLASS/SERIES OF STOCK OF OWNERSHIP CLASS/SERIES - ---------------------------- ----------------------- ------------------------- -------------- Cede & Co.* Common Stock 47,045,920 shares--Record 96.36% Depository Trust Company P.O. Box #20 Bowling Green Station New York, NY 10028 7.80% Cumulative Preferred Stock 2,378,516 shares--Record 99.10% 7.30% Tax-Advantaged 3,975,000 shares--Record 99.37% Cumulative Preferred Stock
- ----------------- * Shares held by brokerage firms, banks and other financial intermediaries on behalf of beneficial owners are registered in the name of Cede & Co. 13 DIRECTORS AND OFFICERS The Board of Directors of the Fund is comprised of the eight individuals named below. Two of the Directors, William L. Koke and David L. Meister, are elected annually by the holders of Preferred Stock, voting as a separate class. The remaining six Directors are divided into three classes and are elected by the holders of Common Stock and Preferred Stock, voting together as a single class. The Class I Directors, Charles M. Royce and G. Peter O'Brien, have terms that expire in 2006; the Class II Directors, Mark R. Fetting and Richard M. Galkin, have terms that expire in 2004; and the Class III Directors, Donald R. Dwight and Stephen L. Isaacs, have terms that expire in 2005. To the extent permitted by the 1940 Act and Maryland law, vacancies on the Board can be filled by the remaining Directors for the remainder of the term of the respective Board position. There are no family relationships between any of the Fund's Directors and officers. Each Director will hold office until his term expires and his successor has been duly elected and qualifies or until his earlier resignation or removal. Each of the Fund's Directors is also a director/trustee of the other management investment companies comprising "The Royce Funds", which have seventeen portfolios. DIRECTORS Interested Directors. Certain biographical and other information concerning the Directors who are "interested persons" as defined in the 1940 Act, of the Fund, including their designated classes, is set forth below. Officers are elected by and serve at the pleasure of the Board of Directors. Each officer will hold office for the year ending December 31, 2003, and thereafter until his respective successor is duly elected and qualifies.
TERM OF NUMBER OF OTHER PUBLIC OFFICE AND ROYCE FUNDS' COMPANY NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR - ------------------ ---------------- ---------------- -------------------------------- ------------ ---------------- Charles M. Royce** Class I Director Term as Director President, Chief Investment 18 None (63) and President expires 2006; Officer and Member of Board of Director and Managers of Royce; and Officer since President of The Royce Funds. 1986 Mark R. Fetting** Class II Director Term as Director Executive Vice President of 18 Director/Trustee (48) expires 2004; Legg Mason; Member of Board of of registered Director since Managers of Royce; and Division investment 2001 President and Senior Officer of companies Prudential Financial Group, constituting the Inc. and related companies, 22 Legg Mason including Fund Boards and Funds consulting services to subsidiary companies (from 1991 to 2000). Mr. Fetting's prior business experience also includes having served as Partner, Greenwich Associates, and Vice President, T. Rowe Price Group, Inc.
- --------------------- * Mr. Royce's address is c/o Royce, 1414 Avenue of the Americas, New York, New York 10019. Mr. Fetting's address is c/o Legg Mason, 100 Light Street, Baltimore, Maryland 21202. ** Messrs. Royce and Fetting are "interested persons" of the Fund within the meaning of Section 2(a)(19) of the 1940 Act due to the positions they hold with Royce and for Mr. Fetting, Legg Mason, and their ownership in Legg Mason. 14 Non-Interested Directors. Certain biographical and other information concerning the Fund Directors who are not "interested persons," as defined in the 1940 Act, of the Fund, including their designated classes, is set forth below. Each non-interested Director is also a member of the Fund's audit committee.
TERM OF NUMBER OF OTHER PUBLIC OFFICE AND ROYCE FUNDS' COMPANY NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR - ------------------ ---------------- ---------------- -------------------------------- ------------ ---------------- Donald R. Dwight Class III Term as President of Dwight 18 None (72) Director Director Partners, Inc., corporate expires 2005; communications Director consultants; and Chairman since 1998 (from 1982 until March 1998) of Newspapers New England, Inc. Mr. Dwight's prior experience includes having served as Lieutenant Governor of the Commonwealth of Massachusetts, President and Publisher of Minneapolis Star and Tribune Company and as Trustee of the registered investment companies constituting the 94 Eaton Vance Funds. Richard M. Galkin Class II Term as Private investor. Mr. 18 None (65) Director Director Galkin's prior business of expires 2004; Richard M. Galkin Director Associates, Inc., since 1986 telecommunications consultants, President of Manhattan Cable Television (a subsidiary of Time Inc.), President of Haverhills Inc. (another Time Inc. subsidiary), President of Rhode Island Cable Television and Senior Vice President of Satellite Television Corp. (a subsidiary of Comsat). Stephen L. Isaacs Class III Term as President of The Center 18 None (63) Director Director for Health and Social expires 2005; Policy (since September Director 1996); Attorney and since 1986 President of Health Policy Associates, Inc., consultants. Mr. Isaacs' prior experience includes having served as Director of Columbia University Development Law and Policy Program and Professor at Columbia University. William L. Koke Director elected Term as Financial planner with 18 None (68) by Preferred Director Shoreline Financial Stockholders expires Consultants. Mr. Koke's annually; prior business experience Director includes having served as since 2001 Director of Financial Relations of SONAT, Inc., Treasurer of Ward Foods, Inc. and President of CFC, Inc.
15
TERM OF NUMBER OF OTHER PUBLIC OFFICE AND ROYCE FUNDS' COMPANY NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR - ------------------ ---------------- ---------------- -------------------------------- ------------ ---------------- David L. Meister Director elected Term as Chairman and Chief 18 None (63) by Preferred Director Executive Officer of The Stockholders expires Tennis Channel (since June annually; 2000); and Chief Executive Director Officer of Seniorlife.com since 1986 (from December 1999 to May 2000). Mr. Meister's prior business experience includes having served as a consultant to the communications industry, President of Financial News Network, Senior Vice President of HBO, President of Time-Life Films and Head of Broadcasting for Major League Baseball. G. Peter O'Brien** Class I Term as Trustee of Colgate 18 Director/Trustee of (57) Director Director University, President of the registered expires 2006; Hill House, Inc. and investment companies Director Managing Director/Equity constituting the 22 since 2001 Capital Markets Group of Legg Mason Funds; Merrill Lynch & Co. (from Director of 1971 to 1999). Renaissance Capital Greenwich Fund.
- --------------------- * Messrs. Dwight, Galkin, Isaacs, Koke, Meister and O'Brien's address is c/o Royce, 1414 Avenue of the Americas, New York, New York 10019. ** Solely as a result of his ownership of securities of one of the underwriters, Mr. O'Brien is technically an "interested person," as defined in the 1940 Act, of the Fund until after the completion of the Cumulative Preferred Stock offering. After completion of the offering, he will be a non-interested Director. OFFICERS Certain biographical and other information concerning the other officers of the Fund is set forth below. Officers are elected by and serve at the pleasure of the Board of Directors. Each officer will hold office for the year ending December 31, 2003, and thereafter until his respective successor is duly elected and qualified.
TERM OF OFFICE POSITION(S) AND LENGTH OF PRINCIPAL OCCUPATIONS DURING NAME, AGE AND ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS - ----------------------- --------------- --------------- ----------------------------------- John D. Diederich (52) Vice President, Officer since 2001 Member of Board of Managers, Chief Director of Operating Officer (since October Administration and 2001), Chief Financial Officer Treasurer (since March 2002) and Managing Director of Royce; Vice President, Treasurer and Director of Administration of the other Royce Funds; and President of Royce Fund Services, Inc. Jack E. Fockler, Jr. (44) Vice President Officer since 1995 Managing Director and Vice President of Royce; Vice President of The Royce Funds. W. Whitney George (45) Vice President Officer since 1995 Managing Director and Vice President of Royce; and Vice President of The Royce Funds. Daniel A. O'Byrne (41) Vice President and Officer since 1994 Principal and Vice President of Royce; and Vice President of Assistant Secretary The Royce Funds. John E. Denneen (36) Secretary and Officer from 1996 to General Counsel of Royce (Deputy General Counsel 2001 and since April General Counsel prior to 2003); Principal, Chief Legal
16
TERM OF OFFICE POSITION(S) AND LENGTH OF PRINCIPAL OCCUPATIONS DURING NAME, AGE AND ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS - ----------------------- --------------- --------------- ----------------------------------- 2002 and Compliance Officer and Secretary of Royce (since March 2002); Secretary of The Royce Funds (1996-2001 and since April 2002); Associate General Counsel, Principal and Chief Compliance Officer of Royce (1996-2001); and Principal of Credit Suisse First Boston Private Equity (2001-2002).
- ------------------- * The address of each officer is c/o Royce, 1414 Avenue of the Americas, New York, New York 10019. OWNERSHIP OF SECURITIES Information relating to each Director's share ownership in the Fund and in The Royce Funds as of December 31, 2002 is set forth in the tables below.
Aggregate Dollar Range of Aggregate Dollar Range of Equity Name Equity Securities in the Fund Securities in The Royce Funds ------------------------------------ ------------------------------- ---------------------------------- Interested Directors Charles M. Royce..................... Over $100,000 Over $100,000 Mark R. Fetting...................... None* Over $100,000 Non-Interested Directors Donald R. Dwight..................... $1-$10,000 Over $100,000 Richard M. Galkin.................... $1-$10,000 Over $100,000 Stephen L. Isaacs.................... $10,001-$50,000 $10,001-$50,000** William L. Koke .................... $50,001-$100,000 Over $100,000 David L. Meister..................... None Over $100,000 G. Peter O'Brien..................... $10,001-$50,000 Over $100,000
- ------------------------- * As of the date of this Statement of Additional Information, the aggregate dollar range of equity securities in the Fund held by Mr. Fetting was $10,001-$50,000. ** As of the date of this Statement of Additional Information, the aggregate dollar amount of equity securities in The Royce Funds held by Mr. Isaacs was over $100,000. As of the date of this Statement of Additional Information, all Directors and officers of the Fund as a group owned less than 1% of the Fund's outstanding Common Stock and Preferred Stock. As of the date of this Statement of Additional Information, none of the non-interested Directors of the Fund nor any of their immediate family members owned beneficially or of record any securities issued by Legg Mason or any of its affiliates (other than registered investment companies). BOARD COMMITTEES AND MEETINGS The Board of Directors has an Audit Committee, comprised of Donald R. Dwight, Richard M. Galkin, Stephen L. Isaacs, William L. Koke, David L. Meister and G. Peter O'Brien. The Audit Committee is responsible for, among other things, the appointment, compensation, and oversight of the work of the Fund's independent accountants including the resolution of disagreements regarding financial reporting between Fund management and such independent accountants. The Fund has adopted an Audit Committee charter. Mr. Galkin serves as Chairman of the Audit Committee. The members of the Audit Committee are "independent" within the meaning of the 1940 Act and the New York Stock Exchange corporate governance standards for 17 audit committees. The Fund's Audit Committee held three meetings during the year ended December 31, 2002. Although the Board of Directors does not have a standing compensation committee or a nominating committee, the non-interested Directors review and nominate candidates to serve as non-interested Directors. The non-interested Directors generally will not consider nominees recommended by stockholders of the Fund. COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS For the year ended December 31, 2002, the following Directors of the Fund received compensation from the Fund and The Royce Funds, as follows:
Aggregate Pension or Retirement Estimated Total Compensation Compensation Benefits Accrued as Annual Benefits from The Royce Funds Name from Fund Part of Fund Expenses upon Retirement paid to Directors - ------------------------ --------------------- ------------------------- -------------------- ------------------------ Donald R. Dwight, $15,000 None None $65,250 Director(1) Richard M. Galkin, $15,000 None None $65,250 Director(2) Stephen L. Isaacs, $15,000 None None $65,250 Director William L. Koke, $15,000 None None $65,250 Director David L. Meister, $15,000 None None $65,250 Director G. Peter O'Brien, $15,000 None None $65,250 Director
- ------------- (1) Includes $2,250 from the Fund ($9,562.50 from the Fund and other Royce Funds) deferred during 2002 at the election of Mr. Dwight under The Royce Funds' Deferred Compensation Plan for Trustees/Directors. (2) Includes $15,000 from the Fund ($63,750 from the Fund and other Royce Funds) deferred during 2002 at the election of Mr. Galkin under The Royce Funds' Deferred Compensation Plan for Trustees/Directors. DIRECTORS' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT The Board of Directors determined at meetings held on June 4 and 5, 2003, to approve the continuance of the current Investment Advisory Agreement relating to the Fund. In making their determination, the Directors considered a wide range of information of the type they regularly consider when determining whether to continue a fund's advisory arrangements as in effect from year to year. In its consideration of the current Investment Advisory Agreement, the Board of Directors focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to the Fund by Royce, (b) comparative data with respect to advisory fees paid by other funds with similar investment objectives, (c) the operating expenses and expense ratio of the Fund compared to funds with similar investment objectives, (d) the performance of the Fund as compared to such comparable funds, including risk-adjusted performance information prepared by Morningstar Inc., (e) the relative profitability of the arrangements to Royce, (f) information about the services 18 to be performed and the personnel performing such services under the current Investment Advisory Agreement, (g) the general reputation and financial resources of Royce and Legg Mason, (h) compensation payable by the Fund to affiliates of Royce for other services and (i) Royce's practices regarding the selection and compensation of brokers that execute portfolio transactions for the Fund and the brokers' provision of brokerage and research services to Royce. In particular, the Board of Directors compared the investment advisory fee rate, the annual net expense ratio, and the risk-adjusted investment performance of the Fund to a peer group selected by Morningstar and consisting of 11 other funds with substantially similar investment objectives and policies plus funds in Morningstar's small-cap value category. As set forth in the Prospectus under the heading "Investment Advisory and Other Services - Advisory Fee," Royce is entitled to receive the Basic Fee of 1% per annum of the Fund's average net assets (including assets obtained from the sale of Preferred Stock) 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 ending with the most recent calendar month is utilized for measuring performance and average net assets, as described below. 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. With respect to investment advisory fee rates, the Board of Directors noted that the Basic Fee was equal to the peer group average. Although the Fund paid a higher investment advisory fee rate than any other fund in the peer group, the Board of Directors noted that the amounts paid in excess of the peer group average were due to the Fund's outperformance of the S&P 600. The Board of Directors believes that the performance adjustment feature serves as an appropriate incentive for Royce to manage the Fund's portfolio to the best of its abilities for the benefit of the Fund's stockholders. The Board of Directors also considered the following to be positive factors: (a) Royce is not entitled to receive an investment advisory 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, and (b) Royce volunteered to waive the portion of its investment advisory fee attributable to the liquidation preferences of the 7.80% Preferred and the 7.30% Preferred for any month when the Fund's net asset value average annual total return since the initial issuances of the 7.80% Preferred and the 7.30% Preferred failed to exceed the blended dividend rate on those assets. With respect to annual net expense ratios, even with the performance adjustment feature described above, the Board of Directors observed that the Fund's annual net expense ratio on total net assets (which includes assets attributable to the liquidation preferences of the 7.80% Preferred and the 7.30% Preferred) was lower than three of the funds in the peer group and lower than the average for funds in Morningstar's small-cap value category. Because the Fund uses a risk-averse approach to investing, the Board of Directors believed that risk-adjusted performance continued to be an appropriate measure of the Fund's investment performance. On this basis, the Fund placed at or near the mean for the one, three and five-year periods among the peer group, but well in excess of the Russell 2000 Index and the S&P 600 for the longer-term periods. For the five-year period, the Fund's risk-adjusted investment performance was in the first quartile of funds in Morningstar's small-cap value category. 19 After its review of the above-described matters, the Board of Directors approved the continuation of the Investment Advisory Agreement between the Fund and Royce. The Board of Directors was advised by separate legal counsel in connection with its review of the investment advisory arrangements of the Fund. INFORMATION CONCERNING ROYCE On October 1, 2001, Royce became an indirect wholly-owned subsidiary of Legg Mason. On March 31, 2002, Royce's corporate predecessor was merged into Royce Holdings, LLC (a wholly-owned subsidiary of Legg Mason), which then changed its name to Royce & Associates, LLC. As a result of this merger, Royce & Associates, LLC became the Fund's investment adviser and a direct wholly-owned subsidiary of Legg Mason. CODE OF ETHICS AND RELATED MATTERS Royce and the Fund have adopted a Code of Ethics under which directors (other than non-management directors), officers and employees of Royce ("Royce-related persons") and interested trustees/directors, officers and employees of the Fund are generally prohibited from personal trading in any security which is then being purchased or sold or considered for purchase or sale by the Fund or any other Royce account. The Code of Ethics permits such persons to engage in other personal securities transactions if (i) the securities involved are certain debt securities, money market instruments, shares of registered open-end investment companies or shares acquired from an issuer in a rights offering or under an automatic dividend reinvestment or employer-sponsored automatic payroll deduction cash purchase plan, (ii) the transactions are either non-volitional or are effected in an account over which such person has no direct or indirect influence or control or (iii) they first obtain permission to trade from Royce's Compliance Officer and either an executive officer or Senior Portfolio Manager of Royce. The Code contains standards for the granting of such permission, and permission to trade will usually be granted only in accordance with such standards. Royce's clients include several private investment companies in which Royce, Royce-related persons and/or other Legg Mason affiliates have (and, therefore, may be deemed to beneficially own) a share of up to 15% of the company's realized and unrealized net capital gains from securities transactions, but less than 25% of the company's equity interests. The Code of Ethics does not restrict transactions effected by Royce for such private investment company accounts, and transactions for such accounts are subject to Royce's allocation policies and procedures. See "Brokerage Allocation and Other Practices". The Code of Ethics can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090. The Code of Ethics is available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov. Copies of the Code of Ethics may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102. As of June 30, 2003, Royce-related persons, interested trustees/ directors, officers and employees of The Royce Funds and members of their immediate families beneficially owned 20 shares of The Royce Funds having a total value of over $48.2 million, and such persons beneficially owned equity interests in Royce-related private investment companies totaling approximately $9.9 million. INVESTMENT ADVISORY AND OTHER SERVICES ADVISORY FEE For the years ended December 31, 2002, 2001 and 2000, Royce received investment advisory fees from the Fund of $10,024,212, $9,410,553 and $7,342,211 (net of $665,068, $249,670 and $505,624 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 June 30, 2004 and may be continued in effect from year to year thereafter if such continuance is specifically approved at least annually by the Board of Directors or by the vote of a majority of the Fund's outstanding voting securities and, in either case, by a majority of the directors who are not parties to the Agreement or interested persons of any such party. The Investment Advisory Agreement will automatically terminate if it is assigned (as defined by the 1940 Act and the rules thereunder) and may be terminated without penalty by vote of a majority of the Fund's outstanding voting securities or by either party thereto on not less than 60 days' written notice. SERVICE CONTRACT WITH STATE STREET State Street Bank and Trust Company ("State Street"), the custodian of the Fund's assets, provides certain management-related services to the Fund. Such services include keeping books of accounts and rendering such financial and other statements as may be requested by the Fund from time to time 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 State Street. For the fiscal years ended December 21 31, 2002, 2001 and 2000, the Fund paid $213,265, $235,710 and $218,247 in fees to the Fund's custodian and transfer agent. 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 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 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, securities of the same issuer are frequently purchased, held or sold by more than one Royce 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 account on the same trading day, Royce may seek 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'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 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 believes 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. In addition, from time to time, certain other Royce accounts managed by Royce portfolio managers 22 other than Charles M. Royce, may establish short positions in securities in which the Fund has a long position. The Fund may effect brokerage transactions on a securities exchange with Legg Mason Wood Walker, Incorporated ("Legg Mason Wood Walker") and any other affiliated broker-dealers in accordance with the procedures and requirements set forth in Rule 17e-1 under the 1940 Act. Any such transactions would involve the use of the affiliated broker-dealer for execution purposes only and/or for locating the purchasers or sellers involved in the transaction. The affiliated broker-dealer would not be compensated because of any other research-related service or product provided or to be provided by it and may not be used to effect brokerage transactions in Nasdaq or other over-the-counter securities. Although the Fund will not effect any principal transactions with any affiliated broker-dealers, they may purchase securities that are offered in certain underwritings in which an affiliated broker-dealer is a participant in accordance with the procedures and requirements set forth in Rule 10f-3 under the 1940 Act. Charles M. Royce and/or trusts primarily for the benefit of members of his family may own or acquire substantial amounts of Legg Mason common stock. During the year ended December 31, 2002, 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, 2002, 2001 and 2000, the Fund paid brokerage commissions of approximately $1,043,502, $601,519 and $694,788, respectively. Since October 1, 2001, when Royce became an indirect wholly-owned subsidiary of Legg Mason, the Fund paid no brokerage commissions to Legg Mason Wood Walker or to any other affiliates of Legg Mason. PROXY VOTING POLICIES AND PROCEDURES In June 2003, in response to rules adopted by the Commission, Royce adopted written proxy voting policies and procedures (the "Proxy Voting Procedures") for itself, the Fund, and all The Royce Funds and clients accounts for which Royce is responsible for voting proxies. The Board of Directors of the Fund has delegated all proxy voting decisions to Royce. In voting proxies, Royce is guided by general fiduciary principles. Royce's goal is to act prudently, solely in the best interest of the beneficial owners of the accounts it manages. Royce attempts to consider all factors of its vote that could affect the value of the investment and will vote proxies in the manner it believes will be consistent with efforts to enhance and/or protect stockholder value. Royce personnel are responsible for monitoring receipt of all proxies and ensuring that proxies are received for all securities for which Royce has proxy voting responsibility. Royce divides proxies into "regularly recurring" and "non-regularly recurring" matters. Examples of regularly recurring matters include non-contested elections of directors and non-contested approvals of independent auditors. Regularly recurring matters are usually voted as recommended by the issuer's board of directors or management. Non-regularly recurring matters are brought to the attention of portfolio manager(s) for the applicable account(s) and, after giving consideration to advisories provided by an independent third party research firm, the portfolio manager(s) directs that such matters be voted in a way that he believes should better protect or enhance the value of the investment. If the portfolio manager determines that 23 information relating to a proxy requires additional analysis, is missing, or is incomplete, the portfolio manager will give the proxy to an analyst or another portfolio manager for review and analysis. Under certain circumstances, Royce may vote against a proposal from the issuer's board of directors or management. Royce's portfolio managers decide these issues on a case-by-case basis. A Royce portfolio manager may, on occasion, decide to abstain from voting a proxy or a specific proxy item when such person concludes that the potential benefit of voting is outweighed by the cost or when it is not in the client's best interest to vote. In furtherance of Royce's goal to vote proxies in the best interests of its clients, Royce follows specific procedures outlined in the Proxy Voting Procedures to identify, assess and address material conflicts that may arise between Royce's interests and those of its clients before voting proxies on behalf of such clients. In the event such a material conflict of interest is identified, the proxy will be voted by Royce in accordance with the recommendation given by an independent third party research firm. NET ASSET VALUE The net asset value ("NAV") of the Fund's shares of Common Stock is calculated as of the close of regular trading on the NYSE (generally 4:00 p.m. Eastern time) every day that the NYSE is open. The Fund makes this information available daily by telephone (800-221-4268) and via its web site (www.roycefunds.com) and through electronic distribution for media publication, including major internet-based financial services web sites and portals (bloomberg.com, yahoo.com, cbsmarketwatch.com, etc.). Currently, The Wall Street Journal, The New York Times and Barron's publish NAVs for closed-end investment companies weekly. The NAV per share 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 outstanding shares of Common Stock. The Fund's investments are valued based on market value or, if market quotations are not readily available, at their fair value as determined in good faith under procedures established by the Fund's Board of Directors. For the years ended December 31, 2002, 2001 and 2000, the Fund's portfolio turnover rates were 35%, 30% and 36%, respectively. BOOK-ENTRY SYSTEM 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. The Cumulative Preferred Stock will be held in book-entry only form. Shares of Cumulative Preferred Stock will not be delivered in certificated form to individual purchasers thereof. The laws of some jurisdictions require that certain purchasers of Cumulative Preferred Stock take physical delivery of such securities in certificated form. Such limits and laws may impair the ability to transfer beneficial interests in shares of Cumulative Preferred Stock. 24 DTC has provided the Fund with the following information: DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the United States Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing corporation" registered under Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds securities that its participants ("Direct Participants") deposit with DTC. DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through computerized records for Direct Participants' accounts. This eliminates the need to exchange certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Other organizations, such as securities brokers and dealers, banks and trust companies that work through a Direct Participant, also use DTC's book-entry system. The rules that apply to DTC and its participants are on file with the Securities and Exchange Commission. A number of Direct Participants, together with the New York Stock Exchange, Inc., The American Stock Exchange LLC and the National Association of Securities Dealers, Inc., own DTC. DTC's ability to perform properly its services is also dependent upon other parties, including, but not limited to, issuers and their agents, as well as DTC's participants, third party vendors from whom DTC licenses software and hardware, and third party vendors on whom DTC relies for information or the provision of services, including telecommunication and electrical utility service providers, among others. The information in this section concerning DTC and DTC's system has been obtained from sources that the Fund believes to be reliable, but the Fund takes no responsibility for the accuracy thereof. FINANCIAL STATEMENTS The audited financial statements for the fiscal year ended December 31, 2002, together with the report of Tait, Weller & Baker thereon, and the unaudited financial statements for the six months ended June 30, 2003, are included below in this Statement of Additional Information. 25 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS DECEMBER 31, 2002 - -------------------------------------------------------------------------------- COMMON STOCKS - 94.2% SHARES VALUE ------ ----- CONSUMER PRODUCTS - 7.4% Apparel and Shoes - 2.6% Jones Apparel Group (a) 81,500 $ 2,888,360 K-Swiss Cl. A 119,000 2,583,490 Nautica Enterprises (a) 85,700 952,127 Oshkosh B'Gosh Cl. A 104,300 2,925,615 Polo Ralph Lauren Cl. A (a) 150,000 3,264,000 Timberland Company Cl. A (a) 15,000 534,150 Weyco Group 127,664 4,381,428 Wolverine World Wide 99,400 1,501,934 ------------ 19,031,104 ------------ Collectibles - 0.3% The Boyds Collection (a,d) 210,100 1,397,165 Enesco Group (a) 117,200 829,776 ------------ 2,226,941 ------------ Food/Beverage/Tobacco - 0.6% 800 JR Cigar (a,e) 172,400 2,241,200 Hain Celestial Group (a) 37,800 574,560 Hershey Creamery 709 1,311,650 ------------ 4,127,410 ------------ Home Furnishing/Appliances - 1.0% Bassett Furniture Industries 116,675 1,670,786 Falcon Products (a) 377,000 1,526,850 La-Z-Boy (d) 68,200 1,635,436 Lifetime Hoan 295,327 1,408,710 Natuzzi ADR (b) 62,200 631,952 ------------ 6,873,734 ------------ Publishing - 0.6% Marvel Enterprises (a) 304,400 2,733,512 Scholastic Corporation (a) 35,000 1,258,250 ------------ 3,991,762 ------------ Sports and Recreation - 1.2% Callaway Golf 35,000 463,750 Coachmen Industries 67,700 1,069,660 Fleetwood Enterprises (a,d) 234,300 1,839,255 Monaco Coach (a) 123,950 2,051,372 Sturm, Ruger & Co. 258,400 2,472,888 Thor Industries (d) 22,100 760,903 ------------ 8,657,828 ------------ Other Consumer Products - 1.1% Burnham Corporation Cl. B 18,000 648,000 Fossil (a) 15,000 305,100 Lazare Kaplan International (a) 103,600 563,584 Matthews International Cl. A 196,000 4,376,876 Oakley (a) 175,000 1,797,250 Scotts (The) Cl. A (a) 10,000 490,400 ------------ 8,181,210 ------------ TOTAL (Cost $39,087,482) 53,089,989 ============ CONSUMER SERVICES - 5.4% Leisure/Entertainment - 0.8% Ascent Media Group Cl. A (a) 380,900 426,608 Corus Entertainment Cl. B (a) 22,000 262,900 Hasbro 50,000 577,500 Hearst-Argyle Television (a) 11,000 265,210 +Magna Entertainment Cl. A (a,d) 140,800 872,960 Shuffle Master (a,d) 15,000 286,650 Ticketmaster Cl. B (a) 121,200 2,571,864 +TiVo (a,d) 70,000 366,100 ------------ 5,629,792 ------------ Restaurants/Lodgings - 1.0% +Benihana Cl. A (a,d) 2,500 33,750 Four Seasons Hotels 80,000 2,260,000 IHOP Corporation (a) 161,700 3,880,800 Prime Hospitality (a) 106,100 864,715 Ryan's Family Steak Houses (a) 40,900 464,215 ------------ 7,503,480 ------------ Retail Stores - 2.5% Big Lots (a) 307,200 4,064,256 Charming Shoppes (a,d) 753,400 3,149,212 Claire's Stores 127,700 2,818,339 PAYLESS SHOESOURCE (a) 93,200 4,797,004 Stein Mart (a) 192,800 1,176,080 Urban Outfitters (a) 83,800 1,975,166 ------------ 17,980,057 ------------ Other Consumer Services - 1.1% ITT Educational Services (a) 120,000 2,826,000 SOTHEBY'S HOLDINGS CL. A (a) 500,200 4,501,800 Strayer Education 10,000 575,000 ------------ 7,902,800 ------------ TOTAL (Cost $39,910,757) 39,016,129 ============ FINANCIAL INTERMEDIARIES - 10.0% Banking - 2.2% BOK Financial (a) 121,904 3,948,471 Farmers & Merchants Bank of Long Beach 1,266 4,000,560 First National Bank Alaska 2,130 2,886,150 Mechanics Bank 200 3,320,000 Oriental Financial Group 63,800 1,568,204 ------------ 15,723,385 ------------ Insurance - 7.4% Argonaut Group 187,000 2,758,250 Erie Indemnity Company Cl. A (d) 107,900 3,912,454 Everest Re Group 25,300 1,399,090 Fidelity National Financial 13,275 435,818 First American 31,700 703,740 Leucadia National 57,900 2,160,249 Markel Corporation (a) 4,200 863,100 NYMAGIC (a) 60,200 1,170,890 Navigators Group (a) 83,200 1,909,440 +PICO Holdings (a) 151,100 2,029,273 PMA Capital Cl. A (d) 241,700 3,463,561 PXRE Group 176,551 4,325,499 The Phoenix Companies 81,900 622,440 PROASSURANCE (a) 430,170 9,033,570 RLI 118,724 3,312,400 Reinsurance Group of America (d) 30,000 812,400 Trenwick Group (d) 212,260 152,827 Wesco Financial 11,990 3,716,301 WHITE MOUNTAINS INSURANCE GROUP (d) 25,600 8,268,800 Zenith National Insurance 106,900 2,514,288 ------------ 53,564,390 ------------ Securities Brokers - 0.4% E*TRADE Group (a) 575,000 2,794,500 ------------ TOTAL (Cost $48,682,808) 72,082,275 ============ FINANCIAL SERVICES - 6.3% Information and Processing - 2.0% +Advent Software (a,d) 33,000 449,790 BARRA (a,d) 42,200 1,279,926 eFunds Corporation (a) 177,675 1,618,619 +FactSet Research Systems (d) 140,000 3,957,800 26 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- FINANCIAL SERVICES (CONTINUED) Information and Processing (continued) Fair, Isaac and Co. 5,190 $ 221,613 Global Payments 61,500 1,968,615 Moody's Corporation 50,000 2,064,500 National Processing (a) 20,000 321,000 SEI Investments 93,200 2,533,176 ------------ 14,415,039 ------------ Insurance Brokers - 1.4% Brown & Brown 20,000 646,400 Crawford & Co. Cl. A 297,350 1,219,135 Crawford & Co. Cl. B 75,300 376,500 Gallagher (Arthur J.) & Company 106,200 3,120,156 HILB, ROGAL & HAMILTON 115,350 4,717,815 ------------ 10,080,006 ------------ Investment Management - 2.7% Affiliated Managers Group (a,d) 60,000 3,018,000 Alliance Capital Management Holding L.P. (d) 139,000 4,309,000 BKF Capital Group (a) 94,000 1,659,100 BlackRock Cl. A (a) 35,000 1,379,000 Eaton Vance (d) 80,200 2,265,650 Federated Investors Cl. B 15,000 380,550 John Nuveen Company Cl. A 119,200 3,021,720 +Neuberger Berman 105,000 3,516,450 ------------ 19,549,470 ------------ Other Financial Services - 0.2% PRG-Schultz International (a) 123,800 1,101,820 ------------ TOTAL (Cost $33,842,910) 45,146,335 ============ HEALTH - 8.3% Commercial Services - 1.6% IDEXX Laboratories (a) 104,100 3,466,530 PAREXEL International (a) 277,700 3,051,923 Pharmaceutical Product Development (a) 10,000 292,700 Quintiles Transnational (a) 180,300 2,181,630 Sybron Dental Specialties (a) 21,000 311,850 The TriZetto Group (a) 190,200 1,167,828 Young Innovations (a) 57,550 1,339,188 ------------ 11,811,649 ------------ Drugs and Biotech - 2.1% Abgenix (a) 38,000 280,060 Affymetrix (a) 86,600 1,982,274 +Albany Molecular Research (a,d) 40,000 591,640 Antigenics (a,d) 38,500 394,240 Applera Corporation- Celera Genomics Group (a,d) 199,200 1,902,360 Biopure Corporation Cl. A (a,d) 43,200 160,704 BioSource International (a) 1,600 9,582 Celgene Corporation (a) 40,000 858,800 Cerus Corporation (a,d) 21,700 466,550 Chiron Corporation (a,d) 21,800 819,680 Gene Logic (a) 308,100 1,937,949 Genzyme Corporation - General Division (a) 28,000 827,960 IDEC Pharmaceuticals (a) 28,100 932,077 Lexicon Genetics (a) 256,200 1,211,826 Millennium Pharmaceuticals (a) 24,000 190,560 Perrigo (a,d) 169,900 2,064,285 Shire Pharmaceuticals Group ADR (a,b,d) 20,853 393,913 ------------ 15,024,460 ------------ Health Services - 0.9% Covance (a) 132,700 3,263,093 Gentiva Health Services (a) 30,150 265,621 Health Management Associates Cl. A 27,400 490,460 Lincare Holdings (a) 24,600 777,852 Manor Care (a) 38,300 712,763 MedQuist (a) 73,893 1,497,072 ------------ 7,006,861 ------------ Personal Care - 0.6% Ocular Sciences (a,d) 177,500 2,754,800 Regis 57,200 1,486,628 ------------ 4,241,428 ------------ Surgical Products and Devices - 3.1% ARROW INTERNATIONAL (d) 180,600 7,345,002 CONMED (a) 38,500 754,215 Datascope 37,000 917,637 Diagnostic Products Corporation 25,000 965,500 Haemonetics (a,d) 92,900 1,993,634 Invacare 100,000 3,330,000 Novoste (a,d) 66,500 480,130 STERIS (a) 48,600 1,178,550 Varian Medical Systems (a) 75,800 3,759,680 Zoll Medical (a) 20,200 720,534 ------------ 21,444,882 ------------ TOTAL (Cost $54,015,112) 59,529,280 ============ INDUSTRIAL PRODUCTS - 14.1% Building Systems and Components - 1.2% Decker Manufacturing 6,022 218,298 Preformed Line Products Company 131,600 2,193,772 SIMPSON MANUFACTURING (a) 190,400 6,264,160 ------------ 8,676,230 ------------ Construction Materials - 1.9% ASH GROVE CEMENT COMPANY CL. B 50,518 6,377,897 FLORIDA ROCK INDUSTRIES 158,800 6,042,340 Oregon Steel Mills (a) 247,900 996,558 ------------ 13,416,795 ------------ Industrial Components - 1.5% Bel Fuse Cl. A (a) 6,300 114,030 Belden (d) 47,800 727,516 Donaldson Company 26,000 936,000 Kaydon Corporation 161,200 3,419,052 Penn Engineering & Manufacturing 251,600 2,679,540 Penn Engineering & Manufacturing Cl. A 77,600 869,120 PerkinElmer 135,000 1,113,750 Powell Industries (a) 32,400 553,360 Woodhead Industries 45,400 513,020 ------------ 10,925,388 ------------ Machinery - 3.4% COHERENT (a) 233,700 4,662,315 Federal Signal (d) 58,600 1,138,012 Graco 26,550 760,658 LINCOLN ELECTRIC HOLDINGS 237,880 5,506,922 National Instruments (a,d) 41,100 1,335,339 Nordson Corporation 172,200 4,275,726 Oshkosh Truck 5,000 307,500 PAXAR (a) 175,100 2,582,725 Woodward Governor 83,600 3,636,600 ------------ 24,205,797 ------------ Paper and Packaging - 0.4% Peak International (a) 408,400 1,547,836 Sealed Air (a) 34,000 1,268,200 ------------ 2,816,036 ------------ 27 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- INDUSTRIAL PRODUCTS (CONTINUED) Pumps, Valves and Bearings - 0.8% Baldor Electric (d) 62,900 $ 1,242,275 ConBraCo Industries (a) 7,630 572,250 Denison International ADR (a,b) 89,400 1,430,400 Franklin Electric 23,600 1,133,036 NN 127,100 1,269,729 ------------ 5,647,690 ------------ Specialty Chemicals and Materials - 1.2% Arch Chemicals 38,200 697,150 CFC International (a) 123,500 549,575 Hawkins 301,278 2,708,489 MACDERMID 211,631 4,835,768 ------------ 8,790,982 ------------ Textiles - 0.3% Fab Industries (a) 67,700 551,755 Unifi (a) 265,100 1,391,775 ------------ 1,943,530 ------------ Other Industrial Products - 3.4% BHA Group Holdings (a) 187,252 3,211,372 Brady Corporation Cl. A 79,400 2,647,990 Diebold 100,000 4,122,000 IMPCO Technologies (a,d) 15,500 72,695 KIMBALL INTERNATIONAL CL. B 334,880 4,772,040 Maxwell Technologies (a,d) 26,500 160,325 Myers Industries 52,727 564,179 Peerless Mfg. (a,c) 158,600 1,316,380 Steelcase Cl. A 82,500 904,200 Trinity Industries (d) 20,000 379,200 VELCRO INDUSTRIES 525,800 4,811,070 Wescast Industries Cl. A 56,000 1,394,400 ------------ 24,355,851 ------------ TOTAL (Cost $73,264,335) 100,778,299 ============ INDUSTRIAL SERVICES - 12.9% Advertising/Publishing - 0.8% Catalina Marketing (a,d) 60,000 1,110,000 Grey Global Group 3,817 2,332,569 Interpublic Group of Companies 180,000 2,534,400 ------------ 5,976,969 ------------ Commercial Services - 4.2% ABM Industries 119,200 1,847,600 ALLIED WASTE INDUSTRIES (a) 594,800 5,948,000 Carlisle Holdings (a) 204,900 563,475 Central Parking 89,200 1,682,312 +Convergys Corporation (a) 144,000 2,181,600 Cornell Companies (a,d) 124,400 1,119,600 iGATE Corporation (a) 139,500 365,490 Iron Mountain (a) 127,450 4,207,125 Korn/Ferry International (a) 87,400 653,752 Learning Tree International (a,d) 53,400 731,580 MPS Group (a) 294,300 1,630,422 Manpower 55,800 1,780,020 +Metro One Telecommunications (a,d) 25,000 161,250 New Horizons Worldwide (a) 136,500 539,175 On Assignment (a) 78,800 671,376 RemedyTemp Cl. A (a) 78,500 1,099,000 +Renaissance Learning (a,d) 10,000 189,000 Spherion Corporation (a) 109,000 730,300 +TRC Companies (a,d) 52,000 682,760 TMP Worldwide (a) 149,000 1,685,190 West Corporation (a) 75,000 1,245,000 ------------ 29,714,027 ------------ Engineering and Construction - 0.4% Clayton Homes (d) 25,000 304,500 EMCOR Group (a) 15,000 795,150 Jacobs Engineering Group (a,d) 20,000 712,000 McDermott International (a) 71,000 310,980 Washington Group International (a) 50,000 797,500 ------------ 2,920,130 ------------ Food/Tobacco Processors - 1.3% FARMER BROS. 22,000 6,798,000 MGP Ingredients 321,200 2,505,360 ------------ 9,303,360 ------------ Industrial Distribution - 1.0% Central Steel & Wire 3,699 1,764,423 RITCHIE BROS. AUCTIONEERS (a,d) 155,200 5,020,720 ------------ 6,785,143 ------------ Printing - 1.5% BOWNE & CO. 383,100 4,578,045 Ennis Business Forms 62,700 728,574 Moore Corporation (a) 90,700 825,370 New England Business Service 178,300 4,350,520 ------------ 10,482,509 ------------ Transportation and Logistics - 3.1% Airborne 100,000 1,483,000 AirNet Systems (a) 219,000 1,077,480 Atlas Air Worldwide Holdings (a,d) 165,000 249,150 C. H. Robinson Worldwide 40,000 1,248,000 CNF 62,600 2,080,824 Continental Airlines Cl. B (a,d) 150,000 1,087,500 EGL (a) 198,525 2,828,981 +Forward Air (a) 95,000 1,843,950 Frozen Food Express Industries (a) 306,635 796,331 Hub Group Cl. A (a) 77,000 369,600 Landstar System (a,d) 35,800 2,089,288 Patriot Transportation Holding (a) 136,300 3,775,510 Pittston Brink's Group 137,278 2,536,897 UTI Worldwide (d) 45,000 1,181,250 ------------ 22,647,761 ------------ Other Industrial Services - 0.6% Landauer 117,900 4,097,025 Republic Services (a) 18,600 390,228 ------------ 4,487,253 ------------ TOTAL (Cost $81,661,251) 92,317,152 ============ NATURAL RESOURCES - 6.4% Energy Services - 2.4% Carbo Ceramics 105,600 3,558,720 ENSCO International 6,443 189,746 Global Industries (a) 119,500 498,315 Helmerich & Payne 98,400 2,746,344 Input/Output (a) 540,100 2,295,425 Precision Drilling (a) 37,500 1,220,250 Tidewater 21,600 671,760 +Universal Compression Holdings (a) 115,000 2,199,950 Willbros Group (a) 460,600 3,786,132 ------------ 17,166,642 ------------ 28 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- NATURAL RESOURCES (CONTINUED) Oil and Gas - 2.0% Tom Brown (a) 76,000 $ 1,907,600 +Cimarex Energy (a) 138,170 2,473,243 DENBURY RESOURCES (a) 402,600 4,549,380 EOG Resources (d) 5,000 199,600 Holly Corporation 20,000 437,000 Husky Energy 75,000 781,952 PetroCorp (a) 155,400 1,592,850 3TEC Energy (a) 124,200 1,762,398 Toreador Resources (a) 100,300 251,753 Vintage Petroleum 48,300 509,565 ------------ 14,465,341 ------------ Precious Metals and Mining - 0.8% AngloGold ADR (b) 111,900 3,833,694 +Glamis Gold (a,d) 70,000 793,800 Gold Fields ADR (b) 57,800 806,888 MK Gold (a) 517,900 220,108 ------------ 5,654,490 ------------ Real Estate - 1.2% Alico 52,000 1,383,200 Chelsea Property Group 55,000 1,832,050 Consolidated-Tomoka Land 13,564 261,107 Public Storage 45,000 1,453,950 Trammell Crow Company (a) 432,400 3,891,600 ------------ 8,821,907 ------------ TOTAL (Cost $36,026,788) 46,108,380 ============ TECHNOLOGY - 18.5% Aerospace/Defense - 1.2% Curtiss-Wright (d) 58,300 3,720,706 Ducommun (a) 182,300 2,889,455 Herley Industries (a) 30,000 522,240 Integral Systems (a) 74,800 1,499,740 ------------ 8,632,141 ------------ Components and Systems - 5.2% Adaptec (a) 99,500 562,175 Advanced Digital Information (a) 90,000 603,900 American Power Conversion (a,d) 231,200 3,502,680 Analogic 5,000 251,440 Cognex Corporation (a) 163,400 3,011,462 DDi Corporation (a) 20,000 4,400 Dionex (a) 96,000 2,852,160 Excel Technology (a) 168,500 3,014,465 Imation Corporation (a) 35,700 1,252,356 InFocus Corporation (a) 79,000 486,640 KEMET (a) 135,000 1,179,900 Kronos (a) 35,850 1,326,092 Newport (a,d) 102,600 1,288,656 Pemstar (a,d) 245,000 553,700 Perceptron (a) 397,400 854,410 Radiant Systems (a) 57,500 553,725 Rainbow Technologies (a) 116,900 838,173 REMEC (a) 214,200 831,096 Scitex (a) 245,700 346,437 Storage Technology (a) 90,000 1,927,800 Symbol Technologies 304,900 2,506,278 TTM Technologies (a) 280,500 928,175 TECHNITROL 285,900 4,614,426 Vishay Intertechnology (a) 73,900 826,202 Zebra Technologies Cl. A (a) 62,500 3,581,250 ------------ 37,697,998 ------------ Distribution - 2.4% Anixter International (a) 41,900 974,175 Arrow Electronics (a) 326,100 4,170,819 Avnet (a) 405,355 4,389,995 Benchmark Electronics (a,d) 45,400 1,301,164 Plexus (a) 269,600 2,367,088 Tech Data (a) 151,500 4,084,440 ------------ 17,287,681 ------------ Internet Software and Services - 0.5% CNET Networks (a) 379,400 1,028,174 CryptoLogic (a,d) 202,000 955,460 DoubleClick (a) 196,700 1,113,322 RealNetworks (a) 85,400 325,374 Vastera (a) 15,000 84,765 ------------ 3,507,095 ------------ IT Services - 3.7% American Management Systems (a) 331,900 3,979,481 Answerthink (a) 655,000 1,637,500 +BearingPoint (a) 340,000 2,346,000 CGI Group Cl. A (a,d) 106,700 466,279 Covansys Corporation (a) 251,600 945,513 DiamondCluster International Cl. A (a) 233,900 734,446 Forrester Research (a) 91,500 1,424,655 Gartner Cl. A (a) 166,000 1,527,200 Keane (a) 467,000 4,198,330 MAXIMUS (a,d) 88,000 2,296,800 Perot Systems Cl. A (a) 115,100 1,233,872 QRS Corporation (a) 57,500 379,500 Sapient Corporation (a,d) 1,099,400 2,253,770 Syntel (a) 65,300 1,371,953 Unisys Corporation (a) 215,000 2,128,500 ------------ 26,923,799 ------------ Semiconductors and Equipment - 2.2% BE Semiconductor Industries (a) 58,000 255,200 Credence Systems (a) 10,600 98,898 Cymer (a,d) 14,500 467,625 DuPont Photomasks (a) 35,000 813,750 Electroglas (a,d) 281,700 433,818 Exar (a) 87,300 1,082,520 Fairchild Semiconductor Cl. A (a) 175,000 1,874,250 Helix Technology 51,900 581,280 +Integrated Circuit Systems (a) 140,600 2,565,950 Intevac (a) 191,850 765,482 Kulicke & Soffa Industries (a,d) 105,800 605,176 Lam Research (a) 45,000 486,000 Lattice Semiconductor (a) 264,000 2,315,280 Mentor Graphics (a) 225,700 1,774,002 National Semiconductor (a) 23,200 348,232 Novellus Systems (a) 12,000 336,960 NVIDIA Corporation (a,d) 35,000 402,850 Veeco Instruments (a,d) 65,000 751,400 ------------ 15,958,673 ------------ Software - 1.8% Adobe Systems 30,000 744,030 ANSYS (a,d) 45,500 919,100 Aspen Technology (a,d) 27,100 76,693 Autodesk 251,000 3,589,300 Business Objects ADR (a,d) 25,500 382,500 29 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- TECHNOLOGY (CONTINUED) Software (continued) JDA Software Group (a) 149,900 $ 1,448,034 MRO Software (a) 46,000 558,670 MSC.Software (a) 42,600 328,872 Macromedia (a) 61,600 656,040 Manugistics Group (a,d) 49,200 118,080 Novell (a) 90,000 300,600 Phoenix Technologies (a) 40,900 235,993 Progress Software (a) 50,500 653,975 SPSS (a) 107,500 1,503,925 Transaction Systems Architects Cl. A (a) 237,300 1,542,450 ------------ 13,058,262 ------------ Telecommunications - 1.5% ADC Telecommunications (a) 113,000 236,170 +ADTRAN (a,d) 40,000 1,316,000 Allegiance Telecom (a,d) 2,516,700 1,686,189 +Andrew Corporation (a,d) 30,000 308,400 Globecomm Systems (a) 243,700 913,875 IDT Corporation (a) 25,000 432,250 IDT Corporation Cl. B (a) 40,000 620,400 Inet Technologies (a) 65,000 396,500 Level 3 Communications (a,d) 488,400 2,393,160 Liberty Satellite & Technology Cl. A (a,d) 116,530 308,804 PECO II (a) 93,600 59,904 Plantronics (a) 55,100 833,663 Time Warner Telecom Cl. A (a,d) 242,000 510,620 +Tollgrade Communications (a,d) 35,500 416,415 ------------ 10,432,350 ------------ TOTAL (Cost $161,093,372) 133,497,999 ============ MISCELLANEOUS - 4.9% TOTAL (Cost $39,674,965) 35,529,837 ============ TOTAL COMMON STOCKS (Cost $607,259,780) 677,095,675 ============ PREFERRED STOCKS - 0.1% +Aristotle Corporation 11.00% Conv. 4,800 38,160 SVB Capital I 8.25% 20,000 484,000 ------------ TOTAL PREFERRED STOCKS (Cost $531,005) 522,160 ============ PRINCIPAL AMOUNT --------- CORPORATE BONDS - 0.2% Dixie Group 7.00% Conv. Sub. Deb. due 5/15/12 $ 584,000 297,840 Richardson Electronics 7.25% (c) Conv. Sub. Deb. due 12/15/06 1,319,000 1,055,200 ------------ TOTAL CORPORATE BONDS (Cost $1,555,818) 1,353,040 ============ U.S. TREASURY OBLIGATIONS - 4.3% U.S. Treasury Notes 4.25%, due 3/31/03 25,000,000 25,185,550 +7.50%, due 2/15/05 5,000,000 5,606,640 ------------ TOTAL U.S. TREASURY OBLIGATIONS (Cost $30,461,424) 30,792,190 ============ REPURCHASE AGREEMENT - 1.2% State Street Bank & Trust Company, 0.50% dated 12/31/02, due 1/2/03, maturity value $8,646,240 (collateralized by U.S. Treasury Bonds, 6.00% due 2/15/26, valued at $8,820,698) (Cost $8,646,000) 8,646,000 ============ TOTAL INVESTMENTS - 100.0% (Cost $648,454,027) 718,409,065 CASH AND OTHER ASSETS LESS LIABILITIES 2,366,558 PREFERRED STOCK (160,000,000) ------------ NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS $560,775,623 ============ - -------------------------------------------------------------------------------- (a) Non-income producing. (b) American Depository Receipt. (c) At December 31, 2002, the Fund owned 5% or more of the Company's outstanding voting securities thereby making the Company an Affiliated Company as that term is defined in the Investment Company Act of 1940. (d) A portion of these securities were on loan at December 31, 2002. Total market value of loaned securities at December 31, 2002 was $23,072,285. (e) A security for which market quotations are no longer readily available represents 0.3% of investments. This security has been valued at its fair value under procedures established by the Fund's Board of Directors. + New additions in 2002. BOLD INDICATES THE FUND'S LARGEST 20 EQUITY HOLDINGS IN TERMS OF DECEMBER 31, 2002 MARKET VALUE. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $652,067,259. At December 31, 2002, net unrealized appreciation for all securities was $66,341,806, consisting of aggregate gross unrealized appreciation of $170,833,078 and aggregate gross unrealized depreciation of $104,491,272. The primary differences in book and tax basis cost is the timing of the recognition of losses on securities sold and amortization of discount for book and tax purposes. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 30 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2002 - -------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $639,808,027) $709,763,065 Repurchase agreement (at cost and value) 8,646,000 Cash 32 Collateral from brokers on securities loaned 25,147,370 Receivable for investments sold 6,380,230 Receivable for dividends and interest 1,011,806 Prepaid expenses 23,624 - -------------------------------------------------------------------------------- Total Assets 750,972,127 - -------------------------------------------------------------------------------- LIABILITIES: Payable for collateral on securities loaned 25,147,370 Payable for investments purchased 3,821,040 Payable for investment advisory fee 802,926 Preferred dividends accrued but not yet declared 266,225 Accrued expenses 158,943 - -------------------------------------------------------------------------------- Total Liabilities 30,196,504 - -------------------------------------------------------------------------------- PREFERRED STOCK: 7.80% Cumulative Preferred Stock - $0.001 par value, $25 liquidation value per share; 2,400,000 shares outstanding 60,000,000 7.30% Tax-Advantaged Cumulative Preferred Stock - $0.001 par value, $25 liquidation value per share; 4,000,000 shares outstanding 100,000,000 - -------------------------------------------------------------------------------- Total Preferred Stock 160,000,000 - -------------------------------------------------------------------------------- NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS $560,775,623 - -------------------------------------------------------------------------------- ANALYSIS OF NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Par value of Common Stock - $0.001 per share; 42,417,362 shares outstanding (150,000,000 shares authorized) $ 42,417 Additional paid-in capital 496,006,603 Accumulated net realized loss on investments (3,813,147) Net unrealized appreciation on investments 69,955,038 Preferred dividends accrued but not yet declared (266,224) - -------------------------------------------------------------------------------- Net Assets applicable to Common Stockholders (net asset value per share - $13.22) $560,775,623 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Year ended Year ended December 31, December 31, 2002 2001 ------------ ------------ INVESTMENT OPERATIONS: Net investment income (loss) $ (583,347) $ 2,247,245 Net realized gain on investments 62,933,497 53,961,553 Net change in unrealized appreciation on investments (156,381,089) 46,195,029 - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from investment operations (94,030,939) 102,403,827 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (581,030) (370,182) Net realized gain on investments (11,398,970) (11,609,818) - -------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (11,980,000) (11,980,000) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS (106,010,939) 90,423,827 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (2,981,664) (1,768,474) Net realized gain on investments (58,496,049) (55,464,014) - -------------------------------------------------------------------------------- Total distributions to Common Stockholders (61,477,713) (57,232,488) - -------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders 39,123,307 32,687,267 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS (128,365,345) 65,878,606 NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Beginning of year 689,140,968 623,262,362 - -------------------------------------------------------------------------------- End of year (including undistributed net investment income of $2,116,678 in 2001) $ 560,775,623 $689,140,968 - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 31 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Income: Dividends $ 7,614,855 Interest 2,842,281 - -------------------------------------------------------------------------------- Total income 10,457,136 - -------------------------------------------------------------------------------- Expenses: Investment advisory fees 10,689,280 Stockholder reports 306,974 Administrative and office facilities expenses 210,877 Custody and transfer agent fees 213,265 Directors' fees 115,005 Professional fees 68,790 Other expenses 101,360 - -------------------------------------------------------------------------------- Total expenses 11,705,551 Fees waived by investment advisor (665,068) - -------------------------------------------------------------------------------- Net expenses 11,040,483 - -------------------------------------------------------------------------------- Net investment income (loss) (583,347) - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 62,933,497 Net change in unrealized appreciation on investments (156,381,089) - -------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (93,447,592) - -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS RESULTING FROM INVESTMENT OPERATIONS (94,030,939) - -------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS (11,980,000) - -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS $(106,010,939) - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 32 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.
Years ended December 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $17.31 $16.56 $15.77 $15.72 $16.91 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS: Net investment income (loss) (0.02) 0.05 0.18 0.26 0.17 Net realized and unrealized gain (loss) on investments (2.25) 2.58 2.58 1.65 0.67 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment operations (2.27) 2.63 2.76 1.91 0.84 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (0.01) (0.01) (0.03) (0.04) (0.03) Net realized gain on investments (0.28) (0.30) (0.30) (0.32) (0.26) - ---------------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (0.29) (0.31) (0.33) (0.36) (0.29) - ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS (2.56) 2.32 2.43 1.55 0.55 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (0.07) (0.05) (0.13) (0.15) (0.16) Net realized gain on investments (1.44) (1.44) (1.35) (1.22) (1.38) - ---------------------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (1.51) (1.49) (1.48) (1.37) (1.54) - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders (0.02) (0.08) (0.16) (0.13) (0.09) Effect of Preferred Stock offering - - - - (0.11) - ---------------------------------------------------------------------------------------------------------------------------------- Total capital stock transactions (0.02) (0.08) (0.16) (0.13) (0.20) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $13.22 $17.31 $16.56 $15.77 $15.72 - ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $13.25 $15.72 $14.438 $13.063 $13.75 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (a): Market Value (6.9)% 20.0% 22.7% 5.7% 1.5% Net Asset Value (15.6)% 15.2% 16.6% 11.7% 3.3% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (b,c) 1.72% 1.61% 1.43% 1.39% 1.31% Management fee expense 1.56% 1.45% 1.25% 1.18% 1.10% Other operating expenses 0.16% 0.16% 0.18% 0.21% 0.21% Net investment income (loss) (0.09)% 0.35% 1.18% 1.47% 1.11% SUPPLEMENTAL DATA: Net Assets Applicable to Common Stockholders, End of Period (in thousands) $560,776 $689,141 $623,262 $552,928 $516,963 Liquidation Value of Preferred Stock, End of Period (in thousands) $160,000 $160,000 $160,000 $160,000 $160,000 Portfolio Turnover Rate 35% 30% 36% 41% 43% PREFERRED STOCK: Total shares outstanding 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 Asset coverage per share $112.62 $132.68 $122.38 $111.40 $105.78 Liquidation preference per share $25.00 $25.00 $25.00 $25.00 $25.00 Average market value per share: 7.80% Cumulative (d) $26.37 $25.70 $23.44 $24.98 $25.91 7.30% Tax-Advantaged Cumulative (d) $25.82 $25.37 $22.35 $24.24 $25.43 - ----------------------------------------------------------------------------------------------------------------------------------
(a) The Market Value Total Return is calculated assuming a purchase of Common Stock on the opening of the first business day and a sale on the closing of the last business day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation, to be reinvested at prices obtained under the Fund's Distribution Reinvestment and Cash Purchase Plan. Net Asset Value Total Return is calculated on the same basis, except that the Fund's net asset value is used on the purchase and sale dates instead of market value. (b) Expense ratios based on total average net assets including liquidation value of Preferred Stock were 1.38%, 1.30%, 1.12%, 1.06% and 1.06% for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively. (c) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.82%, 1.65%, 1.51%, 1.48% and 1.34% for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively. (d) The average of month-end market values during the period. 33 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Royce Value Trust, Inc. ("the Fund") was incorporated under the laws of the State of Maryland on July 1, 1986 as a diversified closed-end investment company. The Fund commenced operations on November 26, 1986. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. VALUATION OF INVESTMENTS: Securities listed on an exchange or on the Nasdaq National Market System (NMS) 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 bid price for exchange-listed securities and at the average of their bid and asked prices for Nasdaq NMS 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 bid price. Securities for which market quotations are not readily available are valued at their fair value under procedures established by the Fund's Board of Directors. 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. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes. EXPENSES: The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors' Fees otherwise payable. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement. TAXES: As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The Schedule of Investments includes information regarding income taxes under the caption "Income Tax Information". DISTRIBUTIONS: The Fund currently has a policy of paying quarterly distributions on the Fund's Common Stock. Distributions are currently being made at the annual rate of 9% of the rolling average of the prior four calendar quarter-end NAVs of the Fund's Common Stock, with the fourth quarter distribution being the greater of 2.25% of the rolling average or the distribution required by IRS regulations. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year. REPURCHASE AGREEMENTS: The Fund enters into repurchase agreements with respect to its portfolio securities solely with State Street Bank and Trust Company ("SSB&T"), the custodian of its assets. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of SSB&T, including possible delays or restrictions upon the ability of the Fund to dispose of the underlying securities. 34 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 2. SECURITIES LENDING: The Fund loans securities to qualified institutional investors for the purpose of realizing additional income. This income is included in interest income. Collateral on all securities loaned for the Fund is accepted in cash and is invested temporarily, typically, and specifically at December 31, 2002, in a registered money market fund, by the custodian. The collateral is equal to at least 100% of the current market value of the loaned securities. 3. CAPITAL STOCK: The Fund currently has two issues of Preferred Stock outstanding: 7.80% Cumulative Preferred Stock and 7.30% Tax-Advantaged Cumulative Preferred Stock. Both issues of Preferred Stock have a liquidation preference of $25.00 per share. Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing Preferred Stock. The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that distributions are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital. The Fund issued 2,615,641 and 2,167,201 shares of Common Stock as reinvestment of distributions by Common Stockholders for the years ended December 31, 2002 and 2001, respectively. 4. INVESTMENT ADVISORY AGREEMENT: As compensation for its services under the Investment Advisory Agreement, Royce & Associates, LLC ("Royce") receives a fee comprised of a Basic Fee ("Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 600 SmallCap Index ("S&P 600"). The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the Fund's month-end net assets attributable to common stockholders plus liquidation value of Preferred Stock for the rolling 60-month period ending with such month. The Basic Fee for each month is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the S&P 600 for the performance period by more than two percentage points. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and is 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 is 1/12 of .5% and is 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 is not 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. 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. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to an issue of the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the applicable Preferred Stock dividend rate. For the year ended December 31, 2002, the Fund accrued and paid Royce advisory fees totaling $10,024,212, which is net of $665,068 voluntarily waived by Royce. 5. DISTRIBUTIONS TO STOCKHOLDERS: The tax character of distributions paid to stockholders during 2002 and 2001 was as follows: --------------------------------------------------------------------- Distributions paid from: 2002 2001 ---- ---- Ordinary income $ 6,028,029 16,631,761 Long-term capital gain 67,429,684 52,580,727 ---------- ---------- $73,457,713 $69,212,488 =========== =========== --------------------------------------------------------------------- As of December 31, 2002, the tax basis components of distributable earnings included in stockholders' equity were as follows: ---------------------------------------------- Post October Loss $ (199,915) Unrealized appreciation 66,341,806 Accrued preferred distributions (266,224) ----------- $65,875,667 =========== ---------------------------------------------- 35 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 6. PURCHASES AND SALES OF INVESTMENT SECURITIES: For the year ended December 31, 2002, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $290,458,749 and $274,219,404, respectively. 7. TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES: An "Affiliated Company", as defined in the Investment Company Act of 1940, is a company in which a Fund owns 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the year ended December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Purchases Sales ------------------- -------------------- Affiliated Company Shares Cost Shares Cost Realized Gain (Loss) Dividend Income ------------------ ------ ---- ------ ---- -------------------- --------------- Open Plan Systems -- -- 376,000 $ 927,874 $ (924,114) -- PCD 5,300 $ 2,756 482,900 2,705,721 (2,659,433) -- Patriot Transportation Holdings -- -- 30,000 558,200 100,805 -- Peerless Mfg. -- -- -- -- -- -- Richardson Electronics 10,000 106,750 190,300 1,375,899 (190,330) $22,036 Richardson Electronics 7.25% Conv. due 12/15/06 -- -- -- -- -- -- RockShox -- -- 1,141,400 537,508 (69,534) -- - ------------------------------------------------------------------------------------------------------------------------------------
8. PREFERRED STOCK PRESENTATION To reflect recent accounting guidance from the Securities and Exchange Commission, the Statement of Assets and Liabilities has been modified to present the liquidation value of Preferred Stock below Liabilities and above Net Assets Applicable to Common Stockholders. As revised, Preferred Stock is no longer included as a component of net assets of the Fund. Likewise, the Statement of Operations, the Statement of Changes in Net Assets, and the Financial Highlights have been revised to show distributions to Preferred Stockholders as a component of the net decrease in net assets applicable to Common Stockholders resulting from investment operations. These modifications do not change the amount of net assets applicable to Common Stockholders, the net asset value per share of Common Stock, or the total return per share of Common Stock. 36 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ROYCE VALUE TRUST, INC. We have audited the accompanying statement of assets and liabilities of Royce Value Trust, Inc., including the schedule of investments, as of December 31, 2002, and the related statement of operations for the year then ended, and the statement of changes in net assets for the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2002, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above and audited by us present fairly, in all material respects, the financial position of Royce Value Trust, Inc. at December 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. TAIT, WELLER & BAKER Philadelphia, PA January 15, 2003, except for Note 8, as to which the date is September 12, 2003. 37 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- COMMON STOCKS - 91.1% SHARES VALUE ------ ----- CONSUMER PRODUCTS - 7.0% Apparel and Shoes - 2.5% Jones Apparel Group (a) 81,500 $ 2,384,690 K-Swiss Cl. A 119,000 4,107,880 Nautica Enterprises (a) 83,700 1,073,871 Oshkosh B'Gosh Cl. A 104,300 2,816,100 Polo Ralph Lauren Cl. A 150,000 3,868,500 Timberland Company Cl. A (a) 10,000 528,600 WEYCO GROUP 112,664 5,183,671 Wolverine World Wide 94,400 1,818,144 --------------- 21,781,456 --------------- Collectibles - 0.2% The Boyds Collection (a) 234,200 1,103,082 Enesco Group (a) 117,200 867,280 --------------- 1,970,362 --------------- Food/Beverage/Tobacco - 0.6% 800 JR Cigar (a,e) 172,400 2,241,200 Hain Celestial Group (a) 37,800 604,422 Hershey Creamery 709 1,772,500 Lancaster Colony 16,900 653,354 --------------- 5,271,476 --------------- Home Furnishing/Appliances - 1.1% Bassett Furniture Industries 116,675 1,549,444 Falcon Products (a,c) 782,600 3,310,398 La-Z-Boy (d) 68,200 1,526,316 Lifetime Hoan (d) 295,327 2,250,392 Natuzzi ADR (b) 62,200 498,844 --------------- 9,135,394 --------------- Publishing - 0.5% Martha Stewart Living Omnimedia Cl. A (a,d) 6,000 56,340 Scholastic Corporation (a) 130,000 3,871,400 --------------- 3,927,740 --------------- Sports and Recreation - 0.7% Callaway Golf 35,000 462,700 Coachmen Industries 67,700 809,015 Fleetwood Enterprises (a,d) 234,300 1,733,820 Monaco Coach (a) 141,050 2,162,296 Thor Industries 22,100 902,122 --------------- 6,069,953 --------------- Other Consumer Products - 1.4% Blyth 54,700 1,487,840 Burnham Corporation Cl. B 18,000 859,500 Fossil (a) 15,000 353,400 Lazare Kaplan International (a) 103,600 600,880 Matthews International Cl. A 196,000 4,852,960 Oakley (a) 243,100 2,861,287 Scotts (The) Cl. A (a) 20,000 990,000 --------------- 12,005,867 --------------- TOTAL (Cost $42,721,425) 60,162,248 =============== CONSUMER SERVICES - 5.1% Leisure/Entertainment - 0.5% Ascent Media Group Cl. A (a,d) 380,900 472,316 Corus Entertainment Cl. B (a,d) 22,000 370,920 Gemstar-TV Guide International (a) 215,100 1,094,859 Hasbro 50,000 874,500 Magna Entertainment Cl. A (a) 198,800 994,000 Shuffle Master (a,d) 5,000 146,950 TiVo (a) 17,000 209,950 --------------- 4,163,495 --------------- Restaurants/Lodgings - 1.4% Benihana Cl. A (a,d) 57,500 759,000 CEC Entertainment (a) 30,000 1,107,900 Four Seasons Hotels (d) 80,000 3,460,800 IHOP CORPORATION (d) 161,700 5,104,869 Jack in the Box (a) 10,000 223,000 Prime Hospitality (a,d) 106,100 711,931 Ryan's Family Steak Houses (a,d) 48,900 684,600 --------------- 12,052,100 --------------- Retail Stores - 2.3% Big Lots (a) 307,200 4,620,288 Charming Shoppes (a,d) 803,400 3,992,898 Claire's Stores 127,700 3,238,472 Payless ShoeSource (a) 289,600 3,620,000 Stein Mart (a) 192,800 1,154,872 Urban Outfitters (a,d) 83,800 3,008,420 --------------- 19,634,950 --------------- Other Consumer Services - 0.9% ITT Educational Services (a) 120,000 3,510,000 Sotheby's Holdings Cl. A (a,d) 540,200 4,019,088 Strayer Education 10,000 794,500 --------------- 8,323,588 --------------- TOTAL (Cost $42,102,506) 44,174,133 =============== FINANCIAL INTERMEDIARIES - 9.3% Banking - 2.3% BOK Financial (a) 125,561 4,842,888 Farmers & Merchants Bank of Long Beach 1,266 4,665,210 First National Bank Alaska 2,130 3,197,130 Mechanics Bank 200 3,500,000 Mercantile Bankshares 20,000 787,600 NetBank 70,000 921,200 Oriental Financial Group 79,750 2,048,777 --------------- 19,962,805 --------------- Insurance - 6.3% Argonaut Group (a) 187,000 2,305,710 ERIE INDEMNITY COMPANY CL. A 169,900 7,008,375 Everest Re Group 12,600 963,900 Fidelity National Financial 12,843 395,051 First American 31,700 835,295 Leucadia National 51,500 1,911,680 Markel Corporation (a) 4,200 1,075,200 Montpelier Re Holdings (a) 53,000 1,674,800 NYMAGIC 85,200 1,726,152 Navigators Group (a) 83,200 2,481,024 PICO Holdings (a) 154,300 2,005,900 PMA Capital Cl. A (d) 231,700 2,912,469 PXRE Group 176,551 3,495,710 Philadelphia Consolidated Holding (a) 35,000 1,414,000 The Phoenix Companies (d) 81,900 739,557 PROASSURANCE CORPORATION (a) 202,070 5,453,869 RLI 118,724 3,906,020 Reinsurance Group of America (d) 30,000 963,000 Trenwick Group (a,d) 212,260 65,801 Wesco Financial 9,850 3,073,200 38 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- FINANCIAL INTERMEDIARIES (CONTINUED) Insurance (continued) WHITE MOUNTAINS INSURANCE GROUP (d) 16,900 $ 6,675,500 Zenith National Insurance (d) 106,900 3,046,650 --------------- 54,128,863 --------------- Securities Brokers - 0.6% E*TRADE Group (a) 575,000 4,887,500 Knight Trading Group (a) 115,000 715,300 --------------- 5,602,800 --------------- Other Financial Intermediaries - 0.1% Chicago Mercantile Exchange (d) 10,000 696,300 --------------- TOTAL (Cost $50,876,045) 80,390,768 =============== FINANCIAL SERVICES - 6.2% Information and Processing - 2.1% BARRA (a) 42,200 1,506,540 eFunds Corporation (a) 167,675 1,933,293 FACTSET RESEARCH SYSTEMS (d) 140,000 6,167,000 Fair Isaac 5,190 267,025 Global Payments 61,500 2,183,250 Moody's Corporation 50,000 2,635,500 National Processing (a,d) 20,000 321,600 SEI Investments 93,200 2,982,400 --------------- 17,996,608 --------------- Insurance Brokers - 1.0% Brown & Brown 20,000 650,000 Crawford & Co. Cl. A 297,350 1,442,147 Crawford & Co. Cl. B 75,300 369,723 Gallagher (Arthur J.) & Company 106,200 2,888,640 Hilb, Rogal & Hamilton 105,550 3,592,922 --------------- 8,943,432 --------------- Investment Management - 2.7% Affiliated Managers Group (a,d) 60,000 3,657,000 Alliance Capital Management Holding L.P. 139,000 5,073,500 BKF Capital Group (a) 94,000 2,052,020 BlackRock Cl. A (a,d) 35,000 1,576,400 Eaton Vance 80,200 2,534,320 Federated Investors Cl. B 35,000 959,700 Neuberger Berman (d) 105,000 4,190,550 Nuveen Investments Cl. A 119,200 3,247,008 --------------- 23,290,498 --------------- Other Financial Services - 0.4% PRG-Schultz International (a,d) 284,200 1,676,780 Van der Moolen Holding ADR (b) 119,000 1,642,200 --------------- 3,318,980 --------------- TOTAL (Cost $37,351,067) 53,549,518 =============== HEALTH - 8.1% Commercial Services - 1.5% IDEXX Laboratories (a) 104,100 3,506,088 PAREXEL International (a,d) 277,700 3,873,915 Pharmaceutical Product Development (a) 10,000 287,300 Quintiles Transnational (a) 130,300 1,848,957 Sybron Dental Specialties (a,d) 21,000 495,600 The TriZetto Group (a) 190,200 1,148,808 Young Innovations (a) 77,550 2,210,175 --------------- 13,370,843 --------------- Drugs and Biotech - 2.3% Abgenix (a,d) 38,000 398,620 Affymetrix (a,d) 96,600 $ 1,903,986 Antigenics (a,d) 38,500 443,520 Applera Corporation - Celera Genomics Group (a) 199,200 2,055,744 Biopure Corporation Cl. A (a,d) 43,200 263,952 BioSource International (a) 1,600 11,040 Celgene Corporation (a) 40,000 1,216,000 Cephalon (a) 4,900 201,684 Cerus Corporation (a) 21,700 163,401 Chiron Corporation (a) 21,800 953,096 DUSA Pharmaceuticals (a) 79,700 200,047 Endo Pharmaceuticals Holdings (a) 120,000 2,030,400 Genzyme Corporation - General Division (a) 28,000 1,170,400 Human Genome Sciences (a) 90,000 1,144,800 IDEC Pharmaceuticals (a,d) 28,100 955,400 Invitrogen Corporation (a) 40,000 1,534,800 Lexicon Genetics (a) 256,200 1,719,102 Millennium Pharmaceuticals (a) 50,000 786,500 Perrigo Company 169,900 2,657,236 Shire Pharmaceuticals Group ADR (a,b) 20,853 410,804 --------------- 20,220,532 --------------- Health Services - 1.3% Accredo Health (a) 8,705 189,769 Albany Molecular Research (a) 65,000 981,500 First Consulting Group (a) 315,900 1,475,253 Gene Logic (a,d) 138,100 824,457 Gentiva Health Services (a) 30,150 271,350 Health Management Associates Cl. A 27,400 505,530 +IMPATH (a,d) 93,000 1,315,020 Lincare Holdings (a) 24,600 775,146 Manor Care (a) 58,300 1,458,083 MedQuist (a) 73,893 1,495,594 On Assignment (a) 293,200 1,172,800 Quovadx (a) 168,400 503,516 --------------- 10,968,018 --------------- Personal Care - 0.6% Ocular Sciences (a,d) 177,500 3,523,375 Regis 57,200 1,661,660 --------------- 5,185,035 --------------- Surgical Products and Devices - 2.4% Allied Healthcare Products (a) 60,000 214,200 ARROW INTERNATIONAL 151,100 6,671,065 CONMED Corporation (a) 38,500 703,010 Datascope 34,000 1,009,460 Diagnostic Products 25,000 1,026,250 Haemonetics (a) 92,900 1,737,230 Invacare 100,000 3,300,000 Novoste (a) 66,500 399,000 STERIS (a) 48,600 1,122,174 Varian Medical Systems (a) 60,800 3,500,256 Zoll Medical (a) 20,200 677,912 --------------- 20,360,557 --------------- TOTAL (Cost $60,623,736) 70,104,985 =============== INDUSTRIAL PRODUCTS - 13.4% Building Systems and Components - 1.1% Decker Manufacturing 6,022 198,726 Preformed Line Products Company 131,600 1,928,598 SIMPSON MANUFACTURING (a,d) 190,400 6,968,640 --------------- 9,095,964 --------------- 39 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- INDUSTRIAL PRODUCTS (CONTINUED) Construction Materials - 1.8% ASH GROVE CEMENT COMPANY CL. B 50,518 $ 5,961,124 ElkCorp 25,000 562,500 FLORIDA ROCK INDUSTRIES 153,800 6,348,864 Oregon Steel Mills (a) 247,900 718,910 Synalloy Corporation (a,c) 345,000 1,873,350 --------------- 15,464,748 --------------- Industrial Components - 1.8% Bel Fuse Cl. A 53,200 1,090,600 Belden (d) 95,800 1,522,262 C & D Technologies 50,000 718,000 Donaldson Company 26,000 1,155,700 Kaydon Corporation 171,200 3,560,960 Penn Engineering & Manufacturing 251,600 3,434,340 Penn Engineering & Manufacturing Cl. A 77,600 942,064 PerkinElmer 135,000 1,864,350 Powell Industries (a) 57,400 840,336 Woodhead Industries 45,400 568,408 --------------- 15,697,020 --------------- Machinery - 3.5% Cognex Corporation (a) 163,400 3,651,990 COHERENT (a) 233,700 5,534,016 Federal Signal (d) 58,600 1,029,602 Graco 26,550 849,600 Lincoln Electric Holdings 237,880 4,855,131 National Instruments (a,d) 41,100 1,552,758 Nordson Corporation 172,200 4,106,970 Oshkosh Truck 13,000 771,160 PAXAR Corporation (a) 370,100 4,071,100 Woodward Governor 83,600 3,594,800 --------------- 30,017,127 --------------- Paper and Packaging - 0.4% Peak International (a) 408,400 1,816,972 Sealed Air (a) 34,000 1,620,440 --------------- 3,437,412 --------------- Pumps, Valves and Bearings - 0.7% Baldor Electric 62,900 1,295,740 ConBraCo Industries 7,630 587,510 Denison International ADR (a,b) 79,400 1,528,450 Franklin Electric 23,600 1,313,340 NN 127,100 1,609,086 --------------- 6,334,126 --------------- Specialty Chemicals and Materials - 1.2% Arch Chemicals 38,200 729,620 CFC International (a) 123,500 666,900 Commercial Metals 5,000 88,950 Hawkins 301,278 3,018,806 MACDERMID 211,631 5,565,895 --------------- 10,070,171 --------------- Textiles - 0.4% Fab Industries (a) 209,800 1,930,160 Unifi (a) 285,100 1,767,620 --------------- 3,697,780 --------------- Other Industrial Products - 2.5% BHA Group Holdings 187,252 3,709,462 Brady Corporation Cl. A 129,400 4,315,490 Diebold 100,000 4,325,000 IMPCO Technologies (a) 15,500 95,480 KIMBALL INTERNATIONAL CL. B 334,880 5,224,128 Maxwell Technologies (a,d) 21,500 123,840 Myers Industries 52,727 500,907 Peerless Mfg. (a,c) 158,600 1,752,530 Quantum Fuel Systems Technologies Worldwide (a,d) 15,500 34,565 Steelcase Cl. A (d) 82,500 970,200 Trinity Industries (d) 20,000 370,200 --------------- 21,421,802 --------------- TOTAL (Cost $83,669,214) 115,236,150 =============== INDUSTRIAL SERVICES - 13.4% Advertising/Publishing - 0.7% Catalina Marketing (a,d) 60,000 1,059,000 Cordiant Communications Group ADR (a,b) 100,000 28,000 Grey Global Group 3,817 2,948,671 Interpublic Group of Companies (a) 155,000 2,073,900 --------------- 6,109,571 --------------- Commercial Services - 5.0% ABM Industries (d) 119,200 1,835,680 ALLIED WASTE INDUSTRIES (a) 569,800 5,726,490 Carlisle Holdings (a) 204,900 676,170 Central Parking (d) 171,400 2,118,504 Convergys Corporation (a) 156,000 2,496,000 Core Laboratories (a) 125,200 1,352,160 Cornell Companies (a) 124,400 1,883,416 Covance (a) 132,700 2,401,870 Hewitt Associates Cl. A (a) 40,000 942,000 +Hudson Highland Group (a,d) 11,174 212,418 iGATE Corporation (a) 144,500 501,415 Iron Mountain (a) 127,450 4,727,120 Korn/Ferry International (a) 189,400 1,534,140 Learning Tree International (a,d) 53,400 834,642 MPS Group (a) 539,300 3,710,384 Manpower 55,800 2,069,622 Metro One Telecommunications (a,d) 25,000 129,000 Monster Worldwide (a) 149,000 2,939,770 New Horizons Worldwide (a) 136,500 584,220 RemedyTemp Cl. A (a,d) 78,500 724,555 Renaissance Learning (a,d) 10,000 219,000 Spherion Corporation (a) 109,000 757,550 TRC Companies (a,d) 53,000 782,280 United Stationers (a) 23,000 831,910 Wackenhut Corrections (a) 21,100 289,281 Watson Wyatt & Company Holdings Cl. A (a) 45,000 1,043,100 West Corporation (a) 75,000 1,998,750 --------------- 43,321,447 --------------- Engineering and Construction - 0.5% EMCOR Group (a) 15,000 740,400 Jacobs Engineering Group (a) 20,000 843,000 McDermott International (a) 71,000 449,430 Washington Group International (a) 100,000 2,196,000 --------------- 4,228,830 --------------- Food/Tobacco Processors - 0.9% FARMER BROS. 15,000 5,089,350 MGP Ingredients 321,200 2,805,682 --------------- 7,895,032 --------------- 40 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- INDUSTRIAL SERVICES (CONTINUED) Industrial Distribution - 1.1% Central Steel & Wire 3,699 $ 1,387,125 RITCHIE BROS. AUCTIONEERS (a) 155,200 5,976,752 Strategic Distribution (a) 115,000 1,870,015 --------------- 9,233,892 --------------- Printing - 1.5% Bowne & Co. 383,100 4,991,793 Ennis Business Forms 62,700 912,285 Moore Wallace (a) 90,700 1,331,476 NEW ENGLAND BUSINESS SERVICE 178,300 5,349,000 --------------- 12,584,554 --------------- Transportation and Logistics - 3.1% Airborne 100,000 2,090,000 AirNet Systems (a) 219,000 886,950 Atlas Air Worldwide Holdings (a,d) 210,000 308,700 Brink's Company (The) 137,278 2,000,140 C. H. Robinson Worldwide 40,000 1,422,400 CNF 62,600 1,588,788 Continental Airlines Cl. B (a,d) 150,000 2,245,500 EGL (a,d) 198,525 3,017,580 Forward Air (a,d) 148,000 3,754,760 Frozen Food Express Industries (a) 306,635 968,967 Hub Group Cl. A (a) 77,000 676,060 Landstar System (a) 33,800 2,124,330 Patriot Transportation Holding (a) 136,300 3,842,297 UTI Worldwide 45,000 1,403,550 --------------- 26,330,022 --------------- Other Industrial Services - 0.6% Landauer 117,900 4,931,757 Republic Services (a) 18,600 421,662 --------------- 5,353,419 --------------- TOTAL (Cost $90,768,813) 115,056,767 =============== NATURAL RESOURCES - 6.6% Energy Services - 2.7% Carbo Ceramics (d) 105,600 3,933,600 ENSCO International 6,443 173,317 Global Industries (a) 119,500 575,990 Hanover Compressor Company (a) 175,000 1,977,500 Helmerich & Payne 98,400 2,873,280 Input/Output (a) 540,100 2,905,738 Precision Drilling (a) 37,500 1,416,000 TETRA Technologies (a) 49,000 1,452,850 Tidewater 21,600 634,392 Universal Compression Holdings (a) 115,000 2,398,900 Willbros Group (a) 485,600 5,045,384 --------------- 23,386,951 --------------- Oil and Gas - 2.0% Tom Brown (a) 76,000 2,112,040 +Chesapeake Energy (d) 73,000 737,300 Cimarex Energy (a) 138,170 3,281,537 Denbury Resources (a) 352,600 4,735,418 EOG Resources 5,000 209,200 EnCana Corporation 21,638 830,250 Husky Energy 85,000 1,097,179 PetroCorp (a) 154,900 1,727,135 Prima Energy (a) 17,500 365,400 Toreador Resources (a) 100,300 301,903 Veritas DGC (a) 123,000 1,414,500 Vintage Petroleum 48,300 544,824 --------------- 17,356,686 --------------- Precious Metals and Mining - 0.7% AngloGold ADR (b,d) 111,900 3,569,610 Glamis Gold (a) 115,000 1,319,050 Gold Fields ADR (b) 57,800 704,004 MK Gold (a) 517,900 393,604 Stillwater Mining (a) 60,000 308,400 --------------- 6,294,668 --------------- Real Estate - 1.2% Alico 52,000 1,283,880 Chelsea Property Group 55,000 2,217,050 Consolidated-Tomoka Land 13,564 340,728 Public Storage 45,000 1,524,150 Trammell Crow Company (a) 432,400 4,587,764 --------------- 9,953,572 --------------- TOTAL (Cost $41,719,336) 56,991,877 =============== TECHNOLOGY - 20.2% Aerospace/Defense - 0.9% Curtiss-Wright (d) 58,300 3,684,560 Ducommun (a) 117,200 1,652,520 Herley Industries (a) 32,000 543,360 Integral Systems (a) 74,800 1,487,024 --------------- 7,367,464 --------------- Components and Systems - 5.4% Adaptec (a,d) 99,500 774,110 Advanced Digital Information (a) 79,000 789,210 American Power Conversion 231,200 3,604,408 Analogic Corporation 5,000 243,800 Catapult Communications (a) 75,100 797,562 Dionex Corporation (a) 89,000 3,537,750 Excel Technology (a) 168,500 3,846,855 Imation Corporation 35,700 1,350,174 InFocus Corporation (a) 79,000 372,880 KEMET Corporation (a,d) 135,000 1,363,500 Kronos (a) 35,850 1,821,538 Methode Electronics Cl. A 50,000 537,500 Newport Corporation (a,d) 102,600 1,518,480 Pemstar (a,d) 220,000 921,800 Perceptron (a) 397,400 2,384,400 Radiant Systems (a) 47,500 320,150 Rainbow Technologies (a) 116,900 983,129 REMEC (a,d) 214,200 1,490,832 Scitex (a) 245,700 624,078 Storage Technology (a) 90,000 2,316,600 Symbol Technologies 304,900 3,966,749 TTM Technologies (a) 280,500 1,315,545 Technitrol (a) 285,900 4,302,795 Tektronix (a) 65,000 1,404,000 Vishay Intertechnology (a) 83,900 1,107,480 Zebra Technologies Cl. A (a) 62,500 4,699,375 --------------- 46,394,700 --------------- Distribution - 2.5% Anixter International (a,d) 41,900 981,717 Arrow Electronics (a) 316,100 4,817,364 AVNET (a,d) 405,355 5,139,901 Benchmark Electronics (a) 45,400 1,396,504 41 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- SHARES VALUE ------ ----- TECHNOLOGY (CONTINUED) Distribution (continued) Brightpoint (a) 11,286 $ 138,818 Insight Enterprises (a) 71,500 719,290 Plexus (a) 274,600 3,166,138 TECH DATA (a) 200,500 5,355,355 --------------- 21,715,087 --------------- Internet Software and Services - 0.8% CNET Networks (a) 265,400 1,653,442 CryptoLogic (a) 202,000 1,510,960 CyberSource Corporation (a) 10,000 27,400 DoubleClick (a) 166,700 1,541,975 EarthLink (a) 122,700 968,103 +Overture Services (a,d) 5,000 90,650 RealNetworks (a) 85,400 579,012 +Satyam Computer Services ADR (b,d) 20,000 198,600 Stamps.com (a) 80,300 385,440 Vastera (a) 15,000 89,550 --------------- 7,045,132 --------------- IT Services - 4.3% American Management Systems (a) 331,900 4,739,532 Answerthink (a) 655,000 1,264,150 BearingPoint (a) 486,000 4,689,900 CIBER (a) 70,000 491,400 Covansys Corporation (a) 251,600 772,412 DiamondCluster International Cl. A (a) 288,900 1,071,819 Forrester Research (a) 91,500 1,496,940 Gartner Cl. A (a) 166,000 1,258,280 CGI Group Cl. A (a) 106,700 642,334 KEANE (a) 497,000 6,774,110 MAXIMUS (a,d) 113,000 3,122,190 Perot Systems Cl. A (a) 165,100 1,875,536 QRS Corporation (a) 57,500 304,750 Sapient Corporation (a) 1,124,400 3,114,588 Syntel (a) 72,400 1,138,852 Unisys Corporation (a) 325,000 3,991,000 --------------- 36,747,793 --------------- Semiconductors and Equipment - 2.9% Artisan Components (a) 15,000 339,150 BE Semiconductor Industries (a) 58,000 310,300 Credence Systems (a) 10,600 89,782 Cymer (a,d) 14,500 464,145 DSP Group (a) 115,000 2,475,950 DuPont Photomasks (a) 35,000 659,050 Electroglas (a,d) 281,700 369,027 Exar Corporation (a) 92,300 1,461,109 Fairchild Semiconductor Cl. A (a) 183,000 2,340,570 GlobespanVirata (a) 85,000 701,250 Helix Technology (d) 51,900 686,637 Integrated Circuit Systems (a,d) 135,000 4,243,050 Intevac (a,d) 216,650 1,455,888 Kulicke & Soffa Industries (a) 105,800 676,062 Lattice Semiconductor (a) 264,000 2,172,720 Mentor Graphics (a,d) 225,700 3,268,136 National Semiconductor (a) 43,200 851,904 Novellus Systems (a) 12,000 439,452 NVIDIA Corporation (a) 14,000 322,140 ParthusCeva (a) 31,666 258,078 Semitool (a) 50,000 246,500 Veeco Instruments (a,d) 65,000 1,106,950 --------------- 24,937,850 --------------- Software - 1.9% Adobe Systems 30,000 962,100 ANSYS (a) 45,500 1,415,050 Aspen Technology (a,d) 27,100 130,080 Autodesk 251,000 4,056,160 Business Objects ADR (a,b,d) 25,500 559,725 JDA Software Group (a) 149,900 1,677,381 MRO Software (a) 46,000 396,980 MSC.Software (a,d) 42,600 287,124 Macromedia (a) 61,600 1,296,064 Manugistics Group (a,d) 49,200 202,212 Novell (a) 146,000 449,680 Phoenix Technologies (a,d) 40,900 231,085 Progress Software (a) 50,500 1,046,865 SPSS (a) 107,500 1,799,550 Transaction Systems Architects Cl. A (a) 237,300 2,126,208 --------------- 16,636,264 --------------- Telecommunication - 1.5% ADC Telecommunications (a) 113,000 263,064 ADTRAN (a) 40,000 2,040,800 Allegiance Telecom (a,d) 2,016,700 110,918 Anaren (a,d) 30,000 281,100 Andrew Corporation (a) 30,000 276,000 Arris Group (a,d) 70,000 347,200 Comverse Technology (a) 30,000 450,900 Globecomm Systems (a) 233,700 766,536 IDT Corporation (a,d) 25,000 447,500 IDT Corporation Cl. B (a) 40,000 704,000 Inet Technologies (a) 65,000 648,050 Level 3 Communications (a,d) 408,400 2,711,776 Liberty Satellite & Technology Cl. A (a,d) 196,530 510,978 PECO II (a) 93,600 58,781 Plantronics (a) 55,100 1,194,017 Polycom (a,d) 37,000 512,820 Sycamore Networks (a) 38,000 145,540 Time Warner Telecom Cl. A (a) 204,000 1,299,480 --------------- 12,769,460 --------------- TOTAL (Cost $167,662,238) 173,613,750 =============== UTILITIES - 0.1% Southern Union (a) 10,000 169,400 --------------- TOTAL (Cost $132,500) 169,400 =============== MISCELLANEOUS - 1.7% TOTAL (Cost $11,930,853) 14,181,950 =============== TOTAL COMMON STOCKS (Cost $629,557,734) 783,631,546 =============== PREFERRED STOCKS - 0.1% Aristotle Corporation 11.00% Conv. 4,800 33,888 SVB Capital I 8.25% 20,000 499,980 --------------- TOTAL PREFERRED STOCKS (Cost $531,005) 533,868 =============== 42 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE ------ ----- CORPORATE BONDS - 0.2% Dixie Group 7.00% Conv. Sub. Deb. due 5/15/12 $ 537,000 $ 322,200 Richardson Electronics 7.25% Conv. Sub. Deb. due 12/15/06 1,319,000 1,081,580 --------------- TOTAL CORPORATE BONDS (Cost $1,544,984) 1,403,780 =============== U.S. TREASURY OBLIGATIONS - 3.2% U.S. Treasury Notes 5.625%, due 2/15/06 25,000,000 27,649,425 --------------- TOTAL U.S. TREASURY OBLIGATIONS (Cost $27,453,124) 27,649,425 =============== REPURCHASE AGREEMENT - 5.4% State Street Bank & Trust Company, 0.30% dated 6/30/03, due 7/1/03, maturity value $46,399,387 (collateralized by U.S. Treasury Notes, 1.75% due 12/31/04, valued at $47,329,137) (Cost $46,399,000) $ 46,399,000 =============== TOTAL INVESTMENTS - 100.0% (Cost $705,485,847) 859,617,619 LIABILITIES LESS CASH AND OTHER ASSETS - (396,423) PREFERRED STOCK (160,000,000) --------------- NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS $ 699,221,196 =============== - -------------------------------------------------------------------------------- (a) Non-income producing. (b) American Depository Receipt. (c) At June 30, 2003, the Fund owned 5% or more of the Company's outstanding voting securities thereby making the Company an Affiliated Company as that term is defined in the Investment Company Act of 1940. (d) A portion of these securities were on loan at June 30, 2003. Total market value of loaned securities at June 30, 2003 was $33,925,944. (e) A security for which market quotations are no longer readily available represents 0.3% of investments. This security has been valued at its fair value under procedures established by the Fund's Board of Directors. + New additions in 2003. BOLD INDICATES THE FUND'S LARGEST 20 EQUITY HOLDINGS IN TERMS OF JUNE 30, 2003 MARKET VALUE. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $709,157,702. At June 30, 2003, net unrealized appreciation for all securities was $150,459,917, consisting of aggregate gross unrealized appreciation of $228,856,672 and aggregate gross unrealized depreciation of $78,396,755. The primary differences in book and tax basis cost is the timing of the recognition of losses on securities sold and amortization of discount for book and tax purposes. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 43 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $659,086,847) $813,218,619 Repurchase agreement (at cost and value) 46,399,000 Cash 126 Collateral from brokers on securities loaned 36,246,784 Receivable for investments sold 612,103 Receivable for dividends and interest 929,758 - -------------------------------------------------------------------------------- Total Assets 897,406,379 - -------------------------------------------------------------------------------- LIABILITIES: Payable for collateral on securities loaned 36,246,784 Payable for investments purchased 637,532 Payable for investment advisory fee 809,646 Preferred dividends accrued but not yet declared 266,225 Accrued expenses 224,996 - -------------------------------------------------------------------------------- Total Liabilities 38,185,183 - -------------------------------------------------------------------------------- PREFERRED STOCK: 7.80% Cumulative Preferred Stock - $0.001 par value, $25 liquidation value per share; 2,400,000 shares outstanding 60,000,000 7.30% Tax-Advantaged Cumulative Preferred Stock - $0.001 par value, $25 liquidation value per share; 4,000,000 shares outstanding 100,000,000 - -------------------------------------------------------------------------------- Total Preferred Stock 160,000,000 - -------------------------------------------------------------------------------- NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS $699,221,196 - -------------------------------------------------------------------------------- ANALYSIS OF NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Par value of Common Stock - $0.001 per share; 48,820,755 shares outstanding (150,000,000 shares authorized) $ 48,821 Additional paid-in capital 566,557,501 Accumulated net investment loss (895,291) Accumulated net realized gain on investments 15,009,715 Net unrealized appreciation on investments 154,131,809 Quarterly and accrued distributions (35,631,359) - -------------------------------------------------------------------------------- Net Assets applicable to Common Stockholders (net asset value per share - $14.32) $699,221,196 - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 44 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Income: Dividends $ 2,629,376 Interest 851,553 - -------------------------------------------------------------------------------- Total income 3,480,929 - -------------------------------------------------------------------------------- Expenses: Investment advisory fees 4,482,527 Stockholder reports 176,214 Custody and transfer agent fees 104,025 Administrative and office facilities expenses 58,433 Directors' fees 55,391 Professional fees 46,220 Other expenses 70,077 - -------------------------------------------------------------------------------- Total expenses 4,992,887 Fees waived by investment advisor (616,667) - -------------------------------------------------------------------------------- Net expenses 4,376,220 - -------------------------------------------------------------------------------- Net investment income (loss) (895,291) - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments 18,822,862 Net change in unrealized appreciation on investments 84,176,771 - -------------------------------------------------------------------------------- Net realized and unrealized gain on investments 102,999,633 - -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM INVESTMENT OPERATIONS 102,104,342 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS (5,990,000) - -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS $ 96,114,342 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Six months ended Year ended June 30, 2003 December 31, (unaudited) 2002 ---------------- ----------- INVESTMENT OPERATIONS: Net investment loss $ (895,291) $ (583,347) Net realized gain on investments 18,822,862 62,933,497 Net change in unrealized appreciation on investments 84,176,771 (156,381,089) - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from investment operations 102,104,342 (94,030,939) - -------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (581,030) Net realized gain on investments - (11,398,970) Quarterly distributions* (5,990,000) - - -------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (5,990,000) (11,980,000) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS 96,114,342 (106,010,939) - -------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (2,981,664) Net realized gain on investments - (58,496,049) Quarterly distributions* (29,375,135) - - -------------------------------------------------------------------------------- Total distributions to Common Stockholders (29,375,135) (61,477,713) - -------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Proceeds from rights offering 54,505,909 - Reinvestment of distributions to Common Stockholders 17,200,457 39,123,307 - -------------------------------------------------------------------------------- Total capital stock transactions 71,706,366 39,123,307 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLERS 138,445,573 (128,365,345) NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Beginning of period 560,775,623 689,140,968 - -------------------------------------------------------------------------------- End of period (including accumulated net investment loss of $895,291 in 2003) $699,221,196 $ 560,775,623 - -------------------------------------------------------------------------------- *To be allocated to net investment income and capital gains at year-end. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 45 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.
Six months ended Years ended December 31, June 30, 2003 -------------------------------------------- (unaudited) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $13.22 $17.31 $16.56 $15.77 $15.72 $16.91 - ---------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS: Net investment income (loss) (0.02) (0.02) 0.05 0.18 0.26 0.17 Net realized and unrealized gain (loss) on investments 1.97 (2.25) 2.58 2.58 1.65 0.67 - ---------------------------------------------------------------------------------------------------- Total investment operations 1.95 (2.27) 2.63 2.76 1.91 0.84 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (0.01) (0.01) (0.03) (0.04) (0.03) Net realized gain on investments - (0.28) (0.30) (0.30) (0.32) (0.26) Quarterly distributions* (0.13) - - - - - - ---------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (0.13) (0.29) (0.31) (0.33) (0.36) (0.29) - ---------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM INVESTMENT OPERATIONS 1.82 (2.56) 2.32 2.43 1.55 0.55 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (0.07) (0.05) (0.13) (0.15) (0.16) Net realized gain on investments - (1.44) (1.44) (1.35) (1.22) (1.38) Quarterly distributions* (0.65) - - - - - - ---------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (0.65) (1.51) (1.49) (1.48) (1.37) (1.54) - ---------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders (0.00) (0.02) (0.08) (0.16) (0.13) (0.09) Effect of rights offering or Preferred Stock offering (0.07) - - - - (0.11) - ---------------------------------------------------------------------------------------------------- Total capital stock transactions (0.07) (0.02) (0.08) (0.16) (0.13) (0.20) - ---------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.32 $13.22 $17.31 $16.56 $15.77 $15.72 - ---------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $14.94 $13.25 $15.72 $14.438 $13.063 $13.75 - ---------------------------------------------------------------------------------------------------- TOTAL RETURN (a): Market Value 18.4%*** (6.9)% 20.0% 22.7% 5.7% 1.5% Net Asset Value 13.8%*** (15.6)% 15.2% 16.6% 11.7% 3.3% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (b,c) 1.47%** 1.72% 1.61% 1.43% 1.39% 1.31% Management fee expense 1.30%** 1.56% 1.45% 1.25% 1.18% 1.10% Other operating expenses 0.17%** 0.16% 0.16% 0.18% 0.21% 0.21% Net investment income (loss) (0.30)%** (0.09)% 0.35% 1.18% 1.47% 1.11% SUPPLEMENTAL DATA: Net Assets Applicable to Common Stockholders, End of Period (in thousands) $699,221 $560,776 $689,141 $623,262 $552,928 $516,963 Liquidation Value of Preferred Stock, End of Period (in thousands) $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 Portfolio Turnover Rate 12% 35% 30% 36% 41% 43% PREFERRED STOCK: Total shares outstanding 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 Asset coverage per share $134.25 $112.62 $132.68 $122.38 $111.40 $105.78 Liquidation preference per share $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 Average market value per share: 7.80% Cumulative (d) $26.09 $26.37 $25.70 $23.44 $24.98 $25.91 7.30% Tax-Advantaged Cumulative (d) $25.60 $25.82 $25.37 $22.35 $24.24 $25.43 - ----------------------------------------------------------------------------------------------------
(a) The Market Value Total Return is calculated assuming a purchase of Common Stock on the opening of the first business day and a sale on the closing of the last business day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund's Distribution Reinvestment and Cash Purchase Plan. Net Asset Value Total Return is calculated on the same basis, except that the Fund's net asset value is used on the purchase and sale dates instead of market value. (b) Expense ratios based on total average net assets including liquidation value of Preferred Stock were 1.16%, 1.38%, 1.30%, 1.12%, 1.06% and 1.06% for the periods ended June 30, 2003 and December 31, 2002, 2001, 2000, 1999 and 1998, respectively. (c) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.67%, 1.82%, 1.65%, 1.51%, 1.48% and 1.34% for the periods ended June 30, 2003 and December 31, 2002, 2001, 2000, 1999 and 1998, respectively. (d) The average of month-end market values during the period. * To be allocated to net investment income and capital gains at year-end. ** Annualized. *** Not annualized. 46 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Royce Value Trust, Inc. ("the Fund") was incorporated under the laws of the State of Maryland on July 1, 1986 as a diversified closed-end investment company. The Fund commenced operations on November 26, 1986. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. VALUATION OF INVESTMENTS: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date. Securities listed on an exchange or on the Nasdaq National Market System (NMS) 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 bid price for exchange-listed securities and at the average of their bid and asked prices for Nasdaq NMS securities. Other over-the-counter securities for which market quotations are readily available are valued at their bid price. Securities for which market quotations are not readily available are valued at their fair value under procedures established by the Fund's Board of Directors. 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. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes. EXPENSES: The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors' Fees otherwise payable. The deferred fees are invested in certain Royce Funds until distributed in accordance with the agreement. TAXES: As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The Schedule of Investments includes information regarding income taxes under the caption "Income Tax Information". DISTRIBUTIONS: The Fund currently has a policy of paying quarterly distributions on the Fund's Common Stock. Distributions are currently being made at the annual rate of 9% of the rolling average of the prior four calendar quarter-end NAVs of the Fund's Common Stock, with the fourth quarter distribution being the greater of 2.25% of the rolling average or the distribution required by IRS regulations. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year. REPURCHASE AGREEMENTS: The Fund enters into repurchase agreements with respect to its portfolio securities solely with State Street Bank and Trust Company ("SSB&T"), the custodian of its assets. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of SSB&T, including possible delays or restrictions upon the ability of the Fund to dispose of the underlying securities. SECURITIES LENDING: The Fund loans securities to qualified institutional investors for the purpose of realizing additional income. This income is included in interest income. Collateral on all securities loaned for the Fund is accepted in cash and is invested temporarily, typically, and specifically at June 30, 2003, in a registered money market fund, by the custodian. The collateral is equal to at least 100% of the current market value of the loaned securities. 47 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CAPITAL STOCK: The Fund currently has two issues of Preferred Stock outstanding: 7.80% Cumulative Preferred Stock and 7.30% Tax-Advantaged Cumulative Preferred Stock. Both issues of Preferred Stock have a liquidation preference of $25.00 per share. Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing Preferred Stock. The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that distributions are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital. The Fund issued 1,313,310 and 2,615,641 shares of Common Stock as reinvestment of distributions by Common Stockholders for the six months ended June 30, 2003 and the year ended December 31, 2002, respectively. During the quarter ended March 31, 2003, the Fund completed a rights offering of 5,090,083 shares to its stockholders at the rate of one share for each 10 rights held by the stockholders of record on January 28, 2003. These shares were priced at $10.77, which was $0.50 below the last reported sale price on the New York Stock Exchange on March 11, 2003. 34.5% of the offering was subscribed for through primary subscription. The remaining shares were purchased by those stockholders who subscribed with their primary rights and who also elected to purchase additional shares using over-subscription rights. INVESTMENT ADVISORY AGREEMENT: As compensation for its services under the Investment Advisory Agreement, Royce & Associates, LLC ("Royce") receives a fee comprised of a Basic Fee ("Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 600 SmallCap Index ("S&P 600"). The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the Fund's month-end net assets applicable to Common Stockholders plus the liquidation value of Preferred Stock for the rolling 60-month period ending with such month. The Basic Fee for each month is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the S&P 600 for the performance period by more than two percentage points. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and is 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 is 1/12 of .5% and is 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 is not 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. 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. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to an issue of the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the applicable Preferred Stock dividend rate. For the six months ended June 30, 2003, the Fund accrued and paid Royce advisory fees totaling $3,865,860, which is net of $616,667 voluntarily waived by Royce. PURCHASES AND SALES OF INVESTMENT SECURITIES: For the six months ended June 30, 2003, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $87,757,204 and $87,320,273, respectively. TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES: An "Affiliated Company", as defined in the Investment Company Act of 1940, is a company in which a Fund owns 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the six months ended June 30, 2003:
- ------------------------------------------------------------------------------------------------------ Purchases Sales ------------ ----------- Affiliated Company Shares Cost Shares Cost Realized Gain (Loss) Dividend Income ------------------ ------ ---- ------ ---- -------------------- --------------- Falcon Products 405,600 $1,635,894 -- -- -- -- McLeodUSA -- -- -- -- -- -- Peerless Mfg. -- -- -- -- -- -- Synalloy Corporation 345,000 1,797,450 -- -- -- -- - ------------------------------------------------------------------------------------------------------
48 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- PREFERRED STOCK PRESENTATION: To reflect recent accounting guidance from the Securities and Exchange Commission, the Statement of Assets and Liabilities has been modified to present the liquidation value of Preferred Stock below Liabilities and above Net Assets Applicable to Common Stockholders. As revised, Preferred Stock is no longer included as a net asset of the Fund. Likewise, the Statement of Operations, the Statement of Changes in Net Assets, and the Financial Highlights have been revised to show distributions to Preferred Stockholders as a component of the net decrease in net assets applicable to Common Stockholders resulting from investment operations. These modifications do not change the amount of net assets applicable to Common Stockholders, the net asset value per share of Common Stock, or the total return per share of Common Stock. 49 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS 1. a. The following audited financial statements of Royce Value Trust, Inc. (the "Fund") are included in Part B hereof: Schedule of Investments, December 31, 2002; Statement of Assets and Liabilities, December 31, 2002; Statement of Operations for the fiscal year ended December 31, 2002; Statement of Changes in Net Assets for the years ended December 31, 2002 and 2001; Notes to Financial Statements at December 31, 2002; Financial Highlights for the five fiscal years ended December 31, 2002; and Report of Independent Accountants. b. The following unaudited financial statements of the Fund are included in Part B hereof: Schedule of Investments, June 30, 2003; Statement of Assets and Liabilities, June 30, 2003; Statement of Operations for the six months ended June 30, 2003; Statement of Changes in Net Assets for the six months ended June 30, 2003 and for the year ended December 31, 2002; Notes to Financial Statements at June 30, 2003; Financial Highlights for the six months ended June 30, 2003 and for the five fiscal years ended December 31, 2002. 2. Exhibits (a) (1) Articles of Incorporation dated July 1, 1986. (1) (2) Articles of Amendment dated May 6, 1988. (1) (3) Articles of Amendment dated April 28, 1989. (1) (4) Articles of Amendment dated March 2, 1998. (1) (5) Articles of Amendment dated March 19, 1998. (1) (6) Certificate of Correction dated May 11, 1998. (1) (7) Form of Articles Supplementary creating the 7.80% Cumulative Preferred Stock ("7.80% Preferred"). (2) (8) Form of Articles Supplementary creating the 7.30% Tax-Advantaged Cumulative Preferred Stock ("7.30% Preferred"). (3) (9) Form of Articles Supplementary dated February 5, 2003. (1) (10) Form of Articles Supplementary creating the % Cumulative Preferred Stock (the "Cumulative Preferred Stock").* (b) Amended and Restated By-laws. (1) (c) Not applicable. (d) (1) Form of specimen share certificate for Common Stock. (1) (2) Form of share certificate for 7.80% Preferred. (4) (3) Form of share certificate for 7.30% Preferred. (3) (4) Not applicable. (e) Amended and Restated Distribution Reinvestment and Cash Purchase Plan. (5) (f) Not applicable. (g) Investment Advisory Agreement dated October 1, 2001 between the Fund and Royce & Associates, Inc. ("R & A"). (6) (h) Form of Underwriting Agreement.* 1 (i) Not applicable. (j) (1) Custodian Contract with State Street Bank and Trust Company ("State Street") dated October 20, 1986. (1) (2) Amendment to Custodian Contract dated December 11, 1987. (1) (3) Amendment to Custodian Contract dated May 13, 1988. (1) (4) Amendment to Custodian Contract dated April 2, 1992. (1) (5) Amendment to Custodian Contract dated November 3, 1997. (1) (6) Amendment to Custodian Contract dated September 14, 2000.(1) (7) Form of Amendment to Custodian Contract dated April 16, 2003. (1) (k) (1) Registrar, Transfer Agency and Service Agreement with State Street (Common Stock) dated October 20, 1986. (1) (2) Registrar, Transfer Agency and Service Agreement with State Street (7.80% Preferred Stock) dated August 21, 1996. (1) (3) First Amendment to Registrar, Transfer Agency and Paying Agency Agreement (7.80% Preferred and 7.30% Preferred) dated May 18, 1998. (7) (4) Form of Second Amendment to Registrar, Transfer Agency and Paying Agency Agreement (Cumulative Preferred Stock)* (5) Form of Subscription Certificate. (1) (6) Form of Subscription Agent Agreement. (1) (7) Form of Information Agent Agreement. (1) (l) Opinion and Consent of Venable LLP.* (m) Not applicable. (n) Consent of Tait, Weller & Baker, independent auditors for the Fund.* (o) Not applicable. (p) Not applicable. (q) Not applicable. (r) Code of Ethics. (1) - ------- (1) Incorporated by reference to the Fund's Registration Statement on Form N-2, filed with the SEC on January 3, 2003 (File No. 333-102349). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2, filed with the SEC on August 9, 1996 (File No. 333-8039). (3) Incorporated by reference to the Fund's Registration Statement on Form N-2, filed with the SEC on April 29, 1998 (File No. 333-51295). (4) Incorporated by reference to the Fund's Registration Statement on Form N-2, filed with the SEC on July 12, 1996 (File No. 333-8039). (5) Incorporated by reference to the Fund's Registration Statement on Form N-2, filed with the SEC on August 11, 1995 (File No. 811-4875). (6) Incorporated by reference to the Fund's Form NSAR-B, filed with the SEC on February 28, 2002. (7) Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2, filed with the SEC on May 14, 1998 (File No. 333-51295). * Filed herewith. ITEM 25. MARKETING ARRANGEMENTS Please see Exhibit (h) to this Registration Statement. 2 ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement: Estimated Category Expenses - ----------------------------------------------------------------- ------------- Registration fees............................................. 17,798 New York Stock Exchange listing fees.......................... 20,000 Printing expenses ............................................ 33,500 Rating agency fees............................................ 10,000 Accounting fees and expenses.................................. 7,500 Legal fees and expenses....................................... 163,000 Miscellaneous................................................. 30,002 ------------- Total......................................................... 281,800 ============= ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH FUND None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following information is given as of September 2, 2003: Title of Class Number of Record Holders - -------------------------------------------------------------------------------- Common Stock, $.001 par value............................................. 1,968 7.80% Cumulative Preferred Stock, $.001 par value......................... 20 7.30% Tax-Advantaged Cumulative Preferred Stock, $.001 par value.......... 26 ITEM 29. INDEMNIFICATION Reference is made to Section 2-418 of the Maryland General Corporation Law, Article VI and VII of the Fund's Articles of Incorporation, as amended, Article V of the Fund's Amended and Restated By-laws, and the Investment Advisory Agreement, each of which provide for indemnification. The Investment Advisory Agreement between the Fund and R & A obligates the Fund to indemnify R & A and hold it harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees) incurred by R & A in or by reason of any action, suit, investigation or other proceeding arising out of or otherwise based upon any action actually or allegedly taken or omitted to be taken by R & A in connection with the performance of any of its duties or obligations under the Agreement or otherwise as an investment adviser of the Fund. R & A is not entitled to indemnification in respect of any liability to the Fund or its security holders to which it would otherwise be subject by reason of its willful misfeasance, bad faith or gross negligence. Under the Underwriting Agreement relating to the Cumulative Preferred Stock offered hereby, the Registrant agrees to indemnify the Underwriters and each person, if any, who controls the Underwriters within the 3 meaning of the Securities Act of 1933, as amended (the "1933 Act"), against certain types of civil liabilities arising in connection the Registration Statement or Prospectus and Statement of Additional Information. Insofar as indemnification for liability arising under the 1933 Act, may be permitted to directors, officers and controlling persons of the Fund pursuant to the foregoing provisions or otherwise, the Fund has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Fund of expenses incurred or paid by a director, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent or such claim is to be paid under insurance policies, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Fund, its officers and directors, R & A and certain others are presently insured under a Directors and Officers/Errors and Omissions Liability Insurance Policy issued by ICI Mutual Insurance Company, which generally covers claims by the Fund's stockholders and third persons based on or alleging negligent acts, misstatements or omissions by the insureds and the costs and expenses of defending those claims, up to a limit of $15,000,000, with a deductible amount of $250,000. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Reference is made to Schedules D and F to Royce's amended Form ADV (File No. 801-8268), which are incorporated herein by reference. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS Records are located at: 1. Royce Value Trust, Inc. 10th Floor 1414 Avenue of the Americas New York, New York 10019 (Corporate records and records relating to the function of Royce as investment adviser) 2. State Street Bank and Trust Company Two Heritage Drive North Quincy, Massachusetts 02171 Attention: Royce Value Trust, Inc. (Records relating to its functions as Custodian for the Fund) 3. Equiserve Trust Company, N.A. PO Box 43011 Providence, RI 02940-3011 Attention: Royce Value Trust, Inc. (Records relating to its functions as Registrar and Transfer Agent and Dividend Paying Agent for the Fund) ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS 4 (1) Not applicable. (2) Not applicable. (3) Not applicable. (4) Not applicable. (5) The Fund undertakes that, for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Fund pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective. The Fund undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. (6) The Fund undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. 5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 2nd day of October, 2003. ROYCE VALUE TRUST, INC. (Registrant) By: /s/ Charles M. Royce --------------------- Charles M. Royce, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE President (Principal Executive Officer) /s/ Charles M. Royce* and Director - -------------------------------- Charles M. Royce Vice President and Treasurer (Principal /s/ John D. Diederich* Financial and Accounting Officer) - -------------------------------- John D. Diederich Donald R. Dwight* Director - -------------------------------- Donald R. Dwight Mark R. Fetting* Director - -------------------------------- Mark R. Fetting Richard M. Galkin* Director - -------------------------------- Richard M. Galkin Stephen L. Isaacs* Director - -------------------------------- Stephen L. Isaacs William L. Koke* Director - -------------------------------- William L. Koke David L. Meister* Director - -------------------------------- David L. Meister G. Peter O'Brien* Director - -------------------------------- G. Peter O'Brien *By: /s/ Charles M. Royce October 2, 2003 - -------------------------------- Charles M. Royce Attorney-in-Fact
6 EXHIBIT INDEX Exhibit Number Document - -------------- -------- (a)(10) Form of Articles Supplementary creating the % Cumulative Preferred Stock (the "Cumulative Preferred Stock"). (h) Form of Underwriting Agreement. Form of Second Amendment to Registrar, Transfer Agency and Paying Agency Agreement (k)(4) (Cumulative Preferred Stock) (l) Opinion and Consent of Venable LLP. (n) Consent of Tait, Weller & Baker, independent auditors for the Fund. 7 EX-99.A10 4 rvt_63005-exa10.txt FORM OF ARTICLES SUPPLEMENTARY EXHIBIT (a)(10) FORM OF ARTICLES SUPPLEMENTARY Exhibit (a)(10) ROYCE VALUE TRUST, INC. ----------------------- ARTICLES SUPPLEMENTARY % CUMULATIVE PREFERRED STOCK ROYCE VALUE TRUST, INC., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Under a power contained in Article V of the Charter of the Corporation (the "Charter"), the Board of Directors by duly adopted resolutions classified and designated 8,800,000 shares of authorized but unissued Preferred Stock (as defined in the Charter) as % Cumulative Preferred Stock (the "Cumulative Preferred Stock"), with the following preferences, voting powers, rights, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption, which, upon any restatement of the Charter, shall become part of Article V of the Charter, with any necessary or appropriate renumbering or relettering of the sections or subsections hereof: % CUMULATIVE PREFERRED STOCK ------------------------------- ARTICLE I. DEFINITIONS 1. Definitions. ------------ Unless the context or use indicates another or different meaning or intent, the following terms when used in these terms of the Cumulative Preferred Stock shall have the meanings set forth below, whether such terms are used in the singular or plural and regardless of their tense: "Accountant's Confirmation"* means a letter from an Independent Accountant delivered to Moody's with respect to certain Basic Maintenance Reports as specified by Moody's herein or by separate written notice substantially to the effect that: (i) the Independent Accountant has read the Basic Maintenance Report prepared by the Corporation as of the last Quarterly Valuation Date of the Corporation's fiscal year (the "Report"); (ii) with respect to the issue size compliance, issuer diversification and industry diversification calculations, such calculations and the resulting Market Value of Moody's Eligible Assets and Portfolio Calculation are numerically correct; (iii) with respect to the calculation of the Basic Maintenance Amount, such calculation has been compared with the definition of Basic Maintenance Amount in these terms of the Cumulative Preferred Stock and is calculated in accordance with such definition and the results of such calculation have been recalculated and are numerically correct; (iv) with respect to the excess or deficiency of the Portfolio Calculation when compared to the Basic Maintenance Amount calculated for Moody's, the results of the calculation set forth in the Report have been recalculated and are numerically correct; (v) with respect to the lower of two bid prices (or alternative permissible factors used in calculating the Market Value as provided by these terms of the Cumulative Preferred Stock) provided by the custodian of the Corporation's assets for purposes of valuing securities in the portfolio, the Independent Accountant has traced the price used in the Report to the lower of the two bid prices listed in the report provided by such custodian and verified that such information agrees (in the event such information does not agree, the Independent Accountant will provide a listing in its letter of such differences); and (vi) with respect to the description of each security included in the Report, the description of Moody's Eligible Assets has been compared to the definition of Moody's Eligible Assets contained in these terms of the Cumulative Preferred Stock, and the description as appearing in the Report agrees with the definition of Moody's Eligible Assets as described in these terms of the Cumulative Preferred Stock. Each such letter may state: such Independent Accountant has made no independent verification of the accuracy of the description of the investment securities listed in the Report or the Market Value of those securities nor have they performed any procedures other than those specifically outlined above for the purposes of issuing such letter; unless otherwise stated in the letter, the procedures specified therein were limited to a comparison of numbers or a verification of specified computations applicable to numbers appearing in the Report and the schedule(s) thereto; the foregoing procedures do not constitute an examination in accordance with generally accepted auditing standards and the Report discussed in the letter do not extend to any of the Corporation's financial statements taken as a whole; such Independent Accountant does not express an opinion as to whether such procedures would enable such Independent Accountant to determine that the methods followed in the preparation of the Report would correctly determine the Market Value or Discounted Value of the investment portfolio; accordingly, such Independent Accountant expresses no opinion as to the information set forth in the Report or in the schedule(s) thereto and make no representation as to the sufficiency of the procedures performed for the purposes of these terms of the Cumulative Preferred Stock. Such letter shall also state that the Independent Accountant is a "independent accountant" with respect to the Corporation within the meaning of the Securities Act of 1933, as amended, and the related published rules and regulations thereunder. "Adviser" means Royce & Associates, LLC, a Delaware limited liability company. 2 "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 senior securities of the Corporation which are stock, including all outstanding shares of Cumulative Preferred Stock. "Asset Coverage Cure Date" means, with respect to the failure by the Corporation to maintain the Asset Coverage (as required by paragraph 5(a)(i) of Article II hereof) as of the last Business Day of each March, June, September and December of each year, 60 calendar days following such Business Day. "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 Corporation's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Corporation by the issuance of Common Stock shall not be included as a liability) and such liabilities projected to become due and payable by the Corporation 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); (D) any current liabilities of the Corporation as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Corporation 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 Corporation's assets and/or (B) the face value of any of the Corporation's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or securities which mature prior to or on the date of redemption or repurchase of Cumulative Preferred Stock or payment of another liability and are either U.S. Government Obligations or securities which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, in both cases irrevocably held by the Corporation's custodian bank in a segregated account or deposited by the Corporation with the Paying Agent for the payment of the amounts needed to redeem or repurchase Cumulative Preferred Stock or, without duplication, any of (i)(B) through (i)(D) and provided that in the event the Corporation has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof 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 Corporation may deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to be repurchased from (i) above. "Basic Maintenance Amount Cure Date"* means 14 calendar days following a Valuation Date, such date being the last day upon which the Corporation's failure to comply with paragraph 5(a)(ii)(A) of Article II hereof could be cured. 3 "Basic Maintenance Report"* means a report signed by the President, the Treasurer or any Vice President of the Corporation which sets forth, as of the related Valuation Date, the assets of the Corporation, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Basic Maintenance Amount. "Board of Directors" means the Board of Directors of the Corporation. "Business Day" means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close. "Charter" means the Articles of Incorporation, as amended and supplemented (including these terms of the Cumulative Preferred Stock), of the Corporation 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 Corporation. "Corporation" shall mean Royce Value Trust, Inc., a Maryland corporation. "Cumulative Preferred Stock" means the % Cumulative Preferred Stock, par value $.001 per share, of the Corporation. "Date of Original Issue" shall have the meaning set forth in paragraph 1(a) of Article II hereof. "Deposit Securities" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Corporation has a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, each Deposit Security shall 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" with respect to the Cumulative Preferred Stock, means any date on which dividends are payable thereon pursuant to the provisions of paragraph 1(a) of Article II hereof. "Dividend Period" shall have the meaning set forth in paragraph 1(a) of Article II hereof. "Fitch" means Fitch Ratings, or its successor. 4 "Independent Accountant"* means a nationally recognized accountant, or firm of accountants, that is with respect to the Corporation an independent public accountant or firm of independent public accountants under the Securities Act of 1933, as amended. "Lien"* means any material lien, mortgage, pledge, security interest or security agreement of any kind. "Liquidation Preference" shall have the meaning set forth in paragraph 2(a) of Article II hereof with respect to the Cumulative Preferred Stock. "Market Value"* means the amount determined by State Street Bank and Trust Company (so long as prices are provided to it by Reuters or another pricing service and Moody's has received written notice about the use of such other pricing service), or, if Moody's agrees in writing, the then-current bank custodian of the Corporation's assets or such other party approved by Moody's in writing, with respect to specific Moody's Eligible Assets of the Corporation, as follows: Securities listed on a U.S. or non-U.S. exchange or by Nasdaq, and securities traded on Nasdaq's Electronic Bulletin Board, shall be valued on the basis of their last reported sale price or Nasdaq official closing price on the Valuation Date or, if no sale is reported for such Valuation Date, then at their bid price for such Valuation Date. Quotations shall be taken from the market where the security is primarily traded. All other over-the-counter securities for which market quotations are readily available shall be valued at their highest bid price. 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. Notwithstanding the foregoing, "Market Value" may, at the option of the Corporation, mean the amount determined with respect to specific Moody's Eligible Assets of the Corporation in the manner set forth below: (a) as to any corporate bond or convertible corporate bond which is a Moody's Eligible Asset, (i) the product of (A) the unpaid principal balance of such bond as of the Valuation Date and (B)(1) if the bond is traded on a national securities exchange or quoted on the Nasdaq System, the last sales price reported on the Valuation Date or (2) if there was no reported sales price on the Valuation Date or if the bond is not traded on a national securities exchange or quoted on the Nasdaq System, the lower of two bid prices for such bond provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, plus (ii) accrued interest on such bond or, if two bid prices cannot be obtained, such Moody's Eligible Asset shall have a Market Value of zero; (b) as to any common or preferred stock which is a Moody's Eligible Asset, (i) if the stock is traded on a national securities exchange or quoted on the NASDAQ System, the last sales price reported on the Valuation Date or (ii) if there was no reported sales price on the 5 Valuation Date, the lower of two bid prices for such stock provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such Moody's Eligible Asset shall have a Market Value of zero; (c) the product of (i) as to U.S. Government Obligations, Short Term Money Market Instruments (other than demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements) and other commercial paper, the face amount or aggregate principal amount of such U.S. Government Obligations, Short Term Money Market Instruments or other commercial paper, as the case may be, and (ii) the lower of the bid prices for the same kind of securities or instruments, as the case may be, having, as nearly as practicable, comparable interest rates and maturities provided by two recognized securities dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such Moody's Eligible Asset will have a Market Value of zero; (d) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements included in Short Term Money Market Instruments, the face value thereof. "Moody's" means Moody's Investors Service, Inc., or its successor. "Moody's Discount Factor"* means, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows: (i) Preferred securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to whether such asset pays cumulative or non-cumulative dividends, in accordance with the table set forth below. Rating Category (1) - ------------------- Cumulative Non-Cumulative ---------- -------------- Aaa 150% 165% Aa 155% 171% A 160% 176% Baa 165% 182% 6 Ba 196% 216% B 216% 238% Below B and Unrated 250% 275% - ------------ (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Corporation's assets can be derived from other sources as well as combined with a number of sources as presented by the Corporation to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a non-convertible preferred security is unrated by Moody's, S&P or Fitch, the Corporation will use the percentage set forth opposite "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. The Moody's Discount Factor applied to non-convertible preferred securities that are Rule 144A Securities will equal the sum of the Moody's Discount Factor which would apply if such securities were registered under the Securities Act plus 20%. (ii) Corporate debt securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
Terms To Maturity of Rating Category(1) Below B Corporate Debt Security -------------------------------------------------- and ----------------------- Aaa Aa A Baa Ba B Unrated --- -- - --- -- - ------- 1 year or less................................. 109% 112% 115% 118% 137% 150% 250% 2 years or less (but longer than 1 year)....... 115 118 122 125 146 160 250% 3 years or less (but longer than 2 years)...... 120 123 127 131 153 168 250% 4 years or less (but longer than 3 years)...... 126 129 133 138 161 176 250% 5 years or less (but longer than 4 years)...... 132 135 139 144 168 185 250% 7 years or less (but longer than 5 years)...... 139 143 147 152 179 197 250% 10 years or less (but longer than 7 years)..... 145 150 155 160 189 208 250% 15 years or less (but longer than 10 years).... 150 155 160 165 196 216 250% 20 years or less (but longer than 15 years).... 150 155 160 165 196 228 250% 30 years or less (but longer than 20 years).... 150 155 160 165 196 229 250% Greater than 30 years.......................... 165 173 181 189 205 240 250%
- -------------------------- (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Corporation's assets can be derived from other sources as well as combined with a number of sources as presented by the Corporation to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate debt security is unrated by Moody's, S&P or Fitch, the Corporation will use the percentage set forth under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of such securities. 7 (iii) U.S. Government Obligations and U.S. Treasury Strips:
U.S. Government Obligations U.S. Treasury Strips Remaining Term To Maturity Discount Factor Discount Factor - ---------------------------------------------------------- ------------------------------- ---------------------- 1 year or less........................................ 107% 107% 2 years or less (but longer than 1 year).............. 113 115 3 years or less (but longer than 2 years)............. 118 121 4 years or less (but longer than 3 years)............. 123 128 5 years or less (but longer than 4 years)............. 128 135 7 years or less (but longer than 5 years)............. 135 147 10 years or less (but longer than 7 years)............ 141 163 15 years or less (but longer than 10 years)........... 146 191 20 years or less (but longer than 15 years)........... 154 218 30 years or less (but longer than 20 years)........... 154 244
(iv) Short term instruments and cash: The Moody's Discount Factor applied to short term portfolio securities, including without limitation short term corporate debt securities, Short Term Money Market Instruments and short term municipal debt obligations, will be (A) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (B) 115%, so long as such portfolio securities mature or have a demand feature at par not exercisable within the Moody's Exposure Period; (C) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period; and (D) 148%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable greater than the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. A Moody's Discount Factor of 100% will also apply to money market funds rated by a NRSRO that comply with Rule 2a-7 under the 1940 Act. (v) Rule 144A Securities: Except as set forth in clause (i) above with respect to non-convertible preferred securities, the Moody's Discount Factor applied to Rule 144A Securities will be 130% of the Moody's Discount Factor which would apply if the securities were registered under the Securities Act. (vi) Convertible securities (including convertible preferred securities):
Rating Category(1) -------------------------------------------------------------------------------- Below B and Industry Category Aaa Aa A Baa Ba B Unrated - --------------------------- --- -- - --- -- - ------- Utility 162% 167% 172% 188% 195% 199% 300% Industrial 256% 261% 266% 282% 290% 293% 300% Financial 233% 238% 243% 259% 265% 270% 300% Transportation 250% 265% 275% 285% 290% 295% 300%
8 (1) Unless conclusions regarding liquidity risk as well as estimates of both the probability and severity of default for the Corporation's assets can be derived from other sources as well as combined with a number of sources as presented by the Corporation to Moody's, securities rated below B3 by Moody's and unrated securities, which are securities rated by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible Assets. If a convertible security is unrated by Moody's, S&P or Fitch, the Corporation will use the percentage set forth under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. (vii) U.S. Common Stock and Common Stock of foreign issuers for which ADRs are traded. Utility......................................................... 170% Industrial...................................................... 264% Financial....................................................... 241% Other........................................................... 300% (viii) The Moody's Discount Factor applied to Common Stock of foreign issuers (in existence for at least five years) for which no ADRs are traded will be 400%. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth above will be the percentage provided in writing by Moody's. For purposes of this definition, ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. "Moody's Eligible Assets"* means: ----------------------- (i) Cash (including interest and dividends due on assets rated (A) Baa3 or higher by Moody's if the payment date is within five Business Days of the Valuation Date, (B) A2 or higher if the payment date is within thirty days of the Valuation Date, and (C) A1 or higher if the payment date is within the Moody's Exposure Period) and receivables for assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such receivables are (A) settled through clearing house firms with respect to which the Corporation has received prior written authorization from Moody's or (B)(1) with counterparties having a Moody's long term debt rating of at least Baa3 or the equivalent from S&P or Fitch or (2) with counterparties having a Moody's Short Term Money Market Instrument rating of at least P-1 or the equivalent from S&P or Fitch. 9 (ii) Short Term Money Market Instruments, so long as (A) such securities are rated at least P-1 or if not rated by Moody's, rated at least A-1+/AA or SP-1+/AA by S&P or the equivalent by Fitch, (B) in the case of demand deposits, time deposits and overnight funds, the supporting entity is rated at least A2 by Moody's or the equivalent by S&P or Fitch, or (C) in all other cases, the supporting entity (1) is rated A2 by Moody's or the equivalent by S&P or Fitch and the security matures within one month, (2) is rated A1 by Moody's or the equivalent by S&P or Fitch and the security matures within three months or (3) is rated at least Aa3 by Moody's or the equivalent by S&P or Fitch and the security matures within six months. In addition, money market funds that comply with Rule 2a-7 under the 1940 Act are Moody's Eligible Assets; (iii) U.S. Government Obligations and U.S. Treasury Strips; (iv) Rule 144A Securities; (v) Corporate debt securities, except as noted below, if (A)(1) such securities are rated B3 or higher by Moody's or the equivalent by S&P or Fitch; (2) for securities, which provide for conversion or exchange at the option of the issuer into equity capital at some time over their lives, the issuer must be rated at least B3 by Moody's or the equivalent by S&P or Fitch; or (3) for debt securities rated Ba1 and below by Moody's or the equivalent by S&P or Fitch, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (B) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's, S&P or Fitch; and (C) such securities have been registered under the Securities Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act, except that such securities that are not subject to U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded. In order to merit consideration as Moody's Eligible Asset, debt securities are issued by entities which have not filed for bankruptcy within the past three years, are current on all principal and interest in their fixed income obligations, are current on all preferred security dividends and possess a current, unqualified auditor's report without qualified, explanatory language. Corporate debt securities not rated at least B3 by Moody's or the equivalent by S&P or Fitch or not rated by Moody's, S&P or Fitch shall be considered to be Moody's Eligible Assets only to the extent the Market Value of such corporate debt securities does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets. (vi) Preferred securities if (A) such preferred securities pay cumulative or non-cumulative dividends, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros, (C) the issuer or the parent 10 company of the issuer of such a preferred security has common stock listed on either the New York Stock Exchange, the American Stock Exchange or Nasdaq or is a U.S. Government Agency, (D) the issuer or the parent company of the issuer of such a preferred security has a senior debt rating or a preferred security rating from Moody's of Baa3 or higher or the equivalent from S&P or Fitch and (E) such preferred security has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 from Moody's or the equivalent from S&P or Fitch (if the issuer of such preferred security or the parent company of the issuer has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred security without such a dividend history would also be eligible). In addition, the preferred securities must have the diversification requirements set forth in the table below and the preferred securities issue must be greater than $50 million. Diversification Table: ---------------------- The table below establishes maximum limits for inclusion as Moody's Eligible Assets (other than common stock as set forth below) prior to applying Moody's Discount Factors to Moody's Eligible Assets.
Minimum Maximum Maximum Maximum Single Issue Size Single Single Industry Industry Ratings(1) ($ in Million)(2) Issuer (3)(4) Non-Utility (4)(5) Utility(4)(5) - ---------- ----------------- ------------- ------------------ ------------- Aaa.................. $100 100% 100% 100% Aa................... 100 20 60 30 A.................... 100 10 40 25 Baa.................. 100 6 20 20 Ba................... 50(6) 4 12 12 B1-B2................ 50(6) 3 8 8 B3 or below.......... 50(6) 2 5 5
- ----------- (1) Refers to the preferred security and senior debt rating of the portfolio holding. (2) Except for preferred security, which has a minimum issue size of $50 million. (3) Companies subject to common ownership of 25% or more are considered as one issuer. (4) Percentages represent a portion of the aggregate Market Value of the Corporation's total assets. (5) Industries are determined according to Moody's Industry Classifications, as defined herein. (6) Portfolio holdings from issues ranging from $50 million to $100 million are limited to 20% of the Corporation's total assets. (vii) 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 Corporation; provided, however, that common stock which, while a Moody's Eligible Asset owned by the Corporation, ceases paying any regular cash dividend will no longer be considered a Moody's Eligible Asset until 71 days after the date of the announcement of such cessation, unless the issuer of the common stock has senior debt securities rated at least A3 by Moody's or the equivalent by S&P or Fitch, (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 (i) sponsored 11 ADR programs or (ii) Level II or Level III ADRs, and (C) which are 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 (and in existence for at least five years), for which no ADRs are traded; Common Stock Diversification Table: -----------------------------------
Maximum Single Maximum Single Maximum Single Industry Category Issuer (%)(1) Industry (%)(1) State (%)(1) ----------------- ------------- --------------- ------------ Utility 4 50 7(2) Industrial 4 45 7 Financial 5 40 6 Other 6 20 N/A
- ----------------------- (1) Percentages represent both a portion of the aggregate Market Value and the number of outstanding shares of the common stock portfolio. (2) Utility companies operating in more than one state should be diversified according to the state of incorporation. (viii) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition but only upon receipt by the Corporation of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Corporation that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the AMPS. When the Corporation sells a portfolio security and agrees to repurchase it at a future date, the Discounted Value of such security will constitute a Moody's Eligible Asset and the amount the Corporation is required to pay upon repurchase of such security will count as a liability for purposes of calculating the Basic Maintenance Amount. When the Corporation purchases a security and agrees to sell it at a future date to another party, cash receivable by the Corporation thereby will constitute a Moody's Eligible Asset if the long term debt of such other party is rated at least A2 by Moody's or the equivalent by S&P or Fitch and such agreement has a term of 30 days or less; otherwise the Discounted Value of such security will constitute a Moody's Eligible Asset. For the purpose of calculation of Moody's Eligible Assets, portfolio securities which have been called for redemption by the issuer thereof shall be valued at the lower of Market Value or the call price of such portfolio securities. 12 Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent that it has been irrevocably deposited for the payment of (i)(A) through (i)(D) under the definition of Basic Maintenance Amount or to the extent it is subject to any Liens, including assets segregated under margin account requirements in connection with the engagement in hedging transactions, except for (A) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Corporation will not affect the status of such assets as a Moody's Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Corporation by the Adviser, the Corporation's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement. For purposes of this definition, ratings assigned by S&P or Fitch are generally accepted by Moody's at face value. However, adjustments to face value may be made by Moody's to particular categories of credits for which the S&P and/or Fitch rating does not seem to approximate a Moody's rating equivalent. Split rated securities assigned by S&P and Fitch will be accepted by Moody's at the lower of the two ratings. "Moody's Exposure Period"* means the sum of (i) that number of calendar days from the last Valuation Date on which the Portfolio Calculation was at least equal to the Basic Maintenance Amount to the Valuation Date on which the Portfolio Calculation was not at least equal to the Basic Maintenance Amount, (ii) that number of calendar days following a Valuation Date that the Corporation has under these terms of the Cumulative Preferred Stock to cure any failure to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount, and (iii) the maximum number of calendar days the Corporation has to effect a redemption under Article II, paragraph 3 of these terms of the Cumulative Preferred Stock. "Moody's Industry Classifications"* means, for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Cumulative Preferred Stock): Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil 13 Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting, Engineering, Construction, Hardware, Forest Products (building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land Development Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers, Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass Personal and Non Durable Consumer Products (Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies Diversified/Conglomerate Manufacturing Diversified/Conglomerate Service Diversified Natural Resources, Precious Metals and Minerals: Fabricating, Distribution Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste Disposal Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, Televisions, Tape Machines, Speakers, Printers, Drivers, Technology Finance: Investment Brokerage, Leasing, Syndication, Securities Farming and Agriculture: Livestock, Grains, Produce; Agricultural Chemicals, Agricultural Equipment, Fertilizers Grocery: Grocery Stores, Convenience Food Stores Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges Hotels, Motels, Inns and Gaming Insurance: Life, Property and Casualty, Broker, Agent, Surety Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy Manufacturing, Motion Picture Production Theaters, Motion Picture Distribution 14 Machinery (Non-Agriculture, Non-Construction, Non-Electronic): Industrial, Machine Tools, Steam Generators Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales of the foregoing Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, Television, Cable Broadcasting Equipment Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes Personal Transportation: Air, Bus, Rail, Car Rental Utilities: Electric, Water, Hydro Power, Gas Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national agencies The Corporation will use its discretion in determining which industry classification is applicable to a particular investment in consultation with the Independent Accountant and Moody's, to the extent the Corporation considers necessary. "Nasdaq" means the Nasdaq Stock Market, Inc. "1940 Act" means the Investment Company Act of 1940, as amended. "Notice of Redemption" has the meaning set forth in paragraph 3(c)(i) of Article II hereof. "NRSRO" means any nationally reorganized statistical rating organization, as that term is used in Rule 15a3-1 under the Securities Exchange Act of 1934, as amended, or any successor provisions. "Officers' Certificate" means a certificate signed by any two of the President, a Vice President, the Treasurer or the Secretary of the Corporation or by any one of the foregoing and an Assistant Treasurer or Assistant Secretary of the Corporation. 15 "Paying Agent" means Equiserve Trust Company, N.A. and its successors or any other paying agent appointed by the Corporation with respect to the Cumulative Preferred Stock and/or any other Preferred Stock. "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 Corporation, and includes the Cumulative Preferred Stock. "Quarterly Valuation Date"* means the last Valuation Date in March, June, September and December of each year, commencing _____________, ______. "Redemption Price" has the meaning set forth in paragraph 3(a) of Article II hereof. "Rule 144A Securities" means securities that are restricted as to resale under U.S. federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act or successor provisions. "Securities Act" means the Securities Act of 1933, as amended. "Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation, the remaining term to maturity thereof is not in excess of 180 days: (i) Commercial paper rated P-1 by Moody's, F1 by Fitch or A-1 by S&P if such commercial paper matures in 30 days or less, or P-1 by Moody's and either F1 by Fitch or A-1+ by S&P if such commercial paper matures in over 30 days; (ii) Demand or time deposits in, and banker's acceptances and certificates of deposit of (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); (iii) Overnight funds; (iv) U.S. Government Obligations; and (v) Eurodollar demand or time deposits in, or certificates of deposit of, the head office or the London branch office of a depository institution or trust company if the certificates of deposit, 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 that have (1) credit ratings on such Valuation Date of at least P-1 from Moody's and either F1+ from 16 Fitch or A-1+ from S&P, in the case of commercial paper or certificates of deposit, and (2) credit ratings on each Valuation Date of at least Aa3 from Moody's and either AA- from Fitch or AA- from S&P, 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 Corporation, all of the foregoing requirements shall be applicable except that the required long-term unsecured debt credit rating of such depository institution or trust company from Moody's, Fitch and S&P shall be at least A2, A and A, respectively; and provided further, however, that the foregoing credit rating requirements shall 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 certificates of deposit, if any, of such depository institution or trust company are not rated on any Valuation Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and there is no long-term rating, and (3) the holding company shall meet all of the foregoing credit rating requirements (including the preceding proviso in the case of investments that mature in no more than one Business Day from the date of purchase or other acquisition by the Corporation); and provided further, that the interest receivable by the Corporation shall not be subject to any withholding or similar taxes. "S&P" means Standard & Poor's, or its successor. "U.S. Government Agency" means any agency, sponsored enterprise or instrumentality of the United States of America. "U.S. Government Obligations" means direct obligations of the United States or U.S. Government Agencies that are entitled to the full faith and credit of the United States and that, other than United States Treasury Bills and U.S. Treasury Strips, provide for the periodic payment of interest and the full payment of principal at maturity. "U.S. Treasury Strips" means securities based on direct obligations of the United States Treasury created through the Separate Trading of Registered Interest and Principal of Securities program. "Valuation Date"* means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. "Voting Period" shall have the meaning set forth in paragraph 4(b) of Article II hereof. 2. Certain Definitions Dependent on Facts Ascertainable Outside the Charter. Those of the foregoing definitions which are marked with an asterisk (the "Definitions") have been adopted by the Board of Directors of the Corporation in order to obtain an Aaa rating from Moody's on the shares of Cumulative Preferred Stock on their Date of Original Issue and to maintain such rating. The interpretation or applicability of any or all of the Definitions may from time to time be modified by the Board of Directors in its sole discretion based on a determination by the Board of Directors that such action is necessary or appropriate with respect 17 to the Cumulative Preferred Stock; provided, however, that the Board of Directors receives written confirmation from Moody's that any such modification would not impair the ratings then assigned by Moody's to the Cumulative Preferred Stock. Furthermore, if the Board of Directors determines not to continue to comply with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof as provided in paragraph 7 of Article II hereof, then the Definitions, unless the context otherwise requires, shall be without force and effect and have no meaning for these terms of the Cumulative Preferred Stock. ARTICLE II. CUMULATIVE PREFERRED STOCK 1. Dividends. ---------- (a) Holders of shares of Cumulative Preferred Stock shall be entitled to receive, when, as and if authorized by the Board of Directors and declared by the Corporation, out of funds legally available therefor, cumulative cash dividends at the annual rate of % per share (computed on the basis of a 360-day year consisting of twelve 30-day months) of the initial Liquidation Preference of $25.00 per share on the Cumulative Preferred Stock and no more, payable quarterly on March 23, June 23, September 23 and December 23 in each year (each, a "Dividend Payment Date"), commencing December 23, 2003 (or, if any such day is not a Business Day, then on the next succeeding Business Day), to holders of record of Cumulative Preferred Stock as they appear on the stock register of the Corporation at the close of business on the preceding March 6, June 6, September 6 and December 6 (or, if any such day is not a Business Day, then on the next succeeding Business Day), as the case may be, in preference to dividends on shares of Common Stock and any other stock of the Corporation ranking junior to the Cumulative Preferred Stock in payment of dividends. Dividends on shares of Cumulative Preferred Stock shall accumulate from the date on which the first such shares of Cumulative Preferred Stock are originally issued ("Date of Original Issue"). Each period beginning on and including a Dividend Payment Date (or the Date of Original Issue, in the case of the first dividend period after issuance of such shares) and ending on but excluding the next succeeding Dividend Payment Date is referred to herein as a "Dividend Period." Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors. (b) (i) No dividends shall be declared or paid or set apart for payment on any 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 therefor. If full cumulative dividends are not declared and paid on the shares of Cumulative Preferred Stock, any dividends on the shares of Cumulative Preferred Stock shall be declared and paid pro rata on all outstanding shares of Cumulative Preferred Stock. No holders of shares of Cumulative Preferred Stock shall be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in this paragraph 1(b)(i) on shares of Cumulative Preferred Stock. No interest or sum of money in lieu of interest shall be payable in 18 respect of any dividend payments on any shares of Cumulative Preferred Stock that may be in arrears. (ii) For so long as shares of Cumulative Preferred Stock are outstanding, the Corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation (except by conversion into or exchange for stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (A) immediately thereafter, the Corporation shall have a Portfolio Calculation at least equal to the Basic Maintenance Amount and the Corporation shall maintain the Asset Coverage, (B) full cumulative dividends on all shares of Cumulative Preferred Stock due on or prior to the date of the transaction have been declared and paid (or shall have been declared and sufficient funds for the payment thereof deposited with the Paying Agent) and (C) the Corporation has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision contained herein for mandatory redemption. (iii) Any dividend payment made on the shares of Cumulative Preferred Stock shall first be credited against the dividends accumulated with respect to the earliest Dividend Period for which dividends have not been paid. (c) Not later than the Business Day next preceding each Dividend Payment Date, the Corporation shall deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to pay the dividends that are payable on such Dividend Payment Date, which Deposit Securities shall mature on or prior to such Dividend Payment Date. The Corporation may direct the Paying Agent with respect to the investment of any such Deposit Securities, provided that such investment consists exclusively of Deposit Securities and provided further that the proceeds of any such investment will be available at the opening of business on such Dividend Payment Date. (d) The Board of Directors may authorize and the Corporation may declare an additional dividend on the Cumulative Preferred Stock each year in order to permit the Corporation to distribute its income in accordance with Section 855 (or any successor provision) of the Internal Revenue Code of 1986, as amended (the "Code"), and the other rules and regulations under Subchapter M of the Code. Any such additional dividend shall be payable to holders of the Cumulative Preferred Stock on the next Dividend Payment Date, shall be part of a regular quarterly dividend for the year of declaration payable to holders of record pursuant to paragraph 1(a) hereof and shall not result in any increase in the amount of cash dividends payable for such year pursuant to paragraph 1(a) hereof. 19 2. Liquidation Rights. ------------------- (a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of shares of Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, after claims of creditors but before any distribution or payment shall be made in respect of the Common Stock or any other stock of the Corporation 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 thereon accumulated to and including the date fixed for such distribution or payment (whether or not earned or declared by the Corporation, but excluding interest thereon) (the "Liquidation Preference"), and such holders shall be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up. (b) If, upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the assets of the Corporation available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock and any other outstanding class or series of Preferred Stock of the Corporation ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, shall 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 shall be distributed among the holders of shares 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 shares of Cumulative Preferred Stock, no dividends or distributions shall be made to holders of the Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to liquidation. 3. Redemption. ----------- Shares of the Cumulative Preferred Stock shall be redeemed or redeemable by the Corporation as provided below: (a) Mandatory Redemptions. ---------------------- If the Corporation is required to redeem any shares of Cumulative Preferred Stock pursuant to paragraphs 5(b) or 5(c) of Article II hereof, then the Corporation shall, to the extent permitted by the 1940 Act, Maryland law and any agreement in respect of indebtedness of the Corporation to which it may be a party or by which it may be bound, by the close of business on such Asset Coverage Cure Date or Basic Maintenance Amount Cure Date (herein collectively referred to as a "Cure Date"), as the case may be, fix a redemption date and proceed to redeem shares as set forth in paragraph 3(c) hereof. On such redemption date, the Corporation shall redeem, out of funds legally available therefor, the number of shares of Cumulative Preferred Stock and/or other Preferred Stock equal to the minimum number of shares the redemption of which, if such redemption had occurred immediately prior to the opening of business on such Cure Date, would have resulted in the Asset Coverage having been satisfied or the Corporation having a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, as the 20 case may be, immediately prior to the opening of business on such Cure Date or, if the Asset Coverage or a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at a price equal to $25.00 per share plus accumulated but unpaid dividends thereon (whether or not earned or declared by the Corporation) through the date of redemption (the "Redemption Price"). In the event that shares of Cumulative Preferred Stock are redeemed pursuant to paragraph 5(b) of Article II hereof, the Corporation may, but shall not be required to, redeem a sufficient number of shares of Cumulative Preferred Stock pursuant to this paragraph 3(a) in order that the "asset coverage" of a class of senior security which is stock, as defined in Section 18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption is up to 275%. (b) Optional Redemptions. --------------------- Prior to ________, 2008, the Corporation may, at its option, redeem shares of Cumulative Preferred Stock at the Redemption Price per share only if and to the extent that any such redemption is necessary, in the judgment of the Corporation, to maintain the Corporation's status as a regulated investment company under Subchapter M of the Code. Commencing ______, 2008, and at any time and from time to time thereafter, the Corporation may, at its option, to the extent permitted by the 1940 Act, Maryland law and any agreement in respect of indebtedness of the Corporation to which it may be a party or by which it may be bound, redeem the Cumulative Preferred Stock in whole or in part at the Redemption Price per share. (c) Procedures for Redemption. -------------------------- (i) If the Corporation shall determine or be required to redeem shares of Cumulative Preferred Stock pursuant to this paragraph 3, it shall mail a written notice of redemption ("Notice of Redemption") with respect to such redemption by first class mail, postage prepaid, to each holder of the shares to be redeemed at such holder's address as the same appears on the stock books of the Corporation on the record date in respect of such redemption established by the Board of Directors. Each such Notice of Redemption shall state: (A) the redemption date, which shall be not fewer than 30 days nor more than 45 days after the date of such notice; (B) the number of shares of Cumulative Preferred Stock to be redeemed; (C) the CUSIP number(s) of such shares; (D) the Redemption Price; (E) that dividends on the shares to be redeemed will cease to accumulate on such redemption date; and (F) the provisions of this paragraph 3 under which such redemption is made. 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 also shall specify the number of shares to be redeemed from such holder. No defect in the Notice of Redemption or the mailing thereof shall affect the validity of the redemption proceedings, except as required by applicable law. (ii) If the Corporation shall give a Notice of Redemption, then by the close of business on the Business Day preceding the redemption date specified in the Notice of Redemption the Corporation shall (A) deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock to be redeemed, which Deposit Securities shall mature on or 21 prior to such redemption date, and (B) give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the holders of the shares of Cumulative Preferred Stock called for redemption on the redemption date. The Corporation may direct the Paying Agent with respect to the investment of any Deposit Securities so deposited, provided that the proceeds of any such investment will be available at the opening of business on such redemption date. Upon the date of such deposit (unless the Corporation shall default in making payment of the Redemption Price), all rights of the holders of the shares of Cumulative Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Redemption Price thereof, and such shares shall no longer be deemed outstanding for any purpose. The Corporation shall be entitled to receive, promptly after the date fixed for redemption, any cash in excess of the aggregate Redemption Price of the shares of Cumulative Preferred Stock called for redemption on such date and any remaining Deposit Securities. Any assets so deposited that are unclaimed at the end of two years from such redemption date shall, to the extent permitted by law, be repaid to the Corporation, after which the holders of the shares of Cumulative Preferred Stock so called for redemption shall look only to the Corporation for payment thereof. The Corporation shall be entitled to receive, from time to time after the date fixed for redemption, any interest on the Deposit Securities so deposited. (iii) On the redemption date, each record owner of shares of Cumulative Preferred Stock on the books of the Paying Agent shall be entitled to receive the cash Redemption Price, without interest. (iv) In the case of any redemption of less than all of the shares of Cumulative Preferred Stock pursuant to these terms of the Cumulative Preferred Stock, such redemption shall be made pro rata from each holder of shares of Cumulative Preferred Stock in accordance with the respective number of shares held by each such holder on the record date for such redemption. (v) Notwithstanding the other provisions of this paragraph 3, the Corporation shall not redeem shares of Cumulative Preferred Stock or any other Preferred Stock unless all accumulated and unpaid dividends on all outstanding shares of Cumulative Preferred Stock for all applicable past Dividend Periods (whether or not earned or declared by the Corporation) shall have been or are contemporaneously paid or declared and Deposit Securities for the payment of such dividends shall have been deposited with the Paying Agent as set forth in paragraph 1(c) of Article II hereof. (vi) If the Corporation shall not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of the Cumulative Preferred Stock to be redeemed on any redemption date, the Corporation shall redeem on such redemption date the number of shares of Cumulative Preferred Stock as it shall have legally available funds, or is otherwise able, to redeem ratably from each holder whose shares are to be redeemed, and the remainder of the shares of the Cumulative Preferred Stock required to be redeemed shall be redeemed on the earliest practicable date on which the Corporation shall have funds legally available for the redemption of, or is otherwise able to redeem, such shares. 22 4. Voting Rights. -------------- (a) General. -------- Except as otherwise provided by law or as specified in the Charter or Bylaws, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation, and the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, and of shares of Common Stock shall vote together as a single class; provided that, at all times the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, shall be entitled, as a class, to the exclusion of the holders of all other securities and classes of stock of the Corporation, to elect two directors of the Corporation. Subject to paragraph 4(b) of Article II hereof, the holders of outstanding shares of stock of the Corporation, including the holders of outstanding shares of Preferred Stock (including the Cumulative Preferred Stock), voting as a single class, shall elect the balance of the directors. (b) Right to Elect Majority of Board of Directors. ---------------------------------------------- During any period in which any one or more of the conditions described below shall exist (such period being referred to herein as a "Voting Period"), the number of directorships constituting the Board of Directors shall automatically increase by the smallest number that, when added to the two directors elected exclusively by the holders of shares of Preferred Stock, would constitute a majority of the Board of Directors as so increased by such smallest number; and the holders of shares of Preferred Stock shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of stock of the Corporation), to elect such smallest number of additional directors, together with the two directors that such holders are in any event entitled to elect. A Voting Period shall commence: (i) if at any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the outstanding shares of Cumulative Preferred Stock equal to at least two full years' dividends shall be due and unpaid and sufficient Deposit Securities shall not have been deposited with the Paying Agent for the payment of such accumulated dividends; or (ii) if at any time holders of any other shares of Preferred Stock are entitled to elect a majority of the directors of the Corporation under the 1940 Act. Upon the termination of a Voting Period, the term of office of the additional directors elected by the holders of Preferred Stock, including the Cumulative Preferred Stock, pursuant to this paragraph 4(b) above shall terminate, the remaining directors shall constitute the directors of the Corporation, the number of directorships constituting the Board of Directors shall decrease accordingly and the voting rights described in this paragraph 4(b) shall cease, subject always, however, to the reverting of such voting rights in the holders of Preferred Stock upon the further occurrence of any of the events described in this paragraph 4(b). 23 (c) Right to Vote with Respect to Certain Other Matters. ---------------------------------------------------- (i) So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of a majority 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 Cumulative Preferred Stock. The Corporation shall notify Moody's ten Business Days prior to any such vote described above. Unless a higher percentage is provided for under the Charter, the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock, including Cumulative Preferred Stock, voting together as a single 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. For purposes of the preceding sentence, the phrase "vote of the holders of a majority of the outstanding shares of Preferred Stock" shall mean, with respect to the Preferred Stock, "a majority of the outstanding voting securities" as used in the 1940 Act. The class vote of holders of shares of Preferred Stock, including Cumulative Preferred Stock, described above will be in addition to a separate vote of the requisite percentage of shares of Common Stock and shares of Preferred Stock, including Cumulative Preferred Stock, voting together as a single class, necessary to authorize the action in question. An increase in the number of authorized shares of Preferred Stock pursuant to the Charter or the issuance of additional shares of any series of Preferred Stock (including Cumulative Preferred Stock) pursuant to the Charter shall not in and of itself be considered to adversely affect the contract rights of the holders of Cumulative Preferred Stock. (ii) Notwithstanding the foregoing, and 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 stock of the Corporation, 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 stock, as expressly set forth in the 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 contract rights of holders of the Cumulative Preferred Stock, as expressly set forth in the Charter. (d) Voting Procedures. ------------------ (i) As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described in paragraph 4(b) above, the Corporation shall call a special meeting of such holders and instruct the Paying Agent to mail a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more than 20 days after the date of mailing of such notice. If the Corporation fails to send such notice to the Paying Agent or if the Corporation does not call such a special meeting, it may be called by any such holder on like notice. The record date for determining the holders entitled to notice of and to vote at such special 24 meeting shall be the close of business on the fifth Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting held during a Voting Period, such holders of Preferred Stock, voting together as a class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), shall be entitled to elect the number of directors prescribed in paragraph 4(b) above. (ii) For purposes of determining any rights of the holders of Cumulative Preferred Stock to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these terms of the Cumulative Preferred Stock, by the other provisions of the Charter, by statute or otherwise, a share of Cumulative Preferred Stock which is not outstanding shall not be counted. (iii) The terms of office of all persons who are directors of the Corporation at the time of a special meeting of holders of Preferred Stock, including Cumulative Preferred Stock, to elect directors shall continue, notwithstanding the election at such meeting by such holders of the number of directors that they are entitled to elect, and the persons so elected by such holders, together with the two incumbent directors elected by the holders of Preferred Stock, including Cumulative Preferred Stock, and the remaining incumbent directors elected by the holders of the Common Stock and Preferred Stock, shall constitute the duly elected directors of the Corporation. (iv) Simultaneously with the expiration of a Voting Period, the term of office of the additional directors elected by the holders of Preferred Stock, including Cumulative Preferred Stock, pursuant to paragraph 4(b) above shall terminate, the remaining directors shall constitute the directors of the Corporation, the number of directorships constituting the Board of Directors shall decrease accordingly and the voting rights of such holders of Preferred Stock, including Cumulative Preferred Stock, to elect additional directors pursuant to paragraph 4(b) above shall cease, subject to the provisions of the last sentence of paragraph 4(b). (e) Exclusive Remedy. ----------------- Unless otherwise required by law, the holders of shares of Cumulative Preferred Stock shall not have any rights or preferences other than those specifically set forth herein. The holders of shares of Cumulative Preferred Stock shall have no appraisal rights, preemptive rights or rights to cumulative voting. In the event that the Corporation fails to pay any dividends on the shares of Cumulative Preferred Stock, the exclusive remedy of the holders shall be the right to vote for directors pursuant to the provisions of this paragraph 4. (f) Notification to Moody's. ------------------------ In the event a vote of holders of Cumulative Preferred Stock is required pursuant to the provisions of Section 13(a) of the 1940 Act, as long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall, not later than ten Business Days prior to the date on which such vote is to be taken, notify Moody's that such vote is to be taken and the nature of the action 25 with respect to which such vote is to be taken and, not later than ten Business Days after the date on which such vote is taken, notify Moody's of the result of such vote. 5. Coverage Tests. --------------- (a) Determination of Compliance. ---------------------------- For so long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall make the following determinations: (i) Asset Coverage. The Corporation shall maintain, as of the last Business Day of each March, June, September and December of each year in which any shares of Cumulative Preferred Stock are outstanding, the Asset Coverage. (ii) Basic Maintenance Amount Requirement. ------------------------------------- (A) For so long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall maintain, on each Valuation Date, a Portfolio Calculation at least equal to the Basic Maintenance Amount, each as of such Valuation Date. Upon any failure to maintain the required Portfolio Calculation, the Corporation shall use its best efforts to reattain a Portfolio Calculation at least equal to the Basic Maintenance Amount on or prior to the Basic Maintenance Amount Cure Date, by altering the composition of its portfolio or otherwise. (B) The Corporation shall prepare a Basic Maintenance Report relating to each Valuation Date. On or before 5:00 P.M., New York City time, on the third Business Day after the first Valuation Date following the Date of Original Issue of the Cumulative Preferred Stock and after each (A) Quarterly Valuation Date, (B) Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above, (C) Basic Maintenance Amount Cure Date following a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above and (D) Valuation Date on which the Portfolio Calculation exceeds the Basic Maintenance Amount by 20% or less, the Corporation shall complete and deliver to Moody's a Basic Maintenance Report, which will be deemed to have been delivered to Moody's if Moody's receives a copy or telecopy, telex or other electronic transcription setting forth at least the Portfolio Calculation and the Basic Maintenance Amount each as of the relevant Valuation Date and on the same day the Corporation mails to Moody's for delivery on the next Business Day the full Basic Maintenance Report. The Corporation also shall provide Moody's with a Basic Maintenance Report relating to any other Valuation Date on Moody's specific request. A failure by the Corporation to deliver a Basic Maintenance Report under this paragraph 5(a)(ii)(B) shall be deemed to be delivery of a Basic Maintenance Report indicating a Portfolio Calculation less than the Basic Maintenance Amount, as of the relevant Valuation Date. (C) Within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to the last Quarterly Valuation Date of the Corporation's fiscal year, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such a Basic Maintenance Report. Also, within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) and any Basic Maintenance 26 Amount Cure Date, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report. If any Accountant's Confirmation delivered pursuant to this paragraph 5(a)(ii)(C) shows that an error was made in the Basic Maintenance Report for such Quarterly Valuation Date, or shows that a lower Portfolio Calculation was determined by the Independent Accountants, the calculation or determination made by such Independent Accountants shall be final and conclusive and shall be binding on the Corporation, and the Corporation shall accordingly amend the Basic Maintenance Report and deliver the amended Basic Maintenance Report to Moody's promptly following Moody's receipt of such Accountant's Confirmation. (D) In the event the Portfolio Calculation shown in any Basic Maintenance Report prepared pursuant to paragraph 5(a)(ii)(B) above is less than the applicable Basic Maintenance Amount, the Corporation shall have until the Basic Maintenance Amount Cure Date to achieve a Portfolio Calculation at least equal to the Basic Maintenance Amount, and upon such achievement (and not later than such Basic Maintenance Amount Cure Date) the Corporation shall inform Moody's of such achievement in writing by delivery of a revised Basic Maintenance Report showing a Portfolio Calculation at least equal to the Basic Maintenance Amount as of the date of such revised Basic Maintenance Report, together with an Officers' Certificate to such effect. (E) On or before 5:00 P.M., New York City time, on the first Business Day after shares of Common Stock are repurchased by the Corporation, the Corporation shall complete and deliver to Moody's a Basic Maintenance Report as of the close of business on such date that Common Stock is repurchased. A Basic Maintenance Report delivered as provided in paragraph 5(a)(ii)(B) above also shall be deemed to have been delivered pursuant to this paragraph 5(a)(ii)(E). (b) Failure to Meet Asset Coverage. ------------------------------- If the Asset Coverage is not satisfied as provided in paragraph 5(a)(i) hereof and such failure is not cured as of the related Asset Coverage Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock and/or proceed to redeem a sufficient number of shares of any other Preferred Stock to enable it to meet the requirements of paragraph 5(a)(i) above, and, at the Corporation's discretion, such additional number of shares of Cumulative Preferred Stock in order that the "asset coverage" of a class of senior security which is stock, as defined in Section 18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock is up to 275%, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of any shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof, and/or any other Preferred Stock to be redeemed, as contemplated by its terms. 27 (c) Failure to Maintain a Portfolio Calculation At Least Equal to the Basic Maintenance Amount. -------------------------------- If a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount is not maintained as provided in paragraph 5(a)(ii)(A) above and such failure is not cured by the related Basic Maintenance Amount Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock and/or proceed to redeem a sufficient number of shares of any other Preferred Stock to enable it to meet the requirements of paragraph 5(a)(ii)(A) above, and, at the Corporation's discretion, such additional 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%, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of any shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof, and/or any other Preferred Stock to be redeemed, as contemplated by its terms. (d) Status of Shares Called for Redemption. --------------------------------------- For purposes of determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied, (i) no share of the Cumulative Preferred Stock and/or any other Preferred Stock shall be deemed to be outstanding for purposes of any computation if, prior to or concurrently with such determination, sufficient Deposit Securities to pay the full Redemption Price for such share of Cumulative Preferred Stock and/or the applicable redemption price for such share of any other Preferred Stock shall have been deposited in trust with the Paying Agent and the requisite Notice of Redemption and/or applicable notice of redemption for shares of any other Preferred Stock shall have been given, and (ii) such Deposit Securities deposited with the Paying Agent shall not be included in determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied. 6. Certain Other Restrictions. --------------------------- (a) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation will not, and will cause the Adviser not to, (i) knowingly and willfully purchase or sell a portfolio security for the specific purpose of causing, and with the actual knowledge that the effect of such purchase or sale will be to cause, the Portfolio Calculation as of the date of the purchase or sale to be less than the Basic Maintenance Amount as of such date, (ii) in the event that, as of the immediately preceding Valuation Date, the Portfolio Calculation exceeded the Basic Maintenance Amount by 5% or less, alter the composition of the Corporation's portfolio securities in a manner reasonably expected to reduce the Portfolio Calculation, unless the Corporation shall have confirmed that, after giving effect to such alteration, the Portfolio Calculation exceeded the Basic Maintenance Amount or (iii) declare or pay any dividend or other distribution on any shares of Common Stock or repurchase any shares of Common Stock, unless the Corporation shall have confirmed that, after giving effect to such declaration, other distribution or repurchase, the Corporation continues to satisfy the requirements of paragraph 5(a)(ii)(A) of Article II hereof. 28 (b) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall not (a) acquire or otherwise invest in (i) future contracts or (ii) options on futures contracts, (b) engage in reverse repurchase agreements, (c) engage in short sales, (d) overdraw any bank account, (e) write options on portfolio securities other than call options on securities held in the Corporation's portfolio or that the Corporation has an immediate right to acquire through conversion or exchange of securities held in its portfolio, or (f) borrow money, except for the purpose of clearing and/or settling transactions in portfolio securities (which borrowings shall under any circumstances be limited to the lesser of $10,000,000 and an amount equal to 5% of the Market Value of the Corporation's assets at the time of such borrowings and which borrowings shall be repaid within 60 days and not be extended or renewed), unless in any such case, the Corporation shall have received written confirmation from Moody's that such investment activity will not adversely affect Moody's then current rating of the Cumulative Preferred Stock. Furthermore, for so long as the Cumulative Preferred Stock is rated by Moody's, unless the Corporation shall have received the written confirmation from Moody's referred to in the preceding sentence, the Corporation may engage in the lending of its portfolio securities only in an amount of up to 15% of the Corporation's total assets, provided that the Corporation receives cash collateral for such loaned securities which is maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities and, if invested, is invested only in money market mutual funds meeting the requirements of Rule 2a-7 under the 1940 Act that maintain a constant $1.00 per share net asset value. In determining the Portfolio Calculation, the Corporation shall use the Moody's Discount Factor applicable to the loaned securities rather than the Moody's Discount Factor applicable to the collateral. (c) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall not consolidate the Corporation with, merge the Corporation into, sell or otherwise transfer all or substantially all of the Corporation's assets to another entity or adopt a plan of liquidation of the Corporation, in each case without providing prior written notification to Moody's. 7. Termination of Rating Agency Provisions. ---------------------------------------- (a) The Board of Directors may determine that it is not in the best interests of the Corporation to continue to comply with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, in which case the Corporation will no longer be required to comply with any of the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, provided that (i) the Corporation 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 Corporation is in compliance with the provisions of paragraphs 5(a)(i), 5(a)(ii), 5(c) and 6 of Article II hereof at the time the notice required in clause (i) hereof is given and at the time of the termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, (iii) at the time the notice required in clause (i) hereof is given and at the time of termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's the Cumulative Preferred Stock is listed on the New York Stock Exchange or on another exchange registered with the Securities and Exchange Commission as a national securities exchange and (iv) at the time of termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, the Cumulative Preferred Stock shall have 29 received a rating from at least one NRSRO that is at least comparable to the then current rating from Moody's. (b) On the date that the notice is given in paragraph 7(a) above and on the date that compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's is terminated, the Corporation shall provide the Paying Agent and Moody's with an Officers' Certificate as to the compliance with the provisions of paragraph 7(a) hereof, and the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's shall terminate on such later date and thereafter have no force or effect. 8. Limitation on Issuance of Additional Preferred Stock. ----------------------------------------------------- So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation may issue and sell additional shares of Cumulative Preferred Stock authorized hereby and/or shares of one or more other series of Preferred Stock constituting a series of a class of senior securities of the Corporation representing stock under Section 18 of the 1940 Act in addition to the shares of Cumulative Preferred Stock, provided that (i) immediately after giving effect to the issuance and sale of such additional Preferred Stock and to the Corporation's receipt and application of the proceeds thereof, the Corporation will maintain the Asset Coverage of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Corporation then outstanding, and (ii) no such additional Preferred Stock shall have any preference or priority over any other Preferred Stock of the Corporation upon the distribution of the assets of the Corporation or in respect of the payment of dividends. Shares of the Cumulative Preferred Stock redeemed or otherwise acquired by Corporation shall be returned to the status of authorized but unissued shares of Preferred Stock, without designation as to series. ARTICLE III. ABILITY OF BOARD OF DIRECTORS TO MODIFY THE TERMS OF THE CUMULATIVE PREFERRED STOCK To the extent permitted by law, the Board of Directors may modify or interpret these terms of the Cumulative Preferred Stock to resolve any inconsistency or ambiguity or to remedy any formal defect so long as such modification or interpretation does not materially adversely affect any of the contract rights of holders of the Cumulative Preferred Stock or any other stock of the Corporation, as expressly set forth in the Charter, or, if the Corporation has not previously terminated compliance with the provisions hereof with respect to Moody's pursuant to paragraph 7 of Article II hereof, adversely affect the then current rating on the Cumulative Preferred Stock by Moody's. 30 SECOND: The shares of Cumulative Preferred Stock have been classified and designated by the Board of Directors under the authority contained in the Charter. THIRD: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. FOURTH: The undersigned President of the Corporation acknowledges these Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. 31 IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be signed in its name and on its behalf by its President and attested to by its Secretary on this ___ day of _____________, 2003 ATTEST: ROYCE VALUE TRUST, INC. By:____________________________ By:____________________________ Name: Name: Title: Secretary Title: President 32 EX-99.H 5 rvt_63005-exh.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT (h) UNDERWRITING AGREEMENT Exhibit (h) ROYCE VALUE TRUST, INC. % CUMULATIVE PREFERRED STOCK Liquidation Preference $25.00 per share UNDERWRITING AGREEMENT ---------------------- New York, New York October , 2003 Citigroup Global Markets Inc. UBS Securities LLC As Representatives of the several Underwriters c/o Citigroup Global Markets Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: The undersigned, Royce Value Trust, Inc., a Maryland corporation (the "Fund") and Royce & Associates, LLC, a Delaware limited liability company (the "Adviser") address you as underwriters and as the representatives (the "Representatives") of each of the several underwriters named on Schedule I hereto (herein collectively called "Underwriters"). The Fund proposes to sell to the Underwriters _____ shares (the "Securities") of its % Cumulative Preferred Stock, par value $.001 per share and liquidation preference $25.00 per share (the "Cumulative Preferred Stock"). Unless otherwise stated, the term "you" as used herein means each of Citigroup Global Markets Inc. and UBS Securities LLC individually on its own behalf and on behalf of the other Underwriters. Certain terms used herein are defined in Section 18 hereof. The Securities will be authorized by, and subject to the terms and conditions of, the Articles Supplementary to be adopted in connection with the issuance of the Securities (the "Articles Supplementary"). The Fund and the Adviser wish to confirm as follows their agreements with you and the other several Underwriters on whose behalf you are acting in connection with the several purchases of the Securities by the Underwriters. The Fund has entered into (i) an Investment Advisory Agreement with the Adviser, dated as of October 1, 2001; (ii) a Custodian Agreement with State Street Bank and Trust Company ("State Street") dated as of October 20, 1986, as amended to date; and (iii) a Registrar, Transfer Agency and Paying Agency Agreement with State Street, dated as of August 21, 1996, as amended to date; and such agreements are herein referred to as the "Advisory Agreement," the "Custodian Agreement" and the "Transfer Agency Agreement," respectively. Collectively, the Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement are herein referred to as the "Fund Agreements." 1. Representations and Warranties of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, represent and warrant to, and agree with, each Underwriter as set forth below in this Section 1. (a) The Fund has prepared and filed with the Commission a registration statement (file numbers 333-107578 and 811-04875) on Form N-2, including a related preliminary prospectus (including the statement of additional information incorporated by reference therein), for registration under the 1933 Act and the 1940 Act of the offering and sale of the Securities. The Fund may have filed one or more amendments thereto, including a related preliminary prospectus (including the statement of additional information incorporated by reference therein), each of which has previously been furnished to you. The Fund will next file with the Commission one of the following: either (1) prior to the Effective Date of such registration statement, a further amendment to such registration statement (including the form of final prospectus (including the statement of additional information incorporated by reference therein)) or (2) after the Effective Date of such registration statement, a final prospectus (including the statement of additional information incorporated by reference therein) in accordance with Rules 430A and 497. In the case of clause (2), the Fund has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Acts and the Rules and Regulations to be included in such registration statement and the Prospectus. As filed, such amendment and form of final prospectus (including the statement of additional information incorporated by reference therein), or such final prospectus (including the statement of additional information incorporated by reference therein), shall contain all Rule 430A Information, together with all other such required information, and, except to the extent the Representatives shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Fund has advised you, prior to the Execution Time, will be included or made therein. The Fund has furnished the Underwriters with copies of such Registration Statement, each amendment to such Registration Statement filed with the Commission and each Preliminary Prospectus. (b) Each Preliminary Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 497, complied when so filed in all material respects with the provisions of the Acts and the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (c) The Registration Statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective, the Prospectus and any supplement thereto when filed with the 2 Commission under Rule 497 and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission, complied or will comply in all material respects with the provisions of the Acts and the Rules and Regulations and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in writing by or on behalf of any Underwriter through you expressly for use therein. (d) The Securities have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them). (e) The Fund's capitalization and adjusted capitalization as of June 30, 2003 is as set forth in the Prospectus; all outstanding shares of the Fund's Common Stock, the 7.30% Preferred and the 7.80% Preferred have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights, and conform to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them). (f) The Fund is a corporation duly organized and validly existing in good standing under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its property or assets and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its property or assets or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, property, net assets or results of operations of the Fund, or on the ability of the Fund to perform its obligations under this Agreement or any of the Fund Agreements. The Fund has no subsidiaries. (g) There are no legal or governmental proceedings pending or, to the knowledge of the Fund, threatened, against the Fund, or to which the Fund or any of its property or assets is subject, that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Acts or the Rules and Regulations. 3 (h) The Fund is not in violation of its articles of incorporation, as amended and supplemented to date, including the Articles Supplementary relating to the 7.30% Preferred and the Articles Supplementary relating to the 7.80% Preferred (collectively, the "Charter") or bylaws (the "Bylaws"), or of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, any state securities commission, any national securities exchange, any arbitrator, any court or governmental agency, body or official having jurisdiction over the Fund, or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its property or assets may be bound. (i) Neither the issuance and sale of the Securities, the execution, delivery or performance of this Agreement or any of the Fund Agreements by the Fund, nor the consummation by the Fund of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with, the Commission, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official (except for the registration of the Securities under the 1933 Act and such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by you and the required rating agency confirmation), (B) violates or will violate or conflicts or will conflict with any provision of the Charter or bylaws of the Fund or any statute, law, regulation or judgment, injunction, order or decree applicable to the Fund or any of its property or assets or (C) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its property or assets may be bound, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets is subject. The Fund is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency. (j) Tait, Weller & Baker, who have audited the financial statements included or incorporated by reference in the Registration Statement and the Prospectus, are independent public accountants with respect to the Fund within the meaning of the 1933 Act and the 1933 Act Rules and Regulations. (k) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), present fairly the financial position, results of operations and changes in financial position of the Fund on the basis stated or incorporated by reference in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the 4 other financial and statistical information and data included in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Fund. (l) The execution and delivery of, and the performance by the Fund of its obligations under, this Agreement and the Fund Agreements have been duly and validly authorized by the Fund, and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder and thereunder may be limited under federal or state securities laws. (m) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Fund has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Fund, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Fund, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, property, net assets or results of operations of the Fund taken as a whole, whether or not arising in the ordinary course of business. (n) The Fund has not distributed and, prior to the later to occur of the Closing Date and the completion of the distribution of the Securities will not distribute, any offering material in connection with the offering and sale of the Securities other than the Registration Statement, the Preliminary Prospectus, the Prospectus or other materials, if any, permitted by the Acts or the Rules and Regulations. (o) The Fund has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and assets and to conduct its business in the manner described in the Prospectus (and any supplement thereto), subject to such qualifications as may be set forth in the Prospectus; the Fund has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any supplement thereto); and, except as described in the Prospectus (and any supplement thereto), none of such permits contains any restriction that is materially burdensome to the Fund. (p) The Fund maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with general or specific authorization from the Fund's officers and with the applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and the Code; (ii) 5 transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets and to maintain compliance with the books and records requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only in accordance with general or specific authorization from the Fund's officers; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) To the Fund's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (r) The Fund has filed all tax returns required to be filed, which returns are complete and correct, and the Fund is not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto; and the statements in the Prospectus under the headings "Taxation", "Description of Cumulative Preferred Stock" and "Description of Capital Stock" fairly summarize the matters therein described. (s) No holder of any security of the Fund has any right to require registration of shares of Cumulative Preferred Stock or any other security of the Fund because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. (t) The Fund, subject to the registration statement having been declared effective and the filing of the Prospectus under Rule 497, has taken all required action under the Acts and the Rules and Regulations to make the public offering and consummate the sale of the Securities as contemplated by this Agreement. (u) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license. (v) The Fund is registered under the 1940 Act as a closed-end, diversified management investment company and the 1940 Act Notification has been duly filed with the Commission and, at the time of filing thereof and any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund is, and at all times through the completion of the transactions contemplated hereby will be, in compliance in all material respects with the terms and conditions of the Acts. No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act, and the Advisers Act Rules and Regulations; the Fund has not received any notice from the Commission pursuant to Section 8(e) of the 1940 Act with respect to the 1940 Act Notification or the Registration Statement. 6 (w) Except as stated in this Agreement and in the Prospectus (and any supplement thereto), the Fund has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Securities, and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund. (x) The Fund has filed in a reasonably timely manner each document or report required to be filed by it pursuant to the Exchange Act and Exchange Act Rules and Regulations; each such document or report at the time it was filed conformed to the requirements of the Exchange Act and the Exchange Act Rules and Regulations; and none of such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (y) Each of the Fund Agreements and the Fund's and the Adviser's obligations under this Agreement and each of the Fund Agreements comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations. (z) The Fund will use its reasonable best efforts to cause the Cumulative Preferred Stock, on or prior to the Closing Date, to be assigned a rating of "Aaa" by the Rating Agency. (aa) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code. (bb) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), no director of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of any Underwriter. (cc) The Fund will use its reasonable best efforts to cause the Cumulative Preferred Stock to be listed, subject to notice of issuance, on the NYSE within 30 days of the effectiveness of the Registration Statement and to comply with the rules and regulations of such exchange. (dd) The Fund intends to direct the investment of the proceeds of the offering of the Securities in such a manner as to comply with the requirements of Subchapter M of the Code. (ee) All advertising, sales literature or other promotional material (including "prospectus wrappers", "broker kits", "road show slides" and "road show scripts"), whether in printed or electronic form, authorized in writing by or prepared by the Fund or the Adviser for use in connection with the offering and sale of the Securities (collectively, "sales material"), if any, complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1933 Act Rules and Regulations and the 7 rules and interpretations of the NASD and if required to be filed with the NASD under the NASD's conduct rules were or will be so filed prior to the Closing. No sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ff) The Fund's directors and officers/errors and omissions insurance policy and its fidelity bond required by Rule 17g-1 of the 1940 Act Rules and Regulations are in full force and effect; the Fund is in compliance with the terms of such policy and fidelity bond in all material respects; and there are no claims by the Fund under any such policy or fidelity bond as to which any insurance company is denying liability or defending under a reservation of rights clause; the Fund has not been refused any insurance coverage sought or applied for; and the Fund has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Fund, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). (gg) Except as disclosed in the Registration Statement and the Prospectus, the Fund (i) does not have any material lending or other relationship with any affiliate of Citigroup Global Markets Inc. and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of Citigroup Global Markets Inc. (hh) There is and has been no failure on the part of the Fund and any of the Fund's directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (the "Sarbanes-Oxley Act"), including Sections 302 and 906 related to certifications. (ii) The operations of the Fund are and have been conducted at all times in compliance in all material respects with any applicable financial recordkeeping and reporting requirements of The Bank Secrecy Act of 1970, as amended (including amendments pursuant to the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001), the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the "Money Laundering Laws") and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Fund with respect to the Money Laundering Laws is pending or, to the knowledge of the Fund, threatened. (jj) Neither the Fund nor, to the knowledge of the Fund, any director, officer, agent, employee or affiliate of the Fund is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department 8 ("OFAC"); and the Fund will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC. (kk) Neither the Fund nor, to the knowledge of the Fund, any director, officer, agent, employee or affiliate of the Fund is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the FCPA, including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any "foreign official" (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Fund, and, to the knowledge of the Fund, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith. Any certificate signed by any officer of the Fund and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the Fund, as to matters covered thereby, to each Underwriter. 2. Representations and Warranties of the Adviser. The Adviser represents and warrants to each Underwriter as follows: (a) The Adviser is a limited liability company duly formed and validly existing in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its property or assets and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its property or assets or the conduct of its business requires such registration or qualification, except where the failure to so register or to qualify does not have a material adverse effect on the condition (financial or other), business, prospects, property, net assets or results of operations of the Adviser, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement. (b) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any supplement thereto). There does not exist any proceeding or, to the Adviser's knowledge, any facts or circumstances the existence of which could reasonably lead to any proceeding, which might adversely affect the registration of the Adviser with the Commission. 9 (c) There are no legal or governmental proceedings pending or, to the knowledge of the Adviser, threatened against the Adviser, or to which the Adviser or any of its property or assets is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or that may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, prospects, property, net assets or results of operations of the Adviser or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement. (d) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, nor the consummation by the Adviser of the transactions contemplated hereby or thereby (i) requires the Adviser to obtain any consent, approval, authorization or other order of or registration with, the Commission, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official, (ii) violates or will violate or conflicts or will conflict with any provision of the certificate of formation or by-laws or other organizational documents of the Adviser or any statute, law, regulation or judgment, injunction, order or decree applicable to the Adviser or any of its property or assets or (iii) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any agreement, indenture, lease or other instrument to which the Adviser is a party or by which it or any of its property or assets may be bound, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Adviser is subject. The Adviser is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency. (e) The execution and delivery of, and the performance by the Adviser of its obligations under, this Agreement and the Investment Advisory Agreement have been duly and validly authorized by the Adviser, and this Agreement and the Investment Advisory Agreement have been duly executed and delivered by the Adviser and each constitutes the valid and legally binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except as rights to indemnity and contribution hereunder may be limited under federal or state securities laws. (f) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus (or any supplement thereto) and under this Agreement and the Investment Advisory Agreement. (g) The description of the Adviser in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) complied and comply in all material respects with the provisions the Acts, the Advisers Act, the Rules and Regulations, and the Advisers Act Rules and Regulations and such description did not, as of the effective date of the Registration Statement and the date hereof, and will not, as of the Closing Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 10 (h) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Adviser has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Fund, and there has not been any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, property, net assets or results of operations of the Adviser, whether or not arising in the ordinary course of business, or which, in each case, could have a material adverse effect on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.. (i) The Adviser has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and assets and to conduct its business in the manner described in the Prospectus (and any supplement thereto); the Adviser has fulfilled and performed all its material obligations with respect to such permits, and to the Adviser's knowledge no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Adviser under any such permit; and, except as described in the Prospectus (and any supplement thereto), none of such permits contains any restriction that is materially burdensome to the Adviser (j) Except as stated in this Agreement and in the Prospectus (and any supplement thereto), the Adviser has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Securities, and the Adviser is not aware of any such action taken or to be taken by any affiliates of the Adviser. (k) Charles M. Royce is the validly appointed President of the Adviser. (l) In the event that the Fund or the Adviser makes available any promotional materials intended for use only by qualified broker-dealers and registered representatives thereof by means of an Internet web site or similar electronic means, the Adviser will install and maintain pre-qualification and password-protection or similar procedures which are reasonably designed to effectively prohibit access to such promotional materials by persons other than qualified broker-dealers and registered representatives thereof. (m) This Agreement and the Investment Advisory Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations. 3. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Fund agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase 11 price of $_____ per share, the number of the Underwritten Securities set forth opposite such Underwriter's name in Schedule I hereto. 4. Delivery and Payment. Delivery of and payment for the Underwritten Securities shall be made at 10:00 AM, New York City time, on ______, ___, 2003 or at such time on such later date not more than three Business Days after the foregoing date as the Representatives shall designate, which date and time may be postponed by agreement between the Representatives and the Fund or as provided in Section 10 hereof (such date and time of delivery and payment for the Securities being herein called the "Closing Date"). Delivery of the Securities shall be made to the Representatives for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representatives of the purchase price thereof to or upon the order of the Fund by wire transfer payable in same-day funds to an account specified by the Fund. Delivery of the Underwritten Securities shall be made through the facilities of The Depository Trust Company unless the Representatives shall otherwise instruct. 5. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Securities for sale to the public as set forth in the Prospectus. 6. Agreements of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, agree with the several Underwriters as follows: (a) The Fund will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereto, to become effective. Prior to the termination of the offering of the Securities, the Fund will not file any amendment of the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Fund has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably object. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 497, the Fund will cause the Prospectus, properly completed, and any supplement thereto to be filed in a form approved by the Representatives with the Commission pursuant to Rule 497 within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Fund will promptly advise the Representatives (1) when the Registration Statement, if not effective at the Execution Time, shall have become effective, (2) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 497 or when any Rule 462(b) Registration Statement shall have been filed with the Commission, (3) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (4) of any request by the Commission or its staff for any amendment of the Registration Statement, or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or for any additional information, (5) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (6) of the receipt by the Fund of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding 12 for such purpose. The Fund will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Securities is required to be delivered under the 1933 Act, any event occurs as a result of which, in the judgment of the Fund or in the reasonable opinion of counsel for the Underwriters, the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the 1933 Act, the 1940 Act and the Rules and Regulations, the Fund promptly will (1) notify the Representatives of any such event; (2) prepare and file with the Commission, subject to the second sentence of paragraph (a) of this Section 6, an amendment or supplement which will correct such statement or omission or effect such compliance; and (3) supply any supplemented Prospectus to you in such quantities as you may reasonably request. (c) As soon as practicable, the Fund will make generally available to its security holders and to the Representatives an earnings statement or statements of the Fund which will satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 under the 1933 Act. (d) The Fund will furnish to the Representatives and counsel for the Underwriters signed copies of the Registration Statement (including exhibits thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the 1933 Act, as many copies of each Preliminary Prospectus and the Prospectus and any supplement thereto as the Representatives may reasonably request. (e) The Fund will arrange, if necessary, for the qualification of the Securities for sale under the laws of such jurisdictions as the Representatives may designate and will maintain such qualifications in effect so long as required for the distribution of the Securities; provided that in no event shall the Fund be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Securities, in any jurisdiction where it is not now so subject. (f) The Fund will not, without the prior written consent of Citigroup Global Markets Inc., offer, sell, contract to sell, pledge, or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Fund or any affiliate of the Fund or any person in privity with the Fund, directly or indirectly, including the filing (or participation in the filing) of a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act) any other senior security of the Fund or any securities convertible into, or exercisable, or exchangeable for, any senior security of the Fund; or 13 publicly announce an intention to effect any such transaction for a period of 180 days following the Execution Time. (g) The Fund will comply with all applicable securities and other applicable laws, rules and regulations, including, without limitation, the Sarbanes-Oxley Act, and to use its best efforts to cause the Fund's directors and officers, in their capacities as such, to comply with such laws, rules and regulations, including, without limitation, the provisions of the Sarbanes-Oxley Act. (h) The Fund and the Adviser will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Fund to facilitate the sale or resale of the Securities. (i) The Fund agrees to pay the costs and expenses relating to the following matters: (A) the preparation, printing or reproduction and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto), each Preliminary Prospectus, the Prospectus and the 1940 Act Notification and each amendment or supplement to any of them; (B) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, any sales material and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in connection with the offering and sale of the Securities; (C) the preparation, printing, authentication, issuance and delivery of certificates for the Securities, including any stamp or transfer taxes in connection with the original issuance and sale of the Securities; (D) the printing (or reproduction) and delivery of this Agreement, any blue sky memorandum, dealer agreements and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Securities; (E) the registration of the Securities under the 1933 Act and the listing of the Securities on the NYSE; (F) any registration or qualification, if necessary, of the Securities for offer and sale under the securities or blue sky laws of the several states (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such registration and qualification); (G) any filings required to be made with the NASD (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such filings); (H) the transportation and other expenses incurred by or on behalf of Fund representatives in connection with presentations to prospective purchasers of the Securities; (I) the fees and expenses of the Fund's accountants and the fees and expenses of counsel (including local and special counsel) for the Fund; (J) the fees payable to the Rating Agency; and (K) all other costs and expenses incident to the performance by the Fund of its obligations hereunder, but not including the fees, expenses, and costs of Simpson Thacher & Bartlett LLP, counsel to the Underwriters, except as provided in Sections 6(i)(D) and (G) and in Section 8 of this Agreement (j) The Fund will direct the investment of the net proceeds of the offering of the Securities in such a manner as to comply with the investment objectives, policies and restrictions of the Fund as described in the Prospectus. 14 (k) The Fund will use its best efforts to cause the Cumulative Preferred Stock to be listed, subject to notice of issuance, on the NYSE within 30 days of effectiveness of the Registration Statement and to comply with the rules and regulations of such exchange. (l) The Fund will use its best efforts to cause the Cumulative Preferred Stock, on or prior to the Closing Date, to be assigned a rating of "Aaa" by the Rating Agency. (m) The Fund will comply with the requirements of Subchapter M of the Code to qualify as a regulated investment company under the Code. (n) The Fund and the Adviser will use their reasonable best efforts to perform all of the agreements required of them by this Agreement and discharge all conditions of theirs to closing as set forth in this Agreement. 7. Conditions to the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Fund and the Adviser contained herein as of the Execution Time, the Closing Date and any settlement date pursuant to Section 4 hereof, to the accuracy of the statements of the Fund made in any certificates pursuant to the provisions hereof, to the performance by the Fund or the Adviser of its obligations hereunder and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless the Representatives agree in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the Business Day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 497, the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 497; and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and no proceedings for that purpose shall have been instituted or threatened by the Commission. (b) The Fund shall have requested and caused Sidley Austin Brown & Wood LLP, special counsel for the Fund, to have furnished to the Representatives their opinion, dated the Closing Date and addressed to the Representatives, to the effect that: (i) the Fund is qualified to do business and is in good standing as a foreign corporation in the State of New York, and, to such counsel's knowledge, owns, possesses or has obtained and currently maintains, all material governmental licenses, permits, consents, orders, approvals and other authorizations under the Federal laws of the United States and the laws of the State of New York necessary to carry on its business as contemplated by the Prospectus; 15 (ii) the Securities have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable; (iii) this Agreement has been duly authorized, executed and delivered by the Fund and complies with the provisions of the 1940 Act and the 1940 Act Rules and Regulations applicable to the Fund; (iv) each of the Fund Agreements has been duly authorized, executed and delivered by the Fund, each complies as to form in all material respects with all applicable provisions of the 1940 Act and the 1940 Act Rules and Regulations; (v) the Registration Statement is effective under the 1933 Act and the 1933 Act Rules and Regulations and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or the 1933 Act Rules and Regulations or proceedings therefor initiated or threatened by the Commission; (vi) at the time the Registration Statement became effective, the Registration Statement (other than the financial statements, accompanying notes, and other financial or statistical information contained or incorporated by reference therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the Acts and the Rules and Regulations; (vii) to such counsel's knowledge, (A) there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments of the Fund required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, (B) the descriptions thereof are correct in all material respects, (C) references thereto are correct and (D) no default exists in the due performance or observance by the Fund of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed as an exhibit to the Registration Statement; (viii) no consent, approval, authorization or order of any court or governmental authority or agency is required in connection with the performance by the Fund of its obligations under this Agreement, except for (A) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by you, (B) the required rating agency confirmation (as to which such counsel need express no opinion), (C) such as have been made or obtained under the 1933 Act, and (D) such as may have been obtained under Maryland law; and to such counsel's knowledge, the execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or encumbrance 16 upon any property or assets of the Fund pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Charter or the bylaws of the Fund, or, to such counsel's knowledge, any Federal or New York law or administrative regulation, or administrative or court decree; (ix) the Fund is registered with the Commission under the 1940 Act and the 1940 Act Rules and Regulations as a closed-end, diversified management investment company, and all required action has been taken by the Fund under the Acts and the Rules and Regulations to make the public offering and consummate the sale of the Securities pursuant to this Agreement; the provisions of the Charter and the bylaws of the Fund comply as to form in all material respects with the requirements of the 1940 Act and the 1940 Act Rules and Regulations; and, to such counsel's knowledge, no order of suspension or revocation of such registration under the 1940 Act and the 1940 Act Rules and Regulations, has been issued or proceedings therefor initiated or threatened by the Commission; (x) the information in the Prospectus under the caption "Taxation", to the extent that it constitutes matters of Federal income tax law or legal conclusions relating to Federal income tax matters, has been reviewed by them and is correct in all material respects; and (xi) to the knowledge of such counsel, there is no pending or threatened action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Fund or its property of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectus. In rendering such opinion, Sidley Austin Brown & Wood LLP shall additionally state that nothing has come to their attention that has caused them to believe that the Registration Statement or any amendment thereto, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any supplement thereto, as of the time it was first provided to the Underwriters or as of the Closing Date, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that such counsel need not express any belief with respect to the financial statements, accompanying notes, and other financial and statistical information contained or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement to either of the foregoing). In addition, Sidley Austin Brown & Wood LLP (A) may state that they express no opinion as to the laws of any jurisdiction other than the laws of the State of New York, the laws of the State of Maryland and the Federal laws of the United States of America, (B) may rely as to matters involving the laws of the State of Maryland upon the opinion of Venable, Baetjer and Howard, LLP referred to in paragraph (c) of 17 this Section 7 and (C) may rely, as to matters of fact, upon the representations and warranties made by the Fund and the Adviser herein and on certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials. Except as otherwise specifically provided herein, when giving their opinions to their "knowledge", Sidley Austin Brown & Wood LLP have relied solely upon an inquiry of the attorneys of that firm who have worked on matters for the Fund, on certificates or written statements of officers of the Fund and, where appropriate, a review of the Registration Statement, Prospectus, exhibits to the Registration Statement, the Charter and bylaws of the Fund and a review of the minute books of the Fund and have made no other investigation or inquiry. (c) You shall have received on the Closing Date an opinion of Venable, LLP, special Maryland counsel to the Fund, dated the Closing Date and addressed to you, to the effect that: (i) the Fund is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT; (ii) the Fund has the corporate power to own, lease and operate its property or assets and to conduct its business in all material respects as described in the Registration Statement and in the Prospectus; (iii) the authorized capital stock of the Fund conforms as to legal matters in all material respects to the description thereof in the Prospectus under the captions "Description of Cumulative Preferred Stock" and "Description of Capital Stock"; (iv) the sale and issuance of Securities have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non- assessable, and the issuance of the Securities will not be subject to preemptive or other similar rights pursuant to the Charter or Bylaws of the Fund or the Maryland General Corporation Law. (v) the Fund has the corporate power to enter into the Fund Agreements; the execution and delivery of the Fund Agreements have been duly authorized by the Fund; each of the Fund Agreements has been duly executed and, so far as it is known to such counsel, delivered by the Fund; (vi) so far as is known to such counsel, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or constitute a breach of the Charter or the Bylaws of the Fund, or any Maryland law or regulation, or, so far as is known to such counsel, any order of any Maryland governmental authority (other than any law, regulation or order in connection with the securities laws of the State of Maryland, as to which no opinion is hereby expressed); and 18 (vii) insofar as statements in the Prospectus purport to summarize certain provisions of Maryland law or regulations or legal or governmental proceedings, of the State of Maryland, if any, such statements are accurate in all material respects. In rendering such opinion, Venable LLP may rely, as to matters of fact, upon the representations and warranties made by the Fund and the Adviser herein and on certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials. Except as otherwise specifically provided herein, when giving their opinions to their "knowledge", Venable LLP have relied solely upon an inquiry of the attorneys of that firm who have worked on matters for the Fund, on certificates or written statements of officers of the Fund and, where appropriate, a review of the Registration Statement, Prospectus, exhibits to the Registration Statement, the Charter and bylaws of the Fund and have made no other investigation or inquiry. (d) You shall have received on the Closing Date an opinion of John E. Denneen, Esq., General Counsel for the Adviser, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) the Adviser has been duly formed and is validly existing as a limited liability company in good standing under the laws of the State of Delaware, with corporate power and authority to conduct its business as described in the Registration Statement and in the Prospectus; (ii) the Adviser is duly registered as an investment adviser under the Advisers Act and the Advisers Act Rules and Regulations and, subject to the matters covered by the no-action letters of the Commission in Quest Advisory Corp.; Royce Value Trust, Inc. (pub. avail. December 22, 1986) and Royce Value Trust, Inc. (pub. avail. July 29, 1988) (collectively, the "No-Action Letters"), is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations, from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus; (iii) this Agreement and the Investment Advisory Agreement each has been duly authorized, executed and delivered by the Adviser and, subject to the matters covered by the No-Action Letters, constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights generally and to general equitable principles (except as to those provisions relating to indemnity or contribution for liabilities arising under such agreement, as to which no opinion need be expressed); and, to his knowledge, neither the execution and delivery of this Agreement or the Investment Advisory Agreement nor the performance by the Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of, any of the terms and provisions of, or constitute, with or without the giving of notice or the lapse of time or both, a default under, any agreement or instrument to which the Adviser is a party or by which the Adviser is bound, or, except as set 19 forth in the No-Action Letters, any law, order, rule or regulation applicable to the Adviser of any jurisdiction, court, Federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its property or assets or operations; (iv) to such counsel's knowledge, the description of the Adviser in the Registration Statement and in the Prospectus (and any amendment or supplement to either of them) does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (v) to the best knowledge of such counsel after reasonable inquiry, other than as described or contemplated in the Prospectus, there are no actions, suits or other legal or governmental proceedings pending or threatened against the Adviser or to which the Adviser or any of its property is subject which are required to be described in the Prospectus; and (vi) no material consent, approval, authorization or order of or registration or filing with any court, regulatory body, administrative or other governmental body, agency or official is required on the part of the Adviser for the performance of this Agreement or the Investment Advisory Agreement or for the consummation by the Adviser of the transactions contemplated hereby or thereby. In rendering such opinion, such counsel (A) may state that he expresses no opinion as to the laws of any jurisdiction other than the laws of the State of New York, the laws of the State of Delaware and the federal laws of the United States of America, (B) may rely, as to matters of fact, upon the representations and warranties made by the Fund and the Adviser herein and on certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials, and (C) may state that he is a member of the Bar of the State of New York. (e) The Representatives shall have received on the Closing Date an opinion of Simpson Thacher & Bartlett LLP, counsel to the Underwriters, dated the Closing Date and addressed to the Representatives, with respect to such matters as the Underwriters may reasonably request. (f) The Fund shall have furnished to the Representatives a certificate of the Fund, signed by the Chairman of the Board or the President and the principal financial or accounting officer of each of the Fund and the Adviser, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus, any supplements to the Prospectus, and this Agreement and that: (i) The representations and warranties of the Fund and the Adviser in this Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date and the Fund and the Adviser have complied with 20 all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted by the Commission or, to the Fund's or the Adviser's knowledge, threatened by the Commission; and (iii) Since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), there has been no material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Fund or the Adviser, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). (g) The Fund shall have requested and caused Tait, Weller & Baker, the independent public accountants to the Fund, to have furnished to the Representatives, at the Execution Time and at the Closing Date, letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance heretofore approved by the Representatives. (h) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (g) of this Section 7 or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, business or properties of the Fund and the Adviser, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto) the effect of which, in any case referred to in clause (i) or (ii) above, is, in the sole judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (i) The Fund shall have furnished to you a report showing compliance with the asset coverage requirements of the 1940 Act and a Basic Maintenance Report, each dated the Closing Date and in the form and substance satisfactory to you. Each such report shall assume receipt of the net proceeds from the sale of the Securities and the use of such net proceeds to redeem the 7.80% Preferred and the 7.30% Preferred as contemplated by the Prospectus and may use portfolio holdings and valuations as of the close of business of any day not more than six business days preceding the Closing Date, provided, however, that the Fund represents in such report that its total net assets as of the Closing Date have not declined by 5% or more from such valuation date. (j) The Fund shall have delivered and the Underwriters shall have received evidence satisfactory to the Underwriters that the Cumulative Preferred Stock is rated 21 "Aaa" by the Rating Agency as of the Closing Date, and there shall not have been given any notice of any intended or potential downgrading, or any review for a potential downgrading, in the rating according to the shares of the Cumulative Preferred Stock by the Rating Agency. (k) Prior to the Closing Date, the Fund and the Adviser shall have furnished to the Representatives such further information, certificates and documents as the Representatives may reasonably request. If any of the conditions specified in this Section 7 shall not have been fulfilled when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the Closing Date by the Representatives. Notice of such cancellation shall be given to the Fund in writing or by telephone or facsimile confirmed in writing. The documents required to be delivered by this Section 7 shall be delivered at the office of Simpson Thacher & Bartlett LLP, counsel for the Underwriters, at 425 Lexington Avenue, New York, New York, 10017, Attention: Cynthia G. Cobden, Esq., on the Closing Date. 8. Reimbursement of Underwriters' Expenses. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because of any termination pursuant to Section 11 hereof or because of any refusal, inability or failure on the part of the Fund or the Adviser to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Fund will reimburse the Underwriters severally through Citigroup Global Markets Inc. on demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. 9. Indemnification and Contribution. (a) The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each of the Representatives and each other Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls any Underwriter within the meaning of the 1933 Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several (including reasonable costs of investigation), to which they or any of them may become subject under the 1933 Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any Preliminary Prospectus, any sales material (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; 22 provided, however, that the Fund will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Fund by or on behalf of any Underwriter through the Representatives specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Fund may otherwise have. (b) Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Fund and the Adviser, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Fund or the Advisers within the meaning of either the 1933 Act or the Exchange Act, to the same extent as the foregoing indemnity from the Fund and the Advisers to each Underwriter, but only with reference to written information relating to such Underwriter furnished to the Fund by or on behalf of such Underwriter through the Representatives specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. The Fund and the Adviser acknowledge that the statements set forth in the last paragraph of the cover page regarding delivery of the Securities and, under the heading "Underwriting", (i) the list of Underwriters and their respective participation in the sale of the Securities, (ii) the sentences related to concessions and reallowances and (iii) the paragraph related to stabilization, syndicate covering transactions and penalty bids in any Preliminary Prospectus and the Prospectus constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in any Preliminary Prospectus or the Prospectus. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve the indemnifying party from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below) and to control such action; provided, however, that such counsel shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (A) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (B) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (C) the 23 indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (D) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 9 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Fund, the Adviser and the Underwriters severally agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Fund, the Adviser and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and by the Underwriters on the other from the offering of the Securities; provided, however, that in no case shall any Underwriter (except as may be provided in any agreement among underwriters relating to the offering of the Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Securities purchased by such Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Fund, the Adviser and the Underwriters severally shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and of the Underwriters on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Fund and the Adviser (treated jointly for this purpose as one person) shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by it, and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Fund, the Adviser and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person who controls an Underwriter within the meaning of either the 1933 Act or the Exchange Act and each director, officer, employee and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each person who controls the Fund or the Adviser within the meaning of either the 1933 Act or the Exchange Act, each officer of the Fund and the Adviser who shall have signed the Registration Statement and each director of the Fund and the Adviser shall have the same rights to contribution as the Fund and the Adviser, subject in each case to the applicable terms and conditions of this paragraph (d). The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to 24 the respective number of Securities set forth opposite their names in Schedule I (or such numbers of Securities increased as set forth in Section 10 hereof) and not joint. (e) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability from claimants on claims that are the subject matter of such action, suit or proceeding. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 9 and the representations and warranties of the Fund and the Adviser set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Fund, the Adviser or their shareholders, trustees, directors, managers, members or officers or any person controlling the Fund or the Adviser (control to be determined within the meaning of the 1933 Act or the Exchange Act), (ii) acceptance of any Securities and payment therefor hereunder and (iii) any termination of this Agreement. A successor to any Underwriter or to the Fund, the Adviser or their shareholders, trustees, directors, managers, members or officers or any person controlling any Underwriter, the Fund or the Adviser shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. 10. Default by an Underwriter. If any one or more Underwriters shall fail to purchase and pay for any of the Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the number of Securities set forth opposite their names in Schedule I hereto bears to the aggregate number of Securities set forth opposite the names of all the remaining Underwriters or in such other proportion as you may specify in accordance with the Citigroup Global Markets Inc. Master Agreement Among Underwriters) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate number of Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate number of Securities set forth in Schedule I hereto, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if such nondefaulting Underwriters do not purchase all of the Securities, this Agreement will terminate without liability to any nondefaulting Underwriter or the Fund. In the event of a default by any Underwriter as set forth in this Section 10, the Closing Date shall be postponed for such period, not exceeding five Business Days, as the Representatives shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Underwriter of its liability, if any, to the Fund and any nondefaulting Underwriter for damages occasioned by its default hereunder. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I 25 hereto who, with your approval and the approval of the Fund, purchases Firm Securities which a defaulting Underwriter agreed, but failed or refused, to purchase. 11. Termination. This Agreement shall be subject to termination in the absolute discretion of the Representatives, without liability on the part of the Underwriters to the Fund or the Adviser, by notice given to the Fund or the Adviser prior to delivery of and payment for the Securities, if at any time prior to such time (i) trading in the Fund's Common Stock or Cumulative Preferred Stock shall have been suspended by the Commission or the NYSE or trading in securities generally on the NYSE shall have been suspended or limited or minimum prices shall have been established on either of the exchanges, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the Representatives, impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Prospectus (exclusive of any supplement thereto). 12. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Fund and the Adviser or its officers and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Fund or the Adviser or any of the officers, directors, employees, agents or controlling persons referred to in Section 9 hereof, and will survive delivery of and payment for the Securities. The provisions of Sections 8 and 9 hereof shall survive the termination or cancellation of this Agreement. 13. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Representatives, will be mailed, delivered or telefaxed to the Citigroup Global Markets Inc. General Counsel (fax no.: (212) 816-7912) and confirmed to the General Counsel, Citigroup Global Markets Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General Counsel; or, if sent to the Fund or the Adviser, will be mailed, delivered or telefaxed to Royce Value Trust, Inc. (fax no.: (212) 832-8921) and confirmed to it at Royce Value Trust, Inc., 1414 Avenue of the Americas, New York, New York 10019, attention of the Legal Department. 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers, trustees, directors, employees, agents and controlling persons referred to in Section 9 hereof, and no other person will have any right or obligation hereunder. 15. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. 16. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. 26 17. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof. 18. Definitions. The terms which follow, when used in this Agreement, shall have the meanings indicated. "1933 Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "1933 Act Rules and Regulations" shall mean the rules and regulations of the Commission under the 1933 Act. "1940 Act" shall mean the Investment Company Act of 1940, as amended. "1940 Act Rules and Regulations" shall mean the rules and regulations of the Commission under the 1940 Act. "1940 Act Notification" shall mean a notification of registration of the Fund as an investment company under the 1940 Act on Form N-8A, as the 1940 Act Notification may be amended from time to time. "7.80% Preferred" shall mean the Fund's issued and outstanding 7.80% Cumulative Preferred Stock, par value $.001 per share. "7.30% Preferred" shall mean the Fund's issued and outstanding 7.30% Tax- Advantaged Cumulative Preferred Stock, par value $.001 per share. "Acts" shall mean, collectively, the 1933 Act and the 1940 Act. "Advisers Act" shall mean the Investment Advisers Act of 1940, as amended. "Advisers Act Rules and Regulations" shall mean the rules and regulations of the Commission under the Advisers Act. "Basic Maintenance Report" shall mean that report that is delivered to the Rating Agency on or before the third Business Day after each Quarterly Valuation Date. "Business Day" shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in New York City. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" shall mean the Securities and Exchange Commission. "Effective Date" shall mean each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any Rule 462(b) Registration Statement became or become effective. 27 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Act Rules and Regulations" shall mean the rules and regulations of the Commission under the Exchange Act. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "FCPA" means Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder. "NASD" means the National Association of Securities Dealers, Inc. "NYSE" means the New York Stock Exchange, Inc. "Preliminary Prospectus" shall mean any preliminary prospectus (including the statement of additional information incorporated by reference therein) referred to in Section 1(a) above and any preliminary prospectus (including the statement of additional information incorporated by reference therein) included in the Registration Statement at the Effective Date that omits Rule 430A Information. "Prospectus" shall mean the prospectus (including the statement of additional information incorporated by reference therein) relating to the Securities that is first filed pursuant to Rule 497 after the Execution Time or, if no filing pursuant to Rule 497 is required, shall mean the form of final prospectus (including the statement of additional information incorporated by reference therein) relating to the Securities included in the Registration Statement at the Effective Date. "Quarterly Valuation Date" means the last Valuation Date of March, June, September and December, commencing _________ __, 2003. "Rating Agency" shall mean Moody's Investor Services, Inc. "Registration Statement" shall mean the registration statement referred to in Section 1(a) above, including exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto or any Rule 462(b) Registration Statement becomes effective prior to the Closing Date, shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be. Such term shall include any Rule 430A Information deemed to be included therein at the Effective Date as provided by Rule 430A. "Rule 430A" and "Rule 462" refer to such rules under the 1933 Act. "Rule 430A Information" shall mean information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. 28 "Rule 462(b) Registration Statement" shall mean a registration statement and any amendments thereto filed pursuant to Rule 462(b) relating to the offering covered by the registration statement referred to in Section 1(a) hereof. "Rule 497" refers to Rule 497(c) or 497(h) under the 1933 Act, as applicable. "Rules and Regulations" shall mean, collectively, the 1933 Act Rules and Regulations and the 1940 Act Rules and Regulations. "Valuation Date" means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Fund, the Adviser and the several Underwriters. Very truly yours, ROYCE VALUE TRUST, INC. By: --------------------------------------- Name: Title: ROYCE & ASSOCIATES, LLC By: --------------------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Citigroup Global Markets Inc. UBS Securities LLC By: Citigroup Global Markets Inc. Name: Title: For itself and the other several Underwriters named in Schedule I to the foregoing Agreement. 30 SCHEDULE I ----------
NUMBER OF UNDERWRITTEN UNDERWRITERS SECURITIES TO BE PURCHASED - ------------ -------------------------- Citigroup Global Markets Inc..................................... UBS Securities LLC .............................................. ---------- 8,800,000 Total.......................................... ==========
EX-99.K4 6 rvt_63005-exk4.txt FORM OF SECOND AMENDMENT TO REGISTRAR EXHIBIT (k)(4) SECOND AMENDMENT TO REGISTRAR, TRANSFER AGENCY AND PAYING AGENCY AGREEMENT Exhibit (k)(4) SECOND AMENDMENT TO REGISTRAR, TRANSFER AGENCY AND PAYING AGENCY AGREEMENT 1. General Background. In accordance with the Amendment provision in Section 11 of the Registrar, Transfer Agency and Paying Agency Agreement between State Street Bank and Trust Company (the "Bank") and Royce Value Trust, Inc. (the "Fund") dated August 21, 1996, as amended by the first amendment thereto, dated May 18, 1998 (collectively the "Agreement"), the parties desire to amend the Agreement. 1.2 This Amendment shall be effective ________ __, 2003 (the "Second Amendment") and all defined terms and definitions in the Agreement shall be the same in the Second Amendment except as specifically revised by this Second Amendment. 2. Additional Stock. The Fund will be issuing a new series of Cumulative Preferred Stock on ________ __, 2003. Section 1.01 of the Agreement is hereby deleted in its entirety and the new Section 1.01 below is inserted in its place. 1.01 Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to act as registrar, transfer agent, dividend paying agent and agent in connection with the payment of any redemption or liquidation proceeds for the Fund's authorized and issued shares of its Cumulative Preferred Stock, including its 7.80% Cumulative Preferred Stock, its 7.30% Tax-Advantaged Cumulative Preferred Stock and its % Cumulative Preferred Stock ("Shares"), as set out in the prospectuses of the Fund offering the sale of the Shares. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their names and on their behalf by and through their duly authorized officers, as of this ___ day of ________, 2003. EQUISERVE, INC. EQUISERVE TRUST COMPANY, N.A. ROYCE VALUE TRUST, INC. (as Successors in interest of State Street Bank & Trust Company) ON BEHALF OF BOTH ENTITIES: By: ____________________________ By: _____________________________ Name: ____________________________ Name: _____________________________ Title: ____________________________ Title: _____________________________ EX-99.L 7 rvt_63005-exl.txt OPINION AND CONSENT OF VENABLE LLP EXHIBIT (l) OPINION AND CONSENT OF VENABLE LLP Exhibit (l) [LETTERHEAD OF VENABLE LLP] October 1, 2003 Royce Value Trust, Inc. 1414 Avenue of the Americas New York, New York 10019 Re: Registration Statement on Form N-2: 1933 Act File No.: 333-107578 1940 Act File No.: 811-04875 ----------------------------------- Ladies and Gentlemen: We have served as special Maryland counsel to Royce Value Trust, Inc., a Maryland corporation registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end management investment company (the "Company"), in connection with certain matters of Maryland law arising out of the registration of 8,800,000 shares (the "Preferred Shares") of a new series of Cumulative Preferred Stock, $.001 par value per share, of the Company to be issued in an underwritten public offering, covered by the above-referenced Registration Statement (the "Registration Statement"), filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the "Documents"): 1. The Registration Statement, and all amendments thereto relating to the Preferred Shares, substantially in the form transmitted to the Commission under the 1933 Act and the 1940 Act; Royce Value Trust, Inc October 1, 2003 Page 2 2. The charter of the Company (the "Charter"), certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the "SDAT"); 3. The form of Articles Supplementary relating to the Preferred Shares, substantially in the form to be filed by the Company with the SDAT (the "Articles Supplementary"), certified as of the date hereof by an officer of the Company; 4. The Bylaws of the Company (the "Bylaws"), certified as of the date hereof by an officer of the Company; 5. A certificate of the SDAT as to the good standing of the Company, dated as of a recent date; 6. Resolutions adopted by the Board of Directors of the Company (the "Resolutions") relating to the classification and designation of the Preferred Shares and the authorization of the sale and issuance of the Preferred Shares, certified as of the date hereof by an officer of the Company; 7. A certificate executed by an officer of the Company, dated as of the date hereof; and 8. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed the following: 1. Each individual executing any of the Documents, whether on behalf of such individual or any other person, is legally competent to do so. 2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so. 3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding. 4. All Documents submitted to us as originals are authentic. The form and content of all Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. Royce Value Trust, Inc October 1, 2003 Page 3 All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise. 5. Prior to the issuance of the Preferred Shares, a pricing committee of the Board of Directors will determine certain terms of issuance of such Preferred Shares, and the Articles Supplementary will be filed with, and accepted for record by, the SDAT (the "Corporate Proceedings"). Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. The issuance of the Preferred Shares has been duly authorized and (assuming that, upon any issuance of the Preferred Shares, the total number of Preferred Shares issued and outstanding will not exceed the total number of Preferred Shares that the Company is then authorized to issue under the Charter), when and if delivered against payment therefor in accordance with the Resolutions and the Corporate Proceedings, the Preferred Shares will be validly issued, fully paid and nonassessable. The foregoing opinion is limited to the substantive laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to compliance with federal or state securities laws, including the securities laws of the State of Maryland, or the 1940 Act. The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you solely for submission to the Commission as an exhibit to the Registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity without, in each instance, our prior Royce Value Trust, Inc October 1, 2003 Page 4 written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act. Very truly yours, /s/ Venable LLP EX-99.N 8 rvt_63005-exn.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT (n) CONSENT OF INDEPENDENT AUDITORS Exhibit (n) CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm in this Registration Statement (Form N-2, File Nos. 333-107578 and 811-04875) of Royce Value Trust, Inc. and to the use of our report dated January 15, 2003 (except for Note 8, as to which the date is September 12, 2003) on the financial statements and financial highlights of Royce Value Trust, Inc. Such financial statements and financial highlights appear in the 2002 Annual Report to Stockholders which is included in the Statement of Additional Information in the Registration Statement. /s/ TAIT, WELLER & BAKER ------------------------ TAIT , WELLER & BAKER Philadelphia, Pennsylvania September 30, 2003 -----END PRIVACY-ENHANCED MESSAGE-----