-----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, LU991nEnlW0TglATjS4Z1UTQwy+v2O/9himxcF97iTUM0OK/Kcx5zEwUxD+H9sSw 9M+zGui+0QeYLvvlTSl8yQ== 0000950117-96-000940.txt : 19960820 0000950117-96-000940.hdr.sgml : 19960820 ACCESSION NUMBER: 0000950117-96-000940 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960819 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08039 FILM NUMBER: 96617568 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 497 1 ROYCE FUND 497 PROSPECTUS 2,400,000 SHARES ROYCE VALUE TRUST, INC. 8% CUMULATIVE PREFERRED STOCK LIQUIDATION PREFERENCE $25.00 PER SHARE ------------------------ The 8% Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the 'Fund') will be senior securities of the Fund. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. The Fund is a closed-end diversified management investment company. The Fund's primary investment objective is long-term capital appreciation, which it seeks by normally investing more than 75% of its assets in common stocks and securities convertible into common stocks of small and medium-sized companies. Quest Advisory Corp. is the Fund's investment adviser. Dividends on the Cumulative Preferred Stock offered hereby, at the annual rate of 8% of the liquidation preference of $25.00 per share, are cumulative from the Date of Original Issue thereof and are payable annually on December 23 in each year, commencing on December 23, 1996. During the Fund's last three fiscal years, distributions paid by the Fund on its Common Stock have consisted primarily of long-term capital gains, and it is currently expected that dividends paid on the Cumulative Preferred Stock similarly will consist primarily of long-term capital gains. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of long-term capital gains. It is a condition to its issuance that the Cumulative Preferred Stock be rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with the receipt of such rating, the composition of the Fund's portfolio must reflect guidelines established by Moody's, and the Fund will be required to maintain a certain discounted asset coverage with respect to the Cumulative Preferred Stock. See 'Investment Objectives and Policies -- Rating Agency Guidelines.' (continued on next page) ------------------------ THE CUMULATIVE PREFERRED STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE (THE 'NYSE'), SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE 'UNDERWRITING.' ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $25 PER SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) FUND(3) ------------ -------------- ------------------ Per Share........................................................... $25.00 $.7875 $24.2125 Total............................................................... $60,000,000 $1,890,000 $58,110,000
- ------------ (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 23, 1996, at the offices of Morgan Stanley & Co. Incorporated, New York, New York against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY & CO. INCORPORATED A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. August 16, 1996 (continued from cover page) The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund for cash at a price equal to $25 per share plus accumulated but unpaid dividends (whether or not earned or declared) (the 'Redemption Price') if the Fund fails to maintain a quarterly asset coverage of at least 250% or to maintain the discounted asset coverage required by Moody's. Commencing August 15, 2001 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock in whole or in part for cash at a price equal to the Redemption Price. Prior to August 15, 2001, the Cumulative Preferred Stock will be redeemable, at the option of the Fund, for cash at a price equal to the Redemption Price, only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption.' This Prospectus sets forth certain information an investor should know before investing and should be retained for future reference. A Statement of Additional Information dated August 16, 1996 has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The table of contents of the Statement of Additional Information appears on page 32 of this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York, New York 10019, or calling the Fund toll-free at (800) 221-4268. ------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CUMULATIVE PREFERRED STOCK TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE CUMULATIVE PREFERRED STOCK IN ANY JURISDICTION IN ANY CIRCUMSTANCES IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ IT IS EXPECTED THAT DELIVERY OF THE SHARES OF CUMULATIVE PREFERRED STOCK WILL BE MADE AGAINST PAYMENT THEREFOR ON OR ABOUT THE DATE SPECIFIED IN THE LAST PARAGRAPH OF THE COVER PAGE OF THIS PROSPECTUS, WHICH IS THE FIFTH BUSINESS DAY FOLLOWING THE DATE HEREOF (SUCH SETTLEMENT CYCLE BEING HEREIN REFERRED TO AS 'T+5'). PURCHASERS OF THE CUMULATIVE PREFERRED STOCK SHOULD NOTE THAT TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE DATE HEREOF AND THE NEXT SUCCEEDING BUSINESS DAY MAY BE AFFECTED BY THE T+5 SETTLEMENT. SEE 'UNDERWRITING'. ------------------------ TABLE OF CONTENTS
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 PAGE ---- Liquidation Rights..................................... 21 Voting Rights.......................................... 21 Termination of Rating Agency Guidelines................ 22 Limitation on Incurrence of Additional Indebtedness and Issuance of Additional Preferred Stock............... 23 Repurchase of Cumulative Preferred Stock............... 24 Description of Capital Stock and Other Securities......................................... 24 Capital Stock.......................................... 24 The Notes.............................................. 24 Taxation................................................... 26 Taxation of Stockholders............................... 26 Taxation of the Fund................................... 28 Other Taxation......................................... 30 Custodian, Transfer Agent and Dividend-Paying Agent........ 30 Underwriting............................................... 30 Legal Matters.............................................. 31 Experts.................................................... 31 Additional Information..................................... 31 Table of Contents of Statement of Additional Information... 32 Glossary................................................... 33
------------------------ 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 8% Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), at a purchase price of $25 per share.
3 Dividends........................... Dividends on the Cumulative Preferred Stock, at the annual rate of 8% of the liquidation preference of $25.00 per share, are cumulative from the Date of Original Issue and are payable, when, as and if declared by the Board of Directors of the Fund, out of funds legally available therefor, annually on December 23 in each year, commencing on December 23, 1996, to the holders of record on the preceeding December 6. See 'Description of Cumulative Preferred Stock -- Dividends.' Potential Tax Benefit to Certain Investors.............. The Fund is required to allocate long-term capital gain distributions, as well as other types of income, proportionately among holders of shares of Common Stock, shares of Cumulative Preferred Stock and, to the extent they receive any 'constructive distributions,' the Fund's 5 3/4% Investment Company Convertible Notes due June 30, 2004 (the 'Notes'), in accordance with the current position of the Internal Revenue Service (the 'IRS'). During the Fund's last three fiscal years, distributions paid by the Fund have consisted primarily of long-term capital gains, and it is currently expected that dividends paid on the Cumulative Preferred Stock will likewise consist primarily of long-term capital gains. Accordingly, certain investors in the Cumulative Preferred Stock may realize a tax benefit to the extent that dividends paid by the Fund on those shares are composed of long-term capital gains. See 'Ordinary Income Equivalent Yield Tables.' Subject to statutory limitations, investors may also be entitled to offset the net long-term capital gain portion of a Cumulative Preferred Stock dividend with capital losses incurred by such investors. See 'Taxation.' No assurance can be given, however, as to what percentage, if any, of the dividends to be paid on the Cumulative Preferred Stock will consist of long-term capital gains. To the extent that dividends on the shares of Cumulative Preferred Stock are not paid from net long-term capital gains, they will be paid from ordinary income or net short-term capital gains or will represent a return of capital. Rating.............................. It is a condition to their issuance that the Cumulative Preferred Stock be issued with a rating of 'aaa' from Moody's Investors Service, Inc. ('Moody's'). The Articles Supplementary creating and fixing the rights and preferences of the Cumulative Preferred Stock (the 'Articles Supplementary') contain certain provisions which reflect guidelines established by Moody's (the 'Rating Agency Guidelines') in order to obtain such rating on the Cumulative Preferred Stock on the Date of Original Issue. Although it is the Fund's present intention to continue to comply with the Rating Agency Guidelines, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines. If the Fund voluntarily terminates compliance with the Rating Agency Guidelines, the dividend rate payable on the Cumulative Preferred Stock will be increased by .50% per annum. See 'Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines.' Asset Coverage...................... The Fund will be required to maintain, as of the last Business Day of March, June, September and December of each year, Asset Coverage of at least 250% with respect to the Cumulative Preferred Stock. This required Asset Coverage is greater than the 200% asset coverage required by Section 18 of the Investment Company Act of 1940, as amended (the '1940 Act'). If the Fund had issued and sold the Cumulative Preferred Stock offered hereby as of June 30, 1996, the Asset Coverage would have been 461%. See 'Description of Cumulative Preferred Stock -- Asset Maintenance.'
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 August 15, 2001 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock, in whole or in part, for cash at a price equal to the Redemption Price. Prior to August 15, 2001, the Cumulative Preferred Stock will be redeemable at the option of the Fund at the Redemption Price only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption -- Optional Redemption.'
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. The shares of Cumulative Preferred Stock have been approved for listing on the New York Stock Exchange (the 'NYSE'), subject to official notice of issuance. However, during an initial period which is not expected to exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period. Special Considerations and Risk Factors........................... The market price for the Cumulative Preferred Stock will be influenced by changes in interest rates. As indicated above, the Cumulative Preferred Stock is subject to redemption under specified circumstances. To the extent that the Fund experiences a substantial decline in the value of its net assets, it may be required to redeem Cumulative Preferred Stock to restore compliance with the applicable asset coverage requirements. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn while an investor holds shares either as a result of the Fund's termination of compliance with the Rating Agency Guidelines or otherwise, and the credit rating does not eliminate or mitigate the risks of investing in the Cumulative Preferred Stock. A reduction or withdrawal of the credit rating may have an adverse effect on the market value of the Cumulative Preferred Stock. Payments to the holders of Cumulative Preferred Stock of dividends or upon redemption or in liquidation will be subject to the prior payments of interest and repayment of principal then due on the Notes or any other indebtedness of the Fund. Also, under the Indenture relating to the Notes, the Fund cannot declare any cash dividends or distributions on the Cumulative Preferred Stock or purchase or redeem any shares of the Cumulative Preferred Stock if, immediately thereafter, asset coverage for senior securities representing indebtedness, as defined under Section 18 of the 1940 Act, would be less than 300%, or if the Fund fails to maintain a certain discounted asset coverage for the Notes pursuant to rating agency guidelines relating to the Notes. If the Fund had issued and sold the Cumulative Preferred Stock offered hereby as of June 30, 1996, the asset coverage for the Notes would have been 1,152%. See 'Description of Capital Stock and Other Securities -- The Notes.'
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 rate on the Cumulative Preferred Stock, assuming distributions consisting of three different proportions of L/T Capital Gains and Ordinary Income for an investor in the 39.6% Federal marginal tax bracket and assuming no change in the current maximum Federal long-term capital gains tax rate of 28.0%.
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF ----------------------------- PERCENTAGE OF CUMULATIVE PREFERRED STOCK DIVIDEND COMPOSED OF* 8.00% - ------------------------------- ORDINARY IS EQUIVALENT TO AN ORDINARY L/T CAPITAL GAINS INCOME INCOME YIELD OF - ----------------- -------- ----------------------------- 75.0% 25.0% 9.15% 50.0% 50.0% 8.77% 25.0% 75.0% 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 indicated dividend rate for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF ---------------------------- 8.00% 1996 FEDERAL IS EQUIVALENT TO AN ORDINARY TAX BRACKET`D' INCOME YIELD OF - ------------------------------ ---------------------------- 39.6%......................... 9.15% 36.0%......................... 8.75% 31.0%......................... 8.26% 28.0% or lower................ 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 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 auditors. The financial information for the years ended prior to December 31, 1991 and for the period from November 26, 1986 (commencement of operations) to December 31, 1986 is covered in prior reports of Coopers & Lybrand L.L.P., upon which unqualified opinions were issued.
SIX-MONTHS PERIOD ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------------------------------------- DEC. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- (UNAUDITED) Net Asset Value, Beginning of Period............ $13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $ 9.25 $7.98 $ 9.29 $9.30 ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Income from Investment Operations(a) Net investment income............ 0.07 0.04 0.04 0.09 0.15 0.17 0.17 0.15 0.13 0.28 0.03 Net realized and unrealized gains (losses) on investments....... 0.85 2.70 0.09 2.12 2.12 3.20 (1.49) 1.59 1.68 (1.04) (0.04) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total from Investment Operations.... 0.92 2.74 0.13 2.21 2.27 3.37 (1.32) 1.74 1.81 (0.76) (0.01) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Less Distributions Dividends from net investment income............ -- (0.03) (0.01) (0.09) (0.15) (0.17) (0.17) (0.17) (0.06) (0.36) (0.00) Distributions from capital gains..... -- (1.26) (1.04) (1.06) (0.75) (0.44) (0.15) (0.35) (0.45) (0.16) (0.00) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Distributions. -- (1.29) (1.05) (1.15) (0.90) (0.61) (0.32) (0.52) (0.51) (0.52) (0.00) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Capital Stock Transactions Effect of rights offering.......... -- (0.12) (0.14) (0.08) (0.06) (0.10) (0.08) (0.09) (0.00) (0.00) (0.00) Effect of reinvestment of distributions..... -- (0.11) (0.07)* (0.01) (0.04) (0.01) (0.05) (0.03) (0.03) (0.03) (0.00) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Capital Stock Transactions... -- (0.23) (0.21) (0.09) (0.10) (0.11) (0.13) (0.12) (0.03) (0.03) (0.00) ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Net Asset Value, End of Period(a)...... $14.48 $13.56 $12.34 $13.47 $12.50 $11.23 $ 8.58 $10.35 $9.25 $ 7.98 $9.29 ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Market Value, End of Period............ $12.375 $11.875 $11.00 $12.875 $12.25 $10.375 $ 8.125 $ 9.50 $8.125 $ 6.75 $9.875 ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- ----------- ------- ------ ------- ------ ------- ------- ------ ------ ------- -------- Total Investment Return(b) Net Asset Value(a)........ 6.8% 22.6% 1.1% 17.9% 19.9% 39.5% -13.1% 19.2% 22.4% -9.1% 0.1% Market Value...... 4.2% 20.5% -5.6% 14.8% 26.8% 35.3% -10.8% 23.9% 27.4% -26.5% -1.3% Ratios Based on Average Net Assets Total Expenses(c)... 1.29%`D' 2.01% 2.01% 1.33% 0.81% 0.79% 0.94% 0.95% 1.09% 0.40% 1.79%*`D' Management Fees..... 0.38%`D' 0.97% 1.21% 1.09% 0.53% 0.43% 0.44% 0.44% 0.49% 0.00% 1.04%*`D' Interest Expense.... 0.70%`D' 0.75% 0.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%*`D' Other Operating Expenses.......... 0.21%`D' 0.29% 0.34% 0.24% 0.28% 0.36% 0.50% 0.51% 0.60% 0.40% 0.75%*`D' Net Investment Income............ 0.92%`D' 0.34% 0.31% 0.74% 1.31% 1.52% 1.78% 1.48% 1.42% 2.92% 3.45%*`D' Supplemental Data: Net Assets, End of Period (millions)........ $364 $339 $269 $247 $202 $167 $118 $131 $107 $90 $100 Portfolio Turnover Rate.............. 13% 32% 35% 33% 40% 34% 28% 36% 29% 66% 13% Average Commission Paid#............. $0.0574 -- -- -- -- -- -- -- -- -- --
- ------------ * 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, as amended (the '1940 Act'). The Fund commenced operations in November 1986. As of June 30, 1996, the Fund had 24,836,018 shares of Common Stock issued and outstanding, with an aggregate net asset value of $364,428,204. The Fund's principal office is located at 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (800) 221-4268. The Fund seeks to achieve its primary investment objective of long-term capital appreciation principally through investment in common stocks and fixed income securities convertible into common stocks of companies, generally with stock market capitalizations ranging from $100 million to $1 billion. See 'Investment Objectives and Policies.' USE OF PROCEEDS The net proceeds of the offering are estimated at $57,740,000, after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Fund's investment adviser expects to invest such proceeds in accordance with the Fund's investment objectives and policies within six months from the completion of the offering, depending on market conditions for the types of securities in which the Fund principally invests. Pending such investment, the proceeds will be held in high quality short-term debt securities and instruments. CAPITALIZATION The following table sets forth the capitalization of the Fund as of June 30, 1996, and as adjusted to give effect to this offering.
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 8% Cumulative Preferred Stock issued and outstanding...................................................... $ 0 $ 60,000,000 ------------ ------------ ------------ ------------ Common Stock, $.001 par value: Authorized 150,000,000 shares; issued and outstanding 24,836,018 shares.................................................... $ 24,836 $ 24,836 Additional paid-in capital............................................. 254,574,002 252,314,002(1) Undistributed net investment income.................................... 2,181,080 2,181,080 Accumulated net realized gains on investments.......................... 22,313,646 22,313,646 Unrealized appreciation on investments................................. 85,334,640 85,334,640 ------------ ------------ Net assets applicable to outstanding Common Stock................. $364,428,204 $362,168,204 ------------ ------------ ------------ ------------
- ------------ (1) After deducting underwriting discounts and estimated costs of this offering of $2,260,000. 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 stocks........................................................................ $371,214,067 91.4% Preferred stocks..................................................................... 175,375 0.0 Corporate bonds...................................................................... 3,049,330 0.8 Repurchase agreements................................................................ 31,500,000 7.8 ------------ ---------- Total investments............................................................... $405,938,772 100.0% ------------ ---------- ------------ ----------
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 U.S. Treasury bills, domestic bank certificates of deposit, repurchase agreements with its custodian bank covering U.S. Treasury and agency obligations having a term of not more than one week and high-quality commercial paper, or retain all or part of its assets in cash. Accordingly, the composition of the Fund's portfolio may vary from time to time. The price movements, earnings and other developments of each portfolio security are closely monitored, with a view to selling such securities when price objectives are reached or when a security no longer meets Quest's criteria. Quest does not engage in market timing transactions (i.e., shifting the portfolio or a significant portion of it in or out of the market in anticipation of general market fluctuations). Quest purchases and sells securities for the Fund at such times as it deems to be in the best interest of the Fund's Common Stockholders. Although there may be some short-term portfolio turnover, securities are generally purchased which Quest believes will appreciate in value over the long-term. The Fund has not, however, placed any limit on its rate of portfolio turnover, and securities may be sold without regard to the time they have been held when, in the judgment of Quest, investment 13 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 8% per share of the liquidation preference of $25.00 per share and no more, payable annually on December 23 in each year (the 'Dividend Payment Date'), commencing on December 23, 1996, to the persons in whose names the shares of Cumulative Preferred Stock are registered at the close of business on the preceding December 6. Dividends on the shares of Cumulative Preferred Stock will accumulate from the date on which such shares are originally issued (the 'Date of Original Issue'). No dividends will be declared or paid or set apart for payment on shares of Cumulative Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Dates thereof. If full cumulative dividends are not declared and paid on the Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred Stock will be declared and paid pro rata to the holders of the outstanding shares. Holders of Cumulative Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment that may be in arrears. For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Fund ranking junior to or on a 18 parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of its Common Stock or any other junior stock (except by conversion into or exchange for stock of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (i) immediately after such transaction, the Fund will have a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount and the Fund will maintain the Asset Coverage (see ' -- Asset Maintenance' and ' -- Redemption' below), (ii) full cumulative dividends on shares of Cumulative Preferred Stock due on or prior to the date of the transactions have been declared and paid (or sufficient Deposit Securities to cover such payment have been deposited with the Paying Agent) and (iii) the Fund has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision for mandatory redemption contained in the Articles Supplementary. ASSET MAINTENANCE The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Articles Supplementary. These requirements are summarized below. Asset Coverage. The Fund will be required under the Articles Supplementary to maintain as of the last Business Day of each March, June, September and December of each year, an asset coverage of at least 250% (or such higher percentage as may be required under the 1940 Act) with respect to all outstanding senior securities of the Fund which are stock, including the Cumulative Preferred Stock (the 'Asset Coverage'). If the Fund fails to maintain the Asset Coverage on such dates and such failure is not cured in 60 days, the Fund will be required under certain circumstances to redeem certain of the shares of Cumulative Preferred Stock. See ' -- Redemption' below. If the shares of Cumulative Preferred Stock offered hereby had been issued and sold as of June 30, 1996, the Asset Coverage immediately following such issuance and sale (after giving effect to the deduction of the underwriting discounts and estimated offering expenses for such shares of $2,260,000), would have been computed as follows: 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 August 15, 2001, the Fund may, at its option, redeem shares of Cumulative Preferred Stock at the Redemption Price per share only to the extent that any such redemption is necessary, in the judgment of the Fund, to maintain the Fund's status as a regulated investment company ('RIC') under the Internal Revenue Code of 1986, as amended (the 'Code'). Commencing August 15, 2001, and at any time and from time to time thereafter, the Fund may, at its option, redeem shares of Cumulative Preferred Stock in whole or in part at the Redemption Price. Such redemptions are subject to the limitations of the 1940 Act, Maryland law, the Indenture for the Notes and any other agreement relating to indebtedness of the Fund. Redemption Procedures. A Notice of Redemption will be given to the holders of record of Cumulative Preferred Stock selected for redemption not less than 30 or more than 45 days prior to the date fixed for the redemption. Each Notice of Redemption will state (i) the redemption date, (ii) the number of shares of Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such shares, (iv) the Redemption Price, (v) the place or places where such shares are to be redeemed, (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vii) the provision of the Articles Supplementary under which the redemption is being made. No defect in the Notice of Redemption or in the mailing thereof will affect the validity of the redemption proceedings, except as required by applicable law. LIQUIDATION RIGHTS Upon a liquidation, dissolution or winding up of the affairs of the Fund (whether voluntary or involuntary), holders of shares of Cumulative Preferred Stock then outstanding will be entitled to receive out of the assets of the Fund available for distribution to stockholders, after satisfying claims of creditors but before any distribution or payment of assets is made to holders of the Common Stock or any other class of stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25 per share plus an amount equal to all unpaid dividends accumulated thereon to and including the date fixed for such distribution or payment (whether or not earned or declared by the Fund, but excluding interest thereon) (the 'Liquidation Preference'), and such holders will be entitled to no further participation in any distribution payment in connection with any such liquidation, dissolution or winding up. If, upon any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock and any other outstanding Preferred Stock of the Fund ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, will be insufficient to permit the payment in full to such holders of Cumulative Preferred Stock of the Liquidation Preference and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets will be distributed among the holders of Cumulative Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference has been paid in full to the holders of Cumulative Preferred Stock, no dividends or distributions will be made to holders of the Common Stock or any other stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation. Upon any liquidation, the holders of the Common Stock, after required payments to the holders of Preferred Stock, will be entitled to participate equally and ratably in the remaining assets of the Fund. VOTING RIGHTS Except as otherwise stated in this Prospectus and as otherwise required by applicable law, holders of shares of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of Common Stock and of any other Preferred Stock of the Fund then outstanding as a single class. In connection with the election of the Fund's directors, holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be entitled at all times to elect two 21 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 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.......................................................... 480,000 A.G. Edwards & Sons, Inc. ................................................................. 480,000 PaineWebber Incorporated................................................................... 480,000 Prudential Securities Incorporated......................................................... 480,000 Smith Barney Inc. ......................................................................... 480,000 --------- Total............................................................................ 2,400,000 --------- ---------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Cumulative Preferred Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are committed to take and pay for all of the shares of Cumulative Preferred Stock offered hereby if any are taken. The Underwriters initially propose to offer part of the shares of Cumulative Preferred Stock offered hereby directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $.50 per share. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $.25 per share to certain other dealers. After the initial offering of the Cumulative Preferred Stock, the offering price and other selling terms may from time to time be varied by the Underwriters named on the cover page of this Prospectus. The underwriting discount of $.7875 per share is equal to 3.15% of the initial public offering price. Investors must pay for any shares of Cumulative Preferred Stock purchased on or before August 23, 1996. The Fund and Quest have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Fund anticipates that the Underwriters may, subsequent to the completion of the offering of Cumulative Preferred Stock hereunder, from time to time act as brokers or dealers in connection with the execution of portfolio transactions for the Fund. The Underwriters may also, during the pendency of 30 the offering of Cumulative Preferred Stock hereunder, act as brokers with respect to such transactions. See 'Brokerage Allocation and Other Practices' in the Statement of Additional Information. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. The shares of Cumulative Preferred Stock have been approved for listing on the NYSE, subject to official notice of issuance. However, during an initial period which is not expected to exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period. The Underwriters have undertaken to sell shares to a minimum of 100 beneficial owners. It is expected that delivery of the shares of Cumulative Preferred Stock will be made against payment therefor on or about the date specified in the last paragraph of the cover page of this Prospectus, which is the fifth business day following the date hereof. Under Rule 15c6-1 of the Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the shares of Cumulative Preferred Stock on the date hereof or any day prior to the third business day before the date of delivery of the Cumulative Preferred Stock will be required, by virtue of the fact that the shares of Cumulative Preferred Stock will settle in T+5, to agree to a delayed settlement cycle at the time of any such trade to prevent a failed settlement. Those who purchase the Cumulative Preferred Stock and wish to trade shares of the Cumulative Preferred Stock on the date hereof or the next succeeding business day should consult their own advisor. LEGAL MATTERS Certain matters concerning the legality under Maryland law of the Cumulative Preferred Stock will be passed on by Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Certain legal matters will be passed on by Brown & Wood LLP, New York, New York, special counsel to the Fund, and by Davis Polk & Wardwell, New York, New York, counsel to the Underwriters. Brown & Wood LLP and Davis Polk & Wardwell will each rely as to matters of Maryland law on the opinion of Venable, Baetjer and Howard, LLP. EXPERTS Ernst & Young LLP, independent auditors, are the independent auditors of the Fund. The audited financial statements of the Fund and certain of the information appearing under the caption 'Financial Highlights' included in this Prospectus have been audited by Ernst & Young LLP and Coopers & Lybrand L.L.P. for the periods indicated in their reports with respect thereto, and are included in reliance upon such reports and upon the authority of such firms as experts in accounting and auditing. Ernst & Young LLP has an office at 787 Seventh Avenue, New York, New York 10019, and also performs tax and other professional services for the Fund. The address of Coopers & Lybrand L.L.P. is 1 Post Office Square, Boston, Massachusetts 02109. ADDITIONAL INFORMATION The Fund is subject to the informational requirements of the Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports and other information with the SEC. Reports, proxy statements and other information filed by the Fund with the SEC pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such material can be obtained from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov containing reports, 31 proxy and information statements and other information regarding registrants, including the Fund, that file electronically with it. The Fund's Common Stock is listed on the New York Stock Exchange, and reports, proxy statements and other information concerning the Fund and filed with the SEC by the Fund can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. This Prospectus constitutes part of a Registration Statement filed by the Fund with the SEC under the Securities Act of 1933 and the 1940 Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the Cumulative Preferred Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION A Statement of Additional Information dated August 16, 1996 has been filed with the SEC and is incorporated by reference in this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York, New York 10019, or calling the Fund toll-free at (800) 221-4268. The Table of Contents of the Statement of Additional Information is as follows:
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 8% Cumulative Preferred Stock, par value $.001 per share, of the Fund. 'Date of Original Issue' has the meaning set forth on page 18 of this Prospectus. 'Deposit Securities' means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Fund has a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, each Deposit Security will be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such 33 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
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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
(table continued on next page) 35 (table continued from previous page)
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 20 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 STATEMENT OF ADDITIONAL INFORMATION 2,400,000 SHARES ROYCE VALUE TRUST, INC. 8% CUMULATIVE PREFERRED STOCK LIQUIDATION PREFERENCE $25.00 PER SHARE The 8% Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Value Trust, Inc. (the 'Fund') will be senior securities of the Fund. The Fund will use the net proceeds of the offering to purchase additional portfolio securities in accordance with its investment objectives and policies. The Fund is a closed-end diversified management investment company. The Fund's primary investment objective is long-term capital appreciation, which it seeks by normally investing more than 75% of its assets in common stocks and securities convertible into common stocks of small and medium-sized companies. The Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (212) 355-7311. Quest Advisory Corp. is its investment adviser. This Statement of Additional Information is not a prospectus, but should be read in conjunction with the Fund's Prospectus (dated August 16, 1996). Please retain this document for future reference. To obtain an additional copy of the Prospectus, the Fund's Annual Report to Stockholders for the year ended December 31, 1995, or the Fund's Semi-Annual Report to Stockholders for the six months ended June 30, 1996, please call Investor Information at 1-800-221-4268. TABLE OF CONTENTS
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 16, 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 STATEMENT OF DIFFERENCES The dagger footnote symbol shall be expressed as `D' -----END PRIVACY-ENHANCED MESSAGE-----