-----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, PU5LToU0vWNtSGT4uTqbp8Lxlz04BCIiGWC3qhP/cGZjlR7RxDjPRDM8gABQayeu 1nbAr3tsOW0dOQzCz4AS3A== 0000950117-96-000836.txt : 19960812 0000950117-96-000836.hdr.sgml : 19960812 ACCESSION NUMBER: 0000950117-96-000836 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19960809 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE VALUE TRUST INC CENTRAL INDEX KEY: 0000804116 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133356097 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-08039 FILM NUMBER: 96606525 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04875 FILM NUMBER: 96606526 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 ROYCE FUND N-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996 SECURITIES ACT FILE NO. 333-8039 INVESTMENT COMPANY ACT FILE NO. 811-4875 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-2 [x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ [x] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] POST-EFFECTIVE AMENDMENT NO. AND/OR [x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x] AMENDMENT NO. 21 (CHECK APPROPRIATE BOX OR BOXES) ------------------------ 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 221-4268 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. HOWARD J. KASHNER, ESQ. JAMES D. PHYFE, ESQ. BROWN & WOOD LLP ROYCE VALUE TRUST, INC. DAVIS POLK & WARDWELL ONE WORLD TRADE CENTER 1414 AVENUE OF THE AMERICAS 450 LEXINGTON AVENUE NEW YORK, NEW YORK 10048-0557 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 securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box. [ ] If appropriate, check the following box: [ ] this [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement]. [ ] This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is . If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [x] ------------------------ CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED MAXIMUM MAXIMUM OFFERING AGGREGATE AMOUNT OF TITLE OF SECURITIES PRICE OFFERING REGISTRATION BEING REGISTERED AMOUNT BEING REGISTERED PER SHARE(1) PRICE(1) FEE(2) % Cumulative Preferred Stock............................. 2,400,000 Shares $25.00 $60,000,000 $20,689.66
(1) Estimated solely for the purpose of calculating the registration fee. (2) Previously paid. ------------------------ 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. ________________________________________________________________________________ CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A)
ITEM NUMBER IN FORM N-2 CAPTION IN PROSPECTUS - ------------------------------------------------------------ ------------------------------------------------------ PART A -- INFORMATION REQUIRED IN A PROSPECTUS 1. Outside Front Cover................................... Front Cover Page 2. Inside Front and Outside Back Cover Page.............. Front Cover Page; Inside Front Cover Page 3. Fee Table and Synopsis................................ Not Applicable 4. Financial Highlights.................................. Financial Highlights 5. Plan of Distribution.................................. Front Cover Page; Prospectus Summary; Underwriting 6. Selling Shareholders.................................. Not Applicable 7. Use of Proceeds....................................... Use of Proceeds; Investment Objectives and Policies 8. General Description of the Registrant................. Front Cover Page; Prospectus Summary; The Fund; Investment Objectives and Policies 9. Management............................................ Prospectus Summary; Investment Advisory and Other Services; Custodian, Transfer Agent and Dividend-Paying Agent 10. Capital Stock, Long-Term Debt, and Other Securities... Front Cover Page; Prospectus Summary; Ordinary Income Equivalent Yield Tables; Capitalization; Investment Objectives and Policies; Description of Cumulative Preferred Stock; Description of Capital Stock and Other Securities; Taxation 11. Defaults and Arrears on Senior Securities............. Not Applicable 12. Legal Proceedings..................................... Not Applicable 13. Table of Contents of the Statement of Additional Information......................................... Table of Contents of Statement of Additional Information PART B -- INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 14. Cover Page............................................ Front Cover Page 15. Table of Contents..................................... Front Cover Page 16. General Information and History....................... Not Applicable 17. Investment Objective and Policies..................... Not Applicable 18. Management............................................ Directors and Officers; Investment Advisory and Other Services 19. Control Persons and Principal Holders of Securities... Principal Stockholders 20. Investment Advisory and Other Services................ Investment Advisory and Other Services 21. Brokerage Allocation and Other Practices.............. Brokerage Allocation and Other Practices 22. Tax Status............................................ Not Applicable 23. Financial Statements.................................. Financial Statements
PART C -- OTHER INFORMATION Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. PROSPECTUS (SUBJECT TO COMPLETION, ISSUED AUGUST 9, 1996) 2,400,000 SHARES ROYCE VALUE TRUST, INC. % CUMULATIVE PREFERRED STOCK, LIQUIDATION PREFERENCE $25.00 PER SHARE ------------------------ The % Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the 'Fund') will be senior securities of the Fund. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. The Fund is a closed-end diversified management investment company. The Fund's primary investment objective is long-term capital appreciation, which it seeks by normally investing more than 75% of its assets in common stocks and securities convertible into common stocks of small and medium-sized companies. Quest Advisory Corp. is the Fund's investment adviser. Dividends on the Cumulative Preferred Stock offered hereby, at the annual rate of % of the liquidation preference of $25.00 per share, are cumulative from the Date of Original Issue thereof and are payable annually on in each year, commencing on 1996. During the Fund's last three fiscal years, distributions paid by the Fund on its Common Stock have consisted primarily of long-term capital gains, and it is currently expected that dividends paid on the Cumulative Preferred Stock similarly will consist primarily of long-term capital gains. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of long-term capital gains. It is a condition to its issuance that the Cumulative Preferred Stock be rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with the receipt of such rating, the composition of the Fund's portfolio must reflect guidelines established by Moody's, and the Fund will be required to maintain a certain discounted asset coverage with respect to the Cumulative Preferred Stock. See 'Investment Objectives and Policies -- Rating Agency Guidelines.' (continued on next page) ------------------------ APPLICATION HAS BEEN MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE NEW YORK STOCK EXCHANGE (THE 'NYSE'). IF SUCH APPLICATION IS GRANTED, TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE 'UNDERWRITING.' ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $25 PER SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) FUND(3) ------------ ------------------ ------------------ Per Share.................................................... $25.00 Total(3)..................................................... $60,000,000
- ------------ (1) Plus accumulated dividends, if any, from the Date of Original Issue. (2) The Fund and the investment adviser have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (3) Before deducting offering expenses payable by the Fund, estimated at $370,000. ----------------------------- The shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to the approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the shares will be made on or about August , 1996, at the offices of Morgan Stanley & Co. Incorporated, New York, New York against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY & CO. INCORPORATED A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. August , 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. (continued from cover page) The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund for cash at a price equal to $25 per share plus accumulated but unpaid dividends (whether or not earned or declared) (the 'Redemption Price') if the Fund fails to maintain a quarterly asset coverage of at least 250% or to maintain the discounted asset coverage required by Moody's. Commencing 2001 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock in whole or in part for cash at a price equal to the Redemption Price. Prior to 2001, the Cumulative Preferred Stock will be redeemable, at the option of the Fund, for cash at a price equal to the Redemption Price, only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption.' This Prospectus sets forth certain information an investor should know before investing and should be retained for future reference. A Statement of Additional Information dated August , 1996 has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The table of contents of the Statement of Additional Information appears on page 32 of this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York, New York 10019, or calling the Fund toll-free at (800) 221-4268. ------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CUMULATIVE PREFERRED STOCK TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE CUMULATIVE PREFERRED STOCK IN ANY JURISDICTION IN ANY CIRCUMSTANCES IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................................... 3 Ordinary Income Equivalent Yield Tables................. 8 Financial Highlights.................................... 10 The Fund................................................ 11 Use of Proceeds......................................... 11 Capitalization.......................................... 11 Portfolio Composition................................... 12 Investment Objectives and Policies...................... 12 Investment Objectives.............................. 12 Investment Policies................................ 12 Rating Agency Guidelines........................... 14 Changes in Investment Objectives and Policies...... 15 Investment Restrictions............................ 15 Investment Advisory and Other Services.................. 16 Portfolio Management............................... 16 Investment Advisory Agreement...................... 16 Advisory Fee....................................... 17 Description of Cumulative Preferred Stock............... 18 General............................................ 18 Dividends.......................................... 18 Asset Maintenance.................................. 19 Redemption......................................... 20 Liquidation Rights................................. 21 PAGE ---- Voting Rights...................................... 21 Termination of Rating Agency Guidelines............ 23 Limitation on Incurrence of Additional Indebtedness and Issuance of Additional Preferred Stock....... 23 Repurchase of Cumulative Preferred Stock........... 24 Description of Capital Stock and Other Securities...................................... 24 Capital Stock...................................... 24 The Notes.......................................... 24 Taxation................................................ 26 Taxation of Stockholders........................... 26 Taxation of the Fund............................... 29 Other Taxation..................................... 30 Custodian, Transfer Agent and Dividend-Paying Agent..... 30 Underwriting............................................ 30 Legal Matters........................................... 31 Experts................................................. 31 Additional Information.................................. 31 Table of Contents of Statement of Additional Information........................................... 32 Glossary................................................ 33
------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S CUMULATIVE PREFERRED STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following information is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus and the Statement of Additional Information. Capitalized terms not defined in this Summary are defined in the Glossary that appears at the end of this Prospectus. The Fund; Investment Objectives and Policies.......................... Royce Value Trust, Inc. (the 'Fund') has been engaged in business as a closed-end diversified management investment company since its initial offering in November 1986. The primary investment objective of the Fund is to obtain long-term capital appreciation by normally investing more than 75% of its assets in common stock, convertible preferred stocks and convertible debentures. Current income is a secondary investment objective of the Fund, and it may also invest up to 25% of its assets in the non-convertible preferred stocks and non-convertible debt securities of various companies. The Fund seeks to achieve its objectives by investing principally in equity securities of small and medium-sized companies, generally with stock market capitalizations ranging from $100 million to $1 billion, selected by a value approach. The Fund's average annual total returns on the net asset values of its Common Stock for the one year and five year periods ended June 30, 1996, and from inception on November 26, 1986 to June 30, 1996, were 16.0%, 15.9% and 12.4%, respectively. Total return figures are based on the Fund's historical performance, assume reinvestment of distributions and full participation in primary rights offerings, and are not intended to indicate future performance. See 'Investment Objectives and Policies.' The Investment Adviser.............. Quest Advisory Corp. ('Quest') has served as the investment adviser to the Fund since its inception. Quest also serves as investment adviser to other management investment companies, with aggregate net assets of approximately $1.3 billion as of June 30, 1996, and manages other institutional accounts. As compensation for its services under the present Investment Advisory Agreement, Quest receives a fee at a rate ranging from .5% up to 1.5% per annum of the Fund's average net assets for the applicable performance period, depending upon the investment performance of the Fund relative to the investment record of the Standard & Poor's 600 SmallCap Stock Price Index (the 'S&P 600'), determined by comparisons made over rolling periods of up to 60 months. However, Quest will not receive any fee for any month when the Fund's investment performance, rounded to the nearest whole point, is negative on an absolute basis for the 36 month period then ended. The present Investment Advisory Agreement replaced a similar investment advisory agreement between the Fund and Quest, under which the Fund's investment performance was measured against the record of the Standard & Poor's 500 Composite Stock Price Index over a rolling period of 36 months. For a more detailed description of the methods by which the advisory fee is determined, see 'Investment Advisory and Other Services -- Advisory Fee.' The Fund's portfolio is managed by Quest's senior investment staff, including Charles M. Royce, Quest's President and Chief Investment Officer, who is primarily responsible for supervising Quest's investment management activities. See 'Investment Advisory and Other Services -- Portfolio Management' herein and 'Directors and Officers' in the Statement of Additional Information. The Offering........................ The Fund is offering 2,400,000 shares of % Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), at a purchase price of $25 per share.
3 Dividends........................... Dividends on the Cumulative Preferred Stock, at the annual rate of % of the liquidation preference of $25.00 per share, are cumulative from the Date of Original Issue and are payable, when, as and if declared by the Board of Directors of the Fund, out of funds legally available therefor, annually on in each year, commencing on , 1996, to the holders of record on the preceeding . See 'Description of Cumulative Preferred Stock -- Dividends.' Potential Tax Benefit to Certain Investors.............. The Fund is required to allocate long-term capital gain distributions, as well as other types of income, proportionately among holders of shares of Common Stock, shares of Cumulative Preferred Stock and, to the extent they receive any 'constructive distributions,' the Fund's 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the 'Notes'), in accordance with the current position of the Internal Revenue Service (the 'IRS'). During the Fund's last three fiscal years, distributions paid by the Fund have consisted primarily of long-term capital gains, and it is currently expected that dividends paid on the Cumulative Preferred Stock will likewise consist primarily of long-term capital gains. Accordingly, certain investors in the Cumulative Preferred Stock may realize a tax benefit to the extent that dividends paid by the Fund on those shares are composed of long-term capital gains. See 'Ordinary Income Equivalent Yield Tables.' Subject to statutory limitations, investors may also be entitled to offset the net long-term capital gain portion of a Cumulative Preferred Stock dividend with capital losses incurred by such investors. See 'Taxation.' No assurance can be given, however, as to what percentage, if any, of the dividends to be paid on the Cumulative Preferred Stock will consist of long-term capital gains. To the extent that dividends on the shares of Cumulative Preferred Stock are not paid from net long-term capital gains, they will be paid from ordinary income or net short-term capital gains or will represent a return of capital. Rating.............................. It is a condition to their issuance that the Cumulative Preferred Stock be issued with a rating of 'aaa' from Moody's Investors Service, Inc. ('Moody's'). The Articles Supplementary creating and fixing the rights and preferences of the Cumulative Preferred Stock (the 'Articles Supplementary') contain certain provisions which reflect guidelines established by Moody's (the 'Rating Agency Guidelines') in order to obtain such rating on the Cumulative Preferred Stock on the Date of Original Issue. Although it is the Fund's present intention to continue to comply with the Rating Agency Guidelines, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines. If the Fund voluntarily terminates compliance with the Rating Agency Guidelines, the dividend rate payable on the Cumulative Preferred Stock will be increased by .50% per annum. See 'Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines.' Asset Coverage...................... The Fund will be required to maintain, as of the last Business Day of March, June, September and December of each year, Asset Coverage of at least 250% with respect to the Cumulative Preferred Stock. This required Asset Coverage is greater than the 200% asset coverage required by Section 18 of the Investment Company Act of 1940, as amended (the '1940 Act'). If the Fund had issued and sold the Cumulative Preferred Stock offered hereby as of June 30, 1996, the Asset Coverage would have been 461%. See 'Description of Cumulative Preferred Stock -- Asset Maintenance.'
4 Also, the Fund will be required to maintain a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount. The discount factors and guidelines for determining the Portfolio Calculation have been established by Moody's in connection with the Fund's receipt of a rating on the Cumulative Preferred Stock on their Date of Original Issue of 'aaa' from Moody's. See 'Investment Objectives and Policies -- Rating Agency Guidelines.' Voting Rights....................... At all times, holders of shares of Cumulative Preferred Stock and any other Preferred Stock will elect two members of the Fund's Board of Directors, and holders of Cumulative Preferred Stock, any other Preferred Stock and Common Stock, voting as a single class, will elect the remaining directors. However, upon a failure by the Fund to pay dividends on the Cumulative Preferred Stock in an amount equal to two full years' dividends, holders of Cumulative Preferred Stock, voting as a separate class with any other outstanding shares of Preferred Stock of the Fund, will have the right to elect the smallest number of directors that would constitute a majority of the directors until cumulative dividends have been paid or provided for. Holders of Cumulative Preferred Stock and any other Preferred Stock will vote separately as a class on certain other matters, as required under the Fund's Articles Supplementary, the 1940 Act and Maryland law. Except as otherwise indicated in this Prospectus and as otherwise required by applicable law, holders of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of Common Stock and any other Preferred Stock as a single class. See 'Description of Cumulative Preferred Stock -- Voting Rights.' Mandatory Redemption................ The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund in the event that the Fund fails to maintain the quarterly Asset Coverage or to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount required by Moody's and does not cure such failure by the applicable cure date. Any such redemption will be made for cash at a price equal to $25 per share plus accumulated and unpaid dividends (whether or not earned or declared) to the redemption date (the 'Redemption Price'). In the event that shares are redeemed due to a failure to maintain the quarterly Asset Coverage, the Fund may redeem a sufficient number of shares of Cumulative Preferred Stock in order that the asset coverage, as defined in the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption is up to 275%. In the event that shares are redeemed due to a failure to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount, the Fund may redeem a sufficient number of shares of Cumulative Preferred Stock in order that the Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock by up to 10%. See 'Description of Cumulative Preferred Stock -- Redemption -- Mandatory Redemption.' Optional Redemption................. Commencing , 2001 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock, in whole or in part, for cash at a price equal to the Redemption Price. Prior to , 2001, the Cumulative Preferred Stock will be redeemable at the option of the Fund at the Redemption Price only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption -- Optional Redemption.'
5 Liquidation Preference.............. The liquidation preference of each share of Cumulative Preferred Stock is $25 plus an amount equal to accumulated and unpaid dividends (whether or not earned or declared) to the date of distribution. See 'Description of Cumulative Preferred Stock -- Liquidation Rights.' Use of Proceeds..................... The Fund will use the net proceeds from the offering of the Cumulative Preferred Stock to purchase additional portfolio securities in accordance with its investment objectives and policies. See 'Use of Proceeds.' Listing............................. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the shares of Cumulative Preferred Stock on the New York Stock Exchange (the 'NYSE'). However, during an initial period which is not expected to exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters do not intend to make a market in the Cumulative Preferred Stock. Consequently, it is anticipated that an investment in the Cumulative Preferred Stock will be illiquid during such period. Special Considerations and Risk Factors........................... The market price for the Cumulative Preferred Stock will be influenced by changes in interest rates. As indicated above, the Cumulative Preferred Stock is subject to redemption under specified circumstances. To the extent that the Fund experiences a substantial decline in the value of its net assets, it may be required to redeem Cumulative Preferred Stock to restore compliance with the applicable asset coverage requirements. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn while an investor holds shares either as a result of the Fund's termination of compliance with the Rating Agency Guidelines or otherwise, and the credit rating does not eliminate or mitigate the risks of investing in the Cumulative Preferred Stock. A reduction or withdrawal of the credit rating may have an adverse effect on the market value of the Cumulative Preferred Stock. Payments to the holders of Cumulative Preferred Stock of dividends or upon redemption or in liquidation will be subject to the prior payments of interest and repayment of principal then due on the Notes or any other indebtedness of the Fund. Also, under the Indenture relating to the Notes, the Fund cannot declare any cash dividends or distributions on the Cumulative Preferred Stock or purchase or redeem any shares of the Cumulative Preferred Stock if, immediately thereafter, asset coverage for senior securities representing indebtedness, as defined under Section 18 of the 1940 Act, would be less than 300%, or if the Fund fails to maintain a certain discounted asset coverage for the Notes pursuant to rating agency guidelines relating to the Notes. If the Fund had issued and sold the Cumulative Preferred Stock offered hereby as of June 30, 1996, the asset coverage for the Notes would have been 1,152%. See 'Description of Capital Stock and Other Securities -- The Notes.'
6 Federal Income Tax Considerations.................... The Fund has qualified, and intends to remain qualified, for Federal income tax purposes, as a regulated investment company. Qualification requires, among other things, compliance by the Fund with certain distribution requirements. Limitations on distributions if the Fund failed to satisfy the asset coverage requirements on the Cumulative Preferred Stock and/or the Notes could jeopardize the Fund's ability to meet the distribution requirements. The Fund presently intends, however, to the extent possible, to purchase or redeem Cumulative Preferred Stock and/or the Notes if necessary in order to maintain compliance with such asset coverage requirements. See 'Taxation' for a more complete discussion of these and other Federal income tax considerations. Custodian, Transfer and Dividend-Paying Agent and Registrar......................... State Street Bank and Trust Company ('State Street') serves as the Fund's custodian and, with respect to the Cumulative Preferred Stock, as transfer and dividend paying agent and registrar and as agent to provide notice of redemption and certain voting rights. See 'Custodian, Transfer and Dividend-Paying Agent and Registrar.'
7 ORDINARY INCOME EQUIVALENT YIELD TABLES Over the Fund's last three fiscal years, distributions paid by the Fund on its Common Stock have consisted, on average, of 75.2% net long-term capital gains ('L/T Capital Gains') and 24.8% ordinary income/net short-term capital gains ('Ordinary Income')(1). Cumulative Preferred Stock investors who are in a Federal marginal income tax bracket higher than the current 28.0% maximum Federal tax rate on long-term capital gains would, under the current position of the IRS, realize a tax advantage on their investment to the extent that distributions by the Fund to its stockholders continue to be partially composed of the less highly taxed net long-term capital gains. The following table shows examples of the pure Ordinary Income equivalent yield that would be generated by the indicated dividend rates on the Cumulative Preferred Stock, assuming distributions consisting of three different proportions of L/T Capital Gains and Ordinary Income for an investor in the 39.6% Federal marginal tax bracket and assuming no change in the current maximum Federal long-term capital gains tax rate of 28.0%.
PERCENTAGE OF CUMULATIVE PREFERRED STOCK A CUMULATIVE PREFERRED STOCK DIVIDEND COMPOSED OF* DIVIDEND RATE OF - ------------------------------- ------------------------------------------- 7.50% 7.75% 8.00% ORDINARY IS EQUIVALENT TO AN ORDINARY L/T CAPITAL GAINS INCOME INCOME YIELD OF - ----------------- -------- ------------------------------------------- 75.0% 25.0% 8.58% 8.87% 9.15% 50.0% 50.0% 8.22% 8.49% 8.77% 25.0% 75.0% 7.86% 8.12% 8.38%
- ------------ (1) For the fiscal years of the Fund ended December 31, 1993, 1994 and 1995, distributions paid by the Fund on its Common Stock consisted of 71.3% L/T Capital Gains and 28.7% Ordinary Income, 83.8% L/T Capital Gains and 16.2% Ordinary Income, and 70.5% L/T Capital Gains and 29.5% Ordinary Income, respectively. * A number of factors could affect the composition of the Fund's distributions. Such factors include (i) active management of the Fund's assets, which may result in varying proportions of L/T Capital Gains, Ordinary Income and/or return of capital in Fund distributions; (ii) for as long as the Notes or other indebtedness of the Fund are outstanding, the Fund's distributions consisting of a larger proportion of L/T Capital Gains than would be the case in the absence of such indebtedness because interest is normally paid out of Ordinary Income; and (iii) possible revocation or revision of the IRS revenue ruling requiring the proportionate allocation of L/T Capital Gains among holders of various classes of capital stock and, to the extent they receive constructive distributions, the Notes. 8 As illustrated in the table below, the yield advantage of the lower Federal long-term capital gains tax rate would be diminished for investors in tax brackets below the 39.6% rate assumed in the table above, and there would be no effect on the yield for an investor in a Federal marginal income tax bracket of 28.0% or lower. Assuming a Cumulative Preferred Stock dividend composed of 75.0% L/T Capital Gains and 25.0% Ordinary Income (representing approximately the average annual composition of distributions paid by the Fund for its last three fiscal years), the following table shows the pure Ordinary Income equivalent yields that would be generated at the assumed dividend rates for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF ------------------------------------------- 7.50% 7.75% 8.00% 1996 FEDERAL IS EQUIVALENT TO AN ORDINARY TAX BRACKET`D' INCOME YIELD OF - ------------------------------ ------------------------------------------- 39.6%......................... 8.58% 8.87% 9.15% 36.0%......................... 8.20% 8.48% 8.75% 31.0%......................... 7.74% 8.00% 8.26% 28.0% or lower................ 7.50% 7.75% 8.00%
- ------------ `D' Annual taxable income levels corresponding to the 1996 Federal marginal tax brackets are as follows: 39.6% -- over $263,750 for both single and joint returns; 36.0% -- $121,301-$263,750 for single returns, $147,701-$263,750 for joint returns; 31.0% -- $58,151-$121,300 for single returns, $96,901-$147,700 for joint returns; and 28.0% -- $24,001-$58,150 for single returns, $40,101-$96,900 for joint returns. An investor's marginal tax rates may exceed the rates shown in the above table due to the reduction, or possible elimination, of the personal exemption deduction for high-income taxpayers and an overall limit on itemized deductions. Income also may be subject to certain state, local and foreign taxes. For investors who pay alternative minimum tax, equivalent yields may be lower than those shown above. The tax rates shown above do not apply to corporate taxpayers. ------------------------ The tax characteristics of the Fund are described more fully under 'Taxation'. Consult your tax adviser for further details. The charts above are for illustrative purposes only and cannot be taken as an indication of an anticipated yield on the Cumulative Preferred Stock or of the composition of future distributions by the Fund. 9 FINANCIAL HIGHLIGHTS The selected data set forth below is for a share of Common Stock outstanding for the periods presented. The financial information was derived from and should be read in conjunction with the Financial Statements of the Fund incorporated by reference into this Prospectus and the Statement of Additional Information. The financial information for the year ended December 31, 1995 has been audited by Ernst & Young LLP, independent auditors, as stated in their report accompanying such Financial Statements. The financial information for each of the four years ended December 31, 1994 has been audited by Coopers & Lybrand L.L.P., independent accountants. The financial information for the years ended prior to December 31, 1991 and for the period from November 26, 1986 (commencement of operations) to December 31, 1986 is covered in prior reports of Coopers & Lybrand L.L.P., upon which unqualified opinions were issued.
PERIOD YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------------------------------------- DEC. 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 SIX-MONTHS ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- ENDED JUNE 30, 1996 ---------- (UNAUDITED) Net Asset Value, Beginning of Period............ $ 13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $ 9.25 $7.98 $ 9.29 $9.30 ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Income from Investment Operations(a) Net investment income............ 0.07 0.04 0.04 0.09 0.15 0.17 0.17 0.15 0.13 0.28 0.03 Net realized and unrealized gains (losses) on investments....... 0.85 2.70 0.09 2.12 2.12 3.20 (1.49) 1.59 1.68 (1.04) (0.04) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total from Investment Operations.... 0.92 2.74 0.13 2.21 2.27 3.37 (1.32) 1.74 1.81 (0.76) (0.01) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Less Distributions Dividends from net investment income............ -- (0.03) (0.01) (0.09) (0.15) (0.17) (0.17) (0.17) (0.06) (0.36) (0.00) Distributions from capital gains..... -- (1.26) (1.04) (1.06) (0.75) (0.44) (0.15) (0.35) (0.45) (0.16) (0.00) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Distributions... -- (1.29) (1.05) (1.15) (0.90) (0.61) (0.32) (0.52) (0.51) (0.52) (0.00) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Capital Stock Transactions Effect of rights offering.......... -- (0.12) (0.14) (0.08) (0.06) (0.10) (0.08) (0.09) (0.00) (0.00) (0.00) Effect of reinvestment of distributions..... -- (0.11) (0.07)* (0.01) (0.04) (0.01) (0.05) (0.03) (0.03) (0.03) (0.00) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Capital Stock Transactions... -- (0.23) (0.21) (0.09) (0.10) (0.11) (0.13) (0.12) (0.03) (0.03) (0.00) ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Net Asset Value, End of Period(a)...... $ 14.48 $13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $9.25 $ 7.98 $9.29 ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Market Value, End of Period............ $ 12.375 $11.875 $11.00 $12.875 $12.25 $10.375 $ 8.125 $ 9.50 $8.125 $ 6.75 $9.875 ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- ---------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Investment Return(b) Net Asset Value(a)........ 6.8% 22.6% 1.1% 17.9% 19.9% 39.5% -13.1% 19.2% 22.4% -9.1% 0.1% Market Value...... 4.2% 20.5% -5.6% 14.8% 26.8% 35.3% -10.8% 23.9% 27.4% -26.5% -1.3% Ratios Based on Average Net Assets Total Expenses(c)... 1.29% `D' 2.01% 2.01% 1.33% 0.81% 0.79% 0.94% 0.95% 1.09% 0.40% 1.79% *`D' Management Fees..... 0.38% `D' 0.97% 1.21% 1.09% 0.53% 0.43% 0.44% 0.44% 0.49% 0.00% 1.04% *`D' Interest Expense.... 0.70% `D' 0.75% 0.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% *`D' Other Operating Expenses.......... 0.21% `D' 0.29% 0.34% 0.24% 0.28% 0.36% 0.75% 0.40% 0.60% 0.51% 0.50% Net Investment Income............ 0.92% `D' 0.34% 0.31% 0.74% 1.31% 1.52% 1.78% 1.48% 1.42% 2.92% 3.45% *`D' Supplemental Data: Net Assets, End of Period (millions)........ $364 $339 $269 $247 $202 $167 $118 $131 $107 $90 $100 Portfolio Turnover Rate.............. 13% 32% 35% 33% 40% 34% 28% 36% 29% 66% 13% Average Commission Paid#............. 0$.0574 -- -- -- -- -- -- -- -- -- --
- ------------ * Includes distributions paid January 31, 1994 and December 30, 1994. `D' Annualized. # For fiscal years beginning on or after October 1, 1995, the Fund is required to disclose its average commission rate paid per share for purchases and sales of investments. (a) Commencing June 21, 1995, Net Asset Value per share, Net Asset Value Total Investment Return and Income from Investment Operations are calculated assuming the Notes are fully converted except when the effect of doing so results in a higher Net Asset Value per share than was calculated without such assumption. If it were assumed that the Notes had not been converted, Net Asset Value per share would have been increased by $0.12 at June 30, 1996 and $0.09 at December 31, 1995. (b) The Net Asset Value and Market Value Total Investment Return assume a continuous stockholder who reinvested all net investment income dividends and capital gains distributions and fully participated in primary rights offerings. (c) Expense ratios before waiver of fees by the investment adviser would have been 2.04% and 2.02% for the years ended December 31, 1995 and 1994, respectively. 10 THE FUND Royce Value Trust, Inc. (the 'Fund') is a closed-end diversified management investment company, incorporated under the laws of the State of Maryland on July 1, 1986 and registered under the Investment Company Act of 1940 (the '1940 Act'). The Fund commenced operations in November 1986. As of June 30, 1996, the Fund had 24,836,018 shares of Common Stock issued and outstanding, with an aggregate net asset value of $364,428,204. The Fund's principal office is located at 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (800) 221-4268. The Fund seeks to achieve its primary investment objective of long-term capital appreciation principally through investment in common stocks and fixed income securities convertible into common stocks of companies, generally with stock market capitalizations ranging from $100 million to $1 billion. See 'Investment Objectives and Policies.' USE OF PROCEEDS The net proceeds of the offering are estimated at , after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Fund's investment adviser expects to invest such proceeds in accordance with the Fund's investment objectives and policies within six months from the completion of the offering, depending on market conditions for the types of securities in which the Fund principally invests. Pending such investment, the proceeds will be held in high quality short-term debt securities and instruments. CAPITALIZATION The following table sets forth the capitalization of the Fund as of June 30, 1996, and as adjusted to give effect to this offering.
OUTSTANDING AS ADJUSTED ------------ ------------ Long-term debt 5 3/4% Investment Company Convertible Notes due June 30, 2004............... $ 40,000,000 $ 40,000,000 ------------ ------------ Total long-term debt.............................................. $ 40,000,000 $ 40,000,000 ------------ ------------ ------------ ------------ Stockholders' equity: Preferred Stock, $.001 par value: Authorized 50,000,000 shares; issued and outstanding 0 shares; as adjusted, 2,400,000 shares of % Cumulative Preferred Stock issued and outstanding............................................... $ 0 $ 60,000,000 ------------ ------------ ------------ ------------ Common Stock, $.001 par value: Authorized 150,000,000 shares; issued and outstanding 24,836,018 shares.................................................... $ 24,836 $ 24,836 Additional paid-in capital............................................. 254,574,002 252,314,002(1) Undistributed net investment income.................................... 2,181,080 2,181,080 Accumulated net realized gains on investments.......................... 22,313,646 22,313,646 Unrealized appreciation on investments................................. 85,334,640 85,334,640 ------------ ------------ Net assets applicable to outstanding Common Stock................. $364,428,204 $362,168,204 ------------ ------------ ------------ ------------
- ------------ (1) After deducting underwriting discounts and estimated costs of this offering of . 11 PORTFOLIO COMPOSITION The following tables set forth certain information with respect to the Fund's investment portfolio as of June 30, 1996.
VALUE PERCENTAGE ------------ ---------- Common stock......................................................................... $371,214,067 91.4% Preferred stocks..................................................................... 175,375 0.0 Corporate bonds...................................................................... 3,049,330 0.8 Repurchase agreement................................................................. 31,500,000 7.8 ------------ ---------- Total investments............................................................... $405,938,772 100.0% ------------ ---------- ------------ ----------
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
VALUE PERCENTAGE ------------ ---------- Financial............................................................................ $ 93,226,190 25.1% Industrial cyclicals................................................................. 88,364,842 23.8 Services............................................................................. 58,552,541 15.8 Consumer durables.................................................................... 41,463,586 11.1 Retail............................................................................... 26,098,348 7.0 Technology........................................................................... 18,365,887 5.0 Consumer staples..................................................................... 15,565,380 4.2 Energy............................................................................... 12,580,388 3.4 Miscellaneous........................................................................ 10,584,705 2.9 Health............................................................................... 6,260,950 1.7 Utilities............................................................................ 151,250 0.0 ------------ ---------- Total common stocks............................................................. $371,214,067 100.0% ------------ ---------- ------------ ----------
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS Number of issuers................................................................................. 298 Weighted average market capitalization (total portfolio).......................................... $359,000,000
INVESTMENT OBJECTIVES AND POLICIES INVESTMENT OBJECTIVES The Fund's primary investment objective and one of its fundamental policies is long-term capital appreciation, which it seeks to achieve by normally investing more than 75% of its assets in common stocks, convertible preferred stocks and convertible debentures. Portfolio securities are selected primarily with a view to achievement of this objective. Current income is a secondary investment objective of the Fund, but is not one of its fundamental policies. See ' -- Changes in Investment Objectives and Policies.' The Fund seeks to achieve this secondary objective by investing in dividend-paying common stocks, convertible preferred stocks and convertible debentures, to the extent that these investments also further its primary objective. There are market risks inherent in any investment, and there is no assurance that the primary or secondary investment objective of the Fund will be achieved. INVESTMENT POLICIES Quest uses a value approach in managing the Fund's assets. Accordingly, in its selection process, Quest puts primary emphasis on analysis of various internal returns indicative of profitability, balance sheets and cash flows and the relationships that these factors have to the price of a given security. Quest's value approach is based on its belief that the securities of certain small or medium-sized companies may sell at a discount from its estimate of such companies' 'private worth', that is, what a knowledgeable buyer would pay for the entire company. Quest attempts to identify and have the Fund invest in such securities, with the expectation that such value 'discount' will narrow over time and thus provide capital appreciation for the Fund's portfolio. 12 The securities of the small and medium-sized companies in which Quest invests for the Fund generally have stock market capitalizations ranging from $100 million to $1 billion. (Stock market capitalization is calculated by multiplying the total number of common shares issued and outstanding by the per share market price of the common stock.) Such companies are often not well-known to the investing public, may not have significant institutional ownership and may have cyclical, static or only moderate growth prospects. Their share prices may be volatile, and their shares may have limited trading volumes. Quest's investment approach therefore requires unusual investor patience and a long-term investment horizon. An investment in the Fund's shares should not be used to play short-term swings in the market and may involve more risk than investment companies which invest in the common stocks of larger, more well-known companies. The Fund may invest up to 10% of its assets in securities of foreign issuers. Foreign investments involve certain additional risks, such as political or economic instability of the issuer or of the country of issue, fluctuating exchange rates and the possibility of imposition of exchange controls. These securities may also be subject to greater fluctuations in price than the securities of U.S. corporations, and there may be less publicly available information about their operations. Foreign companies may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and foreign markets may be less liquid or more volatile than U.S. markets and may offer less protection to investors such as the Fund. The Fund may also invest up to 25% of its assets in non-convertible preferred stocks and non-convertible debt securities of various companies, including up to 5% of its net assets in below investment-grade debt securities also known as high yield fixed income securities. Such debt securities may be in the lowest rated categories of recognized ratings agencies (Ca by Moody's or CC by Standard & Poor's Ratings Group ('S&P')) or unrated, are primarily speculative and involve a high degree of risk. The Fund may invest up to 5% of its total assets in warrants, rights or options. A warrant, right or call option entitles the holder to purchase a given security within a specified period for a specified price and does not represent an ownership interest. A put option gives the holder the right to sell a particular security at a specified price during the term of the option. These securities have no voting rights, pay no dividends and have no liquidation rights. In addition, market prices of warrants, rights or call options do not necessarily move parallel to the market prices of the underlying securities; market prices of put options tend to move inversely to the market prices of the underlying securities. The securities underlying warrants, rights and options could include shares of common stock of a single company or securities market indices representing shares of the common stocks of a group of companies, such as the S&P 600. The assets of the Fund are normally invested in the common stocks, convertible preferred stocks and convertible debentures of small and medium-sized companies. However, for temporary defensive purposes (i.e., when Quest determines that market conditions warrant) or when it has uncommitted cash balances, the Fund may also invest in United States Treasury bills, domestic bank certificates of deposit, repurchase agreements with its custodian bank covering U.S. Treasury and agency obligations having a term of not more than one week and high-quality commercial paper, or retain all or part of its assets in cash. Accordingly, the composition of the Fund's portfolio may vary from time to time. The price movements, earnings and other developments of each portfolio security are closely monitored, with a view to selling such securities when price objectives are reached or when a security no longer meets Quest's criteria. Quest does not engage in market timing transactions (i.e., shifting the portfolio or a significant portion of it in or out of the market in anticipation of general market fluctuations). Quest purchases and sells securities for the Fund at such times as it deems to be in the best interest of the Fund's Common Stockholders. Although there may be some short-term portfolio turnover, securities are generally purchased which Quest believes will appreciate in value over the long-term. The Fund has not, however, placed any limit on its rate of portfolio turnover, and securities may be sold without regard to the time they have been held when, in the judgment of Quest, investment 13 considerations warrant such action. For the six month period ended June 30, 1996 and the years ended December 31, 1995 and 1994, the Fund's portfolio turnover rates were 13%, 32% and 35%, respectively. The Fund's investment policies are subject to certain restrictions. See ' -- Investment Restrictions.' RATING AGENCY GUIDELINES Certain of the capitalized terms used herein are defined in the Glossary that appears at the end of this Prospectus. Moody's has established guidelines in connection with the Fund's receipt of a rating for the Cumulative Preferred Stock on their date of original issue of 'aaa' by Moody's. Moody's, a nationally-recognized securities rating organization, issues ratings for various securities reflecting the perceived creditworthiness of such securities. The guidelines have been developed by Moody's in connection with issuances of asset-backed and similar securities, including debt obligations and various preferred stocks, generally on a case-by-case basis through discussions with the issuers of these securities. The guidelines are designed to ensure that assets underlying outstanding debt or preferred stock will be sufficiently varied and will be of sufficient quality and amount to justify investment-grade ratings. The guidelines do not have the force of law but are being adopted by the Fund in order to satisfy current requirements necessary for Moody's to issue the above-described rating for the Cumulative Preferred Stock, which rating is generally relied upon by investors in purchasing such securities. The guidelines provide a set of tests for portfolio composition and discounted asset coverage that supplement (and in some cases are more restrictive than) the applicable requirements of Section 18 of the 1940 Act. The Moody's guidelines are included in the Articles Supplementary and are referred to in this Prospectus as the 'Rating Agency Guidelines.' The Fund intends to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount. If the Fund fails to meet such requirement and such failure is not cured, the Fund will be required to redeem some or all of the Cumulative Preferred Stock. See 'Description of Cumulative Preferred Stock -- Redemption -- Mandatory Redemption.' The Rating Agency Guidelines also exclude from Moody's Eligible Assets and, therefore, from the Portfolio Calculation, certain types of securities in which the Fund may invest and also prohibit the Fund's acquisition of futures contracts or options on futures contracts, prohibit reverse repurchase agreements, limit the writing of options on portfolio securities and limit the lending of portfolio securities to 5% of the Fund's total assets. Quest does not believe that compliance with the Rating Agency Guidelines will have an adverse effect on its management of the Fund's portfolio or on the achievement of the Fund's investment objectives. For a further discussion of the Rating Agency Guidelines, see 'Description of Cumulative Preferred Stock.' The Fund may, but is not required to, adopt any modifications to the Moody's guidelines that may hereafter be established by Moody's. Failure to adopt such modifications, however, may result in a change in the Moody's rating or a withdrawal of a rating altogether. In addition, Moody's may, at any time, change or withdraw such rating. As set forth in the Articles Supplementary, the Board of Directors of the Fund may, without stockholder approval, adjust, modify, alter or change the Rating Agency Guidelines if Moody's advises the Fund in writing that such adjustment, modification, alteration or change will not adversely affect its then current rating on the Cumulative Preferred Stock. Furthermore, under certain circumstances, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines. If the Fund terminates compliance with the Rating Agency Guidelines, it is likely that Moody's will change its rating on the Cumulative Preferred Stock or withdraw its rating altogether, which may have an adverse effect on the market value of the Cumulative Preferred Stock. It is the Fund's present intention to continue to comply with the Rating Agency Guidelines. As recently described by Moody's, a preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock obligations. The rating on the Cumulative Preferred Stock is not a recommendation to purchase, hold or sell such shares, inasmuch as the rating does not comment as to market price or suitability for a particular investor. Nor do the Rating Agency Guidelines address the likelihood that a holder of Cumulative Preferred Stock will be able to sell such shares. The rating is based on current information furnished to Moody's by the Fund and Quest and 14 information obtained from other sources. The rating may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information. CHANGES IN INVESTMENT OBJECTIVES AND POLICIES The Fund's primary investment objective of long-term capital appreciation principally through investment in common stocks and other equity securities is a fundamental policy of the Fund and may not be changed without approvals of the holders of a majority of the Fund's outstanding shares of Common Stock and outstanding shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a single class, and a majority of the outstanding shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the relevant shares of capital stock of the Fund present or represented at a meeting of stockholders, at which the holders of more than 50% of the outstanding relevant shares of capital stock are present or represented, or (ii) more than 50% of the outstanding relevant shares of capital stock of the Fund). Except as indicated under ' -- Investment Restrictions' below, the Fund does not consider its other policies, such as its secondary investment objective of current income, to be fundamental, and such policies may be changed by the Board of Directors without stockholder approval or prior notice to stockholders. INVESTMENT RESTRICTIONS The policies set forth below are fundamental policies of the Fund and may not be changed without the affirmative vote of the holders of a majority of the Fund's outstanding voting securities, as indicated above under ' -- Changes in Investment Objectives and Policies.' The Fund may not: 1. Issue any class of senior security, or sell any such security of which it is the issuer, except as permitted by the 1940 Act. 2. Purchase securities on margin or write call options on its portfolio securities. 3. Sell securities short. 4. Underwrite the securities of other issuers, or invest in restricted securities. 5. Invest more than 25% of its total assets in any one industry. 6. Purchase or sell real estate or real estate mortgage loans, or invest in the securities of real estate companies unless such securities are publicly-traded. 7. Purchase or sell commodities or commodity contracts. 8. Make loans, except for (a) purchases of portions of issues of publicly-distributed bonds, debentures and other securities, whether or not such purchases are made upon the original issuance of such securities, and (b) repurchase agreements with any bank that is the custodian of its assets covering U.S. Treasury and agency obligations and having a term of not more than one week. 9. Invest in companies for the purpose of exercising control of management. 10. Purchase portfolio securities from or sell such securities directly to any of its officers, directors, employees or investment adviser, as principal for their own accounts. 11. Invest in the securities of any one issuer (other than the United States or any agency or instrumentality of the United States) if, at the time of acquisition, the Fund would own more than 10% of the voting securities of such issuer or, as to 75% of the Fund's total assets, more than 5% of such assets would be invested in the securities of such issuer. 12. Invest more than 5% of its total assets in warrants, rights or options. If a percentage restriction is met at the time of investment, a later increase or decrease in percentage resulting from a change in the value of portfolio securities or amount of total assets will not be considered a violation of any of the above restrictions. In addition to issuing and selling senior securities as set forth in No. 1 above, the Fund may obtain (i) temporary bank borrowings (not in excess of 5% of the value of its total assets) for emergency or 15 extraordinary purposes and (ii) such short-term credits (not in excess of 5% of the value of its total assets) as are necessary for the clearance of securities transactions. Under the 1940 Act, the Indenture relating to the Notes and the Articles Supplementary, such temporary bank borrowings would be treated as indebtedness in determining whether or not asset coverage was at least 300% for senior securities of the Fund representing indebtedness. Such repurchase transactions are in effect loans by the Fund to its custodian, and the agreements for such transactions require the custodian to maintain securities having a value at least equal to the amount loaned as collateral. Repurchase agreements could involve certain risks if the custodian defaults or becomes insolvent, including possible delays or restrictions upon the Fund's ability to dispose of collateral. Although there are no liquidity restrictions on investments made by the Fund and the Fund may, therefore, invest without limit in illiquid securities, the Fund expects to invest only in securities for which market quotations are readily available. INVESTMENT ADVISORY AND OTHER SERVICES Quest Advisory Corp. ('Quest') is a New York corporation organized in February 1967, with offices at 1414 Avenue of the Americas, New York, New York 10019. It became the investment adviser of the Fund in November 1986, when the Fund commenced operations. Quest also serves as investment adviser to other management investment companies, with aggregate net assets of approximately $1.3 billion as of June 30, 1996, and manages other institutional accounts. Under the Fund's Articles of Incorporation, as amended, and Maryland General Corporation Law, the Fund's business and affairs are managed under the direction of its Board of Directors. Investment decisions for the Fund are made by Quest, subject to any direction it may receive from the Fund's Board of Directors, which periodically reviews the Fund's investment performance. PORTFOLIO MANAGEMENT The Fund's portfolio and the portfolios of Quest's other accounts are managed by Quest's senior investment staff, including Charles M. Royce, Quest's President and Chief Investment Officer, who has been primarily responsible for supervising Quest's investment management activities for more than 20 years. Mr. Royce is assisted by Jack E. Fockler, Jr. and W. Whitney George, Vice Presidents of Quest, both of whom participate in such activities, with their specific responsibilities varying from time to time. In the event of any significant change in Quest's senior investment staff, the members of the Fund's Board of Directors who are not interested persons of the Fund will consider what action, if any, should be taken in connection with the Fund's management arrangements. INVESTMENT ADVISORY AGREEMENT Under the Investment Advisory Agreement between the Fund and Quest, Quest determines the composition of the Fund's portfolio, the nature and timing of the changes in the portfolio and the manner of implementing such changes; provides the Fund with investment advisory, research and related services for the investment of its funds; furnishes, without expense to the Fund, the services of those of its executive officers and full-time employees as may be duly elected executive officers or directors of the Fund and pays their salaries and expenses; and pays all expenses incurred in performing its investment advisory duties under the Agreement. The Fund pays all of its own expenses (except those set forth above), including, without limitation, registrar, transfer agent and custodian fees; legal, administrative and clerical services; rent for its office space and facilities; auditing; preparation, printing and distribution of its proxy statements, stockholder reports and notices; Federal and state registration fees; stock exchange listing fees and expenses; Federal, state and local taxes; non-affiliated directors' fees; interest on its borrowings; brokerage commissions; and the cost of issue, sale and repurchase of its shares. Unlike many other investment companies, the Fund is required to pay substantially all of its expenses, and Quest does not incur substantial fixed expenses. There are no applicable state limitations on the Fund's operating expenses. 16 ADVISORY FEE As compensation for its services under the Investment Advisory Agreement, Quest receives a fee comprised of a Basic Fee (the 'Basic Fee') and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 600. A rolling period of 60 months will be utilized for measuring performance and average net assets, as described below. Beginning with the month of July 1997 and for each succeeding month, the Basic Fee will be a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the net assets of the Fund at the end of each month included in the applicable performance period. The performance period for each such month will be from July 1, 1996 to the most recent month-end, until the Investment Advisory Agreement has been in effect for 60 full calendar months, when it will become a rolling 60 month period ending with the most recent calendar month. The Basic Fee for each such month will be increased or decreased at the rate of 1/12 of .05% per percentage point, depending on the extent, if any, by which the investment performance of the Fund exceeds by more than two percentage points, or is exceeded by more than two percentage points by, the percentage change in the investment record of the S&P 600 for the performance period. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, commencing with the month of July 1997, the maximum monthly fee rate as adjusted for performance will be 1/12 of 1.5% and will be payable if the investment performance of the Fund exceeds the percentage change in the investment record of the S&P 600 by 12 or more percentage points for the performance period, and the minimum monthly fee rate as adjusted for performance will be 1/12 of .5% and will be payable if the percentage change in the investment record of the S&P 600 exceeds the investment performance of the Fund by 12 or more percentage points for the performance period. For the period from July 1, 1996 through June 30, 1997, the Basic Fee will be a monthly fee equal to 1/12 of 1% of the net assets of the Fund at the end of each month in such period. The performance period relating to such period will be from July 1, 1996 through June 30, 1997. The Basic Fee for such period would also be subject to increase or decrease as set forth in the preceding paragraph, with the rate of such increase or decrease being applied on an annualized basis. The maximum increase or decrease in the Basic Fee for such period may not exceed .5%. Any portion of the fee for such period, as adjusted as set forth above, in excess of .5% will be paid at the end of such period. Notwithstanding the foregoing, Quest will not be entitled to receive any fee for any month when the investment performance of the Fund for the rolling 36 month period ending with such month is negative on an absolute basis. In the event that the Fund's investment performance for such a performance period is less than zero, Quest will not be required to refund to the Fund any fee earned in respect of any prior performance period. Because the Basic Fee is a function of the Fund's net assets and not of its total assets, Quest will not receive any fee in respect of those assets of the Fund equal to the aggregate unpaid principal amount of the Notes or any other indebtedness of the Fund. Quest will receive a fee in respect of any assets of the Fund equal to the liquidation preference of and any potential redemption premium for any Preferred Stock that may be issued and sold by the Fund, including the Cumulative Preferred Stock. The present Investment Advisory Agreement replaced a similar investment advisory agreement between the Fund and Quest, under which the Fund's investment performance was measured against the record of the Standard & Poor's 500 Composite Stock Price Index over a rolling period of 36 months. The present Investment Advisory Agreement provides that, for the 18 month period from July 1, 1996 to December 31, 1997, the monthly fee payable to Quest will be the lower of the fee calculated under it or the fee that would have been payable to Quest for the month involved under the prior investment advisory agreement. To the extent that Quest receives a fee in excess of .75% per annum of the Fund's average net assets, its compensation may be higher than that paid by most other investment companies with similar investment objectives. 17 DESCRIPTION OF CUMULATIVE PREFERRED STOCK The following is a brief description of the terms of the Cumulative Preferred Stock. This description does not purport to be complete and is qualified by reference to the Articles Supplementary, the form of which is filed as an exhibit to the Fund's Registration Statement. Certain of the capitalized terms used herein are defined in the Glossary that appears at the end of this Prospectus. GENERAL Under the Articles Supplementary, the Fund will be authorized to issue up to 2,400,000 shares of Cumulative Preferred Stock. No fractional shares of Cumulative Preferred Stock will be issued. As of the date of this Prospectus, there were no shares of Cumulative Preferred Stock or any other Preferred Stock of the Fund outstanding. The Board of Directors reserves the right to issue additional shares of Preferred Stock, including Cumulative Preferred Stock, from time to time, subject to the restrictions in the Articles Supplementary. The shares of Cumulative Preferred Stock will, upon issuance, be fully paid and nonassessable and will have no preemptive, exchange or conversion rights. Any shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be classified as authorized but unissued Preferred Stock. The Board of Directors may by resolution classify or reclassify any authorized but unissued Preferred Stock from time to time by setting or changing the preferences, rights, voting powers, restrictions, limitations or terms of redemption. The Fund will not issue any class of stock senior to the shares of Cumulative Preferred Stock. Payments to the holders of Cumulative Preferred Stock of dividends or upon redemption or in liquidation will be subject to the prior payments of interest and repayment of principal then due on the Notes or any other indebtedness of the Fund. Also, under the Indenture relating to the Notes, the Fund cannot declare any cash dividends or distributions on the Cumulative Preferred Stock or purchase or redeem any shares of the Cumulative Preferred Stock if, immediately thereafter, asset coverage for senior securities representing indebtedness, as defined under Section 18 of the 1940 Act, would be less than 300% or if the Fund fails to maintain a certain discounted asset coverage for the Notes pursuant to rating agency guidelines relating to the Notes. See 'Description of Capital Stock and Other Securities -- The Notes.' DIVIDENDS Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Fund out of funds legally available therefor, cumulative cash dividends at the annual rate of % per share of the liquidation preference of $25.00 per share and no more, payable annually on in each year (the 'Dividend Payment Date'), commencing on , 1996, to the persons in whose names the shares of Cumulative Preferred Stock are registered at the close of business on the preceding . Dividends on the shares of Cumulative Preferred Stock will accumulate from the date on which such shares are originally issued (the 'Date of Original Issue'). No dividends will be declared or paid or set apart for payment on shares of Cumulative Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Dates thereof. If full cumulative dividends are not declared and paid on the Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred Stock will be declared and paid pro rata to the holders of the outstanding shares. Holders of Cumulative Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment that may be in arrears. For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Fund ranking junior to or on a 18 parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of its Common Stock or any other junior stock (except by conversion into or exchange for stock of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (i) immediately after such transaction, the Fund will have a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount and the Fund will maintain the Asset Coverage (see ' -- Asset Maintenance' and ' -- Redemption' below), (ii) full cumulative dividends on shares of Cumulative Preferred Stock due on or prior to the date of the transactions have been declared and paid (or sufficient Deposit Securities to cover such payment have been deposited with the Paying Agent) and (iii) the Fund has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision for mandatory redemption contained in the Articles Supplementary. ASSET MAINTENANCE The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Articles Supplementary. These requirements are summarized below. Asset Coverage. The Fund will be required under the Articles Supplementary to maintain as of the last Business Day of each March, June, September and December of each year, an asset coverage of at least 250% (or such higher percentage as may be required under the 1940 Act) with respect to all outstanding senior securities of the Fund which are stock, including the Cumulative Preferred Stock (the 'Asset Coverage'). If the Fund fails to maintain the Asset Coverage on such dates and such failure is not cured in 60 days, the Fund will be required under certain circumstances to redeem certain of the shares of Cumulative Preferred Stock. See ' -- Redemption' below. If the shares of Cumulative Preferred Stock offered hereby had been issued and sold as of June 30, 1996, the Asset Coverage immediately following such issuance and sale (after giving effect to the deduction of the underwriting discounts and estimated offering expenses for such shares of ), would have been computed as follows: Value of Fund assets less liabilities not constituting senior securities = $460,853,218 = 461% - ------------------------------------------------------------------ ----------------- Senior securities $100,000,000 representing indebtedness plus liquidation preference of the Cumulative Preferred Stock
Basic Maintenance Amount. The Fund will be required under the Articles Supplementary to maintain, as of each Valuation Date, portfolio holdings meeting specified guidelines of Moody's, as described under 'Investment Objectives and Policies -- Rating Agency Guidelines', having an aggregate discounted value (a 'Portfolio Calculation') at least equal to the Basic Maintenance Amount. If the Fund fails to meet such requirement as to any Valuation Date and such failure is not cured within 14 days after such Valuation Date, the Fund will be required to redeem certain of the shares of Cumulative Preferred Stock. See ' -- Redemption' below. Any security not in compliance with the Moody's investment guidelines described under 'Investment Objectives and Policies -- Rating Agency Guidelines' will be excluded from the Portfolio Calculation. The Moody's Discount Factors and guidelines for determining the market value of the Fund's portfolio holdings have been based on criteria established in connection with the rating of the Cumulative Preferred Stock. These factors include, but are not limited to, the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a corporate debt obligation, the higher the related discount factor) and the frequency with which the relevant asset is marked to market. The Moody's Discount Factor relating to any asset of the Fund and the Basic Maintenance Amount, the assets eligible for inclusion in the calculation of the discounted value of the 19 Fund's portfolio and certain definitions and methods of calculation relating thereto may be changed from time to time by the Board of Directors, provided that, among other things, such changes will not impair the rating then assigned to the Cumulative Preferred Stock by Moody's. On or before the third Business Day after each Quarterly Valuation Date, the Fund is required to deliver to Moody's a Basic Maintenance Report. Within ten Business Days after delivery of such report relating to the Quarterly Valuation Date, the Fund will deliver letters prepared by the Fund's independent accountants regarding the accuracy of the calculations made by the Fund in its most recent Basic Maintenance Report. If any such letter prepared by the Fund's independent accountants shows that an error was made in the most recent Basic Maintenance Report, the calculation or determination made by the Fund's independent accountants will be conclusive and binding on the Fund. REDEMPTION Mandatory Redemption. The Fund will be required to redeem, at a redemption price equal to $25 per share plus accumulated and unpaid dividends through the date of redemption (whether or not earned or declared) (the 'Redemption Price'), certain of the shares of Cumulative Preferred Stock (to the extent permitted under the 1940 Act, Maryland law, the Indenture for the Notes and any other agreement relating to indebtedness of the Fund) in the event that: (i) the Fund fails to maintain the quarterly Asset Coverage and such failure is not cured on or before 60 days following such failure (a 'Cure Date'); or (ii) the Fund fails to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount as of any Valuation Date, and such failure is not cured on or before the 14th day after such Valuation Date (also, a 'Cure Date'). The amount of such mandatory redemption will equal the minimum number of outstanding shares of Cumulative Preferred Stock the redemption of which, if such redemption had occurred immediately prior to the opening of business on a Cure Date, would have resulted in the Asset Coverage having been satisfied or the Fund having a Portfolio Calculation equal to or greater than the Basic Maintenance Amount on such Cure Date or, if the Asset Coverage or a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at the Redemption Price. In the event that shares of Cumulative Preferred Stock are redeemed due to the occurrence of (i) above, the Fund may, but is not required to, redeem a sufficient number of shares of Cumulative Preferred Stock in order to increase the 'asset coverage' of a class of senior security which is stock, as defined in the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption up to 275%. In the event that shares of Cumulative Preferred Stock are redeemed due to the occurrence of (ii) above, the Fund may, but is not required to, redeem a sufficient number of shares of Cumulative Preferred Stock in order that the Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock by up to 10%. If the Fund does not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of Cumulative Preferred Stock to be redeemed on any redemption date, the Fund will redeem on such redemption date that number of shares for which it has legally available funds, or is otherwise able, to redeem ratably from each holder whose shares are to be redeemed, and the remainder of the shares required to be redeemed will be redeemed on the earliest practicable date on which the Fund will have funds legally available for the redemption of, or is otherwise able to redeem, such shares upon written notice of redemption ('Notice of Redemption'). If fewer than all shares of Cumulative Preferred Stock are to be redeemed, such redemption will be made pro rata from each holder of shares in accordance with the respective number of shares held by each such holder on the record date for such redemption. If fewer than all shares of Cumulative Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder will specify the number of shares to be redeemed from such holder. Unless all accumulated and unpaid dividends for all past dividend periods will have been or are contemporaneously paid or 20 declared and Deposit Securities for the payment thereof deposited with the Paying Agent, no redemptions of Cumulative Preferred Stock may be made. Optional Redemption. Prior to , 2001, the Fund may, at its option, redeem shares of Cumulative Preferred Stock at the Redemption Price per share only to the extent that any such redemption is necessary, in the judgment of the Fund, to maintain the Fund's status as a regulated investment company ('RIC') under the Internal Revenue Code of 1986, as amended (the 'Code'). Commencing , 2001, and at any time and from time to time thereafter, the Fund may, at its option, redeem shares of Cumulative Preferred Stock in whole or in part at the Redemption Price. Such redemptions are subject to the limitations of the 1940 Act, Maryland law, the Indenture for the Notes and any other agreement relating to indebtedness of the Fund. Redemption Procedures. A Notice of Redemption will be given to the holders of record of Cumulative Preferred Stock selected for redemption not less than 30 or more than 45 days prior to the date fixed for the redemption. Each Notice of Redemption will state (i) the redemption date, (ii) the number of shares of Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such shares, (iv) the Redemption Price, (v) the place or places where such shares are to be redeemed, (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vii) the provision of the Articles Supplementary under which the redemption is being made. No defect in the Notice of Redemption or in the mailing thereof will affect the validity of the redemption proceedings, except as required by applicable law. LIQUIDATION RIGHTS Upon a liquidation, dissolution or winding up of the affairs of the Fund (whether voluntary or involuntary), holders of shares of Cumulative Preferred Stock then outstanding will be entitled to receive out of the assets of the Fund available for distribution to stockholders, after satisfying claims of creditors but before any distribution or payment of assets is made to holders of the Common Stock or any other class of stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25 per share plus an amount equal to all unpaid dividends accumulated thereon to and including the date fixed for such distribution or payment (whether or not earned or declared by the Fund, but excluding interest thereon) (the 'Liquidation Preference'), and such holders will be entitled to no further participation in any distribution payment in connection with any such liquidation, dissolution or winding up. If, upon any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock and any other outstanding Preferred Stock of the Fund ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, will be insufficient to permit the payment in full to such holders of Cumulative Preferred Stock of the Liquidation Preference and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets will be distributed among the holders of Cumulative Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference has been paid in full to the holders of Cumulative Preferred Stock, no dividends or distributions will be made to holders of the Common Stock or any other stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation. Upon any liquidation, the holders of the Common Stock, after required payments to the holders of Preferred Stock, will be entitled to participate equally and ratably in the remaining assets of the Fund. VOTING RIGHTS Except as otherwise stated in this Prospectus and as otherwise required by applicable law, holders of shares of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of Common Stock and of any other Preferred Stock of the Fund then outstanding as a single class. In connection with the election of the Fund's directors, holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be entitled at all times to elect two 21 of the Fund's directors, and the remaining directors will be elected by holders of shares of Common Stock and holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class. In addition, if at any time dividends on outstanding shares of Cumulative Preferred Stock and/or any other Preferred Stock are unpaid in an amount equal to at least two full years' dividends thereon or if at any time holders of any shares of Preferred Stock are entitled, together with the holders of shares of Cumulative Preferred Stock, to elect a majority of the directors of the Fund under the 1940 Act, then the number of directors constituting the Board of Directors automatically will be increased by the smallest number that, when added to the two directors elected exclusively by the holders of shares of Cumulative Preferred Stock and any other Preferred Stock as described above, would constitute a majority of the Board of Directors as so increased by such smallest number. Such additional directors will be elected at a special meeting of stockholders which will be called and held as soon as practicable, and at all subsequent meetings at which directors are to be elected, the holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be entitled to elect the smallest number of additional directors that, together with the two directors which such holders in any event will be entitled to elect, constitutes a majority of the total number of directors of the Fund as so increased. The terms of office of the persons who are directors at the time of that election will continue. If the Fund thereafter pays, or declares and sets apart for payment in full, all dividends payable on all outstanding shares of Cumulative Preferred Stock and any other Preferred Stock for all past dividend periods, the additional voting rights of the holders of shares of Cumulative Preferred Stock and any other Preferred Stock as described above will cease, and the terms of office of all of the additional directors elected by the holders of shares of Cumulative Preferred Stock and any other Preferred Stock (but not of the directors with respect to whose election the holders of shares of Common Stock were entitled to vote or the two directors the holders of shares of Cumulative Preferred Stock and any other Preferred Stock have the right to elect in any event) will terminate automatically. So long as shares of the Cumulative Preferred Stock are outstanding, the Fund will not, without the affirmative vote of the holders of two-thirds of the shares of Cumulative Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of the Cumulative Preferred Stock. The Board of Directors, however, without stockholder approval, may amend, alter or repeal the Rating Agency Guidelines in the event the Fund receives confirmation from Moody's that any such amendment, alteration or repeal would not impair the rating then assigned to the Cumulative Preferred Stock. Furthermore, under certain circumstances, without the vote of stockholders, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines. See ' -- Termination of Rating Agency Guidelines' below. The affirmative vote of a majority of the votes entitled to be cast by holders of outstanding shares of the Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be required to approve any plan of reorganization adversely affecting such shares or any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, changes in the Fund's investment objective or changes in the investment restrictions described as fundamental policies under 'Investment Objectives and Policies.' The class vote of holders of shares of the Cumulative Preferred Stock and any other Preferred Stock described above will be in addition to a separate vote of the requisite percentage of shares of Common Stock and Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class, necessary to authorize the action in question. The foregoing voting provisions will not apply to any shares of Cumulative Preferred Stock if, at or prior to the time when the act with respect to which such vote otherwise would be required will be effected, such shares will have been (i) redeemed or (ii) called for redemption and sufficient Deposit Securities provided to the Paying Agent to effect such redemption. TERMINATION OF RATING AGENCY GUIDELINES The Articles Supplementary provide that the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines, in 22 which case the Fund will no longer be required to comply with such guidelines, provided that (i) the Fund has given the Paying Agent, Moody's and holders of the Cumulative Preferred Stock at least 20 calendar days written notice of such termination of compliance, (ii) the Fund is in compliance with the Rating Agency Guidelines at the time the notice required in clause (i) above is given and at the time of termination of compliance with the Rating Agency Guidelines, (iii) at the time the notice required in clause (i) above is given and at the time of termination of compliance with the Rating Agency Guidelines, the Cumulative Preferred Stock is listed on the New York Stock Exchange or on another exchange registered with the Securities and Exchange Commission as a national securities exchange and (iv) at the time of termination of compliance with the Rating Agency Guidelines, the cumulative cash dividend rate payable on a share of the Cumulative Preferred Stock is increased by .50% per annum. If the Fund voluntarily terminates compliance with the Rating Agency Guidelines, Moody's may change its rating on the Cumulative Preferred Stock or withdraw its rating altogether, which may have an adverse effect on the market value of the Cumulative Preferred Stock. It is the Fund's present intention to continue to comply with the Rating Agency Guidelines. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF ADDITIONAL PREFERRED STOCK So long as any shares of Cumulative Preferred Stock are outstanding, the Fund may issue and sell one or more series of a class of senior securities of the Fund representing indebtedness under the 1940 Act and/or otherwise create or incur indebtedness in addition to the Notes, provided that (i) if the Fund is using the proceeds (net of all offering expenses payable by the Fund) of such additional indebtedness to purchase all or a portion of the Notes or any shares of the Cumulative Preferred Stock or to repay, redeem or otherwise refinance all or a portion of the Notes or any shares of the Cumulative Preferred Stock and/or any other indebtedness or Preferred Stock then outstanding or if such indebtedness constitutes a temporary bank borrowing (not in excess of 5% of the value of the Fund's total assets) for emergency or extraordinary purposes, then the Fund will, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an 'asset coverage' for all senior securities of the Fund representing indebtedness, as defined in the 1940 Act, of at least 300% of the amount of all indebtedness of the Fund then outstanding, or (ii) if the Fund is using the proceeds (net of all offering expenses payable by the Fund) of such additional indebtedness for any other purpose, then the Fund will, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an 'asset coverage' for all senior securities representing indebtedness, as defined in the 1940 Act, of at least 500% of the amount of all indebtedness of the Fund then outstanding. Any possible liability resulting from lending and/or borrowing portfolio securities, entering into reverse repurchase agreements, entering into futures contracts and writing options, to the extent such transactions are made in accordance with the investment restrictions of the Fund then in effect, will not be considered to be indebtedness limited by the Articles Supplementary. So long as any shares of Cumulative Preferred Stock are outstanding, the Fund may issue and sell shares of one of more other series of Preferred Stock constituting a series of a class of senior securities of the Fund representing stock under the 1940 Act in addition to the shares of Cumulative Preferred Stock, provided that (i) if the Fund is using the proceeds (net of all offering expenses payable by the Fund) of such additional Preferred Stock to purchase all or a portion of the shares of Cumulative Preferred Stock or to redeem or otherwise refinance all or a portion of the shares of Cumulative Preferred Stock, any other Preferred Stock and/or any indebtedness of the Fund then outstanding, then the Fund will, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an 'asset coverage' for all senior securities of the Fund which are stock, as defined in the 1940 Act, of at least 250% of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Fund then outstanding, or (ii) if the Fund is using the proceeds (net of all offering expenses payable by the Fund) of such additional Preferred Stock for any other purpose, then the Fund will, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an 'asset coverage' for all senior securities of the Fund which are stock, as defined in the 1940 Act, of at least 300% of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Fund then outstanding, and, 23 in the case of either (i) or (ii) above, (iii) no such additional Preferred Stock will have any preference or priority over any other Preferred Stock of the Fund upon the distribution of the assets of the Fund or in respect of the payment of dividends. REPURCHASE OF CUMULATIVE PREFERRED STOCK The Fund is a closed-end investment company and, as such, holders of Cumulative Preferred Stock do not, and will not, have the right to redeem their shares of the Fund. The Fund, however, may repurchase shares of the Cumulative Preferred Stock when it is deemed advisable by the Board of Directors in compliance with the requirements of the 1940 Act and the rules and regulations thereunder. DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES CAPITAL STOCK Common Stock. The Fund is authorized to issue 150,000,000 shares of Common Stock, par value $.001 per share. Each share of Common Stock has equal voting, dividend, distribution and liquidation rights. The shares of Common Stock outstanding are fully paid and non-assessable. The shares of Common Stock are not redeemable and have no preemptive, conversion or cumulative voting rights. As a New York Stock Exchange-listed company, the Fund is required to hold annual meetings of its stockholders. Preferred Stock. The Fund's Board of Directors has authority to cause the Fund to issue and sell up to 50,000,000 shares of Preferred Stock, par value $.001 per share, that may be convertible into shares of the Fund's Common Stock. The terms of such Preferred Stock would be fixed by the Board of Directors and would materially limit and/or qualify the rights of the holders of the Fund's Common Stock. The Board of Directors has designated 2,400,000 shares of Preferred Stock as the Cumulative Preferred Stock offered hereby. See 'Description of Cumulative Preferred Stock.' The following table shows the number of shares of (i) capital stock authorized, (ii) capital stock held by the Fund for its own account and (iii) capital stock outstanding for each class of authorized securities of the Fund as of June 30, 1996.
AMOUNT OUTSTANDING AMOUNT HELD (EXCLUSIVE OF BY FUND AMOUNT HELD AMOUNT FOR ITS OWN BY FUND FOR ITS TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT) - ----------------------------------------------------------------- ------------ ----------- --------------- Common Stock..................................................... 150,000,000 0 24,836,018 Cumulative Preferred Stock....................................... 50,000,000 0 0
THE NOTES General. On June 22, 1994, the Fund issued and sold $40,000,000 aggregate principal amount of its 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the 'Notes') under an Indenture dated June 15, 1994 (the 'Indenture') between the Fund and United States Trust Company of New York, as trustee (the 'Trustee'). The Notes, which are listed on the New York Stock Exchange, are unsecured obligations of the Fund. Interest on the Notes at the rate of 5 3/4% per annum is payable semi-annually, on each June 30 and December 31, to holders of record at the close of business on the immediately preceding June 15 and December 15. Interest may be increased on July 1, 1999, as described below. Set forth below is a summary of the material terms of the Notes. The asset coverage per $1,000 of the Notes as of June 30, 1996, December 31, 1995 and December 31, 1994 was $10,078, $9,439 and $7,687, respectively. The last reported sale price for the Notes on the NYSE on or about those dates was 101.25%, 101.50% and 94.25%. Conversion Rights. Each Note is convertible into shares of the Common Stock of the Fund, at the option of its holder, at any time prior to maturity, except during the period from the second trading day prior to the ex-dividend date through the record date for distributions to Common Stockholders (and, 24 in certain cases, through December 31 of) each year and unless previously redeemed at the option of the Fund. The initial conversion price was $14.00 per share. The conversion price as of June 30, 1996 was $13.30, entitling the holder to acquire 75.19 shares of Common Stock for each $1,000 principal amount of Notes converted. In order to compensate the Fund's Common Stockholders for the preferential return payable to Noteholders, the Notes provide for an annual escalation of 6.75% in the conversion price. In order to compensate Noteholders for the decline in net asset value attributable to the annual distributions payable to Common Stockholders, the Notes also provide for a reduction in the conversion price in the same proportion that such distributions reduce net asset value per share of Common Stock. The annual escalation of 6.75% and the annual reduction for distributions are made simultaneously with one another, resulting in a single annual net adjustment to the conversion price then in effect. This annual net adjustment is made on the trading day in December of each year when the Fund's Common Stock trades without (i.e., 'ex-dividend') any distributions of net investment income and capital gains to be paid on the payment date therefor to its Common Stockholders. The conversion price is also subject to customary adjustment in the event of any stock splits or stock dividends and for certain rights offerings and other capital share transactions, and the annual escalation may be reduced or eliminated for certain years. Reset of Terms. If the average market price per $1,000 principal amount of Notes for the 45 trading days ending May 31, 1999 is less than $950, then on July 1, 1999, the Fund will either call all of the Notes for redemption or reset one or more terms of the Notes in order to increase their market value on such date to or as nearly as possible to par. Such reset terms may include an increase in the rate of interest, an increase or a decrease in the rate at which the conversion price escalates (before reduction for distributions) and/or a decrease in the conversion price then in effect. Asset Coverage. Under the 1940 Act and the Indenture, the Fund cannot declare any cash or other non-stock dividends or distributions on shares of the Cumulative Preferred Stock or any other Preferred Stock or its Common Stock or purchase any shares of its capital stock if, immediately thereafter, asset coverage for the Notes and any other senior securities of the Fund representing indebtedness would be less than 300%. Under the Code, the Fund must, among other things, distribute at least 90% of its investment company taxable income each year in order to maintain its qualification for tax treatment as a regulated investment company and must distribute additional amounts in order to avoid becoming liable for income and excise taxes. See 'Taxation.' Under the Indenture, the Fund has agreed to maintain, as of the last day of March, June, September and December of each calendar year while any Notes are outstanding, asset coverage for senior securities representing indebtedness equal to at least 300% of the amount of any senior securities representing indebtedness, including the Notes. If the required asset coverage is not met as of the last day of March, June, September or December in any calendar year while the Notes are outstanding, and is not restored as of the last business day of a month ending within 20 days after notice by the Trustee, an event of default is deemed to have occurred under the Indenture, entitling the Trustee to accelerate the due date of the Notes (for this purpose, without limitation, the default will be deemed cured if, within the prescribed period, the Fund has notified the Trustee to call for redemption such portion of the Notes as, alone or together with other action taken by the Fund, would cause the Fund to have the requisite asset coverage). For so long as any Notes are outstanding, the Fund will be required pursuant to the Rating Agency Provisions (as defined below) of the Indenture to maintain, as of the last business day of each week, a discounted asset coverage of the Notes for Moody's equal to a basic maintenance amount (currently, approximately $40,000,000 plus accrued and accruing interest on the Notes). If the Fund fails to maintain the required discounted asset coverage of the Notes for Moody's equal to such basic maintenance amount, the Rating Agency Provisions provide that the Fund will use its best efforts to reattain such asset coverage. The Rating Agency Provisions also prevent the Fund from paying dividends or other distributions on shares of the Cumulative Preferred Stock or any other Preferred Stock or its Common Stock and from repurchasing or redeeming any shares of capital stock unless, after giving effect to such dividends, other distributions, and purchases, the Fund continues to maintain the required discounted asset coverage for Moody's. 25 Optional Redemption by the Fund. Commencing July 1, 1997, and any time thereafter prior to maturity, the Fund may, at its option, redeem the Notes in whole or in part for cash at a price equal to 100% of their principal amount, together with accrued interest thereon. Prior to July 1, 1997, the Fund has the option to redeem the Notes for cash at a price equal to 100% of their principal amount, together with accrued interest thereon, to the extent that such a redemption may become necessary for the Fund to maintain an asset coverage of not less than 300% and up to 330% for the Notes and for any other senior securities of the Fund representing indebtedness then outstanding and/or to enable the Fund to continue to qualify for treatment as a regulated investment company under the Code. Mandatory Redemption by the Fund. The Notes are subject to mandatory partial redemption by the Fund if the Fund fails to maintain the discounted asset coverage of the Notes for Moody's and such failure is not cured on or before the cure date. The aggregate principal amount of Notes subject to such mandatory partial redemption will equal the minimum aggregate principal amount of outstanding Notes (rounded to the next higher increment to $1,000) the redemption of which would have caused the Fund to have the required asset coverage on a pro forma basis at the close of business on the cure date, provided that, if there is no such minimum aggregate principal amount of outstanding Notes the redemption of which would have such result, all of the outstanding Notes will be redeemed. Such mandatory redemption will be at a redemption price equal to 100% of the principal amount of Notes to be redeemed, together with interest accrued thereon to the date fixed for redemption. Rating Agency Provisions. The Indenture governing the Notes contains certain provisions (the 'Rating Agency Provisions') which reflect guidelines established by Moody's in order to obtain the Aaa rating on the Notes on the date of their issuance. Under certain circumstances, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Provisions. If the Fund terminates compliance with the Rating Agency Provisions, the rate of interest payable on the Notes will be increased by .25% per annum, provided that if such termination occurs prior to July 1, 1999 and the terms of the Notes are reset on such date, as provided above, in order to increase their market value on such date at or as nearly as possible to par, then such increase in the rate of interest will terminate as of June 30, 1999. TAXATION The following Federal income tax discussion is based on the advice of Brown & Wood LLP. The discussion reflects applicable tax laws of the United States as of the date of this Prospectus, which tax laws are subject to being changed retroactively or prospectively. The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ('RICs') under the Code. If it so qualifies, the Fund (but not its stockholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to stockholders. The Fund intends to distribute substantially all of such income. TAXATION OF STOCKHOLDERS Dividends paid by the Fund from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as 'ordinary income dividends') are taxable to stockholders as ordinary income. Distributions made from an excess of net long-term capital gains over net short-term capital losses (including gains or losses from certain transactions in warrants, rights and options) ('capital gain dividends') are taxable to stockholders as long-term capital gains, regardless of the length of time the stockholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less, however, will be treated as long-term capital loss to the extent of any capital gain dividends received by the stockholder. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). The tax rate that can be imposed on the excess of net long-term capital gains over net short-term capital losses is subject to a ceiling which, for non-corporate taxpayers, is currently less than the 26 maximum tax rate on ordinary income. In recent years, a number of legislative proposals concerning the tax treatment of capital gains have been introduced in Congress. The proposals have ranged from eliminating the preferential treatment of capital gains to eliminating tax on capital gains of individuals, and have included both restoration of a deduction for capital gains and a 15% maximum tax rate for capital gains of individuals and corporations. It cannot be predicted whether any of these proposals may ultimately become law, nor can the effective date of any legislation be anticipated. Any change in the tax treatment of capital gains, however, would have an effect on the tax consequences of an investment in the Cumulative Preferred Stock. Stockholders may be entitled to offset their capital gain dividends with capital losses. There are a number of statutory provisions affecting when capital losses may be offset against capital gains and limiting the use of losses from certain investments and activities. Accordingly, stockholders with capital losses are urged to consult their own tax advisers. Dividends are taxable to stockholders whether they are paid in cash or, in the case of Common Stockholders, paid in additional shares of Common Stock under the Fund's plan for the automatic investment of dividends. Not later than 60 days after the close of its taxable year, the Fund will provide its stockholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. Although it is anticipated that most of the Fund's dividends will continue to be designated as capital gain dividends, for which no dividends received deduction is available, a portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. If the Fund pays a dividend in January which was declared in the previous October, November or December to stockholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its stockholders on December 31 of the year in which such dividend was declared. The Code provides that capital gain recognized on the termination of a position held as part of a 'conversion transaction' will be treated as ordinary income, to the extent it does not exceed the interest that would have accrued on the net investment in the conversion transaction at an interest rate prescribed by the Code. A 'conversion transaction,' for these purposes, is a transaction substantially all of the return from which is attributable to the time value of the net investment in the transaction, and which is marketed as producing capital gains, but having the characteristics of a loan. Although there are no regulations construing this provision, the conversion transaction rules would not apply to an investment in the Cumulative Preferred Stock because dividends paid with respect to the Cumulative Preferred Stock will not constitute gain which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction. Ordinary income dividends (but not long-term capital gains distributions) paid to stockholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident stockholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some stockholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ('backup withholding'). A stockholder, however, may generally avoid becoming subject to this requirement by filing an appropriate form with the payor (i.e., the financial institution or brokerage firm where the stockholder maintains his or her account), certifying under penalties of perjury that such stockholder's taxpayer identification number is correct and that such stockholder (i) has never been notified by the IRS that he or she is subject to backup withholding, (ii) has been notified by the IRS that he or she is no longer subject to backup withholding or (iii) is exempt from backup withholding. Corporate stockholders and certain other stockholders are exempt from backup withholding. Backup withholding is not an 27 additional tax. Any amounts withheld under the backup withholding rules from payments made to a stockholder may be credited against such stockholder's Federal income tax liability. At the time of a stockholder's purchase, the market price of the Fund's Common Stock or Cumulative Preferred Stock may reflect undistributed net investment income or capital gains. A subsequent distribution of these amounts by the Fund will be taxable to the stockholder even though the distribution economically is a return of part of the stockholder's investment. Investors should carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution that would nevertheless be taxable to them. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares of the same class are acquired within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Designation of Capital Gain Dividends to Cumulative Preferred Stock. The IRS has taken the position in Revenue Ruling 89-81 that if a RIC has two classes of shares, it may designate distributions made to each class in any year as consisting of no more than such class's proportionate share of particular types of income, such as long-term capital gain. A class's proportionate share of a particular type of income is determined according to the percentage of total dividends paid by the RIC during such year that was paid to such class. Consequently, the Fund will designate distributions made to the Common Stock and Cumulative Preferred Stock and any other Preferred Stock and any constructive distributions with respect to the Notes as consisting of particular types of income in accordance with the classes' proportionate shares of such income. Because of this rule, the Fund is required to allocate a portion of its net capital gains to holders of Common Stock, holders of Cumulative Preferred Stock and any other Preferred Stock and, to the extent they receive constructive distributions, holders of the Notes. The amount of net capital gains and other types of income allocable among holders of the Cumulative Preferred Stock and any other Preferred Stock, the Common Stock and the Notes will depend upon the amount of such gains and other income realized by the Fund and the total dividends or, in the case of the Notes, constructive distributions, paid by the Fund on shares of Common Stock and Cumulative Preferred Stock and any other Preferred Stock and on the Notes during a taxable year. In identifying dividends and other distributions during a taxable year, the Fund will take into account those paid under Section 855 of the Code, which relates to certain distributions paid after the close of the Fund's taxable year, but attributable to such taxable year. In the opinion of Brown & Wood LLP, special counsel to the Fund, under current law the manner, as described above, in which the Fund intends to allocate net capital gains and other taxable income between shares of Common Stock and Cumulative Preferred Stock and, to the extent that they receive constructive distributions, holders of the Notes will be respected for Federal income tax purposes. However, there is currently no direct guidance from the IRS or other sources specifically addressing whether the Fund's method of allocation will be respected for Federal income tax purposes, and it is possible that the IRS could disagree with counsel's opinion and attempt to reallocate the Fund's net capital gains or other taxable income. Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS were to challenge in court the Fund's allocation of income and gain, the IRS would be unlikely to prevail. The opinion of Brown & Wood LLP, however, represents only its best legal judgment and is not binding on the IRS or the courts. TAXATION OF THE FUND The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its ordinary income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. 28 The Fund may invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities ('high yield securities'). Some of these high yield securities may be purchased at a discount and may therefore cause the Fund to accrue income before amounts due under the obligations are paid. In addition, a portion of the interest payments on such high yield securities may be treated as dividends for Federal income tax purposes. If the Fund does not meet the asset coverage requirements of the 1940 Act, the Articles Supplementary or the Indenture, the Fund will be required to suspend distributions to the holders of the Cumulative Preferred Stock and/or Common Stock until the asset coverage is restored. See 'Description of Cumulative Preferred Stock -- Dividends' and 'Description of Capital Stock and Other Securities -- The Notes.' Such a suspension of distributions might prevent the Fund from distributing 90% of its investment company taxable income, as is required in order to avoid Fund-level taxation on the Fund's distributions, or might prevent it from distributing enough income and capital gain to avoid completely imposition of the excise tax. Upon any failure to meet the asset coverage requirements of the 1940 Act, the Articles Supplementary or the Indenture, the Fund may, and in certain circumstances will be required to, partially redeem shares of the Cumulative Preferred Stock in order to maintain or restore the requisite asset coverage and avoid the adverse consequences to the Fund and its stockholders of failing to qualify as a RIC. If asset coverage were restored, the Fund would again be able to pay dividends and might be able to avoid Fund-level taxation on the Fund's distributions. If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify to be taxed as a RIC in any year, it would be subject to tax in such year on all of its taxable income, whether or not the Fund made any distributions. Furthermore, all distributions from the Fund's earnings and profits would be taxed as ordinary income, regardless of the character of the underlying income and gain in the Fund's hands; the Fund could no longer designate capital gain dividends. To qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to Cumulative Preferred Stockholders and Common Stockholders as an ordinary income dividend, its earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the Fund to the IRS. In addition, if the Fund failed to qualify as a RIC for a period greater than one taxable year, then the Fund would be required to recognize and pay tax on any net built-in gains (the excess of aggregate gains, including items of income, over aggregate losses that would have been realized if the Fund had been liquidated) in order to qualify as a RIC in a subsequent year. In this situation, an election to be taxed only to the extent that it realizes such gains within a ten-year period may be available to the Fund. If the Fund invests in stock of a so-called passive foreign investment company ('PFIC'), the Fund may be subject to Federal income tax on a portion of any 'excess distribution' with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the Fund's holding period for the stock. The amount so allocated to any taxable year of the Fund prior to the taxable year in which the excess distribution or disposition occurs would be taxed to the Fund at the highest marginal income tax rate in effect for the year to which it was allocated, and the tax would be further increased by an interest charge. The amount allocated to the taxable year of the distribution or disposition would be included in the Fund's investment company taxable income and, accordingly, would not be taxable to the Fund to the extent distributed by the Fund as a dividend to stockholders. The Fund may be able to make an election, in lieu of being taxable in the manner described above, to include annually in income its pro rata share of the ordinary earnings and net capital gain (whether or not distributed) of the PFIC. In order to make this election, the Fund would be required to obtain annual information from the PFICs in which it invests, which in many cases may be difficult to obtain. Alternatively, if eligible, the Fund may be able to elect to mark to market its PFIC stock, resulting in the stock being treated as sold at fair market value on the last business day of each taxable year. Any resulting gain would be reported as ordinary income, and any resulting loss would not be recognized. The Fund may make either of these elections with respect to its investments (if any) in PFICs. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the 29 Treasury regulations are subject to change by legislative, judicial or administrative action, either prospectively or retroactively. Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax. OTHER TAXATION Distributions may also be subject to additional state, local and foreign taxes, depending on each stockholder's particular situation. Stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Cumulative Preferred Stock. CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT State Street, which is located at 225 Franklin Street, Boston, Massachusetts 02110, acts as custodian of the securities, cash and other assets of the Fund, as dividend-paying agent and as transfer agent and registrar for the Fund's Cumulative Preferred Stock. Stockholder inquiries should be directed to P.O. Box 8200, Boston, Massachusetts 02266-8200 (Tel. No. (800) 426-5523). UNDERWRITING Under the terms and subject to conditions contained in an Underwriting Agreement dated the date hereof, the Underwriters named below have severally agreed to purchase, and the Fund has agreed to sell to the Underwriters severally, the respective number of shares of Cumulative Preferred Stock set forth opposite their respective names below:
NUMBER OF NAME SHARES - ------------------------------------------------------------------------------------------- --------- Morgan Stanley & Co. Incorporated.......................................................... A.G. Edwards & Sons, Inc................................................................... PaineWebber Incorporated................................................................... Prudential Securities Incorporated......................................................... Smith Barney Inc. ......................................................................... --------- Total............................................................................ 2,400,000 --------- ---------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Cumulative Preferred Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are committed to take and pay for all of the shares of Cumulative Preferred Stock offered hereby if any are taken. The Underwriters initially propose to offer part of the shares of Cumulative Preferred Stock offered hereby directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering of the Cumulative Preferred Stock, the offering price and other selling terms may from time to time be varied by the Underwriters named on the cover page of this Prospectus. The underwriting discount of $ per share is equal to % of the initial public offering price. Investors must pay for any shares of Cumulative Preferred Stock purchased on or before August , 1996. 30 The Fund and Quest have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Fund anticipates that the Underwriters may, subsequent to the completion of the offering of Cumulative Preferred Stock hereunder, from time to time act as brokers or dealers in connection with the execution of portfolio transactions for the Fund. The Underwriters may also, during the pendency of the offering of Cumulative Preferred Stock hereunder, act as brokers with respect to such transactions. See 'Brokerage Allocation and Other Practices' in the Statement of Additional Information. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the Cumulative Preferred Stock on the New York Stock Exchange. 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 do not intend to make a market in the Cumulative Preferred Stock. Consequently, it is anticipated that an investment in the Cumulative Preferred Stock will be illiquid during such period. The Underwriters have undertaken to sell shares to a minimum of 100 beneficial owners. LEGAL MATTERS Certain matters concerning the legality under Maryland law of the Cumulative Preferred Stock will be passed on by Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Certain legal matters will be passed on by Brown & Wood LLP, New York, New York, special counsel to the Fund, and by Davis Polk & Wardwell, New York, New York, counsel to the Underwriters. Brown & Wood LLP and Davis Polk & Wardwell will each rely as to matters of Maryland law on the opinion of Venable, Baetjer and Howard, LLP. EXPERTS Ernst & Young LLP, independent auditors, are the independent auditors of the Fund. The audited financial statements of the Fund and certain of the information appearing under the caption 'Financial Highlights' included in this Prospectus have been audited by Ernst & Young LLP and Coopers & Lybrand L.L.P. for the periods indicated in their reports with respect thereto, and are included in reliance upon such reports and upon the authority of such firms as experts in accounting and auditing. Ernst & Young LLP has an office at 787 Seventh Avenue, New York, New York 10019, and also performs tax and other professional services for the Fund. The address of Coopers & Lybrand L.L.P. is 1 Post Office Square, Boston, Massachusetts 02109. ADDITIONAL INFORMATION The Fund is subject to the informational requirements of the Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports and other information with the SEC. Reports, proxy statements and other information filed by the Fund with the SEC pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such material can be obtained from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Fund, that file electronically with it. The Fund's Common Stock is listed on the New York Stock Exchange, and reports, proxy statements and other information concerning the Fund and filed with the SEC by the Fund can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. 31 This Prospectus constitutes part of a Registration Statement filed by the Fund with the SEC under the Securities Act of 1933 and the 1940 Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the Cumulative Preferred Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION A Statement of Additional Information dated August , 1996 has been filed with the SEC and is incorporated by reference in this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York, New York 10019, or calling the Fund toll-free at (800) 221-4268. The Table of Contents of the Statement of Additional Information is as follows:
PAGE ---- Principal Stockholders........................................................................... 2 Directors and Officers........................................................................... 2 Code of Ethics and Related Matters............................................................... 4 Investment Advisory and Other Services........................................................... 5 Brokerage Allocation and Other Practices......................................................... 6 Net Asset Value.................................................................................. 7 Financial Statements............................................................................. 7
32 GLOSSARY 'Articles Supplementary' means the Fund's Articles Supplementary creating and fixing the rights of the Cumulative Preferred Stock. 'Asset Coverage' has the meaning set forth on page 19 of this Prospectus. 'Basic Maintenance Amount' means, as of any Valuation Date, the dollar amount equal to (i) the sum of (A) the product of the number of shares of Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the Liquidation Preference; (B) to the extent not included in (A), the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each outstanding share of Cumulative Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Basic Maintenance Amount is calculated on a date prior to the initial Dividend Payment Date with respect to the Cumulative Preferred Stock, then from the Date of Original Issue) through the Valuation Date plus all dividends to accumulate on the Cumulative Preferred Stock then outstanding during the 70 days following such Valuation Date; (C) the Fund's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Fund by the issuance of Common Stock will not be included as a liability) and such liabilities projected to become due and payable the Fund during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date but including accrued interest on the Notes); (D) the aggregate outstanding principal amount of Notes; (E) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(D) (including, without limitation, and immediately upon determination, any amounts due and payable by the Fund pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Discounted Value of any of the Fund's assets and/or (B) the face value of any of the Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or securities which mature prior to or on the date of redemption or repurchase of Cumulative Preferred Stock or payment of another liability and are either U.S. Government Obligations or securities which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, in both cases irrevocably held by the Fund's custodian bank in a segregated account or deposited by the Fund with the Paying Agent for the payment of the amounts needed to redeem or repurchase Cumulative Preferred Stock subject to redemption or repurchase or any of (i)(B) through (i)(E) and provided that in the event the Fund has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof and/or Notes at a price of less than the principal amount thereof plus accrued but unpaid interest thereon and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent or the Indenture trustee in the case of the Notes for the payment of the repurchase price the Fund may deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to be repurchased and/or 100% of the aggregate principal amount and accrued but unpaid interest on the Notes to be repurchased from (i) above. 'Business Day' means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close. 'Charter' means the Articles of Incorporation, as amended and supplemented (including these Articles Supplementary), of the Fund on file in the State Department of Assessments and Taxation of Maryland. 'Common Stock' means the Common Stock, par value $.001 per share, of the Fund. 'Cumulative Preferred Stock' means the % Cumulative Preferred Stock, par value $.001 per share, of the Fund. 'Date of Original Issue' has the meaning set forth on page 18 of this Prospectus. 'Deposit Securities' means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Fund has a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, each Deposit Security will be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such 33 Deposit Security but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made. 'Discounted Value' means, with respect to a Moody's Eligible Asset, the quotient of (A) in the case of non-convertible fixed income securities, the lower of the principal amount and the market value thereof or (B) in the case of any other Moody's Eligible Assets, the market value thereof, divided by the applicable Moody's Discount Factor. 'Dividend Payment Date' has the meaning set forth on page 18 of this Prospectus. 'Fund' means Royce Value Trust, Inc., a Maryland corporation. 'Indenture' means the Indenture, dated June 15, 1994, between the Fund and the United States Trust Company of New York, as trustee, relating to the Notes, as supplemented or otherwise amended from time to time. 'Liquidation Preference' has the meaning set forth on page 21 of this Prospectus. 'Moody's' means Moody's Investors Service, Inc., or its successor. 'Moody's Discount Factor' means, with respect to a Moody's Eligible Asset specified below, the following applicable number:
MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR: - --------------------------------------------------------------------------------------- ---------------- Moody's Short Term Money Market Instruments (other than U.S. Government Obligations set forth below) and other commercial paper: Demand or time deposits, certificates of deposit and bankers' acceptances includible in Moody's Short Term Money Market Instruments........................ 1.00 Commercial paper rated P-1 by Moody's maturing in 30 days or less................. 1.00 Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270 days or less..................................................................... 1.15 Commercial paper rated A-1+ by S&P maturing in 270 days or less................... 1.25 Repurchase obligations includible in Moody's Short Term Money Market Instruments if term is less than 30 days and counterparty is rated at least A2............... 1.00 Discount Factor applicable to underlying Other repurchase obligations...................................................... assets Common stocks.......................................................................... 3.00 Preferred stocks: Auction rate preferred stocks..................................................... 3.50 Other preferred stocks issued by issuers in the financial and industrial industries....................................................................... 2.35 Other preferred stocks issued by issuers in the utilities industry................ 1.60 U.S. Government Obligations (other than U.S. Treasury Securities Strips set forth below) with remaining terms to maturity of: 1 year or less.................................................................... 1.08 2 years or less................................................................... 1.15 3 years or less................................................................... 1.20 4 years or less................................................................... 1.26 5 years or less................................................................... 1.31 7 years or less................................................................... 1.40 10 years or less.................................................................. 1.48 15 years or less.................................................................. 1.54 20 years or less.................................................................. 1.61 30 years or less.................................................................. 1.63 U.S. Treasury Securities Strips with remaining terms to maturity of: 1 year or less.................................................................... 1.08
(table continued on next page) 34 (table continued from previous page)
MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR: - --------------------------------------------------------------------------------------- ---------------- 2 years or less................................................................... 1.16 3 years or less................................................................... 1.23 4 years or less................................................................... 1.30 5 years or less................................................................... 1.37 7 years or less................................................................... 1.51 10 years or less.................................................................. 1.69 15 years or less.................................................................. 1.99 20 years or less.................................................................. 2.28 30 years or less.................................................................. 2.56 Corporate bonds: Corporate bonds rated Aaa with remaining terms to maturity of: 1 year or less............................................................... 1.14 2 years or less.............................................................. 1.21 3 years or less.............................................................. 1.26 4 years or less.............................................................. 1.32 5 years or less.............................................................. 1.38 7 years or less.............................................................. 1.47 10 years or less............................................................. 1.55 15 years or less............................................................. 1.62 20 years or less............................................................. 1.69 30 years or less............................................................. 1.71 Corporate bonds rated Aa with remaining terms to maturity of: 1 year or less............................................................... 1.19 2 years of less.............................................................. 1.26 3 years or less.............................................................. 1.32 4 years or less.............................................................. 1.38 5 years or less.............................................................. 1.44 7 years or less.............................................................. 1.54 10 years or less............................................................. 1.63 15 years or less............................................................. 1.69 20 years or less............................................................. 1.77 30 years or less............................................................. 1.79 Corporate bonds rated A with remaining terms to maturity of: 1 year or less............................................................... 1.24 2 years or less.............................................................. 1.32 3 years or less.............................................................. 1.38 4 years or less.............................................................. 1.45 5 years or less.............................................................. 1.51 7 years or less.............................................................. 1.61 10 years or less............................................................. 1.70 15 years or less............................................................. 1.77 20 years or less............................................................. 1.85 30 years or less............................................................. 1.87 Convertible corporate bonds with senior debt securities rated Aa issued by the following type of issuers: Utility...................................................................... 1.80 Industrial................................................................... 2.97 Financial.................................................................... 2.92
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MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR: - --------------------------------------------------------------------------------------- ---------------- Transportation............................................................... 4.27 Convertible corporate bonds with senior debt securities rated A issued by the following type of issuers: Utility...................................................................... 1.85 Industrial................................................................... 3.02 Financial.................................................................... 2.97 Transportation............................................................... 4.32 Convertible corporate bonds with senior debt securities rated Baa issued by the following type of issuers: Utility...................................................................... 2.01 Industrial................................................................... 3.18 Financial.................................................................... 3.13 Transportation............................................................... 4.48 Convertible corporate bonds with senior debt securities rated Ba issued by the following type of issuers: Utility...................................................................... 2.02 Industrial................................................................... 3.19 Financial.................................................................... 3.14 Transportation............................................................... 4.49 Convertible corporate bonds with senior debt securities rated B1 or B2 issued by the following type of issuers: Utility...................................................................... 2.12 Industrial................................................................... 3.29 Financial.................................................................... 3.24 Transportation............................................................... 4.59
'Moody's Eligible Assets' means: i. cash (including, for this purpose, receivables for investments sold to a counterparty whose senior debt securities are rated at least Baa3 by Moody's or a counterparty approved by Moody's and payable within five Business Days following such Valuation Date and dividends and interest receivable within 70 days on investments); ii. Short-Term Money Market Instruments; iii. commercial paper that is not includible as a Short-Term Money Market Instrument having on the Valuation Date a rating from Moody's of at least P-1 and maturing within 270 days; iv. preferred stocks (A) which either (1) are issued by issuers whose senior debt securities are rated at least Baa1 by Moody's or (2) are rated at least 'baa3' by Moody's (or in the event an issuer's senior debt securities or preferred stock is not rated by Moody's, which either (1) are issued by an issuer whose senior debt securities are rated at least A by S&P or (2) are rated at least A by S&P and for this purpose have been assigned a Moody's equivalent rating of at least 'baa3'), (B) of issuers which have (or, in the case of issuers which are special purpose corporations, whose parent companies have) common stock listed on the New York Stock Exchange or the American Stock Exchange, (C) which have a minimum issue size (when taken together with other of the issuer's issues of similar tenor) of $50,000,000, (D) which have paid cash dividends consistently during the preceding three-year period (or, in the case of new issues without a dividend history, are rated at least 'a1' by Moody's or, if not rated by Moody's, are rated at least AA by S&P), (E) which pay cumulative cash dividends in U.S. dollars, (F) which are not convertible into any other class of stock and do not have warrants attached, (G) which are not issued by issuers in the transportation industry and (H) in the case of auction rate preferred stocks, which are rated at least 'aa' by Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved in writing by Moody's and have never had a failed auction; provided, however, that for this purpose the aggregate 36 Market Value of the Company's holdings of any issue of preferred stock will not be less than $500,000 nor more than $5,000,000; v. common stocks (A) which are traded on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market, (B) which, if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which are not privately placed; provided, however, that (1) common stock which, while a Moody's Eligible Asset owned by the Fund, ceases paying any regular cash dividend will no longer be considered a Moody's Eligible Asset until 71 days after the date of the announcement of such cessation, unless the issuer of the common stock has senior debt securities rated at least A3 by Moody's and (2) the aggregate Market Value of the Fund's holdings of the common stock of any issuer will not exceed 4% in the case of utility common stock and 6% in the case of non-utility common stock of the number of outstanding shares times the Market Value of such common stock; vi. U.S. Government Obligations; vii. corporate bonds (A) which are not privately placed, rated at least B3 (Caa subordinate) by Moody's (or, in the event the bond is not rated by Moody's, the bond is rated at least BB- by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), with such rating confirmed on each Valuation Date, (B) which have a minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated and pay interest in cash in U.S. dollars, (D) which are not convertible or exchangeable into equity of the issuing corporation and have a maturity of not more than 30 years, (E) for which, if rated below Baa3, the aggregate Market Value of the Company's holdings do not exceed 10% of the aggregate Market Value of any individual issue of corporate bonds calculated at the time of original issuance, (F) the cash flow from which must be controlled by an Indenture trustee and (G) which are not issued in connection with a reorganization under any bankruptcy law; viii. convertible corporate bonds (A) which are issued by issuers whose senior debt securities are rated at least B2 by Moody's (or, in the event an issuer's senior debt securities are not rated by Moody's, which are issued by issuers whose senior debt securities are rated at least BB by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), (B) which are convertible into common stocks which are traded on the New York Stock Exchange or the American Stock Exchange or are quoted on the NASDAQ National Market System and (C) which, if cash dividend paying, pay cash dividends in U.S. dollars; provided, however, that once convertible corporate bonds have been converted into common stock, the common stock issued upon conversion must satisfy the criteria set forth in clause (v) above and other relevant criteria set forth in this definition in order to be a Moody's Eligible Asset; provided, however, that the Fund's investment in preferred stock, common stock, corporate bonds and convertible corporate bonds described above must be within the following diversification requirements (utilizing Moody's industry and sub-industry categories) in order to be included in Moody's Eligible Assets: ISSUER:
NON-UTILITY MOODY'S RATING MAXIMUM SINGLE ISSUER UTILITY MAXIMUM SINGLE ISSUER (1)(2) (3)(4) (3)(4) - -------------------------------------------------- --------------------- ----------------------------- 'aaa', Aaa........................................ 100% 100% 'aa', Aa.......................................... 20% 20% 'a', A............................................ 10% 10% CS/CB, 'Baa', Baa(5).............................. 6% 4% Ba................................................ 4% 4% B1/B2............................................. 3% 3% B3 (Caa subordinate).............................. 2% 2%
37 INDUSTRY AND STATE:
UTILITY MAXIMUM SINGLE NON-UTILITY MAXIMUM SUB- MOODY'S RATING(1) SINGLE INDUSTRY(3) INDUSTRY(3)(6) UTILITY MAXIMUM SINGLE STATE(3) - ------------------------------- ------------------- -------------- ------------------------------- 'aaa', Aaa..................... 100% 100% 100% 'aa', Aa....................... 60% 60% 20% 'a', A......................... 40% 50% 10%(7) CS/CB, 'baa', Baa(5)........... 20% 50% 7%(7) Ba............................. 12% 12% N/A B1/B2.......................... 8% 8% N/A B3 (Caa subordinate)........... 5% 5% N/A
- ------------ (1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate bonds and convertible corporate bonds rated by S&P but not by Moody's. (2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets. (3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category. (4) Issuers subject to common ownership of 25% or more are considered as one name. (5) CS/CB refers to common stock and convertible corporate bonds, which are diversified independently from the rating level. (6) In the case of utility common stock, utility preferred stock, utility bonds and utility convertible bonds, the definition of industry refers to sub-industries (electric, water, hydro power, gas, diversified). Investments in other sub-industries are eligible only to the extent that the combined sum represents a percentage position of the Moody's Eligible Assets less than or equal to the percentage limits in the diversification tables above. (7) Such percentage will be 15% in the case of utilities regulated by California, New York and Texas. ; and provided, further, that the Fund's investments in auction rate preferred stocks described in clause (iv) above will be included in Moody's Eligible Assets only to the extent that the aggregate Market Value of such stocks does not exceed 10% of the aggregate Market Value of all of the Fund's investments meeting the criteria set forth in clauses (i) through (viii) above less the aggregate Market Value of those investments excluded from Moody's Eligible Assets pursuant to the immediately preceding proviso; and ix. no assets which are subject to any lien or irrevocably deposited by the Fund for the payment of amounts needed to meet the obligations described in clauses (i)(A) through (i)(E) of the definition of 'Basic Maintenance Amount' may be includible in Moody's Eligible Assets. '1940 Act' means the Investment Company Act of 1940, as amended. 'Notes' means the Fund's $40,000,000 aggregate principal amount of 5 3/4% Investment Company Convertible Notes due June 30, 2004, as the same may be modified pursuant to the terms of the Indenture. 'Notice of Redemption' has the meaning set forth on page 20 of this Prospectus. 'Paying Agent' means State Street Bank and Trust Company and its successors or any other paying agent appointed by the Fund. 'Portfolio Calculation' means the aggregate Discounted Value of all Moody's Eligible Assets. 'Preferred Stock' means the preferred stock, par value $.001 per share, of the Fund, and includes the Cumulative Preferred Stock. 'Redemption Price' has the meaning set forth on page 19 of this Prospectus. 38 'Short-Term Money Market Instruments' means the following types of instruments if, on the date of purchase or other acquisition thereof by the Fund (or, in the case of an instrument specified by clauses (i) and (ii) below, on the Valuation Date), the remaining terms to maturity thereof are not in excess of 90 days: (i) U.S. Government Obligations; (ii) commercial paper that is rated at the time of purchase or acquisition and the Valuation Date at least P-1 by Moody's and is issued by an issuer (or guaranteed or supported by a person or entity other than the issuer) whose long-term unsecured debt obligations are rated at least Aa by Moody's; (iii) demand or time deposits in or certificates of deposit of or banker's acceptances issued by (A) a depository institution or trust company incorporated under the laws of the United States of America or any state thereof or the District of Columbia or (B) a United States branch office or agency of a foreign depository institution (provided that such branch office or agency is subject to banking regulation under the laws of the United States, any state thereof or the District of Columbia) if, in each case, the commercial paper, if any, and the long-term unsecured debt obligations (other than such obligations the ratings of which are based on the credit of a person or entity other than such depository institution or trust company) of such depository institution or trust company at the time of purchase or acquisition and the Valuation Date, have (1) credit ratings from Moody's of at least P-1 in the case of commercial paper and (2) credit ratings from Moody's of at least Aa in the case of long-term unsecured debt obligations; provided, however, that in the case of any such investment that matures in no more than one Business Day from the date of purchase or other acquisition by the Fund, all of the foregoing requirements will be applicable except that the required long-term unsecured debt credit rating of such depository institution or trust company from Moody's will be at least A2; and provided, further, however, that the foregoing credit rating requirements will be deemed to be met with respect to a depository institution or trust company if (1) such depository institution or trust company is the principal depository institution in a holding company system, (2) the commercial paper, if any, of such depository institution or trust company is not rated below P-1 by Moody's and (3) the holding company will meet all of the foregoing credit rating requirements (including the preceding proviso in the case of investments that mature in no more than one Business Day from the date of purchase or other acquisition by the Fund); (iv) repurchase obligations with respect to any U.S. Government Obligation entered into with a depository institution, trust company or securities dealer (acting as principal) which is rated (A) at least Aa3 if the maturity is three months or less, (B) at least A1 if the maturity is two months or less and (C) at least A2 if the maturity is one month or less; and (v) Eurodollar demand or time deposits in, or certificates of deposit of, the head office or the London branch office of a depository institution or trust company meeting the credit rating requirements of commercial paper and long-term unsecured debt obligations specified in clause (iii) above, provided that the interest receivable by the Fund will be payable in U.S. dollars and will not be subject to any withholding or similar taxes. 'S&P' means Standard & Poor's Ratings Group, or its successor. 'U.S. Government Obligations' means direct non-callable obligations of the United States, provided that such direct obligations are entitled to the full faith and credit of the United States and that any such obligations, other than United States Treasury Bills and U.S. Treasury Securities Strips, provide for the periodic payment of interest and the full payment of principal at maturity. 'Valuation Date' means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. 39 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. STATEMENT OF ADDITIONAL INFORMATION (SUBJECT TO COMPLETION, ISSUED AUGUST 9, 1996) 2,400,000 SHARES ROYCE VALUE TRUST, INC. % CUMULATIVE PREFERRED STOCK, LIQUIDATION PREFERENCE $25.00 PER SHARE The % Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the 'Fund') will be senior securities of the Fund. The Fund will use the net proceeds of the offering to purchase additional portfolio securities in accordance with its investment objectives and policies. The Fund is a closed-end diversified management investment company. The Fund's primary investment objective is long-term capital appreciation, which it seeks by normally investing more than 75% of its assets in common stocks and securities convertible into common stocks of small and medium-sized companies. The Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (212) 355-7311. Quest Advisory Corp. is its investment adviser. This Statement of Additional Information is not a prospectus, but should be read in conjunction with the Fund's Prospectus (dated August , 1996). Please retain this document for future reference. To obtain an additional copy of the Prospectus, the Fund's Annual Report to Stockholders for the year ended December 31, 1995, or the Fund's Semi-Annual Report to Stockholders for the six months ended June 30, 1996, please call Investor Information at 1-800-221-4268. TABLE OF CONTENTS
PAGE ---- Principal Stockholders..................................................................................... 2 Directors and Officers..................................................................................... 2 Code of Ethics and Related Matters......................................................................... 4 Investment Advisory and Other Services..................................................................... 5 Brokerage Allocation and Other Practices................................................................... 6 Net Asset Value............................................................................................ 7 Financial Statements....................................................................................... 7
Dated August , 1996 PRINCIPAL STOCKHOLDERS As of June 30, 1996, the following person owned of record or was known by the Fund to have owned beneficially 5% or more of the 24,836,016 shares of its Common Stock then outstanding:
NAME AND ADDRESS TYPE AND PERCENTAGE OF OWNERSHIP - ----------------------------------------------------------------- ------------------------------------ Cede & Co., Inc. ............................................... Of record only 90.54% c/o Depository Trust Company P.O. Box 20, Bowling Green Station New York, New York 10274
All officers and directors of the Fund as a group owned approximately 1% of the Fund's outstanding shares of Common Stock as of such date. DIRECTORS AND OFFICERS The following table sets forth certain information as to each Director and officer of the Fund.
POSITION HELD WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS NAME, ADDRESS AND AGE THE FUND DURING THE PAST FIVE YEARS - --------------------------------------- ------------------ ------------------------------------------------ Charles M. Royce* (56) ................ Director, President, Secretary, Treasurer, sole director 1414 Avenue of the Americas President and and sole voting shareholder of Quest Advisory New York, NY 10019 Treasurer Corp. ('Quest'), the Fund's investment adviser; Trustee, President and Treasurer of The Royce Fund ('TRF'), an open-end diversified management investment company of which Quest is the principal investment adviser, and its predecessors; Director, President and Treasurer of the Fund and, since September 1993, of Royce Micro- Cap Trust, Inc. ('OTCM'), a closed-end diversified management investment company of which Quest is the investment adviser (the Fund, TRF and OTCM collectively, 'The Royce Funds'); Secretary and sole director and shareholder of Quest Distributors, Inc. ('QDI'), the distributor of TRF's shares; and managing general partner of Quest Management Company ('QMC'), a registered investment adviser, and its predecessors. Thomas R. Ebright* (52) ............... Director Vice President of Quest; Trustee of TRF and one 50 Portland Pier of its predecessors; Vice President of TRF and Portland, ME 04101 one of its predecessors; Director of the Fund and, since September 1993, of OTCM; Vice President since November 1995 (President until October 1995) and Treasurer of QDI; general partner of QMC and its predecessor until June 1994; President, Treasurer and a director and principal shareholder of Royce, Ebright & Associates, Inc., the investment adviser for a series of TRF, since June 1994; director of Atlantic Pro Sports, Inc. and of the Strasburg Rail Road Co. since March 1993; and President and principal owner of Baltimore Professional Hockey, Inc. until May 1993.
2
POSITION HELD WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS NAME, ADDRESS AND AGE THE FUND DURING THE PAST FIVE YEARS - --------------------------------------- ------------------ ------------------------------------------------ Richard M. Galkin (58) ................ Director Private investor and President of Richard M. 5284 Boca Marina Galkin Associates, Inc., telecommunications Boca Raton, FL 33487 consultants. Stephen L. Isaacs (56) ................ Director Director of Columbia University Development Law 60 Haven Street, Fl. B-2 and Policy Program; Professor at Columbia New York, NY 10032 University; and President of Stephen L. Isaacs & Associates, Consultants. David L. Meister (56) ................. Director Consultant to the communications industry since 111 Marquez Place January 1993; and Executive officer of Digital Pacific Palisades, CA 90272 Planet Inc. from April 1991 to December 1992. Jack E. Fockler, Jr.*(37) ............. Vice President Vice President (since August 1993) and senior 1414 Avenue of the Americas associate of Quest, having been employed by New York, NY 10019 Quest since October 1989; Vice President of The Royce Funds since April 1995; Vice President of QDI since November 1995; and general partner of QMC since July 1993. W. Whitney George* (38) ............... Vice President Vice President (since August 1993) and senior 1414 Avenue of the Americas analyst of Quest, having been employed by New York, NY 10019 Quest since October 1991; Vice President of The Royce Funds since April 1995; general partner of QMC and its predecessor since January 1992. Daniel A. O'Byrne* (34) ............... Vice President Vice President of Quest since May 1994, having 1414 Avenue of the Americas been employed by Quest since October 1986; and New York, NY 10019 Vice President of The Royce Funds since July 1994. John E. Denneen* (29) ................. Secretary Associate General Counsel and Chief Compliance 1414 Avenue of the Americas Officer of Quest since May 1996; Secretary of New York, NY 10019 The Royce Funds since June 1996; and Associate of Seward & Kissel from September 1992 to May 1996.
- ------------ * An 'interested person' of the Fund and/or Quest under Section 2(a)(19) of the 1940 Act. ------------------------ Normally, holders of shares of Preferred Stock of the Fund, including the Cumulative Preferred Stock, voting as a separate class, will elect two members of the Fund's Board of Directors, and holders of Preferred Stock, including the Cumulative Preferred Stock, and Common Stock, voting as a single class, will elect the remaining directors. See 'Description of Cumulative Preferred Stock -- Voting Rights' in the Prospectus. Messrs. Ebright and Meister have been designated as the Preferred Stock directors, subject to election at the first meeting of the Fund's stockholders to be called after issuance of the Cumulative Preferred Stock. All of the Fund's directors are also trustees of TRF and directors of OTCM. The Board of Directors has an Audit Committee, comprised of Richard M. Galkin, Stephen L. Isaacs and David L. Meister. The Audit Committee is responsible for recommending the selection and nomination of the independent auditors of the Fund and for conducting post-audit reviews of its financial condition with such auditors. 3 REMUNERATION OF DIRECTORS AND OFFICERS Set forth below is the compensation paid by the Fund and the other registered investment companies comprising The Royce Funds to each Director of the Fund for the year ended December 31, 1995.
AGGREGATE TOTAL COMPENSATION COMPENSATION FROM THE FUND AND DIRECTOR FROM THE FUND OTHER ROYCE FUNDS - ----------------------------------------------------------------------------- ------------- ------------------ Charles M. Royce............................................................. $ 0 $ 0 Thomas R. Ebright............................................................ 0 0 Richard M. Galkin............................................................ 16,000 60,000 Stephen L. Isaacs............................................................ 16,000 60,000 David L. Meister............................................................. 16,000 60,000
For the year ended December 31, 1995, all directors and officers as a group (six persons) received aggregate remuneration from the Fund of $48,000 for services in all capacities, and no other affiliated person of the Fund (except Quest) or any affiliated person of any affiliate of the Fund received from the Fund during such fiscal year aggregate compensation in excess of $60,000 for services in all capacities. CODE OF ETHICS AND RELATED MATTERS Quest, QDI, QMC and The Royce Funds have adopted a Code of Ethics under which directors, officers, employees and partners of Quest, QDI and QMC ('Quest-related persons') and interested trustees/directors, officers and employees of The Royce Funds are prohibited from personal trading in any security which is then being purchased or sold or considered for purchase or sale by a Royce Fund or any other Quest or QMC account. Such persons are permitted to engage in other personal securities transactions if (i) the securities involved are United States Government debt securities, municipal debt securities, money market instruments, shares of affiliated or non-affiliated registered open-end investment companies or shares acquired from an issuer in a rights offering or under an automatic dividend reinvestment plan or employer-sponsored automatic payroll-deduction cash purchase plan or (ii) they first obtain permission to trade from Quest's Compliance Officer and an executive officer of Quest. The Code contains standards for the granting of such permission, and it is expected that permission to trade will be granted only in a limited number of instances. Quest's and QMC's clients include several private investment companies in which Quest or QMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr. and/or W. Whitney George may be deemed to beneficially own) a share of up to 15% of the company's realized and unrealized net capital gains from securities transactions, but less than 5% of the company's equity interests. The Code of Ethics does not restrict transactions effected by Quest or QMC for such private investment company accounts. Transactions for such private investment company accounts are subject to Quest's and QMC's allocation guidelines and procedures. See 'Brokerage Allocation and Other Practices.' As of June 30, 1996, Quest-related persons, interested trustees/directors, officers and employees of The Royce Funds and members of their immediate families beneficially owned shares of The Royce Funds having a total value of approximately $20.7 million, and Quest's and QMC's equity interests in such private investment companies totalled approximately $3.4 million. 4 INVESTMENT ADVISORY AND OTHER SERVICES ADVISORY FEE The following table illustrates, on an annualized basis, the full range of permitted increases or decreases to the Basic Fee, assuming that the investment performance of the Fund, rounded to the nearest whole point, is not less than zero.
DIFFERENCE BETWEEN PERFORMANCE OF FUND AND % ADJUSTMENT TO CHANGE IN S&P 600 INDEX 1% BASIC FEE FEE AS ADJUSTED ----------------------------------- ------------- --------------- +12 or more............................ +.5 % 1.5 % +11 ................................... +.45 1.45 +10 ................................... +.4 1.4 + 9 ................................... +.35 1.35 + 8 ................................... +.3 1.3 + 7 ................................... +.25 1.25 + 6 ................................... +.2 1.2 + 5 ................................... +.15 1.15 + 4 ................................... +.1 1.1 + 3 ................................... +.05 1.05 + 2 ................................... 0 1 + 1 ................................... 0 1 0 ................................... 0 1 -1 ................................... 0 1 -2 ................................... 0 1 -3 ................................... -.05 .95 -4 ................................... -.1 .9 -5 ................................... -.15 .85 -6 ................................... -.2 .8 -7 ................................... -.25 .75 -8 ................................... -.3 .7 -9 ................................... -.35 .65 -10 ................................... -.4 .6 -11 ................................... -.45 .55 -12 or less............................ -.5 .5
In calculating the investment performance of the Fund and the percentage change in the investment record of the Standard & Poor's 600 SmallCap Stock Price Index (the 'S&P 600'), all dividends and other distributions per share of Common Stock of realized capital gains and/or of any net investment income and any capital gains taxes per share of Common Stock paid or payable on undistributed realized long-term capital gains and all dividends and other distributions on the securities comprising the S&P 600 during the performance period are treated as having been reinvested, and no effect is given to gain or loss resulting from capital share transactions of the Fund. Fractions of a percentage point are rounded to the nearest whole point (to the higher whole point if exactly one-half). For the years ended December 31, 1995, 1994 and 1993, Quest received investment advisory fees from the Fund of $2,951,325 (net of $104,206 voluntarily waived by Quest), $3,170,118 (net of $37,010 voluntarily waived by Quest) and $2,564,267, respectively. OTHER The Investment Advisory Agreement provides that the Fund may use 'Royce' as part of its name only for so long as the Investment Advisory Agreement remains in effect. The name 'Royce' is a property right of Quest, and it may at any time permit others, including other investment entities, to use such name. The Investment Advisory Agreement protects and indemnifies Quest against liability to the Fund, its stockholders or others for any action taken or omitted to be taken by Quest in connection with the 5 performance of any of its duties or obligations under the Investment Advisory Agreement or otherwise as an investment adviser to the Fund. However, Quest is not protected or indemnified against liabilities to which it would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its duties and obligations under the Investment Advisory Agreement. Quest's services to the Fund are not deemed to be exclusive, and Quest or any of its affiliates may provide similar services to other investment companies and other clients or engage in other activities. The Investment Advisory Agreement will remain in effect until April 30, 1998 and may be continued in effect from year to year thereafter if such continuance is specifically approved at least annually by the Board of Directors or by the vote of a majority of the Fund's outstanding voting securities and, in either case, by a majority of the directors who are not parties to the Agreement or interested persons of any such party. The Investment Advisory Agreement will automatically terminate if it is assigned (as defined by the 1940 Act and the rules thereunder) and may be terminated without penalty by vote of a majority of the Fund's outstanding voting securities or by either party thereto on not less than 60 days' written notice. SERVICE CONTRACT WITH STATE STREET State Street Bank and Trust Company ('State Street'), the custodian of the Fund's assets, provides certain management-related services to the Fund. Such services include keeping books of accounts and rendering such financial and other statements as may be requested by the Fund from time to time and generally assisting in the preparation of reports to the Fund's stockholders, to the Securities and Exchange Commission and others, in the auditing of accounts and in other ministerial matters of like nature, as agreed to between the Fund and State Street. During the years ended December 31, 1995, 1994 and 1993, the Fund paid $100,010, $98,118 and $97,977 in fees to State Street for management- related and custodial services. BROKERAGE ALLOCATION AND OTHER PRACTICES Quest is responsible for selecting the brokers who effect the purchases and sales of the Fund's portfolio securities. No broker is selected to effect a security transaction for the Fund unless such broker is believed by Quest to be capable of obtaining the best price for the securities involved in the transaction. In addition to considering a broker's execution capability, Quest generally considers the brokerage and research services which the broker has provided to it, including any research relating to the security involved in the transaction and/or to other securities. Such services may include general economic research, market and statistical information, industry and technical research, strategy and company research, and may be written or oral. Quest determines the overall reasonableness of brokerage commissions paid, after considering the amount another broker might have charged for effecting the transaction and the value placed by Quest upon the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or Quest's overall responsibilities with respect to its accounts. Quest is authorized, under Section 28(e) of the Securities Exchange Act of 1934 and under its Investment Advisory Agreement with the Fund, to pay a broker a commission in excess of that which another broker might have charged for effecting the same transaction, in recognition of the value of brokerage and research services provided by the broker. Brokerage and research services furnished by brokers through whom the Fund effects securities transactions may be used by Quest in servicing all of its accounts and those of QMC, and not all of such services may be used by Quest in connection with the Fund. Even though investment decisions for the Fund are made independently from those for the other accounts managed by Quest and QMC, securities of the same issuer are frequently purchased, held or sold by more than one Quest/QMC account because the same security may be suitable for all of them. When the same security is being purchased or sold for more than one Quest/QMC account on the same trading day, Quest seeks to average the transactions as to price and allocate them as to amount in a manner believed to be equitable to each. Such purchases and sales of the same security are generally 6 effected pursuant to Quest/QMC's Trade Allocation Guidelines and Procedures. Under such Guidelines and Procedures, unallocated orders are placed with and executed by broker-dealers during the trading day. The securities purchased or sold in such transactions are then allocated to one or more of Quest's and QMC's accounts at or shortly following the close of trading, using the average net price obtained. Such allocations are done based on a number of judgmental factors that Quest and QMC believe should result in fair and equitable treatment to those of their accounts for which the securities may be deemed suitable. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained for the Fund. During the year ended December 31, 1995, the Fund did not acquire any securities of any of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or of any of their parents. One or more of the Underwriters have effected purchases and sales of the portfolio securities of the Fund and of other accounts managed by Quest and QMC and may be chosen to effect future transactions for the Fund and such other accounts. NET ASSET VALUE The Fund calculates the net asset value of its shares of Common Stock daily and makes that information available daily by telephone (800-221-4268) and weekly for publication. Currently, The Wall Street Journal, The New York Times and Barron's publish net asset values for closed-end investment companies weekly. Net asset value per share of Common Stock is determined at the close of regular trading on the New York Stock Exchange (currently 4:00 P.M., Eastern time) on each day on which the Exchange is open. The net asset value of the Fund's Common Stock is calculated by dividing the current value of the Fund's total assets less the sum of all of its liabilities and the aggregate liquidation preference of its outstanding shares of Preferred Stock, by the total number of shares of the Common Stock outstanding. In determining net asset value, securities listed on an exchange or on the National Association of Securities Dealers Automated Quotation System are valued on the basis of the last reported sale prior to the time the valuation is made or, if no sale is reported for such day, at their electronically-reported bid price for exchange-listed securities and at the average of their electronically-reported bid and asked prices for NASDAQ securities. Quotations are taken from the market where the security is primarily traded. Other over-the-counter securities for which market quotations are readily available are valued at their electronically-reported bid price or, if there is no such price, then at their representative bid price. Securities for which market quotations are not readily available are valued at their fair value under procedures established and supervised by the Fund's Board of Directors. Notwithstanding the above, bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. Net asset value per share of Common Stock is calculated assuming that the Fund's 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the 'Notes') have been converted, except when the effect of doing so is anti-dilutive (i.e., results in a higher net asset value per share than would otherwise be the case), and this value is reported by the Fund by telephone and for publication as its net asset value per share. The offering costs of the Notes (including the underwriting discount) is being amortized over the term of the Notes. If the Notes are earlier redeemed or otherwise purchased by the Fund, the unamortized cost attributable to the Notes will be charged against operations. Similarly, upon conversion of any Notes, the unamortized cost attributable to the converted Notes will be charged against operations. The offering costs of the Cumulative Preferred Stock (including the underwriting discount) will be charged to additional paid-in capital. FINANCIAL STATEMENTS The audited financial statements included in the Annual Report to the Fund's Stockholders for the fiscal year ended December 31, 1995, together with the report of Ernst & Young LLP thereon, and the unaudited financial statements included in the Semi-Annual Report to the Fund's Stockholders for the six months ended June 30, 1996 are incorporated herein by reference. 7 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS Included in Part A: -- Selected Per Share Data and Ratios for the six months ended June 30, 1996 (unaudited), and the nine years ended December 31, 1995 and the period November 26, 1986 (commencement of operations) to December 31, 1986. Incorporated by reference in Part B: -- Schedule of Investments at December 31, 1995* -- Statement of Assets and Liabilities at December 31, 1995* -- Statement of Operations for the year ended December 31, 1995* -- Statement of Changes in Net Assets for the years ended December 31, 1995 and 1994* -- Statement of Cash Flows for the year ended December 31, 1995* -- Selected Per Share Data and Ratios for the five years ended December 31, 1995* -- Notes to Financial Statements* -- Report of Independent Auditors* Also Incorporated by reference in Part B: --Schedule of Investments at June 30, 1996 (unaudited)** --Statement of Assets and Liabilities at June 30, 1996 (unaudited)** --Statement of Operations for the six months ended June 30, 1996 (unaudited)** --Statement of Changes in Net Assets for the six months ended June 30, 1996 (unaudited) and for the year ended December 31, 1995** --Financial Highlights for the six months ended June 30, 1996 (unaudited) and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991** --Notes to Financial Statements**
- ------------ * Incorporated by reference to the Registrant's 1995 Annual Report to Stockholders filed with the Securities and Exchange Commission (the 'SEC') for the year ended December 31, 1995 pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as amended ('1940 Act'). **_ Incorporated by reference to the Registrant's Semi-Annual Report to Stockholders for the six-months ended June 30, 1996, filed with the SEC pursuant to Rule 30b2-1 under the 1940 Act. 2. EXHIBITS (a)(1) --Articles of Incorporation of the Registrant were filed with the State of Maryland's Department of Assessments and Taxation (the 'Maryland State Department') on July 1, 1986 and as Exhibit 1 to its Registration Statement on Form N-2 filed with the Securities and Exchange Commission (the 'SEC' or the 'Commission') on October 15, 1986 (File No. 811-4875), and are incorporated herein by reference. (2) --Articles of Amendment to the Articles Incorporation of the Registrant were filed with the Maryland State Department on June 3, 1988 and as Exhibit 77Q(a) to its Semi-Annual Report on Form N-SAR for the six months ended June 30, 1988 (File No. 811-4875), and are incorporated herein by reference. (3) --Articles of Amendment to the Articles of Incorporation of the Registrant were filed with the Maryland State Department on May 4, 1989 and as Exhibit (1)(C) to Amendment No. 4 to the Registrant's Registration Statement on Form N-2 on August 14, 1989 (File No. 811-4875), and are incorporated herein by reference. (4) --Form of Articles Supplementary of the Registrant to be filed with the Maryland State Department.
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(b) --Amended and Restated By-laws of the Registrant dated March 2, 1995 were filed as Exhibit (2)(b) to Amendment No. 19 to the Registrant's Registration Statement on Form N-2 on August 11, 1995 (File No. 811-4875), and are incorporated herein by reference. (c) --Not applicable. (d)(1)--Form of specimen certificate for % Cumulative Preferred Stock was filed as Exhibit (d)(1) to Amendment No. 20 to the Registrant's Registration Statement on Form N-2 on July 12, 1996 (File No. 811-4875), and is incorporated herein by reference. (2)--Portions of the Articles of Supplementary of the Registrant defining the rights of holders of % Cumulative Preferred Stock. (i) (e)(1)--Registrant's Distribution Reinvestment and Cash Purchase Plan dated November 1994 was filed as Exhibit (2)(e) to Amendment No. 19 to the Registrant's Registration Statement on Form N-2 on August 11, 1995 (File No. 811-4875), and is incorporated herein by reference. (2)--Amended and Restated Distribution Reinvestment and Cash Purchase Plan of the Registrant dated November 1995 were filed as Exhibit (e)(2) to Amendment No. 20 to the Registrant's Registration Statement on Form N-2 on July 12, 1996 (File No. 811-4875), and are incorporated herein by reference. (f)(1)--Form of Indenture by and between the Registrant and United States Trust Company of New York, as Trustee, including the form of Note, was filed as Exhibit (d) (ii) to its Registration Statement on Form N-2 on June 15, 1994 (File No. 811-4875), and is incorporated herein by reference. (2)--First Supplemental Indenture by and between the Registrant and United States Trust Company of New York, as Trustee, was filed as Exhibit (f)(ii) to Amendment No. 19 to the Registrant's Registration Statement on Form N-2 on August 11, 1995 (File No. 811-4875), and is incorporated herein by reference. (3)--Second Supplemental Indenture by and between the Registrant and United States Trust Company of New York, as Trustee was filed as Exhibit (f)(3) to Amendment No. 20 to the Registrant's Registration Statement on Form N-2 on July 12, 1996 (File No. 811-4875), and is incorporated herein by reference. (g)(1)--Investment Advisory Agreement dated as of October 21, 1992 by and between the Registrant and Quest Advisory Corp. ('Quest') was filed as Exhibit (g) to the Registrant's Registration Statement on Form N-2 on July 19, 1993 (File No. 811-4875), and is incorporated herein by reference. (2)--Investment Advisory Agreement dated as of June 30, 1996 by and between the Registrant and Quest was filed as Exhibit (g)(2) to Amendment No. 20 to the Registrant's Registration Statement on Form N-2 on July 12, 1996 (File No. 811-4875), and is incorporated herein by reference. (3)--Form of letter agreement dated August , 1996 by and between the Registrant and Quest. (h)(1)--Form of Underwriting Agreement with Morgan Stanley & Co. Incorporated. (2)--Form of Master Agreement Among Underwriters. (3)--Form of Master Dealer Agreement. (i) --Not applicable. (j)(1)--Custodian Contract dated as of October 20, 1986 between the Registrant and State Street Bank and Trust Company ('State Street') was filed as Exhibit 9 to Amendment No. 1 to the Registrant's Registration Statement on Form N-2 on November 19, 1986 (File No. 811-4875), and is incorporated herein by reference. (2)--Amendment to such Custodian Contract made December 11, 1987.
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(3)--Amendment to such Custodian Contract made May 13, 1988 was filed as Exhibit 9.1 to Amendment No. 9 to the Registrant's Registration Statement on Form N-2 on March 27, 1991 (File No. 811-4875), and is incorporated herein by reference. (4)--Amendment to such Custodian Contract made April 2, 1992 was filed as Exhibit 9(C) to the Registrant's Registration Statement on Form N-2 on July 22, 1992 (File No. 811-4875), and is incorporated herein by reference. (k)(1)--Registrar, Transfer Agency and Service Agreement dated as of October 20, 1986 between the Registrant and State Street was filed as Exhibit 10 to Amendment No. 1 to the Registrant's Registration Statement on Form N-2 on November 19, 1986 (File No. 811-4875), and is incorporated herein by reference. (2)--Form of Registrar, Transfer Agency and Paying Agency Agreement between the Registrant and State Street. (l) --Opinion and Consent of Venable, Baetjer and Howard, LLP, Maryland counsel to the Registrant. (m) --Not applicable. (n)(1)--Consent of Ernst & Young LLP, independent auditors for the Registrant. (2)--Consent of Coopers & Lybrand L.L.P., independent auditors. (o) --Not applicable. (p) --Not applicable. (q) --Not applicable. (r) --Financial Data Schedule.
- ------------ (i) Reference is made to Article II (Sections 1,2,3,4,7 and 8) of the Registrant's Articles of Supplementary filed herewith as Exhibit 2(a)(4). ITEM 25. MARKETING ARRANGEMENTS See Exhibit (2)(h) to this Registration Statement. 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:
SEC Registration fees....................................................................... $ 20,689 New York Stock Exchange listing fee......................................................... 22,150 Rating Agency fee........................................................................... 20,000 Printing and engraving expenses............................................................. 100,000 Accounting fees and expenses................................................................ 25,000 Legal fees and expenses..................................................................... 146,500 Blue Sky fees and expenses.................................................................. 20,000 Miscellaneous............................................................................... 15,661 -------- Total.................................................................................. $370,000 -------- --------
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following information is given as of June 30, 1996:
NUMBER OF TITLE OF CLASS RECORD HOLDERS - --------------------------------------------------------------------------------------- -------------- Common Stock ($.001 par value)......................................................... 2,631 Preferred Stock ($.001 par value)...................................................... 0 5 3/4% Investment Company Convertible Notes............................................ 9
C-3 ITEM 29. INDEMNIFICATION Reference is made to (i) Item 3 of Part II (page II-1), filed as part of Amendment No. 1 to the Registration Statement of the Registrant on Form N-2 on November 19, 1986 (File No. 811-4875), and (ii) Item 3 of Part II (pages II-1 to II-3), filed as part of Amendment No. 5 to the Registration Statement of the Registrant on Form N-2 on August 23, 1989 (File No. 811-4875), which are incorporated herein by reference. Reference is made to Section 9 of the Underwriting Agreement filed as Exhibit 2(h)(1) to this Registration Statement for provisions relating to indemnification of the Underwriters. The Investment Advisory Agreement between the Registrant and Quest obligates the Registrant to indemnify Quest and hold it harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees) incurred by Quest 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 Quest in connection with the performance of any of its duties or obligations under the Agreement or otherwise as an investment adviser of the Registrant. Quest is not entitled to indemnification in respect of any liability to the Registrant or its security holders to which it would otherwise be subject by reason of its willful misfeasance, bad faith or gross negligence. The Registrant has agreed to indemnify Quest and hold it harmless from and against certain damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses reasonably paid in settlement) incurred by Quest under the Underwriting Agreement. Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the 'Securities Act'), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant 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 Registrant, its officers and directors, Quest 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 Registrant'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 $10,000,000, with a deductible amount of $150,000. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Reference is made to Schedules D and F to Quest's amended Form ADV (File No. 801-8268), which are incorporated herein by reference. C-4 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 Quest as investment adviser) 2. State Street Bank and Trust Company P.O. Box 9061 Boston, Massachusetts 02205-8686 Attention: Royce Value Trust, Inc. (Records relating to its functions as Custodian, Registrar and Transfer Agent and Dividend Paying Agent for the Registrant) ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS 1. Not applicable. 2. Not applicable. 3. Not applicable. 4. Registrant undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement to include any prospectus required by Section 10(a)(3) of the Securities Act, to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement, and to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment will be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time will be deemed to be the initial bona fide offering thereof. Registrant undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 5. Registrant 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 Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective. Registrant 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. Registrant 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 constituting Part B of this Registration Statement. C-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 fifth day of August, 1996. ROYCE VALUE TRUST, INC. 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 below by the following persons in the capacities and on the dates indicated:
NAME TITLE DATE - ------------------------------------------ -------------------------------------------- ------------------- /S/ CHARLES M. ROYCE President, Treasurer and Director August 5, 1996 ......................................... (Principal Executive, Financial and CHARLES M. ROYCE Accounting Officer) /S/ THOMAS R. EBRIGHT Director August 5, 1996 ......................................... THOMAS R. EBRIGHT /S/ RICHARD M. GALKIN Director August 5, 1996 ......................................... RICHARD M. GALKIN /S/ STEPHEN L. ISSACS Director August 5, 1996 ......................................... STEPHEN L. ISSACS /S/ DAVID L. MEISTER Director August 5, 1996 ......................................... DAVID L. MEISTER
C-6 STATEMENT OF DIFFERENCES ------------------------ The dagger symbol shall be expressed as `D' EXHIBIT INDEX (a)(4) --Form of Articles Supplementary. (g)(3) --Form of letter agreement. (h)(1) --Form of Underwriting Agreement. (2) --Form of Master Agreement Among Underwriters. (3) --Form of Master Dealer Agreement. (j)(2) --Amendment to Custodian Contract. (k)(2) --Form of Registrar, Transfer Agency and Paying Agency Agreement. (l) --Opinion and Consent of Venable, Baetjer and Howard, LLP. (n)(1) --Consent of Ernst & Young LLP. (2) --Consent of Coopers & Lybrand L.L.P. (27) --Financial Data Schedule.
EX-99.(A)(4) 2 EXHIBIT (A)(4) ARTICLES SUPPLEMENTARY CREATING AND FIXING THE RIGHTS OF ______% CUMULATIVE PREFERRED STOCK OF ROYCE VALUE TRUST, INC. 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: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article FIFTH of the Charter of the Corporation, the Board of Directors has authorized the issuance of a series of 2,400,000 shares of preferred stock, par value $.001 per share, of the Corporation designated as the "____% Cumulative Preferred Stock" (the "Cumulative Preferred Stock") and has provided for the issuance of shares of such series. SECOND: The preferences, voting powers, rights, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares of the Cumulative Preferred Stock of the Corporation, as set by the Board of Directors, are as follows: ARTICLE I DEFINITIONS Unless the context or use indicates another or different meaning or intent, the following terms when used in these Articles Supplementary 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 substantially to the effect that: (i) the Independent Accountant has read the Basic Maintenance Report for the current Quarterly Valuation Date and a randomly selected Basic Maintenance Report prepared by the Corporation during the quarter ending on such Quarterly Valuation Date (the "Reports"); (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 Articles Supplementary 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 Reports have been recalculated and are numerically correct; (v) with respect to the Moody's and S&P ratings on corporate bonds, convertible corporate bonds and preferred stock, issuer name, issue size and coupon or dividend rate listed in the Reports, that information has been traced and agrees with the information listed in the applicable guides of the respective rating agencies (in the event such information does not agree or such information is not listed in the applicable guides of the respective rating agencies, the Independent Accountant will inquire of the rating agencies what such information is, and provide a listing in its letter of such differences, if any); (vi) with respect to the lower of two bid prices (or alternative permissible factors used in calculating the Market Value as provided by these Articles Supplementary) 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 Reports 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 (vii) with respect to the description of each security included in the Reports, the description of Moody's Eligible Assets has been compared to the definition of Moody's Eligible Assets contained in these Articles Supplementary, and the description as appearing in the Reports agrees with the definition of Moody's Eligible Assets as described in these Articles Supplementary. 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 Reports or the Market Value of those securities nor have they performed any 2 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 Reports and the schedule(s) thereto; the foregoing procedures do not constitute an examination in accordance with generally accepted auditing standards and the Reports 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 Reports 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 Reports or in the schedule(s) thereto and make no representation as to the sufficiency of the procedures performed for the purposes of these Articles Supplementary. 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 Quest Advisory Corp., a New York corporation. "Asset Coverage" means, asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 250%, or such higher percentage as may be required under the 1940 Act, with respect to all outstanding senior securities of the 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 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 3 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, other than dividends on the Cumulative Preferred Stock included in (B), but including accrued interest on the Notes); (D) the aggregate outstanding principal amount of Notes; (E) any current liabilities of the Corporation as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(D) (including, without limitation, and immediately upon determination, any amounts due and payable by the 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 subject to redemption or repurchase or any of (i)(B) through (i)(E) and provided that in the event the Corporation has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof and/or Notes at a price of less than the principal amount thereof plus accrued but unpaid interest thereon and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent or the Indenture trustee in the case of the Notes for the payment of the repurchase price the Corporation may deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to be repurchased and/or 100% of the aggregate principal amount and accrued but unpaid interest on the Notes to be repurchased from (i) above. "Basic Maintenance 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. "Basic Maintenance Report"* means a report signed by the President, the Treasurer or any Vice President of the Corporation 4 which sets forth, as of the related Valuation Date, the assets of the Corporation, the Market Value and Discounted Value thereof (seriatum 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 Articles Supplementary), 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 Asset, 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. 5 "Dividend Period" shall have the meaning set forth in paragraph 1(a) of Article II hereof. "Indenture" means the Indenture, dated June 15, 1994, between the Corporation and the United States Trust Company of New York, as trustee, relating to the Notes, as supplemented or otherwise amended from time to time. "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. "Liquidation Preference" shall have the meaning set forth in paragraph 2(a) of Article II hereof. "Market Value"* means the amount determined by State Street Bank and Trust Company (so long as prices are provided to it by Telekurs N.A., Inc. or another pricing service approved by Moody's in writing), or, if Moody's agrees in writing, the then 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 an exchange or on the NASDAQ System shall be valued on the basis of the last reported sale on the Valuation Date or, if no sale is reported for such Valuation Date, then at their last reported bid price for such day for exchange-listed securities and at the average of their last reported bid and asked prices for such Valuation Date for NASDAQ System securities. Quotations shall be taken from the market where the security is primarily traded. 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) 6 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 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 commercial paper, the face amount or aggregate principal amount of such U.S. Government Obligations or Short Term Money Market Instruments, 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; 7 (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, with respect to a Moody's Eligible Asset specified below, the following applicable number:
Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------- ---------------- Moody's Short Term Money Market Instruments (other than U.S. Government Obligations set forth below) and other commercial paper: Demand or time deposits, certificates of deposit and bankers' acceptances includible in Moody's Short Term Money Market Instruments.............................. 1.00 Commercial paper rated P-1 by Moody's maturing in 30 days or less................................ 1.00 Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270 days or less............................................... 1.15 Commercial paper rated A-1+ by S&P maturing in 270 days or less............................... 1.25 Repurchase obligations includible in Moody's Short Term Money Market Instruments if term is less than 30 days and counterparty is rated at least A2.......................... 1.00 Other repurchase obligations....................................... Discount Factor applicable to underlying assets Common stocks...................................................... 3.00
8
Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------- ---------------- Preferred stocks: Auction rate preferred stocks.............................. 3.50 Other preferred stocks issued by issuers in the financial and industrial industries.......................................... 2.35 Other preferred stocks issued by issuers in the utilities industry........................... 1.60 U.S. Government Obligations (other than U.S. Treasury Securities Strips set forth below) with remaining terms to maturity of: 1 year or less............................................. 1.08 2 years or less............................................ 1.15 3 years or less............................................ 1.20 4 years or less............................................ 1.26 5 years or less............................................ 1.31 7 years of less............................................ 1.40 10 years or less........................................... 1.48 15 years or less........................................... 1.54 20 years or less........................................... 1.61 30 years or less........................................... 1.63 U.S. Treasury Securities Strips with remaining terms to maturity of: 1 year or less............................................. 1.08 2 years or less............................................ 1.16 3 years or less............................................ 1.23 4 years or less............................................ 1.30 5 years or less............................................ 1.37 7 years or less............................................ 1.51 10 years or less........................................... 1.69 15 years or less........................................... 1.99 20 years or less........................................... 2.28 30 years or less........................................... 2.56
9
Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------- ---------------- Corporate bonds: Corporate bonds rated Aaa with remaining terms to maturity of: 1 year or less............................................. 1.14 2 years or less............................................ 1.21 3 years or less............................................ 1.26 4 years or less............................................ 1.32 5 years or less............................................ 1.38 7 years or less............................................ 1.47 10 years or less........................................... 1.55 15 years or less........................................... 1.62 20 years or less........................................... 1.69 30 years or less........................................... 1.71 Corporate bonds rated Aa with remaining terms to maturity of: 1 year or less............................................. 1.19 2 years or less............................................ 1.26 3 years or less............................................ 1.32 4 years or less............................................ 1.38 5 years or less............................................ 1.44 7 years or less............................................ 1.54 10 years or less........................................... 1.63 15 years or less........................................... 1.69 20 years or less........................................... 1.77 30 years or less........................................... 1.79 Corporate bonds rated A with remaining terms to maturity of: 1 year or less............................................. 1.24 2 years or less............................................ 1.32 3 years or less............................................ 1.38 4 years or less............................................ 1.45 5 years or less............................................ 1.51 7 years or less............................................ 1.61 10 years or less........................................... 1.70 15 years or less........................................... 1.77 20 years or less........................................... 1.85 30 years or less........................................... 1.87
10
Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------- ---------------- Convertible corporate bonds with senior debt securities rated Aa issued by the following type of issuers: Utility.................................................... 1.80 Industrial................................................. 2.97 Financial.................................................. 2.92 Transportation............................................. 4.27 Convertible corporate bonds with senior debt securities rated A issued by the following type of issuers: Utility.................................................... 1.85 Industrial................................................. 3.02 Financial.................................................. 2.97 Transportation............................................. 4.32 Convertible corporate bonds with senior debt securities rated Baa issued by the following type of issuers: Utility.................................................... 2.01 Industrial................................................. 3.18 Financial.................................................. 3.13 Transportation............................................. 4.48 Convertible corporate bonds with senior debt securities rated Ba issued by the following type of issuers: Utility.................................................... 2.02 Industrial................................................. 3.19 Financial.................................................. 3.14 Transportation............................................. 4.49 Convertible corporate bonds with senior debt securities rated B1 or B2 issued by the following type of issuers: Utility.................................................... 2.12 Industrial................................................. 3.29 Financial.................................................. 3.24 Transportation............................................. 4.59
"Moody's Eligible Assets"* means: (i) cash (including, for this purpose, receivables for investments sold to a counterparty whose senior debt securities are rated at least Baa3 by Moody's or a 11 counterparty approved by Moody's and payable within five Business Days following such Valuation Date and dividends and interest receivable within 70 days on investments); (ii) Short-Term Money Market Instruments; (iii) commercial paper that is not includible as a Short-Term Money Market Instrument having on the Valuation Date a rating from Moody's of at least P-1 and maturing within 270 days; (iv) preferred stocks (A) which either (1) are issued by issuers whose senior debt securities are rated at least Baa1 by Moody's or (2) are rated at least "baa3" by Moody's (or in the event an issuer's senior debt securities or preferred stock is not rated by Moody's, which either (1) are issued by an issuer whose senior debt securities are rated at least A by S&P or (2) are rated at least A by S&P and for this purpose have been assigned a Moody's equivalent rating of at least "baa3"), (B) of issuers which have (or, in the case of issuers which are special purpose corporations, whose parent companies have) common stock listed on the New York Stock Exchange or the American Stock Exchange, (C) which have a minimum issue size (when taken together with other of the issuer's issues of similar tenor) of $50,000,000, (D) which have paid cash dividends consistently during the preceding three-year period (or, in the case of new issues without a dividend history, are rated at least "a1" by Moody's or, if not rated by Moody's, are rated at least AA by S&P), (E) which pay cumulative cash dividends in U.S. dollars, (F) which are not convertible into any other class of stock and do not have warrants attached, (G) which are not issued by issuers in the transportation industry and (H) in the case of auction rate preferred stocks, which are rated at least "aa" by Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved in writing by Moody's and have never had a failed auction; provided, however, that for this purpose the aggregate Market Value of the Company's holdings of any issue of preferred stock shall not be less than $500,000 nor more than $5,000,000; (v) common stocks (A) which are traded on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market, (B) which, if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which are not privately placed; provided, however, that (1) common stock which, while a Moody's Eligible Asset owned by the 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 12 rated at least A3 by Moody's and (2) the aggregate Market Value of the Corporation's holdings of the common stock of any issuer shall not exceed 4% in the case of utility common stock and 6% in the case of non-utility common stock of the number of outstanding shares times the Market Value of such common stock; (vi) U.S. Government Obligations; (vii) corporate bonds (A) which are not privately placed, rated at least B3 (Caa subordinate) by Moody's (or, in the event the bond is not rated by Moody's, the bond is rated at least BB- by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), with such rating confirmed on each Valuation Date, (B) which have a minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated and pay interest in cash in U.S. dollars, (D) which are not convertible or exchangeable into equity of the issuing corporation and have a maturity of not more than 30 years, (E) for which, if rated below Baa3, the aggregate Market Value of the Company's holdings do not exceed 10% of the aggregate Market Value of any individual issue of corporate bonds calculated at the time of original issuance, (F) the cash flow from which must be controlled by an indenture trustee and (G) which are not issued in connection with a reorganization under any bankruptcy law; (viii) convertible corporate bonds (A) which are issued by issuers whose senior debt securities are rated at least B2 by Moody's (or, in the event an issuer's senior debt securities are not rated by Moody's, which are issued by issuers whose senior debt securities are rated at least BB by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), (B) which are convertible into common stocks which are traded on the New York Stock Exchange or the American Stock Exchange or are quoted on the NASDAQ National Market System and (C) which, if cash dividend paying, pay cash dividends in U.S. dollars; provided, however, that once convertible corporate bonds have been converted into common stock, the common stock issued upon conversion must satisfy the criteria set forth in clause (v) above and other relevant criteria set forth in this definition in order to be a Moody's Eligible Asset; provided, however, that the Corporation's investment in preferred stock, common stock, corporate bonds and convertible corporate bonds described above must be within the following diversification requirements (utilizing Moody's Industry and Sub- 13 industry Categories) in order to be included in Moody's Eligible Assets: Issuer:
Non-Utility Utility Maximum Moody's Rating Maximum Single Issuer Single Issuer -------------- --------------------- ------------- (1)(2) (3)(4) (3)(4) ------ ------ ------ "aaa", Aaa 100% 100% "aa", Aa 20% 20% "a", A 10% 10% CS/CB, "Baa", Baa(5) 6% 4% Ba 4% 4% B1/B2 3% 3% B3 (Caa subordinate) 2% 2%
Industry and State:
Utility Non-Utility Utility Maximum Maximum Single Maximum Single Single Moody's Rating(1) Industry(3) Sub-Industry(3)(6) State(3) - ----------------- ----------- ------------------ -------- "aaa", Aaa 100% 100% 100% "aa", Aa 60% 60% 20% "a", A 40% 50% 10%(7) CS/CB, "baa", Baa(5) 20% 50% 7%(7) Ba 12% 12% N/A B1/B2 8% 8% N/A B3 (Caa subordinate) 5% 5% N/A
(1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate bonds and convertible corporate bonds rated by S&P but not by Moody's. (2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets. (3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category. (4) Issuers subject to common ownership of 25% or more are considered as one name. (5) CS/CB refers to common stock and convertible corporate bonds, which are diversified independently from the rating level. (6) In the case of utility common stock, utility preferred stock, utility bonds and utility convertible bonds, the definition of industry refers to sub-industries (electric, 14 water, hydro power, gas, diversified). Investments in other sub-industries are eligible only to the extent that the combined sum represents a percentage position of the Moody's Eligible Assets less than or equal to the percentage limits in the diversification tables above. (7) Such percentage shall be 15% in the case of utilities regulated by California, New York and Texas. ; and provided, further, that the Corporation's investments in auction rate preferred stocks described in clause (iv) above shall be included in Moody's Eligible Assets only to the extent that the aggregate Market Value of such stocks does not exceed 10% of the aggregate Market Value of all of the Corporation's investments meeting the criteria set forth in clauses (i) through (viii) above less the aggregate Market Value of those investments excluded from Moody's Eligible Assets pursuant to the immediately preceding proviso; and (ix) no assets which are subject to any lien or irrevocably deposited by the Corporation for the payment of amounts needed to meet the obligations described in clauses (i)(A) through (i)(E) of the definition of "Basic Maintenance Amount" may be includible in Moody's Eligible Assets. "Moody's Industry and Sub-Industry Categories"* means as set forth below: 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 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 15 Chemicals, Plastics and Rubber: Chemicals (non- agriculture), Industrial Gases, Sulphur, 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, TVs, 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, 16 Motion Picture Production Theaters, Motion Picture Distribution 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 Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling Personal, Food and Miscellaneous Services Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, T.V., 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 "1940 Act" means the Investment Company Act of 1940, as amended. "Notes" means the Corporation's $40,000,000 aggregate principal amount of 5-3/4% Investment Company Convertible Notes due June 30, 2004, as the same may be modified pursuant to the terms of the Indenture. 17 "Notice of Redemption" has the meaning set forth in paragraph 3(c)(i) of Article II hereof. "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. "Paying Agent" means State Street Bank and Trust Company and its successors or any other paying agent appointed by the Corporation. "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 September 27, 1996. "Redemption Price" has the meaning set forth in paragraph 3(a) of Article II hereof. "Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation (or, in the case of an instrument specified by clauses (i) and (ii) below, on the Valuation Date), the remaining terms to maturity thereof are not in excess of 90 days: (i) U.S. Government Obligations; (ii) commercial paper that is rated at the time of purchase or acquisition and the Valuation Date at least P-1 by Moody's and is issued by an issuer (or guaranteed or supported by a person or entity other than the issuer) whose long-term unsecured debt obligations are rated at least Aa by Moody's; (iii) demand or time deposits in, or certificates of deposit of, or banker's acceptances issued by (A) a depository institution or trust company incorporated under the laws of the United States of America or any state thereof or the District of Columbia or (B) a United States branch office or agency of a foreign depository institution (provided that such branch office or agency is subject to banking regulation under the laws of the United States, any state thereof or the District of Columbia) if, in each case, the commercial paper, if any, and the long-term unsecured 18 debt obligations (other than such obligations the ratings of which are based on the credit of a person or entity other than such depository institution or trust company) of such depository institution or trust company at the time of purchase or acquisition and the Valuation Date, have (1) credit ratings from Moody's of at least P-1 in the case of commercial paper and (2) credit ratings from Moody's of at least Aa in the case of long-term unsecured debt obligations; provided, however, that in the case of any such investment that matures in no more than one Business Day from the date of purchase or other acquisition by the 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 shall be at least A2; 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 commercial paper, if any, of such depository institution or trust company is not rated below P-1 by Moody's and (3) the holding company 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); (iv) repurchase obligations with respect to any U.S. Government Obligation entered into with a depository institution, trust company or securities dealer (acting as principal) which is rated (A) at least Aa3 if the maturity is three months or less, (B) at least A1 if the maturity is two months or less and (C) at least A2 if the maturity is one month or less; and (v) Eurodollar demand or time deposits in, or certificates of deposit of, the head office or the London branch office of a depository institution or trust company meeting the credit rating requirements of commercial paper and long-term unsecured debt obligations specified in clause (iii) above, provided that the interest receivable by the Corporation shall be payable in U.S. dollars and shall not be subject to any withholding or similar taxes. "S&P" means Standard & Poor's Ratings Group or its successors. "U.S. Government Obligations" means direct non-callable obligations of the United States, provided that such direct obligations are entitled to the full faith and credit of the United States and that any such obligations, other than United 19 States Treasury Bills and U.S. Treasury Securities Strips, provide for the periodic payment of interest and the full payment of principal at maturity. "Valuation Date"* means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. "Voting Period" shall have the meaning set forth in paragraph 4(b) of Article II hereof. Those of the foregoing definitions which are marked with an asterisk have been adopted by the Board of Directors of the Corporation in order to obtain a "aaa" rating from Moody's on the shares of Cumulative Preferred Stock on their Date of Original Issue; and the Board of Directors of the Corporation shall have the authority, without stockholder approval, to amend, alter or repeal from time to time the foregoing definitions and the restrictions and guidelines set forth thereunder if Moody's advises the Corporation in writing that such amendment, alteration or repeal will not adversely affect their then current rating on 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 such definitions marked with an asterisk, unless the context otherwise requires, shall have no meaning for these Articles Supplementary. ARTICLE II CUMULATIVE PREFERRED STOCK 1. Dividends. (a) Holders of shares of Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, 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 annually on December 23 in each year (each a "Dividend Payment Date") commencing December 23, 1996 (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 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 capital 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 20 date on which such shares 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 Dates 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 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, 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 or on parity with 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 21 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 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"), which attributes such distribution to the preceding year of the Corporation for federal income tax purposes so that the Corporation may avoid incurring a corporate-level tax, and with the rules and regulations under Subchapter M of the Code. Such additional dividend declaration will be paid to holders of the Cumulative Preferred Stock on the Dividend Payment Date, shall be part of the normal annual dividend paid to holders of record pursuant to paragraph 1(a) hereof and shall not result in any increase in the amount of cash dividends paid pursuant to paragraph 1(a) hereof. 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 22 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 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, the Indenture and any other agreements 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 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 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 23 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 September 1, 2001, 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 September 1, 2001 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, the Indenture and any other agreements 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) the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the Notice of Redemption shall so state) are to be surrendered for payment in respect of such redemption; (F) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (G) the provisions of this paragraph 3 under which such 24 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 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 or after the redemption date, each holder of shares of Cumulative Preferred Stock that are subject to redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in the Notice of Redemption and shall then 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 Articles Supplementary, such redemption shall be made pro rata from each 25 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 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. 4. Voting Rights. (a) General. Except as otherwise provided by law or as specified in the Charter or By-Laws, 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 any meeting of the stockholders of the Corporation held for the election of directors, 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 capital 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 capital 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. 26 (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 directors constituting the Board of Directors shall be automatically increased 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 capital 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 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). (c) Right to Vote with Respect to Certain Other Matters. So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of two-thirds of the shares of Cumulative Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of Cumulative Preferred Stock. 27 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 have the meaning set forth 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. (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 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 28 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. At any such meeting or adjournment thereof in the absence of a quorum, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting without notice, other than by an announcement at the meeting, to a date not more than 120 days after the original record date. (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 Articles Supplementary, 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 terms 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 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 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. 29 (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 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 and any immediately succeeding Business Day on which the Portfolio Calculation exceeds the Basic Maintenance Amount by 5% 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 30 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 a Quarterly Valuation Date, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report and any other Basic Maintenance Report, randomly selected by the Independent Accountants, that was prepared by the Corporation during the quarter ending on such Quarterly Valuation Date. 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 such paragraph 5(a)(ii)(B) and any Basic Maintenance 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. 31 (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 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 the shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof. (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 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 the shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof. 32 (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 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 shall have been deposited in trust with the Paying Agent and the requisite Notice of Redemption 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. (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 (other than the $40,000,000 aggregate principal amount of Notes previously issued by the Corporation), 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 33 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 5% 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 34 of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, the cumulative cash dividend rate payable on a share of the Cumulative Preferred Stock pursuant to paragraph 1(a) of Article II hereof shall be increased by .50% per annum. (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 Incurrence of Additional Indebtedness and Issuance of Additional Preferred Stock. (a) So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation may issue and sell one or more series of a class of senior securities of the Corporation representing indebtedness under Section 18 of the 1940 Act and/or otherwise create or incur indebtedness in addition to the Notes, provided that (i) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional indebtedness to purchase all or a portion of the Notes or any shares of the Cumulative Preferred Stock or to repay, redeem or otherwise refinance all or a portion of the Notes or any shares of the Cumulative Preferred Stock and/or any other indebtedness or Preferred Stock of the Corporation then outstanding or if such indebtedness constitutes a temporary bank borrowing (not in excess of 5% of the value of the Corporation's total assets) for emergency or extraordinary purposes, then the Corporation shall, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities representing indebtedness, as defined in Section 18(h) of the 1940 Act, of at least 300% of the amount of all indebtedness of the Corporation then outstanding, or (ii) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional indebtedness for any other purpose, then the Corporation shall, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities representing indebtedness, as defined in Section 18(h) of the 1940 Act, of at least 500% of the amount of all indebtedness of the Corporation then outstanding. Any possible liability resulting from lending and/or borrowing portfolio securities, entering into reverse repurchase agreements, entering into futures contracts and writing options, to the extent such transactions are made in accordance with the investment 35 restrictions of the Corporation then in effect, shall not be considered to be indebtedness limited by this paragraph 8(a). (b) So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation may issue and sell 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) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional Preferred Stock to purchase all or a portion of the shares of Cumulative Preferred Stock or to redeem or otherwise refinance all or a portion of the shares of Cumulative Preferred Stock, any other Preferred Stock and/or any indebtedness of the Corporation then outstanding, then the Corporation shall, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities which are stock, as defined in Section 18(h) of the 1940 Act, of at least 250% of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Corporation then outstanding, or (ii) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional Preferred Stock for any other purpose, then the Corporation shall, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities which are stock as defined in Section 18(h) of the 1940 Act of at least 300% of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Corporation then outstanding, and, in the case of either (i) or (ii) above, (iii) 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. 36 IN WITNESS WHEREOF, ROYCE VALUE TRUST, INC. has caused these presents to be signed in its name and on its behalf by a duly authorized officer, and its corporate seal to be hereunto affixed and attested by its Secretary, and the said officers of the Corporation further acknowledge said instrument to be the corporate act of the Corporation, and state that to the best of their knowledge, information and belief the matters and facts herein set forth with respect to approval are true in all material respects, all on _____________, 1996. ROYCE VALUE TRUST, INC. By__________________________________ Name: Title: Attest: __________________________________ ____________________ Secretary 37 EX-99.(G)3 3 EXHIBIT (G)3 ROYCE VALUE TRUST, INC. 1414 Avenue of the Americas New York, New York 10019 August __, 1996 Quest Advisory Corp. 1414 Avenue of the Americas New York, New York 10019 Gentlemen: Reference is made to (i) the Investment Advisory Agreement dated as of June 30, 1996 (the "Investment Advisory Agreement") by and between Royce Value Trust, Inc., a Maryland corporation (the "Fund"), and Quest Advisory Corp., a New York corporation ("Quest"), and (ii) the Underwriting Agreement made August __, 1996 (the "Underwriting Agreement") by and between the Fund and Quest and Morgan Stanley & Co. Incorporated, as representative of the several underwriters named therein (the "Underwriters"). The Fund and Quest hereby acknowledge and agree (i) that Quest became a party to the Underwriting Agreement and made representations, warranties, covenants and indemnities therein in favor of the Underwriters at the request of and as an accommodation to the Fund, and (ii) that as between the Fund, on the one hand, and Quest, on the other hand, the Fund shall be primarily liable for the payment and performance of the joint and several obligations of the Fund and Quest to the Underwriters arising thereunder. In order to implement the foregoing, the Fund and Quest further acknowledge and agree that for purposes of Paragraph 8 of the Investment Advisory Agreement (Protection of the Advisor), any liability of Quest to the Underwriters arising under the Underwriting Agreement shall be deemed to have been incurred by Quest as an investment adviser of the Fund, and the Fund hereby agrees to indemnify Quest and hold Quest harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) incurred by Quest under or by reason of the Underwriting Agreement (subject, however, to the limitations and procedures set forth in Paragraph 8 of the Investment Advisory Agreement for indemnification of Quest by the Fund). Very truly yours, ROYCE VALUE TRUST, INC. By:____________________ ACCEPTED AND AGREED QUEST ADVISORY CORP. By:_________________ EX-99.(H)(1) 4 EXHIBIT (H)(1) [ ] Shares ROYCE VALUE TRUST, INC. [ ] CUMULATIVE PREFERRED STOCK LIQUIDATION PREFERENCE $25 PER SHARE UNDERWRITING AGREEMENT August [ ], 1996 August [ ], 1996 Morgan Stanley & Co. Incorporated A.G. Edwards & Sons, Inc. PaineWebber Incorporated Prudential Securities Incorporated Smith Barney Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: ROYCE VALUE TRUST, INC. (the "Fund"), incorporated in Maryland on July 1, 1986, is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund proposes to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") [ ] shares of its _____% Cumulative Preferred Stock, $25 liquidation preference per share (the "Shares"). The Fund has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form N-2 relating to the Shares. The registration statement contains a form of prospectus to be used in connection with the offering and sale of the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended, is hereinafter referred to as the "Registration Statement;" the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." The Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder are collectively referred to as the "Securities Act;" the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder are collectively referred to as the "Investment Company Act;" and the Securities Act and the Investment Company Act are collectively referred to as the "Acts." 1 1. Representations and Warranties of the Fund and the Adviser. The Fund and Quest Advisory Corp., a New York corporation (the "Adviser"), jointly and severally, represent and warrant to each of the Underwriters that: (a) The Registration Statement has become effective, no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Fund or the Adviser, threatened by the Commission. (b) The Fund has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Maryland, has the corporate power and authority to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Fund. The Fund has no subsidiaries. (c) The Fund is registered with the Commission as a diversified, closed-end management investment company under the Investment Company Act and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Fund or the Adviser, threatened by the Commission. No person is serving or acting as an officer or director of, or investment adviser to, the Fund except in accordance with the provisions of the Investment Company Act and the Investment Advisers Act of 1940, as amended, and the rules and regulations of the Commission thereunder (such act and rules being collectively referred to as the "Advisers Act"). (d) Each of this Agreement, the Investment Advisory Agreement between the Adviser and the Fund (the "Advisory Agreement") and the Custody Contract between State Street Bank and Trust Company (the "Custodian") and the Fund (the "Custody Contract") (this Agreement, the Advisory Agreement and the Custody Contract are referred to herein, collectively, as the "Fundamental Agreements") has been duly authorized, executed and delivered by the Fund. Each Fundamental Agreement, other than this Agreement, assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and 2 binding obligation of the Fund, enforceable against the Fund in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law. (e) None of (A) the execution and delivery by the Fund of, and the performance by the Fund of its obligations under, each Fundamental Agreement, or (B) the issue and sale by the Fund of the Shares as contemplated by this Agreement, contravenes or will contravene any provision of applicable law or the articles of incorporation, as amended (the "Charter"), or by-laws, as amended (the "By-Laws"), of the Fund or any agreement or other instrument binding upon the Fund that is material to the Fund, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Fund, whether foreign or domestic. No consent, approval, authorization, order or permit of, or qualification with, any governmental body or agency, self-regulatory organization or court or other tribunal, whether foreign or domestic, is required for the performance by the Fund of its obligations under the Fundamental Agreements, except such as have been obtained and as may be required by the Acts, the Securities Exchange Act of 1934 (such act and the rules and regulations of the Commission thereunder being collectively referred to as the "Exchange Act"), or the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the offer and sale of the Shares by the Underwriters. (f) The authorized capital stock of the Fund conforms as to legal matters to the description thereof contained in the Prospectus, and the Charter and By-Laws of the Fund and the Fundamental Agreements conform as to legal matters to the descriptions thereof contained in the Prospectus; the outstanding shares of the Fund's common stock, par value $.001 per share, have been duly authorized and validly issued and are fully paid and non-assessable. (g) The Charter and By-Laws of the Fund and the Fundamental Agreements comply with all applicable provisions of the Acts, and all approvals of such documents required under the Investment Company Act by 3 the Fund's stockholders and Board of Directors have been obtained and are in full force and effect. (h) The Fundamental Agreements (other than this Agreement) are in full force and effect and neither the Fund nor, to the Fund's knowledge, any other party to any such agreement is in default thereunder in any material respect and, to the knowledge of the Fund and the Adviser, no event has occurred which with the passage of time or the giving of notice or both would constitute a default thereunder. The Fund is not currently in breach of, or in default under, in any material respect, any other written agreement or instrument to which it or its property is bound or affected. (i) The Shares have been duly authorized and, when issued, paid for and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and the issuance of the Shares will not be subject to any pre-emptive or similar rights. No person has rights to the registration of any securities because of the filing of the Registration Statement. (j) The Shares have been approved for listing on the New York Stock Exchange, Inc. (the "New York Stock Exchange"), subject to official notice of issuance. The Fund's Registration Statement on Form 8-A under the Exchange Act is effective. (k) The Shares have been, or prior to the Closing Date will be, assigned a rating of "aaa" by Moody's Investor Service, Inc. ("Moody's"). (l) The Fund intends to direct the investment of the proceeds of the offering described in the Prospectus in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and the Fund is eligible to qualify as a regulated investment company under Subchapter M of the Code. (m) There has not been any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, of the Fund, or in the investment objectives, investment policies, liabilities, business, prospects or operations of the Fund from that set forth in the Prospectus and there have been no transactions entered into by the Fund which are material to the Fund 4 other than those in the ordinary course of its business or as described in the Prospectus. (n) There are no legal or governmental proceedings pending or, to the knowledge of the Fund and the Adviser, threatened against or affecting the Fund that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required. (o) The Fund has all necessary consents, authorizations, approvals, orders (including exemptive orders), certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, self-regulatory organizations and courts and other tribunals, whether foreign or domestic, to own and use its assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file the foregoing would not have a material adverse effect on the Fund. (p) (i) Each document, if any, filed pursuant to the Exchange Act or the Investment Company Act and incorporated by reference in the Prospectus complied when so filed in all material respects with the Exchange Act or the Investment Company Act, (ii) each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any 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, (iii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Acts and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (q) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information concerning any Underwriter furnished 5 to the Fund in writing by such Underwriter through you expressly for use therein. (q) The financial statements included in the Registration Statement and the Prospectus (including documents incorporated therein by reference) present fairly the financial position of the Fund as at the dates indicated and said statements have been prepared in conformity with generally accepted accounting principles. Ernst & Young LLP, whose report is incorporated by reference in the Prospectus, are independent public accountants with respect to the Fund as required by the Acts. (r) There are no material restrictions, limitations or regulations with respect to the ability of the Fund to invest its assets as described in the Prospectus, other than as described therein. (s) Any advertisement used with the written consent of the Fund in the public offering of the Shares pursuant to Rule 482 under the Securities Act (an "Omitting Prospectus") complied and complies with the requirements of Rule 482 and does not contain an untrue statement of a material fact. 2. Representations and Warranties of the Adviser. The Adviser represents and warrants to each of the Underwriters that: (a) The Adviser has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of New York, has the corporate power and authority to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business requires such qualification, except to the extent that failure to be so qualified or be in good standing would not have a material adverse effect on the Adviser. (b) The Adviser is duly registered as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the Investment Company Act from acting under the Advisory Agreement as an investment adviser to the Fund as contemplated by the Prospectus, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Adviser, threatened by the Commission. 6 (c) Each of this Agreement and the Advisory Agreement has been duly authorized, executed and delivered by the Adviser and complies with all applicable provisions of the Acts. The Advisory Agreement, assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Adviser, enforceable against the Adviser in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law. (d) The execution and delivery by the Adviser of, and the performance by the Adviser of its obligations under, this Agreement and the Advisory Agreement do not and will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Adviser or any agreement or other instrument binding upon the Adviser that is material to the Adviser, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Adviser. No consent, approval, authorization, order or permit of, or qualification with, any governmental body or agency, self-regulatory agency or court or other tribunal, whether foreign or domestic, is required for the performance by the Adviser of its obligations under this Agreement or the Advisory Agreement except such as have been obtained and as may be required by the Acts, the Exchange Act or the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the offer and sale of the Shares by the Underwriters. (e) There are no legal or governmental proceedings pending or, to the knowledge of the Adviser, threatened against or affecting the Adviser that are required to be described in the Registration Statement or the Prospectus and are not so described. (f) The Adviser has all necessary consents, authorizations, approvals, orders (including exemptive orders), certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, self-regulatory organizations and courts and other tribunals, whether foreign or domestic, to own and use its assets and to conduct its business in the manner described in the Prospectus, 7 except to the extent that the failure to obtain or file the foregoing would not have a material adverse effect on the Adviser. (g) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus. (h) The Advisory Agreement is in full force and effect and neither the Adviser nor, to the Adviser's knowledge, the Fund is in default thereunder and, to the knowledge of the Adviser, no event has occurred which with the passage of time or the giving of notice or both would constitute a default under such document. (i) All information furnished by and pertaining to the Adviser for use in the Registration Statement and Prospectus, including, without limitation, the description of the Adviser, does not, and on the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (j) There has not been any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the business or operations of the Adviser from that set forth in the Prospectus. 3. Agreements to Sell and Purchase. The Fund hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Fund the respective numbers of Shares set forth in Schedule I hereto opposite their names at a price of $[ ] per Share plus accumulated dividends, if any, to the Closing Date (the "Purchase Price"). The Fund hereby agrees that, during the period beginning on the date hereof and continuing to and including the Closing Date, it will not offer, sell, contract to sell or otherwise dispose of any preferred stock of the Fund or warrants to purchase preferred stock of the Fund substantially similar to the Shares (other than the Shares) without the prior written consent of Morgan Stanley & Co. Incorporated. 8 4. Terms of Public Offering. The Fund and the Adviser are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Fund and the Adviser are further advised by you that the Shares are to be offered (i) to the public initially at a price of $25 per share (the "Public Offering Price") plus accrued dividends, if any, and (ii) to certain dealers selected by you at a price that represents a concession not in excess of $[ ] per Share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $[ ] per Share to any Underwriter or to certain other dealers. 5. Payment and Delivery. Payment for the Shares shall be made to the Fund in Federal or other funds immediately available in New York City against delivery of the Shares for the respective accounts of the several underwriters at the office of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York, at 10:00 A.M., local time, on August , 1996 or at such other time on the same or such other date, not later than [ ], 1996, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Closing Date." Certificates for the Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than two full business days prior to the Closing Date. Such certificates shall be made available to you for inspection not later than 10:00 A.M. local time, on the business day next preceding the Closing Date. The certificates evidencing the Shares shall be delivered to you on the Closing Date, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the purchase price therefor. 6. Conditions to the Underwriters' Obligations. The respective obligations of the Fund and the Adviser and the several obligations of the Underwriters hereunder are subject to the condition that the Registration Statement shall have become effective not later than the date hereof. The several obligations of the Underwriters hereunder are subject to the following further conditions: 9 (a) Subsequent to the execution an delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Fund's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, of the Fund or the Adviser or in the investment objectives, investment policies, liabilities, business, prospects or operations of the Fund from that set forth in the Registration Statement, that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date separate certificates, dated the Closing Date and signed by an executive officer of each of the Fund and the Adviser in his or her capacity as such, to the effect set forth in clause (a) above and to the effect that the respective representations and warranties of the Fund and the Adviser contained in this Agreement shall be true and correct in all material respects as of the Closing Date and that the Fund and the Adviser have in all material respects complied with all of the agreements and satisfied all of the conditions on their part to be performed or satisfied hereunder on or before the Closing Date. (c) The Adviser and the Fund shall have each performed in all material respects all of their respective obligations to be performed hereunder on or prior to the Closing Date. (d) You shall have received on the Closing Date an opinion of Brown & Wood LLP, special counsel for the Fund, dated the Closing Date, to the effect that: (i) the Fund is qualified to do business and in good standing as a foreign corporation in the 10 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; (ii) this Agreement has been duly authorized, executed and delivered by the Fund and complies with the provisions of the Investment Company Act applicable to the Fund; (iii) the Registration Statement is effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act or proceedings therefor initiated or threatened by the Commission; the Fund's Registration Statement on Form 8-A under the Exchange Act is effective; (iv) at the time the Registration Statement became effective, the Registration Statement (other than the financial statements and other financial or statistical information included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the Acts; (v) 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; (vi) no consent, approval, authorization or order of any court or governmental authority or agency is required in connection with the 11 performance by the Fund of its obligations hereunder, except such as has been obtained under the Acts or such as may be required under state securities laws; and to such counsel's knowledge, the execution and delivery of this Agreement and the consummation of the transactions contemplated herein and therein 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 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 By-Laws of the Fund, or, to such counsel's knowledge, any Federal or New York law or administrative regulation, or administrative or court decree; (vii) each of the Advisory Agreement and the Custodian Contract has been duly authorized and approved by the Fund, each complies as to form in all material respects with all applicable provisions of the Investment Company Act, and each has been duly executed by the Fund; (viii) the Fund is registered with the Commission under the Investment Company Act as a closed-end, diversified, management investment company, and all required action has been taken by the Fund under the Acts to make the public offering and consummate the sale of the Shares pursuant to this Agreement; the provisions of the Charter and the By-Laws of the Fund comply as to form in all material respects with the requirements of the Investment Company Act; and, to such counsel's knowledge, no order of suspension or revocation of such registration under the Investment Company Act, has been issued or proceedings therefor initiated or threatened by the Commission; and (ix) 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. 12 In giving their opinion Brown & Wood LLP shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement, 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, 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 and other financial and statistical information included in the Registration Statement and the Prospectus. In giving their opinion, Brown & Wood LLP (i) may state that they express no opinion as to the laws of any jurisdiction other than the laws of the State of New York and the Federal laws of the United States of America, (ii) 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 (e) below, and (iii) 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 such counsel's knowledge", 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 Fund's Charter and By-laws and a review of the stock ledger books and minute books of the Fund and have made no other investigation or inquiry. (e) You shall have received on the Closing Date an opinion of Venable, Baetjer and Howard LLP, special Maryland counsel to the Fund, dated the Closing Date, to the effect that: (i) the Fund has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland; 13 (ii) the Fund has corporate power and authority, under the laws of the State of Maryland, to own, lease and operate its properties and conduct its business 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 Registration Statement under the captions "Description of Cumulative Preferred Stock" and "Description of Capital Stock and Other Securities - Capital Stock"; (iv) the Shares 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 Shares 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; the form of certificate used to evidence the Shares is in due and proper form and complies with all provisions of applicable Maryland law; (v) the Fund has full corporate power to enter into each Fundamental Agreement; each Fundamental Agreement has been duly and validly authorized, executed and delivered by the Fund; (vi) 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 the Charter or the By-Laws of the Fund, or any Maryland law (other than Maryland securities laws) or regulation, or, to their knowledge, any order of any Maryland court, governmental instrumentality or arbitrator; and (vii) all descriptions in the Prospectus of Maryland statutes and regulations or legal or governmental proceedings, if any, under the laws of the State of Maryland are accurate in all material respects. In giving their opinion, Venable, Baetjer, and Howard 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 14 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 such counsel's knowledge", Venable, Baetjer and Howard 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 Fund's Charter and By-laws and have made no other investigation or inquiry. (f) You shall have received on the Closing Date an opinion of Howard J. Kashner, Esq., General Counsel for the Adviser, dated the Closing Date, to the effect that: (i) the Adviser has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of New York, 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, 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) (hereinafter collectively referred to as the "No-Action Letters"), is not prohibited by the Advisers Act or the Investment Company Act, from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus; (iii) this Agreement and the Advisory Agreement each has been duly authorized, executed and delivered by the Adviser, and the Advisory Agreement 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 15 his knowledge, neither the execution and delivery of this Agreement or the 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 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 properties or operations; (iv) to his knowledge, the description of the Adviser in the Registration Statement and in the Prospectus 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; In giving his opinion, Howard J. Kashner, Esq., (i) may state that he expresses no opinion as to the laws of any jurisdiction other than the laws of the State of New York and the federal laws of the United States of America, and (ii) 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. (g) You shall have received on the Closing Date an opinion of Davis Polk & Wardwell, special counsel for the Underwriters, dated the Closing Date, stating that the statements in the Prospectus under the caption "Underwriters," insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein. In addition to the foregoing opinion, such counsel shall advise the Underwriters that, in the light of such counsel's understanding of the applicable law and the experience it has gained through its practice 16 thereunder, nothing has come to its attention that would lead it to believe that (except for financial statements, schedules and other financial, economic or statistical information contained in the Registration Statement or the Prospectus, as to which counsel need express no belief) the Registration Statement, on the date it became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of the date thereof, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel shall also be permitted to state that because of the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process, that counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus. Davis Polk & Wardwell may, with respect to the preceding paragraph, state that its opinion and belief are based upon its participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. The opinions of Brown & Wood LLP, Venable, Baetjer and Howard LLP and Howard J. Kashner, Esq. described in paragraphs (d), (e) and (f) above shall be rendered to the Underwriters at the request of the Fund and shall so state therein. (h) You shall have received on the date of this Agreement a letter dated such date, and also on the Closing Date a letter dated the Closing Date, in each case in form and substance satisfactory to you, from Ernst & Young LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information regarding the Fund contained in or incorporated by reference into the Registration Statement and the Prospectus. 17 (i) No proceedings shall have been instituted or threatened by the Commission which would adversely affect the Fund's standing as a registered investment company under the Investment Company Act or the standing of the Adviser as a registered investment adviser under the Advisers Act. (j) The Shares shall have been duly authorized for listing on the New York Stock Exchange, subject only to official notice of issuance thereof. (k) The Shares shall have been assigned the rating of Moody's set forth in Section 1(k) hereof and a letter to that effect, dated the Closing Date, shall have been received from Moody's. (l) At the Closing Date and assuming the receipt of the net proceeds from the sale of the Shares, the Asset Coverage requirement shall have been met and the Portfolio Calculation for Moody's is at least equal to the Basic Maintenance Amount (each as defined in the Prospectus), and the Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by the President, or a Vice President or the Treasurer of the Fund, to that effect. 7. Covenants of the Fund. In further consideration of the agreements of the Underwriters herein contained, the Fund covenants and agrees with each Underwriter as follows: (a) To notify you immediately, and confirm such notice in writing, (i) of the institution of any proceedings pursuant to Section 8(e) of the Investment Company Act and (ii) of the happening of any event during the period described in paragraph (d) below which in the judgment of the Fund makes any statement in the Registration Statement or the Prospectus untrue in any material respect or which requires the making of any change in or addition to the Registration Statement or the Prospectus in order to make the statements therein not misleading in any material respect. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement or an order pursuant to Section 8(e) of the Investment Company Act, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. 18 (b) To furnish you, without charge, signed copies of the Registration Statement including exhibits and to each other Underwriter conformed copies of the Registration Statement without exhibits and, during the period described in paragraph (d) below, as many copies of the Prospectus and any supplements and amendments thereto as you may reasonably request. (c) Before amending or supplementing the Registration Statement or the Prospectus during the period described in paragraph (d) below, to furnish you a copy of each such proposed amendment or supplement, and to file no such proposed amendment or supplement to which you reasonably object. (d) If, during such period after the first date of the public offering of the Shares as in the opinion of your counsel the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with law, forthwith to prepare and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Fund) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (e) To use its best efforts to maintain its qualification as a regulated investment company under Subchapter M of the Code. (f) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request and to pay all expenses (including 19 reasonable fees and disbursements of counsel) in connection therewith. (g) To make generally available to the Fund's security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby, an earning statement covering a twelve-month period ending December 31, 1997 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (h) To pay all costs, expenses, fees and taxes incident to (i) the preparation, printing and filing of the Registration Statement and of each amendment thereto, each preliminary prospectus and the Prospectus, and any amendments or supplements thereto, (ii) the printing of this Agreement, the Underwriters' Questionnaire and such other agreements as you may reasonably request, (iii) the preparation, issuance and delivery of the certificates for the Shares to the Underwriters, including stock transfer taxes, if any, payable upon the sale, issuance and delivery by the Fund to the Underwriters of the Shares, (iv) the fees and disbursements of the Fund's counsel and accountants, (v) furnishing such copies of the Registration Statement, the Prospectus and any related preliminary prospectus, and all amendments and supplements thereto, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (vi) the copying and delivery to the Underwriters of copies of the Blue Sky Survey, (vii) any fees charged by Moody's for rating the Shares and (viii) the fees and expenses incurred with respect to the listing of the Shares on the New York Stock Exchange, including the listing fees of the New York Stock Exchange and the preparation, printing and the filing fees with respect to the distribution of documents relating thereto, and the registration of the Shares under the Exchange Act. 8. Covenants of the Adviser. The Adviser will use reasonable efforts to cause the Fund to comply with each of its covenants and agreements contained in paragraphs (a) through (j) of Article 7 above. 20 9. Indemnity and Contribution. (a) Each of the Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (a "controlling person") from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Underwriter or any such controlling person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, any Omitting Prospectus or the Prospectus (as amended or supplemented if the Fund shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission based upon information relating to any Underwriter or furnished to the Fund in writing by any Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Fund shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Adviser, their respective directors, and each officer of the Fund who signs the Registration Statement and each person, if any, who controls the Fund or the Adviser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus (as amended or supplemented if the Fund shall have furnished any amendments or supplements thereto), any preliminary prospectus, or any Omitting Prospectus, or caused by any 21 omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use in the Registration Statement, the Prospectus, any amendment or supplement thereto, any preliminary prospectus or any Omitting Prospectus. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of paragraph (a) or (b) of this Section 7, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (A) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (B) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Fund, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Fund within the meaning of either such Section, and (C) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Adviser, its directors and each person, if any, who controls the Adviser within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by 22 Morgan Stanley. In the case of any such separate firm for the Fund and such directors, officers and control persons of the Fund, such firm shall be designated in writing by the Fund. In the case of any such separate firm for the Adviser and such directors and control persons of the Adviser, such firm shall be designated in writing by the Adviser. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if, in the absence of any settlement, there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened 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 on claims that are the subject matter of such proceeding. (d) To the extent the indemnification provided for in paragraph (a) or (b) of this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Adviser on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Fund or the Adviser on the one hand and of the Underwriters on the other hand shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Fund on the one hand and the total underwriting discounts and commissions received by the Underwriters on the other hand, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Shares. The relative 23 fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund or the Adviser on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (e) The Fund, the Adviser and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) of this Section 9. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) of this Section 9 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) The indemnity and contribution provisions contained in this Section 9 and the representations and warranties of the Fund and the Adviser contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, its officers or directors or any person controlling any Underwriter, the Adviser, its officers or directors or any person controlling the Adviser or the Fund, 24 its officers or directors or any person controlling the Fund and (iii) acceptance of and payment for any of the Shares. (g) It is understood that this indemnity and contribution agreement shall have no effect on any other agreement or arrangement between the Fund and the Adviser with respect to indemnity and contribution. 10. Termination. This Agreement shall be subject to termination by notice given by you to the Fund, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, either of the New York Stock Exchange or the National Association of Securities Dealers, Inc., (ii) trading of any securities of the Fund shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities shall have been declared by either federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in United States financial markets or any calamity or crises that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event singly or together with any other such events makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. If this Agreement is terminated pursuant to this Section 10, such termination shall be without liability of any party to any other party. 11. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date, any one or more of the Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to 25 purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased, and arrangements satisfactory to you and the Fund for the purchase of such Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Fund and the Adviser. In any such case either you or the Fund shall have the right to postpone the Closing Date but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Fund or the Adviser to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Fund or the Adviser shall be unable to perform its obligations under this Agreement, the Fund or the Adviser, as the case may be, will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 26 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 14. Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, ROYCE VALUE TRUST, INC. By___________________________________ QUEST ADVISORY CORP. By___________________________________ Accepted, August [ ], 1996 MORGAN STANLEY & CO. INCORPORATED A.G. EDWARDS & SONS, INC. PAINWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. Acting on behalf of themselves and the several Underwriters named in Schedule I hereto. By MORGAN STANLEY & CO. INCORPORATED By_________________________________ 27 SCHEDULE I
Number of Shares To Underwriter Be Purchased ----------- ------------ Morgan Stanley & Co. Incorporated. . . . . . . A.G. Edwards & Sons, Inc.. . . . . . . . . . . PainWebber Incorporated. . . . . . . . . . . . Prudential Securities Incorporated . . . . . . Smith Barney Inc.. . . . . . . . . . . . . . . [NAMES OF OTHER UNDERWRITERS]. . . . . . . . . --------- Total. . . . . . . . . . . . . . . . --------- ---------
EX-99.(H)2 5 EXHIBIT (H)2 MORGAN STANLEY & CO. Incorporated 1251 Avenue of the Americas New York, New York 10020 MASTER AGREEMENT AMONG UNDERWRITERS August 1, 1982 Dear Sirs: From time to time we may invite you (and others) to participate on the terms set forth herein as underwriter in connection with certain public offerings of securities that are managed by us. If we invite you to participate in a specific offering (an "Offering") to which this Master Agreement Among Underwriters shall apply, we will send you, by wire, telex or other written means, an agreement among underwriters, substantially in the form of Exhibit A hereto (an "AAU"). Any such AAU may exclude or revise such provisions of this Master Agreement Among Underwriters or may contain such additional provisions as you and we mutually deem appropriate. An Underwriters' Questionnaire to be used in connection with such Offerings is attached as Exhibit B hereto. Each AAU shall relate to a specific Offering and shall identify (i) the securities to be offered, their principal terms, the issuer thereof and, if different from the issuer, the seller or sellers of such securities, (ii) the underwriting agreement providing for the purchase of such securities by the several underwriters and whether such agreement provides the several underwriters with an option to purchase additional securities to cover over-allotments, (iii) the price at which such securities are to be purchased by the several underwriters from the seller or sellers thereof (or a formula establishing the maximum such price), (iv) the offering terms, including, if applicable, the public offering price, concession, reallowance and management fee with respect to such securities, (v) the manager or managers for such Offering and (vi) if applicable, the trustee for the indenture under which such securities will be issued. Each AAU shall also set forth your proposed participation in the Offering to which it relates and you hereby agree to accept such participation on the terms set forth or contemplated herein and in such AAU without further action on your part. YOU MAY DECLINE SUCH PARTICIPATION ONLY IF WE RECEIVE BY WIRE, TELEX OR OTHER WRITTEN MEANS A NOTICE FROM YOU TO THAT EFFECT BEFORE THE TIME SPECIFIED IN SUCH AAU FOR SUCH A NOTICE. IF WE DO NOT RECEIVE SUCH A NOTICE BY SUCH TIME, SUCH AAU SHALL CONSTITUTE A VALID AND BINDING CONTRACT BETWEEN US. Unless we have received by wire, telex or other written means a notice from you stating exceptions to the Underwriters' Questionnaire attached as Exhibit B hereto before the time specified in an AAU for such a notice, you hereby confirm that you have no exceptions in connection with the Offering to which such AAU relates. Except to the extent an AAU provides otherwise, you and we hereby agree that the following general provisions shall be incorporated by reference in each AAU. For purposes of such general provisions, the term Applicable AAU means the AAU incorporating such general provisions by reference; the term Agreement means the Applicable AAU including the general provisions incorporated therein by reference as it applies to the Offering identified in such Applicable AAU; the terms Securities, Issuer, Underwriting Agreement, Underwriters, Manager and Trustee shall have the meanings set forth in the Applicable AAU; the term Firm Securities means the Securities that the several Underwriters are initially committed to purchase under the Underwriting Agreement; and the term Additional Securities means the Securities, if any, that the several Underwriters have an option to purchase under the Underwriting Agreement to cover over-allotments. I. 1.1. You understand that the Issuer has filed with the Securities and Exchange Commission (the "Commission") a registration statement including a prospectus relating to the Securities. If the registration statement relates to securities to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "1933 Act"), the term Registration Statement means such registration statement as amended to the date of the Underwriting Agreement. Otherwise, the term Registration Statement means such registration statement as amended at the time when it becomes effective. The term Prospectus means the prospectus, together with the final prospectus supplement, if any, relating to the offering of the Securities, filed pursuant to Rule 424 under the 1933 Act. The term preliminary prospectus means any preliminary prospectus relating to the offering of the Securities or any preliminary prospectus supplement together with a prospectus relating to the offering of the Securities. As used herein the terms Registration Statement, Prospectus and preliminary prospectus shall include in each case the material, if any, incorporated by reference therein. 1.2. You authorize the Manager, on your behalf, to determine the form of the Underwriting Agreement and to execute and deliver to the seller or sellers (collectively, the "Seller") of the Securities the Underwriting Agreement to purchase (i) up to the amount of Firm Securities set forth in the Applicable AAU and (ii) if the Manager elects on behalf of the several Underwriters to exercise any option to purchase Additional Securities, up to the amount of Additional Securities set forth in the Applicable AAU, subject, in each case, to reduction pursuant to Article III. The amount of Firm Securities set forth opposite each Underwriter's name in the Underwriting Agreement plus any additional Firm Securities which you may become obligated to purchase under the Underwriting Agreement or Article X hereof is hereinafter referred to as the original purchase obligation of such Underwriter and the ratio which such original purchase obligation bears to the total amount of Firm Securities set forth in the Underwriting Agreement is hereinafter referred to as the underwriting percentage of such Underwriter. II. 2.1. You authorize the Manager to act as manager of the offering of the Securities for sale by the Underwriters (the "Underwriters' Securities") or by the Seller pursuant to delayed delivery contracts (the "Contract Securities"), if any, contemplated by the Underwriting Agreement. You authorize the Manager to (i) vary the offering terms of the Securities in effect at any time, including, if applicable, the public offering price, concession and reallowance, (ii) purchase any or all of the Additional Securities for the accounts of the several Underwriters pursuant to the Underwriting Agreement, (iii) determine, within the 2 limits of any formula set forth in the Applicable AAU, on your behalf, the price at which the Securities are to be purchased by the several Underwriters from the Seller, (iv) agree, on your behalf, to any addition to, change in or waiver of any provision of the Underwriting Agreement (other than a change in the purchase price of the Securities from that contemplated by the Applicable AAU or an increase of your original purchase obligation) and (v) take any other action as may seem advisable to the Manager in respect of the offering of the Securities. 2.2. The public offering of the Securities is to [sic] made as soon after the Underwriting Agreement is entered into by the Seller and the Manager, as in the Manager's judgment is advisable, on the terms and conditions set forth in the Prospectus and the Applicable AAU. Any public advertisement of the offering of the Securities shall be made by the Manager on behalf of the Underwriters on such date as the Manager shall determine. You agree not to advertise such offering prior to the date of the Manager's advertisement thereof without the Manager's consent. Any advertisement you may make of such offering after such date will be your own responsibility and at your own expense. 2.3. You authorize the Manager to sell for your account to institutions such Securities purchased by you from the Seller as the Manager shall determine. Except for sales for the accounts of Underwriters designated by a purchasing institution, aggregate sales of Securities to institutions shall be made for the accounts of the several Underwriters as nearly as practicable in their respective underwriting percentages. 2.4. You authorize the Manager to sell for your account to dealers such Securities purchased by you from the Seller as the Manager shall determine. Sales of Securities to dealers shall be made for the account of each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for such sales bears to all Securities so held. 2.5. The Manager will advise you promptly, on the date of the public offering, as to the Securities purchased by you which you shall retain for direct sale. At any time prior to the termination of the Agreement, any Securities purchased by you, which are held by the Manager for sale for your account as set forth above but not sold, may, on your request and at the Manager's discretion, be released to you for direct sale, and Securities so released to you shall no longer be deemed held for sale by the Manager. 2.6. From time to time prior to the termination of the Agreement, on the request of the Manager, you will advise the Manager of the amount of Securities remaining unsold which were retained by or released to you for direct sale and of the amount of Securities and other securities of the Issuer remaining unsold which were delivered to you pursuant to Article IV hereof, and, on the request of the Manager, you will release to the Manager any such Securities and other securities remaining unsold (i) for sale by the Manager for your account to institutions or dealers, (ii) for sale by the Seller pursuant to delayed delivery contracts or (iii) if, in the Manager's opinion, such Securities or other securities are needed to make delivery against sales made pursuant to Article IV hereof. III. 3.1. You agree that arrangements for sales of Contract Securities will be made only through the Manager acting either directly or through dealers (including Underwriters acting as dealers), and you authorize the Manager to act on your behalf in making such arrangements. The aggregate amount of Securities to be purchased by the several Underwriters shall be reduced by the respective amounts of Contract Securities attributed to such Underwriters as hereinafter provided. Subject to the provisions of Section 3.2, the aggregate amount of Contract Securities shall be attributed to the Underwriters as nearly as practicable in their respective underwriting percentages, except that, as determined by the Manager in its discretion, (i) 3 Contract Securities directed and allocated by a purchaser to particular Underwriters shall be attributed to such Underwriters and (ii) Contract Securities for which arrangements have been made for sale through dealers shall be attributed to each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for sales to dealers bear to all Securities so held. The fee with respect to Contract Securities payable to the Manager for the accounts of the Underwriters pursuant to the Underwriting Agreement shall be credited to the accounts of the respective Underwriters in proportion to the Contract Securities attributed to such Underwriters pursuant to the provisions of this Section 3.1, less, in the case of each Underwriter, the commission to dealers on Contract Securities sold through dealers and attributed to such Underwriter. 3.2. If the amount of Contract Securities attributable to an Underwriter pursuant to Section 3.1 would exceed such Underwriter's original purchase obligation reduced by the amount of Underwriters' Securities sold by or on behalf of such Underwriter, such excess shall not be attributed to such Underwriter, and such Underwriter shall be regarded as having acted only as a dealer with respect to, and shall receive only the commission to dealers on, such excess. IV. 4.1. You authorize Morgan Stanley & Co. Incorporated to buy and sell (i) Securities, (ii) shares of common stock ("Common Stock") of the Issuer, if the Securities are Common Stock or securities of the Issuer that may be exchanged for or converted into Common Stock, and (iii) any other securities of the Issuer designated in the Applicable AAU, in addition to Securities sold pursuant to Article II hereof, in the open market or otherwise, for long or short account, on such terms as it shall deem advisable, and to over-allot in arranging sales. Such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in their respective underwriting percentages. Any securities which may have been purchased by Morgan Stanley & Co. Incorporated for stabilizing purposes in connection with the offering of the Securities prior to the execution of the Applicable AAU shall be treated as having been purchased pursuant to this Section 4.1 for the accounts of the several Underwriters. At no time shall your net commitment pursuant to the foregoing authorization exceed 10% of your original purchase obligation. On demand you will take up and pay for any securities of the Issuer so purchased for your account and deliver against payment any securities of the Issuer so sold or over-allotted for your account. Morgan Stanley & Co. Incorporated agrees to notify you if it engages in any stabilization transaction requiring reports to be filed pursuant to Rule 17a-2 under the Securities Exchange Act of 1934 (the "1934 Act") and to notify you of the date of termination of stabilization. You agree to file with Morgan Stanley & Co. Incorporated any reports required of you pursuant to such Rule not later than five business days following the day upon which stabilization was terminated and you authorize Morgan Stanley & Co. Incorporated to file on your behalf with the Commission any reports required by such Rule. 4.2. If pursuant to the provisions of Section 4.1 and prior to the termination of the Agreement (or prior to such earlier date as Morgan Stanley & Co. Incorporated may have determined) Morgan Stanley & Co. Incorporated purchases or contracts to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, you for direct sale, or any Securities which may have been issued on transfer or in exchange for such Securities, and which Securities were therefore not effectively placed for investment by you, you authorize Morgan Stanley & Co. Incorporated either to charge your account with an amount equal to the concession to dealers with respect thereto, which amount shall be credited against the cost of such Securities, or to require you to repurchase such Securities at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends and commissions, if any. 4 4.3. If the Securities are Common Stock or securities of the Issuer that may be exchanged for or converted into Common Stock, you agree that you will not, without the advanced approval of Morgan Stanley & Co. Incorporated, buy, sell, deal or trade in (i) any Common Stock, (ii) any security of the Issuer convertible into Common Stock or (iii) any right or option to acquire or sell Common Stock or any security of the Issuer convertible into Common Stock, for your own account or for the account of a customer, except: (a) as provided for in the Agreement or the Underwriting Agreement; (b) that you may convert any security of the Issuer convertible into Common Stock owned by you and sell the Common Stock acquired upon such conversion and that you may deliver Common Stock owned by you upon the exercise of any option written by you as permitted by the provisions set forth herein; (c) in brokerage transactions on unsolicited orders which have not resulted from activities on your part in connection with the solicitation of purchases and which are executed by you in the ordinary course of your brokerage business; and (d) that on or after the date of the initial public offering of the Securities, you may execute covered writing transactions in options to acquire Common Stock, when such transactions are covered by Securities, for the accounts of customers. An opening uncovered writing transaction in options to acquire Common Stock for your account or for the account of a customer shall be deemed, for purposes of this Section 4.3, to be a sale of Common Stock which is not unsolicited. The term "opening uncovered writing transaction in options to acquire" as used above means a transaction where the seller intends to become a writer of an option to purchase any Common Stock which he does not own. An opening uncovered purchase transaction in options to sell Common Stock for your account or for the account of a customer shall be deemed, for purposes of this paragraph, to be a sale of Common Stock which is not unsolicited. The term "opening uncovered purchase transaction in options to sell" as used above means a transaction where the purchaser intends to become an owner of an option to sell Common Stock which he does not own. 4.4. If the Securities are not shares of Common Stock or securities of the Issuer that may be exchanged for or converted into Common Stock, you agree that you will not bid for or purchase, or attempt to induce any other person to purchase, any Securities or any other securities of the Issuer designated in the Applicable AAU other than (i) as provided for in the Agreement or the Underwriting Agreement, (ii) as approved by Morgan Stanley & Co. Incorporated or (iii) as a broker in executing unsolicited orders. 4.5. You represent that you have not participated, since you were invited to participate in the offering of the Securities, in any transaction prohibited by Sections 4.3 or 4.4 and that you have at all times complied with the provisions of Rule 10b-6 of the Commission applicable to such offering. V. 5.1. On the date on which the Underwriters are required to pay the Seller for the Firm Securities, at the office of Morgan Stanley & Co. Incorporated, 55 Water Street, New York, New York, prior to 8:45 A.M. (New York City time) you will deliver to the Manager a certified or official bank check, payable to the order of Morgan Stanley & Co. Incorporated in New York Clearing House funds (or other next day funds), for (i) an amount equal to the public offering price less the selling concession in respect of the Firm 5 Securities to be purchased by you, (ii) an amount equal to the public offering price less the selling concession in respect of such of the Firm Securities to be purchased by you as shall have been retained by or released to you for direct sale or (iii) the amount set forth or indicated in the Applicable AAU, as the Manager shall advise. You will make similar payment as the Manager may direct for Additional Securities, if any, to be purchased by you on the date specified by the Manager for such payment. The Manager will make payment to the Seller against delivery to the Manager for your account of the Securities to be purchased by you and the Manager will deliver to you the Securities paid for by you which shall have been retained by or released to you for direct sale. Unless you promptly give the Manager instructions otherwise, if transactions in the Securities may be settled through the facilities of The Depository Trust Company, payment for and delivery of Securities purchased by you will be made through such facilities, if you are a member, or, if you are not a member, settlement may be made through your ordinary correspondent who is a member. VI. 6.1. You authorize the Manager to charge your account as compensation for the Manager's services in connection with the Securities, including the purchase from the Seller and the management of the offering of the Securities, the amount, if any, set forth as the Management Fee in the Applicable AAU. 6.2. You authorize the Manager to charge your account with your underwriting percentage of all expenses incurred by the Manager under the Agreement in connection with the offering of the Securities or in connection with the purchase, carrying and sale of any securities of the Issuer under the Agreement. VII. 7.1. You authorize the Manager to advance the Manager's own funds for your account, charging current interest rates, or to arrange loans for your account for the purpose of carrying out the provisions of the Agreement, and in connection therewith, to hold or pledge as security therefor all or any securities of the Issuer which the Manager may be holding for your account under the Agreement. 7.2. Out of payment received by the Manager for Securities sold for your account which have been paid for by you, the Manager will remit to you promptly an amount equal to the price paid by you for such Securities. 7.3. The Manager may deliver to you from time to time against payment, for carrying purposes only, any securities of the Issuer purchased by you or for your account under the Agreement which the Manager is holding for sale for your account but which are not sold and paid for. You will redeliver to the Manager against payment any securities of the Issuer delivered to you for carrying purposes at such times as the Manager may demand. 6 VIII. 8.1. The Agreement shall terminate 30 days after the date of the initial public offering of the Securities unless sooner terminated by the Manager. The Manager may at its discretion by notice to you prior to the termination of the Agreement alter any of the terms or conditions of offering determined pursuant to Article II or III hereof, or terminate or suspend the effectiveness of Article IV hereof, or any part thereof. No termination or suspension pursuant to this paragraph shall affect the Manager's authority under Article IV hereof to cover any short position incurred under the Agreement. 8.2. Upon termination of the Agreement or prior thereto at the Manager's discretion, the Manager shall deliver to you any Securities purchased by you from the Seller and held by the Manager for sale for your account to institutions and dealers but not sold and paid for and any securities of the Issuer which are held by the Manager for your account pursuant to the provisions of Article IV hereof. If at the termination of the Agreement the aggregate amount of any securities of the Issuer so held and not sold and paid for does not exceed 10% of the aggregate amount of Securities, Morgan Stanley & Co. Incorporated may, in its discretion, sell for the accounts of the several Underwriters any such securities so held, at such prices, on such terms and in such manner as it may determine. As soon as practicable after termination of the Agreement, your account shall be settled and paid. The Manager may reserve from distribution such amount as the Manager deems advisable to cover possible additional expenses. The determination by the Manager of the amount so to be paid to or by you shall be final and conclusive. Any of your funds in the Manager's hands may be held with the Manager's general funds without accountability for interest. 8.3. Notwithstanding any settlement on the termination of the Agreement, you agree to pay any transfer taxes which may be assessed and paid after such settlement on account of any sales or transfers under the Agreement for your account and your underwriting percentage of (i) all expenses incurred by the Manager in investigating or defending against any claim or proceeding which is asserted or instituted by any party (including any governmental or regulatory body) other than an Underwriter relating to the Registration Statement, any preliminary prospectus or Prospectus (or any amendment or supplement thereto) and (ii) any liability, including attorneys' fees, incurred by the Manager in respect of any such claim or proceeding, whether such liability shall be the result of a judgment or as a result of any settlement agreed to by the Manager, other than any such expense or liability as to which the Manager receives indemnity pursuant to Section 8.4 or indemnity or contribution pursuant to the Underwriting Agreement. 8.4. You agree to indemnify and hold harmless each other Underwriter and each person, if any, who controls any such Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the extent and upon the terms which you agree to indemnify and hold harmless the Seller, the Issuer, its directors, its officers who signed the Registration Statement and any person controlling the Seller or the Issuer as set forth in the Underwriting Agreement. 8.5. Regardless of any termination of the Agreement, your agreements contained in Sections 8.3 and 8.4 shall remain operative and in full force and effect regardless of (i) any termination of the Underwriting Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Seller or Issuer, its directors or officers or any person controlling the Seller or Issuer and (iii) acceptance of and payment for any Securities. IX. 7 9.1. You understand that it is your responsibility to examine the Registration Statement, the Prospectus, any amendment or supplement thereto relating to the offering of the Securities, any preliminary prospectus and the material, if any, incorporated by reference therein and you will familiarize yourself with the terms of the Securities and the other terms of the offering thereof which are to be reflected in the Prospectus and the Applicable AAU. The Manager is authorized, with the approval of counsel for the Underwriters, to approve on your behalf any amendments or supplements to the Registration Statement or the Prospectus. 9.2. You will keep an accurate record of the names and addresses of all persons to whom you give copies of the Registration Statement, the Prospectus or any preliminary prospectus (or any amendment or supplement thereto), and, when furnished with any subsequent amendment to the Registration Statement, any subsequent prospectus or any memorandum outlining changes in the Registration Statement or any prospectus, you will, upon request of the Manager, promptly forward copies thereof to such persons. 9.3. You confirm that the information that you have given or are deemed to have given in response to the Underwriters' Questionnaire attached as Exhibit B hereto which information has been furnished to the Issuer for use in the Registration Statement or the Prospectus is correct. You will notify the Manager immediately of any development before the termination of the Agreement which makes untrue or incomplete any information that you have given or are deemed to have given in response to the Underwriters' Questionnaire. 9.4. Unless you have promptly notified the Manager in writing otherwise, your name as it should appear in the Prospectus and your address are set forth on the signature pages hereof. 9.5. You represent that your commitment to purchase the Securities will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the 1934 Act or of any similar provision of any applicable rules of any securities exchange to which you are subject. 9.6. You represent that you are a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or that you are a foreign bank or dealer not eligible for membership in the NASD. In making sales of Securities, if you are such a member, you agree to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice, or, if you are such a foreign bank or dealer, you agree to comply with such Interpretation and Sections 8, 24 and 36 of such Article as though you were such a member and Section 25 of such Article as it applies to a nonmember broker or dealer in a foreign country. 9.7. The Manager will file a Further State Notice with the Department of State of New York, if required. X. 10.1. If the Underwriting Agreement is terminated as permitted by the terms thereof, your obligations hereunder with respect to the offering of the Securities shall immediately terminate except (i) as set forth in Section 8.5, (ii) that you shall remain liable for your underwriting percentage of all expenses and for any purchases or sales which may have been made for your account pursuant to the provisions of Article IV hereof and (iii) that such termination shall not affect any obligations of any defaulting Underwriter. 8 10.2. If any Underwriter shall default in its obligations (i) pursuant to Section 4.1, (ii) to pay amounts charged to its account pursuant to Section 6.2 or (iii) pursuant to Section 8.3, 8.4 or 10.1, you will assume your proportionate share (determined on the basis of the respective underwriting percentages of the non-defaulting Underwriters) of such obligations, but no such assumption shall relieve any defaulting Underwriter from liability for its default. 10.3. The Manager is authorized to arrange for the purchase by others (including the Manager or any other Underwriter) of any Securities not purchased by any defaulting Underwriter. If such arrangements are made, the respective amounts of Securities to be purchased by the remaining Underwriters and such other person or persons, if any, shall be taken as the basis for all rights and obligations hereunder, but this shall not relieve any defaulting Underwriter from liability for its default. 10.4. If any Underwriter shall default in its obligation to purchase the amount of Firm Securities or Additional Securities which it has agreed to purchase under the Underwriting Agreement and to the extent that arrangements shall not have been made by the Manager for others to assume the obligations of such defaulting Underwriter, each non-defaulting Underwriter severally agrees to assume, at the Manager's request, its share of the obligations of such defaulting Underwriter in the proportion which the amount of Firm Securities set forth opposite its name in the Underwriting Agreement bears to the aggregate amount of Firm Securities set forth opposite the names of all non-defaulting Underwriters in the Underwriting Agreement, or in such proportions as the Manager may specify, provided that in no event shall the amount of Securities which any Underwriter has agreed to purchase be increased pursuant to this Section 10.4 and the Underwriting Agreement, without the written consent of such Underwriter, by an amount in excess of one-ninth of the amount of Securities which such Underwriter agreed to purchase before giving effect to any such increase. No such assumption shall relieve any default Underwriter from liability for its default. XI. 11.1. If you are a foreign bank or dealer and you are not registered as a broker-dealer under Section 15 of the 1934 Act, you agree that while you are acting as an Underwriter in respect of the Securities and in any event during the term of the Agreement, you will not directly or indirectly effect in, or with persons who are nationals or residents of, the United States any transactions (except for the purchases provided for in the Underwriting Agreement and transactions contemplated by Articles II and IV hereof) in (i) Securities, (ii) Common Stock, if the Securities are Common Stock or securities of the Issuer that may be exchanged for or converted into Common Stock or (iii) any other securities of the Issuer designated in the Applicable AAU. 11.2. If you are a foreign bank or dealer, you represent that in connection with sales and offers to sell Securities made by you outside the United States (a) you will not offer or sell any Securities in any jurisdiction except in compliance with applicable laws and (b) you will either furnish to each person to whom any such sale or offer is made a copy of the then current preliminary prospectus, if any, or of the Prospectus (as then amended or supplemented), as the case may be, or inform such person that such preliminary prospectus, if any, or Prospectus will be available upon request. Any offering material in addition to the then current preliminary prospectus or the Prospectus furnished by you to any person in connection with any offers or sales referred to in the preceding sentence (i) shall be prepared and so furnished at your sole risk and expense and (ii) shall not contain information relating to the Securities or the Issuer which is inconsistent in any respect with the information contained in the then current preliminary prospectus, if any, or in the Prospectus (as then amended or supplemented), as the case may be. It is understood that no action has been 9 taken by the Manager, the Seller or the Issuer to permit a public offering in any jurisdiction other than the United States where action would be required for such purpose. XII. 12.1. Nothing contained in this Master Agreement Among Underwriters or the Agreement constitutes you partners with the Manager or with the other Underwriters and the obligations of you and of each of the other Underwriters are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1954, as amended. 12.2. The Manager shall be under no liability to you for any act or omission except for obligations expressly assumed by the Manager in the Agreement. 12.3. This Master Agreement Among Underwriters may be terminated by either party hereto upon five business days' written notice to the other party; provided that with respect to any Offering for which an AAU was sent prior to such notice, this Master Agreement Among Underwriters as it applies to such Offering shall remain in full force and effect and shall terminate with respect to such Offering in accordance with Article VIII hereof. 12.4. This Master Agreement Among Underwriters and the Agreement shall be governed by and construed in accordance with the laws of the State of New York. Please confirm your acceptance of this Master Agreement Among Underwriters by signing and returning to us the enclosed duplicate copy hereof. Very truly yours, MORGAN STANLEY & CO. Incorporated By Managing Director Confirmed and accepted as of August 1, 1982 .............................. (Name of Underwriter) .............................. .............................. (Address) By ........................... 10 Title: (If person signing is not an officer or partner, please attach instrument of authorization.) EXHIBIT A [name of participating underwriter] MORGAN STANLEY & CO. INCORPORATED AGREEMENT AMONG UNDERWRITERS [date] [Name of Issuer] [Title of Securities] Dear Sirs: [Name of Issuer] (the "Issuer") proposes to issue and sell [specify amount] [Title of Securities] (the "Firm Securities") pursuant to the Underwriting Agreement, to be dated , 19 (the "Underwriting Agreement"), between the Issuer and ourselves (the "Manager"), on behalf of the several underwriters named therein (the "Underwriters").(1) [In addition, the several Underwriters shall have an option to purchase from [Name of Seller] an additional [specify amount] [Title of Securities] (the "Additional Securities") to cover over-allotments.](2) The term Securities shall mean the Firm Securities [and the Additional Securities].(2) Except to the extent supplemented or superseded by the terms set forth herein, the provisions contained in the Morgan Stanley & Co. Incorporated Master Agreement Among Underwriters, dated August 1, 1982 (the "Master Agreement"), are incorporated by reference herein. You hereby confirm your agreement with the Manager with respect to the offering of the Securities and with respect to the purchase by the Manager and the other Underwriters, including yourselves, severally of the Securities [for which delayed delivery contracts ("Delayed Delivery Contracts") are not entered into by the Issuer as contemplated in the Underwriting Agreement].(3) [You hereby agree that any action that the Manager is authorized to take, under the Underwriting Agreement, this Agreement or the Master Agreement may be taken by Morgan Stanley & Co. Incorporated on the Manager's behalf.](4) You hereby agree to purchase up to [specify amount] of Firm Securities [and up to [specify amount] of Additional Securities](2) pursuant to the Underwriting Agreement on the following terms: Price to Public:(5) Purchase Price:(5) Underwriting Fee: Selling Concession: Reallowance: [Fee for delayed delivery securities:](3) 1 Management Fee: Offering Date: Anticipated Closing Date: together with any other additional securities of the Issuer which you may be required to purchase pursuant to the Master Agreement. [Principal terms of Securities, if appropriate, e.g., yield, sinking funds, call protection, redemption rights.] [The trustee for the indenture under which the Securities will be issued is [Name of Trustee] [, a subsidiary of [Name of trustee's parent company].](6) [You will not, without the Manager's consent, sell any of the Securities to any account over which you exercise discretionary authority].(7) [The amount of the Securities you hereby agree to purchase may be reduced on the terms set forth in the Master Agreement by sales of Securities pursuant to Delayed Delivery Contracts.](3) [[Title of Restricted Securities] are hereby designated as "other Securities of the Issuer" referred in Sections 4.1, 4.4 and 11.1 of the Master Agreement.](8) Unless we receive a notice to the contrary by wire, telex or other written means from you by [specify time], you agree to accept your participation in the offering and confirm that you have no exceptions to the Underwriters' Questionnaire attached as Exhibit B to the Master Agreement. Please contact [insert name] at [insert phone number] of Morgan Stanley & Co. Incorporated or [insert name] at [insert phone number] of the [Issuer] if you have any questions relating to the offering of the Securities, including the terms of the Underwriting Agreement or any other matters. Very truly yours, MORGAN STANLEY & CO. Incorporated By .......................... Title: [MORGAN STANLEY & CO. Incorporated Name of Co-Manager By: MORGAN STANLEY & CO. 2 Incorporated By .......................... Title: ] (4) 1. Use the following alternate language if the Issuer is not the only seller of the Firm Securities: "[Names of Sellers] propose to sell [specify amount] [Title of Securities] (the "Firm Securities") of [Name of Issuer] (the "Issuer") pursuant to the Underwriting Agreement, to be dated , 19 (the "Underwriting Agreement"), among [Names of Sellers] and ourselves (the "Manager"), on behalf of the several underwriters named therein (the "Underwriters")." 2. Include bracketed material only if there is an over-allotment option. 3. Include bracketed material only if there are delayed delivery contracts. 4. Include bracketed material only if there are co-managers. 5. Include bracketed material only if there is an over-allotment option. 6. Include variable re-offering or formula price language if appropriate. 7. Include bracketed material only if the Issuer was not, immediately prior to filing the Registration Statement, subject to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. 8. Include bracketed material if trading in designated securities is to be restricted. 3 EXHIBIT B UNDERWRITERS' QUESTIONNAIRE In connection with each Offering governed by the Morgan Stanley & Co. Incorporated Master Agreement Among Underwriters, dated August 1, 1982, except as indicated in a reply to the applicable AAU, each underwriter participating in such Offering severally advises the Issuer that: (a) neither such underwriter nor any of its directors, officers or partners have a material relationship, as "material" is defined in Regulation C under the Securities Act of 1933, with the Issuer; (b) if the Registration Statement is on Form S-1, neither such underwriter nor any "group" (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) of which such underwriter is aware is the beneficial owner of more than 5% of any class of voting securities of the Issuer; (c) other than as may be stated in the Morgan Stanley & Co. Incorporated Master Agreement Among Underwriters, dated August 1, 1982, the Applicable AAU, the dealer agreement, if any, the Prospectus or the Registration Statement, such underwriter does not know and has no reason to believe that there is an intention to over-allot or that the price of any security may be stabilized to facilitate the offering of the Securities; (d) other than as may be stated in the Prospectus, such underwriter does not know of any other discounts or commissions to be allowed or paid to the underwriters or of any other items that would be deemed by the National Association of Securities Dealers, Inc. to constitute underwriting compensation for purposes of the Association's Rules of Fair Practice and such underwriter does not know of any discounts or commissions to be allowed or paid to dealers, including any cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the Securities; (e) if the Securities are to be issued under an indenture qualified under the Trust Indenture Act of 1939: (i) such underwriter (if a corporation) does not have outstanding nor has such underwriter assumed or guaranteed any securities issued otherwise than in its present corporate name; (ii) neither such underwriter nor any of its directors, officers or partners is an affiliate, as defined in Rule O-2 under the Trust Indenture Act of 1939, of the Trustee or its parent holding company, if any, and neither of them nor any of their directors or executive officers is a director, officer, partner, employee, appointee or representative of such underwriter as designated in said Act; and (iii) neither such underwriter nor any of its directors, executive officers or partners owns beneficially any shares of voting securities of the Trustee or its parent holding company, if any; and 1 (f) such underwriter has not prepared any report or memorandum for external use in connection with the offering of the Securities; and if the Registration Statement is on Form S-1, such underwriter has not prepared any engineering, management or similar reports or memoranda relating to broad aspects of the business, operations or products of the Issuer within the past twelve months (except for reports solely comprised of recommendations to buy, sell or hold the securities of the Issuer, unless such recommendations have changed within the past six months). If an underwriter notes an exception with respect to material of the type referred to in clause (f), such underwriter will send three copies of each item of such material, together with a statement as to distribution identifying classes of recipients and the number of copies distributed to each such class, to Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New York, New York 10020, Attention: Syndicate Department. As used herein, the term "beneficially" is defined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. 2 EX-99.(H)3 6 EXHIBIT (H)3 MORGAN STANLEY & CO. INCORPORATED 1251 Avenue of the Americas New York, New York 10020 MASTER DEALER AGREEMENT August 1, 1982 Dear Sirs: From time to time we may invite you (and others) to participate on the terms set forth herein as dealer in connection with certain public offerings of securities by one or more underwriters ("Underwriters") that are managed by us. If we invite you to participate in a specific offering (an "Offering") to which this Master Dealer Agreement shall apply, we will give you express notice (a "Pricing Wire") by wire, telex or other written means specifying (i) the securities to be offered and the issuer thereof, (ii) the offering terms, including, if applicable, the public offering price, concession and reallowance with respect to such securities and (iii) the extent to which the general provisions set forth in this Master Dealer Agreement shall apply. Each Pricing Wire shall also set forth your allotment for the Offering to which it relates and you hereby agree to accept such allotment on the terms set forth or contemplated herein and in such Pricing Wire without further action on your part. YOU MAY DECLINE SUCH ALLOTMENT ONLY IF WE RECEIVE BY WIRE, TELEX OR OTHER WRITTEN MEANS A NOTICE FROM YOU TO THAT EFFECT BEFORE THE TIME SPECIFIED IN SUCH PRICING WIRE FOR SUCH A NOTICE. IF WE DO NOT RECEIVE SUCH A NOTICE BY SUCH TIME, SUCH PRICING WIRE SHALL BE BINDING UPON YOU AND SHALL CONSTITUTE A RECONFIRMATION OF YOUR ACCEPTANCE OF THIS MASTER DEALER AGREEMENT. Except to the extent that the applicable Pricing Wire provides otherwise, you hereby agree as follows with respect to each Offering to which we invite you to participate as a dealer. For purposes of the following provisions, with respect to any Offering, the term Securities means the securities to be publicly offered; the term preliminary prospectus means any preliminary prospectus relating to the offering of the Securities or any preliminary prospectus supplement together with a prospectus relating to the offering of the Securities; the term Prospectus means the prospectus, together with the final prospectus supplement, if any, relating to the offering of the Securities, filed pursuant to Rule 424 under the Securities Act of 1933; and the terms Public Offering Price and Reallowance shall mean, respectively, the public offering price and reallowance, if any, then in effect with respect to the Securities. I. 1.1. Securities sold to you for reoffering shall be promptly offered to the public upon the terms set forth in the Prospectus and the Pricing Wire. If a Reallowance is in effect for the Offering, Securities may also be offered for sale at a concession from the Public Offering Price not in excess of the Reallowance to any Underwriter or to any other member of the National Association of Securities Dealers, Inc. (the "NASD") or to any foreign bank or dealer (not eligible for membership in the NASD), who enters into an agreement with us in the form of this Master Dealer Agreement and whom we have invited to participate as a dealer in connection with the Offering. 1.2. If the Securities are shares of common stock ("Common Stock") of the issuer thereof (the "Issuer") or securities of the Issuer that may be exchanged for or converted into Common Stock, you agree that you will not, without our approval in advance, at any time prior to the completion by you of distribution of Securities acquired by you pursuant to this Master Dealer Agreement and the applicable Pricing Wire, buy, sell, deal or trade in (i) any Common Stock, (ii) any security of the Issuer convertible into Common Stock or (iii) any right or option to acquire or sell Common Stock or any security of the Issuer convertible into Common Stock, for your own account or for the account of a customer, except: (a) as provided for in this Master Dealer Agreement, the applicable Pricing Wire, the agreement among underwriters, if any, or the underwriting agreement relating to the Securities; (b) that you may convert any security of the Issuer convertible into Common Stock owned by you and sell the Common Stock acquired upon such conversion and that you may deliver Common Stock owned by you upon the exercise of any option written by you as permitted by the provisions set forth herein; (c) in brokerage transactions on unsolicited orders which have not resulted from activities on your part in connection with the solicitation of 2 purchases and which are executed by you in the ordinary course of your brokerage business; and (d) that on or after the date of the initial public offering of the Securities, you may execute covered writing transactions in options to acquire Common Stock, when such transactions are covered by Securities, for the accounts of customers. An opening uncovered writing transaction in options to acquire Common Stock for your account or for the account of a customer shall be deemed, for purposes of this Section 1.2, to be a sale of Common Stock which is not unsolicited. The term "opening uncovered writing transaction in options to acquire" as used above means a transaction where the seller intends to become a writer of an option to purchase any Common Stock which he does not own. An opening uncovered purchase transaction in options to sell Common Stock for your account or for the account of a customer shall be deemed, for purposes of this paragraph, to be a sale of Common Stock which is not unsolicited. The term "opening uncovered purchase transaction in options to sell" as used above means a transaction where the purchaser intends to become an owner of an option to sell Common Stock which he does not own. 1.3. If the Securities are not shares of Common Stock or securities of the Issuer that may be exchanged for or converted into Common Stock, you agree that you will not bid for or purchase, or attempt to induce any other person to purchase, any Securities or any other securities of the Issuer designated in the Pricing Wire other than (i) as provided in this Master Dealer Agreement, the agreement among underwriters, if any, or the underwriting agreement relating to the Securities or (ii) as a broker in executing unsolicited orders. 1.4. You represent that you have not participated, since the date you were invited to participate in the offering of the Securities, in any transaction prohibited by Section 1.2 or 1.3 and that you have at all times complied with the provisions of Rule 10b-6 of the Securities and Exchange Commission applicable to such offering. 1.5. You agree to advise us from time to time upon request, prior to the termination of this Master Dealer Agreement as it applies to the offering of the Securities, of the amount of Securities remaining unsold which were purchased by you from us or from any other Underwriter or dealer for reoffering and, on our request, you will resell to us any such Securities remaining unsold at the purchase price thereof if, in our opinion, such Securities are needed to make delivery against sales made to others. 1.6. If prior to the termination of this Master Dealer Agreement as it applies to the offering of the Securities (or prior to such earlier date as we have 3 determined) we purchase or contract to purchase in the open market or otherwise any Securities which were purchased by you from us or from any other Underwriter or dealer for reoffering (including any Securities which may have been issued on transfer or in exchange for such Securities), and which Securities were therefore not effectively placed for investment by you, you authorize us either to charge your account with an amount equal to the concession from the Public Offering Price at which you purchased such Securities, which shall be credited against the cost of such Securities, or to require you to repurchase such Securities at a price equal to the total cost of such purchase, including any commissions and transfer taxes on redelivery. II. 2.1. If you purchase any Securities from us in connection with your participation as dealer in such Offering, you agree that such purchases will be evidenced by our written confirmation and will be subject to the terms and conditions set forth in the confirmation and in the Prospectus. 2.2. Securities purchased by you from us in connection with your participation as dealer in such Offering shall be paid for in full at (i) the Public Offering Price, (ii) such price less the applicable concession or (iii) the price set forth or indicated in the Pricing Wire, as we shall advise, at the office of Morgan Stanley & Co. Incorporated, 55 Water Street, New York, New York, at such time and on such day as we may advise you, by certified or official bank check payable in New York Clearing House funds (or other next day funds) to the order of Morgan Stanley & Co. Incorporated against delivery of the Securities. If you are called upon to pay the Public Offering Price for the Securities purchased by you, the applicable concession will be paid to you, less any amounts charged to your account pursuant to Article I above, after termination of this Master Dealer Agreement as it applies to the offering of the Securities. Unless you promptly give us written instructions otherwise, if transactions in the Securities may be settled through the facilities of The Depository Trust Company, payment for and delivery of Securities purchased by you will be made through such facilities, if you are a member, or, if you are not a member, settlement may be made through your ordinary correspondent who is a member. III. 3.1. We will advise you of the date and time of termination of this Master Dealer Agreement as it applies to the offering of the Securities or of any designated provisions hereof. This Master Dealer Agreement shall, in any event, terminate with respect to the offering of the Securities 30 days after the date of the initial public offering of the Securities unless sooner terminated by us. 4 IV. 4.1. In purchasing Securities, you will rely only on the Prospectus and on no other statements whatsoever, written or oral. 4.2. You represent that you are a member in good standing of the NASD or that you are a foreign bank or dealer, not eligible for membership in the NASD, which agrees not to offer or sell any Securities in, or to persons who are nationals or residents of, the United States. In making sales of Securities, if you are such a member, you agree to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice, or, if you are such a foreign bank or dealer, you agree to comply with such Interpretation and Sections 8, 24 and 36 of such Article as though you were such a member and Section 25 of such Article as it applies to a nonmember broker or dealer in a foreign country. 4.3. If you are a foreign bank or dealer, you represent that in connection with sales and offers to sell Securities made by you outside the United States (a) you will not offer or sell any Securities in any jurisdiction except in compliance with applicable laws and (b) you will either furnish to each person to whom any such sale or offer is made a copy of the then current preliminary prospectus, if any, or of the Prospectus (as then amended or supplemented), as the case may be, or inform such person that such preliminary prospectus, if any, or Prospectus will be available upon request. Any offering material in addition to the then current preliminary prospectus or the Prospectus furnished by you to any person in connection with any offers or sales referred to in the preceding sentence (i) shall be prepared and so furnished at your sole risk and expense and (ii) shall not contain information relating to the Securities or the Issuer which is inconsistent in any respect with the information contained in the then current preliminary prospectus, if any, or in the Prospectus (as then amended or supplemented), as the case may be. It is understood that no action has been taken by us or the Issuer to permit a public offering in any jurisdiction other than the United States where action would be required for such purpose. 4.4. You will not give any information or make any representations other than those contained in the Prospectus, or act as agent for the Issuer, any Underwriter or us. 4.5. You agree that we, as manager or co-manager of the offering of the Securities, have full authority to take such action as may seem advisable to us in respect of all matters pertaining to such offering. 5 4.6. Neither we, as manager, nor any Underwriter shall be under any liability to you for any act or omission, except for obligations expressly assumed by us in this Master Dealer Agreement. 4.7. All communications to us relating to the offering of the Securities shall be addressed to the Syndicate Department, Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New York, New York 10020. Unless you have otherwise notified us in writing, any notices to you shall be deemed to have been duly given if mailed or telegraphed to you at the address shown below. V. 5.1. Neither we, as manager, nor any Underwriter will have any responsibility with respect to the right of any dealer to sell Securities in any jurisdiction, notwithstanding any information we may furnish in that connection. VI. 6.1. This Master Dealer Agreement may be terminated by either party hereto upon five business days' written notice to the other party; provided that with respect to any Offering for which a Pricing Wire was sent prior to such notice, this Master Dealer Agreement as it applies to such Offering shall remain in full force and effect and shall terminate with respect to such Offering in accordance with Article III hereof. 6.2. This Master Dealer Agreement and each Pricing Wire shall be governed by and construed in accordance with the laws of the State of New York. Please confirm your acceptance of this Master Dealer Agreement by signing and returning to us the enclosed duplicate copy hereof. Very truly yours, MORGAN STANLEY & CO. INCORPORATED By Managing Director 6 Confirmed and accepted as of August 1, 1982 (Name of Dealer) (Address) By........................... Title: (If person signing is not an officer or partner, please attach instrument of authorization.) 7 EX-99.(J)(2) 7 EXHIBIT (J)(2) AMENDMENT TO CUSTODIAN CONTRACT Amendment to Custodian Contract between ROYCE VALUE TRUST, INC., a corporation organized and existing under the laws of Maryland, having a principal place of business at 1414 Avenue of the Americas, New York, NY 10019 (hereinafter called the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts 02110 (hereinafter called the "Custodian"). WHEREAS: The Fund and the Custodian are parties to a Custodian Contract dated October 20, 1986 (the "Custodian Contract"); WHEREAS: The Fund desires that the Custodian issue a letter of credit (the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual Insurance Company (the "Company") in accordance with the Continuing Letter of Credit and Security Agreement and that the Fund's obligations to the Custodian with respect to the Letter of Credit shall be fully collateralized at all times while the Letter of Credit is outstanding by, among other things, segregated assets of the Fund equal to 125% of the face amount of the Letter of Credit; WHEREAS: The Custodian Contract provides for the establishment of segregated accounts for proper Fund purposes upon Proper Instructions (as defined in the Custodian Contract); and WHEREAS: The Fund and the Custodian desire to establish a segregated account to hold the collateral for the Fund's obligations to the Custodian with respect to the Letter of Credit and to amend the Custodian Contract to provide for the establishment and maintenance thereof; WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto hereby amend the Custodian Contract as follows: 1. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Custodian Contract. 2. The Fund hereby instructs the Custodian to establish and maintain a segregated account (the "Letter of Credit Custody Account") for and in behalf of the Fund as contemplated by Section 2.11 for the purpose of collateralizing the Fund's obligations under this Amendment to the Custodian Contract. 3. The Fund shall deposit with the Custodian and the Custodian shall hold in the Letter of Credit Custody Account cash, U.S. government securities and other high-grade debt securities owned by the Fund acceptable to the Custodian (collectively "Collateral Securities") equal to 125% of the -2- face amount which the Company may draw under the Letter of Credit. Upon receipt of such Collateral Securities in the Letter of Credit Custody Account, the Custodian shall issue the Letter of Credit to the Company. 4. The Fund hereby grants to the Custodian a security interest in the Collateral Securities from time to time in the Letter of Credit Custody Account (the "Collateral") to secure the performance of the Fund's obligations to the Custodian with respect to the Letter of Credit, including, without limitation, under Section 5-114(3) of the Uniform Commercial Code. The Fund shall register the pledge of Collateral and execute and deliver to the Custodian such powers and instruments of assignment as may be requested by the Custodian to evidence and perfect the limited interest in the Collateral granted hereby. 5. The Collateral Securities in the Letter of Credit Custody Account may be substituted or exchanged (including substitutions or exchanges which increase or decrease the aggregate value of the Collateral) only pursuant to Proper Instructions from the Fund after the Fund notifies the Custodian of the contemplated substitution or exchange and the Custodian agrees that such substi- -3- tution or exchange is acceptable to the Custodian, and the Custodian shall not unreasonably withhold such agreement. 6. Upon any payment made pursuant to the Letter of Credit by the Custodian to the Company for the account of the Fund, the Custodian may withdraw from the Letter of Credit Custody Account Collateral Securities in an amount equal in value to the amount actually so paid. The Custodian shall have with respect to the Collateral so withdrawn all of the rights of a secured creditor under the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts at the time of such withdrawal and all other rights granted or permitted to it under law. 7. The Custodian will transfer upon receipt all income earned on the Collateral to the Fund custody account unless the Custodian receives Proper Instructions from the Fund to the contrary. 8. Upon the drawing by the Company of all amounts which may become payable to it under the Letter of Credit for the account of the Fund and the withdrawal of all Collateral Securities with respect thereto by the Custodian pursuant to Section 6 hereof, or upon the termination of that portion of the Letter of Credit issued for its -4- account by the Fund with the written consent of the Company, the Custodian shall transfer any Collateral Securities then remaining in the Letter of Credit Custody Account to another Fund custody account. 9. Collateral held in the Letter of Credit Custody Account shall be released only in accordance with the provisions of this Amendment to Custodian Contract. The Collateral shall at all times until withdrawn pursuant to Section 6 hereof remain the property of the Fund, subject only to the extent of the interest granted herein to the Custodian. 10. Notwithstanding any other termination of the Custodian Contract, the Custodian Contract shall remain in full force and effect with respect to the Letter of Credit Custody Account until transfer of all Collateral Securities pursuant to Section 8 hereof. 11. The Custodian shall be entitled to reasonable compensation for its issuance of the Letter of Credit and for its services in connection with the Letter of Credit Custody Account as agreed upon from time to time between the Fund and the Custodian. -5- 12. The Custodian Contract as amended hereby, shall be governed by, and construed and interpreted under, the laws of the Commonwealth of Massachusetts. 13. The parties agree to execute and deliver all such further documents and instruments and to take such further action as may be required to carry out the purposes of the Custodian Contract, as amended hereby. 14. Except as provided in this Amendment to Custody Contract, the Custodian Contract shall remain in full force and effect, without amendment or modification, and all applicable provisions of the Custodian Contract, as amended hereby, including, without limitation, Section 8 thereof, shall govern the Letter of Credit Custody Account and the rights and obligations of the fund and the Custodian under this Amendment to Custodian Contract. No provision of this Amendment to Custodian Contract shall be deemed to constitute a waiver of any rights of the Custodian under the Custodian Contract or under law. IN WITNESS WHEREOF, each of the parties has caused this Amendment to Custodian Contract to be executed in its name and -6- behalf by its duly authorized representatives and its seal to be hereunder affixed as of the 11th day of December, 1987. ROYCE VALUE TRUST, INC. By: CHARLES M. ROYCE ------------------------ Charles M. Royce, President STATE STREET BANK AND TRUST COMPANY By: E.D. HAWKES JR. ------------------------ Vice President -7- EX-99.(K)(2) 8 EXHIBIT (K)(2) ________________________________________________________________________________ REGISTRAR, TRANSFER AGENCY AND PAYING AGENCY AGREEMENT between ROYCE VALUE TRUST, INC. and STATE STREET BANK AND TRUST COMPANY ________________________________________________________________________________ TABLE OF CONTENTS
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 1 ARTICLE 2 FEES AND EXPENSE 3 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK 4 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND 4 ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION 5 ARTICLE 6 INDEMNIFICATION 6 ARTICLE 7 STANDARD OF CARE 8 ARTICLE 8 COVENANTS OF THE FUND AND THE BANK 8 ARTICLE 9 TERMINATION OF AGREEMENT 9 ARTICLE 10 ASSIGNMENT 9 ARTICLE 11 AMENDMENT 10 ARTICLE 12 MASSACHUSETTS LAW TO APPLY 10 ARTICLE 13 FORCE MAJEURE 10 ARTICLE 14 CONSEQUENTIAL DAMAGES 10 ARTICLE 15 MERGER OF AGREEMENT 10 ARTICLE 16 SURVIVAL 11 ARTICLE 17 SEVERABILITY 11 ARTICLE 18 COUNTERPARTS 11
REGISTRAR, TRANSFER AGENCY AND PAYING AGENCY AGREEMENT AGREEMENT made as of , 1996, by and between Royce Value Trust, Inc., a Maryland corporation, having its principal office and place of business at 1414 Avenue of the Americas, New York, NY 10019, (the 'Fund'), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the 'Bank'). WHEREAS, the Fund desires to appoint the Bank as its registrar, transfer agent, dividend paying agent and agent in connection with certain other activities and the Bank desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows; ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 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 for the Fund's authorized and issued shares of its Cumulative Preferred Stock ('Shares'), dividend paying agent and agent in connection with the payment of any redemption or liquidation proceeds as set out in the prospectus of the Fund, corresponding to the date of this Agreement. 1.02 The Bank agrees that it will perform the following services: (a) In accordance with procedures established from time to time by agreement between the Fund and the Bank, the Bank shall: (i) Issue and record the appropriate number of Shares as authorized and hold such Shares in the appropriate Shareholder account (ii) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate documentation; 1 (iii) Prepare and transmit payments for dividends and distributions declared by the Fund; (iv) Prepare and transmit payments in connection with the redemption of Shares as the payment of liquidation proceeds pursuant to instructions by the Fund; (v) Issue replacement certificates for those certificates alleged to have been lost, stolen or destroyed upon receipt by the Bank of indemnification satisfactory to the Bank and protecting the Bank and the Fund, and the Bank at its option, may issue replacement certificates in place of mutilated stock certificates upon presentation thereof and without such indemnity. 2 (b) In addition to and neither in lieu nor in contravention of the services set forth in the above paragraph (a), the Bank shall: (i) perform all of the customary services of a registrar, transfer agent and dividend paying agent consistent with those requirements in effect as of the date of this Agreement. The detailed definition, frequency, limitations and associated costs (if any) set out in the attached fee schedule, include but are not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, and mailing Shareholder reports to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts where applicable, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all registered Shareholders. (c) The Bank shall provide additional services on behalf of the Fund (i.e., escheatment services) which may be agreed upon in writing between the Fund and the Bank. ARTICLE 2 FEES AND EXPENSES 2.01 For the performance by the Bank pursuant to this Agreement, the Fund agrees to pay the Bank an annual maintenance fee as set out in the initial fee schedule attached hereto. Such fees and out-of-pocket expenses and advances identified under Section 2.02 below may be changed from time to time subject to mutual written agreement between the Fund and the Bank. 2.02 In addition to the fee paid under Section 2.01 above, the Fund agrees to reimburse the Bank for out-of-pocket expenses, including but not limited to confirmation production, postage, forms, telephone, microfilm, microfiche, tabulating proxies, records storage, or advances incurred by the Bank for the items set out in the fee schedule attached hereto. In addition, any other expenses incurred by the Bank at the request or with the consent of the Fund, will be reimbursed by the Fund. 2.03 The Fund agrees to pay all fees and reimbursable expenses within five days following the receipt of the respective billing notice. Postage and the cost of materials for mailing 3 of dividends, proxies, Fund reports and other mailings to all Shareholder accounts shall be advanced to the Bank by the Fund at least seven (7) days prior to the mailing date of such materials. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK The Bank represents and warrants to the Fund that: 3.01 It is a trust company duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts. 3.02 It is duly qualified to carry on its business in the Commonwealth of Massachusetts. 3.03 It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 3.04 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 3.05 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND The Fund represents and warrants to the Bank that: 4.01 It is a corporation duly organized and existing and in good standing under the laws of the State of Maryland. 4.02 It is empowered under applicable laws and by its Articles of Incorporation, as amended, and By-Laws to enter into and perform this Agreement. 4.03 All corporate proceedings required by said Articles of Incorporation, as amended, and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4.04 It is a closed-end, diversified investment company registered under the Investment Company Act of 1940, as amended. 4 4.05 To the extent required by federal securities laws a registration statement under the Securities Act of 1933, as amended is currently effective and appropriate state securities law filings have been made with respect to all Shares of the Fund being offered for sale; information to the contrary will result in immediate notification to the Bank. 4.06 It shall make all required filings under federal and state securities laws. ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION 5.01 The Fund acknowledges that the data bases, computer programs, screen formats, report formats, interactive design techniques, and other information furnished to the Fund by the Bank are provided solely in connection with the services rendered under this Agreement and constitute copyrighted (a) to use such programs and databases (i) solely on the Fund computers, or (ii) solely from equipment at the locations agreed to between the Fund and the Bank and (iii) in accordance with the Bank's applicable user documentation; (b) to refrain from copying or duplicating in any way (other than in the normal course of performing processing on the Funds' computers) any part of any Proprietary Information; (c) to refrain from obtaining unauthorized access trade secrets or propriety information of substantial value to the Bank. Such databases, programs, formats, designs, techniques and other information are collectively referred to below as 'Proprietary Information'. The Fund agrees that it shall treat all Proprietary Information as proprietary to the Bank and further agrees that it shall not divulge any Proprietary Information to any person or organization except as expressly permitted hereunder. The Fund agrees for itself and its employees and agents to any programs, data or other information not owned by the Funds', and if such access is accidently obtained, to respect and safeguard the same proprietary Information; 5 (d) to refrain from causing or allowing information transmitted from the Bank's computer to the Funds' terminal to be retransmitted to any other computer terminal or other device except as expressly permitted by the Bank, (such permission not to be unreasonably withheld); (e) that the Fund shall have access only to those authorized transactions as agreed to between the Fund and the Bank; and (f) to honor reasonable written requests made by the Bank to protect at the Bank's expense the rights of the Bank in Proprietary Information at common law and under applicable statutes. 5.02 If the transactions available to the Fund include the ability to originate electronic instructions to the Bank in order to (i) effect the transfer or movement of cash or Shares or (ii) transmit Shareholder information or other information, then in such event the Bank shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Bank from time to time. ARTICLE 6 INDEMNIFICATION 6.01 The Bank shall not be responsible for, and the Fund shall indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Bank or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct. (b) The Fund's lack of good faith, negligence or willful misconduct which arise out of the breach of any representation or warranty of the Fund hereunder. (c) The reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any previous transfer agent or 6 registrar. (d) The reliance on, or the carrying out by the Bank or its agents or subcontractors of any instructions or requests of the Fund. (e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. 6.02 At any time the Bank may apply to any officer of the Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Bank under this Agreement, and the Bank and its agents or subcontractors shall not be liable and shall be indemnified by the Fund for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. The Bank, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Bank or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change or authority of any person, until receipt of written notice thereof from the Fund. The Bank, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Fund, and the proper countersignature of any former transfer agent or former registrar, or of a co-transfer agent or co-registrar. 6.03 In order that the indemnification provisions contained in this Article 6 shall apply, upon the assertion of a claim for which the Fund may be required to indemnify the Bank, the Bank shall promptly notify the Fund of such assertion, and shall keep the Fund advised with respect to all developments concerning such claim. The Fund shall have the option to participate with the Bank in the defense of such claim or to defend against said claim in its own name or in the name of the Bank. The Bank shall in no case confess any claim or make any compromise in 7 any case in which the Fund may be required to idemnify the Bank except with the Fund's prior written consent. ARTICLE 7 STANDARD OF CARE 7.01 The Bank shall at all times act in good faith and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors unless said errors are caused by its negligence, bad faith, or willful misconduct of that of its employees. ARTICLE 8 CONVENANTS OF THE FUND AND THE BANK 8.01 The fund shall promptly furnish to the Bank the following: (a) A certified copy of the resolution of the Board of Directors of the Fund authorizing the appointment of the Bank and the execution and delivery of this Agreement. (b) A copy of the Articles of Incorporation, as amended, and By-Laws of the Fund and all amendments thereto. 8.02 The Bank hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 8.03 The Bank shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Bank agrees that all such records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 8 8.04 The Bank and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. 8.05 In cases of any requests or demands for the inspection of the Shareholder records of the Fund, the Bank will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. ARTICLE 9 TERMINATION OF AGREEMENT 9.01 This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other. 9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Fund. Additionally, the Bank reserves the right to charge for any other reasonable expenses associated with such termination and/or a charge equivalent to the average of three (3) month's fees. ARTICLE 10 ASSIGNMENT 10.1 Except as provided in Section 10.03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. 10.02 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 10.03 The Bank may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston EquiServe Limited Partnership, a Massachusetts limited partnership ('Boston EquiServe'), which is duly registered as a transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of 1934 ('Section 9 17A(c)(2)'), or (ii) a Boston EquiServe affiliate duly registered as a transfer agent pursuant to Section 17A(c)(2), provided, however, that the Bank shall be as fully responsible to the Fund for the acts and omissions of any subcontractor as it is for its own acts and omissions. ARTICLE 11 AMENDMENT 11.01 This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Directors of the Fund. ARTICLE 12 MASSACHUSETTS LAW TO APPLY 12.01 This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. ARTICLE 13 FORCE MAJEURE 13.01 In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. ARTICLE 14 CONSEQUENTIAL DAMAGES 14.01 Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. ARTICLE 15 MERGER OF AGREEMENT 15.01 This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. 10 ARTICLE 16 SURVIVAL 16.01 All provisions regarding indemnification, warranty, liability and limits thereon, and confidentiality and/or protection of proprietary rights and trade secrets shall survive the termination of this Agreement. ARTICLE 17 SEVERABILITY 17.01 If any provision or provisions of this Agreement shall be held to be invalid, unlawful, or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. ARTICLE 18 COUNTERPARTS 18.01 This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. Royce Value Trust, Inc. BY: __________________________________ ATTEST: - -------------------------------------- State Street Bank and Trust Company BY: __________________________________ Executive Vice President ATTEST: - -------------------------------------- EX-99.L 9 EXHIBIT L Venable, Baetjer and Howard, LLP 1800 Mercantile Bank & Trust Building Two Hopkins Plaza Baltimore, Maryland 21201-2978 (410) 244-7400, Fax (410) 244-7742 AUGUST 9, 1996 Brown & Wood LLP One World Trade Center New York, New York 10048-0557 Re: Royce Value Trust, Inc. Ladies and Gentlemen: We have acted as special Maryland counsel to Royce Trust, Inc., a Maryland corporation (the "Fund"), in connection with the issuance of 2,400,000 of its % Cumulative Preferred Stock, par value $.001 per share (the "Cumulative Preferred Stock"). As special Maryland counsel for the Fund, we are familiar with its Charter and Bylaws. We have examined the prospectus included in its Registration Statement on Form N-2 for the Cumulative Preferred Stock (Securities Act Registration No. 333-8039, Investment Company Act File No. 811-4875) (the "Registration Statement"), substantially in the form in which it is to become effective (the "Prospectus"). We are also familiar with the form of Articles Supplementary relating to the Cumulative Preferred Stock (the "Articles Supplementary") that have been filed as a exhibit to the Brown & Wood LLP August 9, 1996 Page Registration Statement. We have further examined and relied upon a certificate of the Maryland State Department of Assessments and Taxation ("SDAT") to the effect that the Fund is duly incorporated and existing under the laws of the State of Maryland and is in good standing and duly authorized to transact business in the State of Maryland. We have also examined and relied upon such corporate records of the Fund and other documents and certificates with respect to factual matters as we have deemed necessary to render the opinion expressed herein. We have assumed, without independent verification, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with originals of all documents submitted to us as copies. Based on such examination, we are of the opinion and so advise you that when Articles Supplementary have been filed with SDAT, and when the final terms of the issuance of the Cumulative Preferred Stock have been authorized by the Board of Directors pursuant to Section 2-203 of the Maryland General Corporation Law, the Cumulative Preferred Stock to be offered for sale pursuant to the Prospectus will have been duly authorized and, when thereafter sold, issued and paid for Brown & Wood LLP August 9, 1996 Page as contemplated by the Prospectus, will have been validly and legally issued and will be fully paid and nonassessable. This letter expresses our opinion with respect to the Maryland General Corporation Law governing matters such as due organization and the authorization and issuance of stock, but it does not extend to the securities or "Blue Sky" laws of Maryland, to federal securities laws or to other laws. You may rely upon our foregoing opinion in rendering your opinion to the Fund that is to be filed as an exhibit to the Registration Statement. We consent to the reference to us under the caption "Legal Matters" in the Prospectus and to the filing of this opinion as an exhibit to the Registration Statement. We do not thereby admit that we are "experts" within the meaning of the Securities Act of 1933 and the rules and regulations thereunder. This opinion may not be relied upon by any other person on or for any other purpose without our prior written consent. Very truly yours, /s/ Venable, Baetjer and Howard, LLP EX-99.(N)(1) 10 EXHIBIT (N)(1) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions 'Financial Highlights', 'Experts' and 'Financial Statements' and to the incorporation by reference of our report dated February 12, 1996, in this Registration Statement (Form N-2 No. 333-8039) of Royce Value Trust, Inc. ERNST & YOUNG LLP ERNST & YOUNG LLP New York, New York August 6, 1996 EX-99.(N)(2) 11 EXHIBIT (N)(2) [LETTERHEAD OF COOPERS & LYBRAND] CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Royce Value Trust, Inc.: We consent to the reference to our Firm under the caption 'Financial Highlights' in Post-Effective Amendment No. 21 to the Registration Statement of Royce Value Trust, Inc. on Form N-2 (File No. 333-8039) under the Securities Act of 1933. We further consent to the reference to our Firm under the heading 'Experts' in the Statement of Additional Information. COOPERS & LYBRAND LLP COOPERS & LYBRAND L.L.P. Boston, Massachusetts August 7, 1996 EX-27 12 EXHIBIT 27
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