As filed with the Securities and Exchange Commission on August 1, 2003
Securities Act File No. 333-_____
Investment Company Act File No. 811-04875
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933[X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 [X]
______________________
Royce Value Trust, Inc.
(Exact Name of Registrant as Specified In Charter)
______________________
1414 Avenue of the Americas, New York, New York 10019
(Address of Principal Executive Offices)
(800) 221-4268
(Registrant's Telephone Number, including Area Code)
Charles M. Royce, President
Royce Value Trust, Inc.
1414 Avenue of the Americas
New York, New York 10019
(Name and Address of Agent for Service)
______________________
Copies to:
Frank P. Bruno, Esq. John E. Denneen, Esq. Cynthia G. Cobden, Esq.
Sidley Austin Brown & Wood LLP Royce Value Trust, Inc. Simpson Thacher & Bartlett LLP
787 Seventh Avenue 1414 Avenue of the Americas 425 Lexington Avenue
New York, New York 10019 New York, New York 10019 New York, New York 10017
______________________
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
______________________
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box.[ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
======================================================================================================================
Proposed Proposed
Maximum Maximum Amount
Amount Offering Aggregate of
Being Price Per Offering Registration
Title of Securities Being Registered Registered (1) Unit (1) Price(1) Fee(2)
-------------------------------------------------------------------------------------------------------------------------------
__% Cumulative Preferred Stock ($.001 par value per share)...... 40,000 shares $25.00 $1,000,000 $81
======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to the filing date to the designated lockbox of the
Securities and Exchange Commission at Mellon Bank in Pittsburgh, PA.
___________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
2
The information in this Prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state or other jurisdictions where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED __, 2003
PRELIMINARY PROSPECTUS
_________ SHARES
ROYCE VALUE TRUST, INC.
____% Cumulative Preferred Stock
LIQUIDATION PREFERENCE $25.00 PER SHARE
_________________
The ____% Cumulative Preferred Stock, liquidation preference $25.00
per share (the "Cumulative Preferred Stock"), to be issued by Royce Value
Trust, Inc. (the "Fund") will be senior securities of the Fund. The Fund is a
closed-end diversified management investment company. The Fund's primary
investment goal is long-term capital growth. The Fund normally invests at
least 75% of its assets in the equity securities of small- and micro-cap
companies. The Fund's address is 1414 Avenue of the Americas, New York, New
York 10019, and its telephone number is (212) 355-7311. Royce & Associates,
LLC ("Royce") is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the
annual rate of ____% of the liquidation preference of $25.00 per share, are
cumulative from the Date of Original Issue thereof and are payable quarterly
on March __, June __, September __ and December __, commencing on December __,
2003.
(Continued on following page)
_________________
Investing in the Cumulative Preferred Stock involves risks. See
"Prospectus Summary -- Special Considerations and Risk Factors" beginning on
page __ and "Investment Goal, Policies and Risks" beginning on page ___.
_________________
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
_________________
Cumulative Preferred Stock
------------------------------------------------
Per Share Total
------------------------------------------------
Public Offering Price (1).......................... $ $
Underwriting Discount (2).......................... $ $
Proceeds to the Fund (before expenses)(3).......... $ $
___________________
(1) Plus accumulated dividends, if any, from ____________, 2003.
(2) The Fund and Royce have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
(3) Offering expenses payable by the Fund are estimated at $____________.
_________________
The Underwriters are offering the Cumulative Preferred Stock subject
to various conditions. It is expected that delivery of the Cumulative
Preferred Stock will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC") on or about __________ __, 2003.
_________________
Citigroup UBS Investment Bank
__________ __, 2003
(Continued from cover page)
Application will be made to list the Cumulative Preferred Stock on
the New York Stock Exchange (the "NYSE"). If offered, trading of the
Cumulative Preferred Stock on the NYSE is expected to commence within 30 days
of the date of this Prospectus. Prior to this offering, there has been no
public market for the Cumulative Preferred Stock. See "Underwriting."
Distributions paid on the Cumulative Preferred Stock will consist of:
(i) long-term capital gains, (ii) qualified dividend income, (iii) other
ordinary income and/or (iv) returns of capital. The Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the "2003 Tax Act") reduced the individual Federal
income tax rate on long-term capital gains and qualified dividend income to a
maximum of 15%. Under the 2003 Tax Act, the maximum individual Federal income
tax rate on other ordinary income is 35%. These tax rates are scheduled to
apply through 2008. Assuming the 2003 Tax Act had been in effect during the
past one, three and five years ended December 31, 2002, approximately __%, __%
and __% of the distributions paid by the Fund would have consisted of less
highly taxed long-term capital gains and qualified dividend income. It is
currently expected that dividends paid on the Cumulative Preferred Stock will
consist primarily of such long-term capital gains and qualified dividend
income, which are taxed at lower rates for individuals than other ordinary
income. See "Tax Attributes of Preferred Stock Dividends" and "Taxation". No
assurance can be given, however, as to what percentage, if any, of the
dividends paid on the Cumulative Preferred Stock will consist of long-term
capital gains and qualified dividend income.
It is a condition to the issuance of the Cumulative Preferred Stock
that it be rated Aaa by Moody's Investors Service, Inc. ("Moody's"). In
connection with the receipt of such rating, the Fund will be required to
maintain a discounted asset coverage with respect to the Cumulative
Preferred Stock, reflecting guidelines established by Moody's. See "Rating
Agency Guidelines".
The Cumulative Preferred Stock is subject to mandatory redemption, in
whole or in part, by the Fund for cash at a price equal to $25.00 per share
plus accumulated but unpaid dividends (whether or not earned or declared) (the
"Redemption Price") if the Fund fails to maintain a quarterly asset coverage
of at least 200% or to maintain the discounted asset coverage required by
Moody's. Commencing __________ __, 2008 and thereafter, the Fund at its option
may redeem the Cumulative Preferred Stock, in whole or in part, for cash at a
price equal to the Redemption Price. Prior to __________ __, 2008, the
Cumulative Preferred Stock will be redeemable, at the option of the Fund, for
cash at a price equal to the Redemption Price, only to the extent necessary
for the Fund to continue to qualify for tax treatment as a regulated
investment company. See "Description of Cumulative Preferred Stock --
Redemption".
If the Fund voluntarily terminates compliance with the Moody's
guidelines, the Fund will no longer be required to maintain the discounted
asset coverage required by Moody's. However, at the time of such termination,
the Cumulative Preferred Stock must have received a rating from at least one
nationally recognized statistical rating organization that is at least
comparable to the then current rating from Moody's. The Fund will then be
required to comply with the guidelines established by such successor rating
organization. See "Rating Agency Guidelines" and "Description of Cumulative
Preferred Stock -- Termination of Rating Agency Guidelines".
This Prospectus concisely sets forth certain information an investor
should know before investing and should be retained for future reference.
A Statement of Additional Information dated ___________ __, 2003 has
been filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus. The table of contents of the Statement of
Additional Information appears on page __ of this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by writing
to the Fund at its address at 1414 Avenue of the Americas, New York, New York
10019, or by calling the Fund toll-free at (800) 221-4268.
2
In connection with this offering, the Underwriters may over-allot or
effect transactions which stabilize, maintain or otherwise affect the market
price of the Cumulative Preferred Stock, including the entry of stabilizing
bids, syndicate covering transactions or the imposition of penalty bids. For a
description of these activities, see "Underwriting".
You should rely on the information contained in or incorporated by
reference into this Prospectus. Neither the Fund nor the Underwriters have
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. Neither the Fund nor the Underwriters are making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this Prospectus is
accurate as of the date on the front cover of this Prospectus only.
______________________
Table of Contents
Page
----
PROSPECTUS SUMMARY...........................................................4
FINANCIAL HIGHLIGHTS........................................................14
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS.................................17
THE FUND 19
USE OF PROCEEDS.............................................................19
CAPITALIZATION..............................................................20
PORTFOLIO COMPOSITION.......................................................21
INVESTMENT GOAL, POLICIES AND RISKS.........................................21
RATINGS AGENCY GUIDELINES...................................................26
INVESTMENT ADVISORY AND OTHER SERVICES......................................27
DESCRIPTION OF CUMULATIVE PREFERRED STOCK...................................31
DESCRIPTION OF CAPITAL STOCK................................................39
TAXATION....................................................................41
CUSTODIAN, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR..............42
UNDERWRITING................................................................43
LEGAL MATTERS...............................................................44
EXPERTS.....................................................................44
ADDITIONAL INFORMATION......................................................45
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................45
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION....................46
GLOSSARY....................................................................47
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed
information included elsewhere in this Prospectus and the Statement of
Additional Information. Capitalized terms not otherwise defined in this
Summary are defined in the Glossary that appears at the end of this
Prospectus.
The Fund................................... Royce Value Trust, Inc. (the "Fund") has been engaged
in business as a closed-end diversified management
investment company since its initial offering in
November 1986. The Fund's primary investment goal is
long-term capital growth. Royce & Associates, LLC
("Royce"), the Fund's investment adviser, normally
invests more than 75% of the Fund's assets in the equity
securities of small- and micro-cap companies, generally
with stock market capitalizations ranging from $100
million to $2 billion, that Royce believes are trading
significantly below its estimate of their current worth.
The Fund may also invest up to 25% of its assets in
non-convertible fixed income securities. See "Investment
Goal, Policies and Risks".
The Offering............................... The Fund is offering _________ shares of ____% Cumulative Preferred
Stock, par value $.001 per share, liquidation preference
$25.00 per share (the "Cumulative Preferred Stock"), at
a purchase price of $25.00 per share.
Use of Proceeds............................ The Fund will use the net proceeds from the offering of the
Cumulative Preferred Stock to redeem the issued and
outstanding shares of 7.80% Cumulative Preferred Stock,
par value $.001 per share, of the Fund (the "7.80%
Preferred"), and the issued and outstanding shares of
7.30% Tax-Advantaged Cumulative Preferred Stock, par
value $.001 per share, of the Fund (the "7.30%
Preferred"). In order for the Fund to redeem the 7.80%
Preferred and the 7.30% Preferred, the Fund must pay the
7.80% Preferred's aggregate liquidation preference of
$60,000,000 and the 7.30% Preferred's aggregate
liquidation preference of $100,000,000, plus an amount
equal to accumulated and unpaid dividends (whether or
not earned or declared) on the 7.80% Preferred and the
7.30% Preferred through the applicable redemption date.
Royce expects to use the proceeds remaining after the
redemption of the 7.80% Preferred and the 7.30%
Preferred to purchase additional portfolio securities in
4
accordance with the Fund's investment goal and policies.
See "Use of Proceeds".
Dividends.................................. Dividends on the Cumulative Preferred Stock, at the annual rate of
____% of the liquidation preference of $25.00 per share,
are cumulative from the Date of Original Issue and are
payable, when, as and if authorized by the Board of
Directors and declared by the Fund, out of funds legally
available therefor, quarterly on March __, June __,
September __, and December __, commencing on December
__, 2003, to the holders of record on the preceding
March __, June __, September __ and December __,
respectively. See "Description of Cumulative Preferred
Stock-- Dividends".
Long-Term Capital Gains and
Qualified Dividend Income ............... The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the
"2003 Tax Act") reduced the individual Federal income
tax rate on long-term capital gains and qualified
dividend income to a maximum of 15%. Long-term capital
gains and qualified dividend income included in
distributions of a regulated investment company (such as
the Fund) to its stockholders are generally passed
through to such stockholders, including preferred
stockholders, and taxed at the related rates. See "Tax
Attributes of Preferred Stock Dividends" and "Taxation".
The 15% income tax rate applicable to capital gains and
qualified dividend income is scheduled to expire after
December 31, 2008. After this date, absent extension or
modification of the relevant legislative provisions,
long-term capital gains distributions paid by the Fund
generally will be taxable at the previously applicable
maximum 20% rate, and distributions attributable to
qualified dividend income will be taxed to the
stockholder at his or her marginal Federal income tax
rate (which generally will be higher than 15%).
Tax Attributes of Preferred Stock
Dividends................................ The distributions paid on the Cumulative Preferred
Stock will, for Federal income tax purposes, consist of
varying proportions of long-term capital gains,
qualified dividend income, other ordinary income
(including short-term capital gain and interest income
and non-qualified dividend income), and/or returns of
capital. Ordinary
5
income, other than qualified dividend income but
including short-term capital gains, interest income and
non-qualified dividend income, is referred to in this
Prospectus as "Other Ordinary Income". The Fund is
required to allocate long-term capital gains, qualified
dividend income and/or Other Ordinary Income
proportionately among holders of shares of its Common
Stock and the Cumulative Preffered Stock offered hereby.
Assuming the 2003 Tax Act had been in effect during the
past one, three and five years ended December 31, 2002,
the distributions of taxable income by the Fund would
have consisted of approximately ____%, ____% and ____%
long-term capital gains and qualified dividend income and
approximately ____%, ____% and ____% Other Ordinary
Income. If the cash dividends paid on the Cumulative
Preferred Stock offered hereby similarly consist
primarily of such capital gains and qualified dividend
income, certain investors in the Cumulative Preferred
Stock may realize a tax benefit to the extent that such
dividends are, for Federal income tax purposes, composed
of the less highly taxed long-term capital gains and
qualified dividend income. See "Tax Attributes of
Preferred Stock Dividends". No assurance can be given,
however, as to what percentage, if any, of the distributions
to be paid on the Cumulative Preferred Stock will consist
of long-term capital gains and/or qualified dividend
income. To the extent that such distributions do not consist
of long-term capital gains and qualified dividend income,
they will be paid from Other Ordinary Income taxable at
higher Federal income tax rates, or will represent a
return of capital.
Subject to statutory limitations, investors may also be
entitled to offset the long-term capital gains portion
of a Cumulative Preferred Stock dividend with capital
losses incurred by such investors. See "Taxation".
Rating..................................... It is a condition to its issuance that the Cumulative Preferred
Stock be issued with a rating of Aaa from Moody's
Investors Service, Inc. ("Moody's"). The Articles
Supplementary creating and fixing the rights and
preferences of the Cumulative Preferred Stock (the
"Articles Supplementary") contain certain provisions
which reflect guidelines established by Moody's (the
"Rating Agency Guidelines") in order to obtain such
rating on the Cumulative Preferred Stock on the Date of
6
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
Fund will no longer be required to maintain the
discounted asset coverage required by Moody's. However
at the time of such termination, the Cumulative Preferred
Stock must have received a rating from at least one
nationally recognized statistical rating organization
("NRSRO") that is at least comparable to the then current
rating from Moody's. See "Description of Cumulative
Preferred Stock -- Termination of Rating Agency
Guidelines".
Asset Maintenance.......................... The Fund will be required to maintain, as of the last
Business Day of March, June, September and December of
each year, Asset Coverage of at least 200% with respect
to the Cumulative Preferred Stock. Assuming the Fund had
issued and sold the Cumulative Preferred Stock and
redeemed the 7.80% Preferred and the 7.30% Preferred as
of June 30, 2003, the Asset Coverage would have been
___%. See "Description of Cumulative Preferred Stock--
Asset Maintenance-- Asset Coverage".
Also, pursuant to the Rating Agency Guidelines, the Fund
will be required to maintain, as of each Valuation Date,
a Portfolio Calculation for Moody's at least equal to
the Basic Maintenance Amount. The discount factors and
guidelines for determining the Portfolio Calculation
have been established by Moody's in connection with the
Fund's receipt from Moody's of a rating on the
Cumulative Preferred Stock on the Date of Original Issue
of Aaa. See "Description of Cumulative Preferred Stock
-- Asset Maintenance -- Basic Maintenance Amount" and
"Rating Agency Guidelines".
Voting Rights.............................. At all times, holders of shares of Cumulative Preferred
Stock and any other Preferred Stock will elect two
members of the Fund's Board of Directors, and holders of
shares of Cumulative Preferred Stock, any other
Preferred Stock and Common Stock, voting as a single
class, will elect the remaining directors. However, upon
a failure by the Fund to pay dividends on the Cumulative
7
Preferred Stock and/or any other Preferred Stock in an
amount equal to two full years' dividends, holders of
Cumulative Preferred Stock, voting as a separate class
together with the holders of any other Preferred Stock,
will have the right to elect the smallest number of
directors that would constitute a majority of the
directors until cumulative dividends have been paid or
provided for. Holders of Cumulative Preferred Stock and
any other Preferred Stock will vote separately as a
class on certain other matters, as required under the
Articles Supplementary and the Investment Company Act of
1940, as amended (the "1940 Act").
Except as otherwise indicated in this Prospectus and as
otherwise required by applicable law, holders of
Cumulative Preferred Stock will be entitled to one vote
per share on each matter submitted to a vote of
stockholders and will vote together with holders of
shares of Common Stock and any other Preferred Stock as
a single class. See "Description of Cumulative Preferred
Stock -- Voting Rights".
Mandatory Redemption....................... The Cumulative Preferred Stock is subject to mandatory
redemption, in whole or in part, by the Fund in the
event that the Fund fails to: (i) maintain the quarterly
Asset Coverage, or (ii) maintain a Portfolio Calculation
at least equal to the Basic Maintenance Amount required
by Moody's and does not cure such failure by the
applicable cure date. Any such redemption will be made
for cash at a price equal to $25.00 per share plus
accumulated and unpaid dividends (whether or not earned
or declared) through the redemption date (the "Redemption
Price"). In the event that shares of Cumulative
Preferred Stock are redeemed due to a failure to
maintain the quarterly Asset Coverage, the Fund may
redeem a sufficient number of shares of Cumulative
Preferred Stock so that the asset coverage, as defined
in the 1940 Act, of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock
after such redemption is up to 275%. In the event that
shares of Cumulative Preferred Stock are redeemed due to
a failure to maintain a Portfolio Calculation at least
equal to the Basic Maintenance Amount, the Fund may
redeem a sufficient number of shares of Cumulative
Preferred Stock and any other Preferred Stock so that the
Portfolio Calculation exceeds the Basic Maintenance Amount of
the remaining
8
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 __________ __, 2008 and thereafter, the
Fund at its option may redeem the Cumulative Preferred
Stock, in whole or in part, for cash at a price equal to
the Redemption Price. Prior to __________ __, 2008, the
Cumulative Preferred Stock will be redeemable at the
option of the Fund at the Redemption Price, only to the
extent necessary for the Fund to continue to qualify for
tax treatment as a regulated investment company. See
"Description of Cumulative Preferred Stock - Redemption
- Optional Redemption".
Liquidation Preference..................... The liquidation preference of each share of Cumulative
Preferred Stock is $25.00 plus an amount equal to all
unpaid dividends accumulated to and including the date
fixed for such distribution or payment (whether or not
earned or declared but excluding interest thereon). See
"Description of Cumulative Preferred Stock --
Liquidation Rights".
Listing.................................... Prior to this offering, there has been no public market for
the Cumulative Preferred Stock. Application will be made
to list the shares of Cumulative Preferred Stock on the
New York Stock Exchange (the "NYSE"). However, during an
initial period, which is not expected to exceed 30 days
from the date of this Prospectus, the Cumulative
Preferred Stock will not be listed on any securities
exchange. During such period, the Underwriters intend to
make a market in the Cumulative Preferred Stock;
however, they have no obligation to do so. Consequently,
an investment in the Cumulative Preferred Stock may be
illiquid during such period.
Special Considerations and Risk
Factors.................................. General. The market price for the Cumulative Preferred
Stock will be influenced by changes in interest rates,
the perceived credit quality of the Cumulative Preferred
Stock and other factors.
Liquidity. During an initial period which is not
expected to exceed 30 days after the date of issuance,
the Cumulative Preferred Stock will not be listed on any
9
securities exchange. During such period, the
Underwriters intend to make a market in the Cumulative
Preferred Stock; however, they have no obligation to do
so. Consequently, the Cumulative Preferred Stock may be
illiquid during such period. No assurance can be provided
that listing on any securities exchange or market making
by the Underwriters will result in the market for
Cumulative Preferred Stock being liquid at any time.
Credit Rating. The credit rating on the Cumulative
Preferred Stock could be reduced or withdrawn by Moody's
while an investor holds shares of Cumulative Preferred
Stock, either as a result of the Fund's termination of
compliance with the Rating Agency Guidelines or
otherwise. The credit rating does not eliminate or
mitigate the risks of investing in the Cumulative
Preferred Stock. A reduction or withdrawal of the credit
rating by Moody's may have an adverse effect on the
liquidity and market value of the Cumulative Preferred
Stock. See "Description of Cumulative Preferred Stock --
Termination of Rating Agency Guidelines".
Market, Selection and Style Risk. As with any investment
company that invests in common stocks, the value of the
Fund's portfolio may decline. For example, if an issuer
of a common stock in which the Fund invests experiences
financial difficulties, defaults on its senior
securities, has the credit rating on its senior
securities reduced or withdrawn, or otherwise is
affected by adverse market factors, the Fund's portfolio
will be negatively impacted. In particular, the prices
of small- and micro-cap companies are generally more
volatile and their markets are generally less liquid
relative to larger-cap companies. Therefore, an
investment in the Fund may involve more risk of loss
than funds investing in larger-cap companies or other
asset classes. See "Investment Goal, Policies and Risks
-- Risk Factors - Investing in Small- and Micro-Cap
Companies". In addition, different types of investment
styles tend to shift into and out of favor with stock
market investors, depending on market and economic
conditions. The performance of funds that invest in
value-style stocks may at times be better or worse than
the performance of stock funds that focus on other types
of stocks or have a broader investment style.
10
Declines in the value of the Fund's portfolio may reduce
the asset coverage for the Cumulative Preferred Stock or
the Fund's income. As indicated above, the Cumulative
Preferred Stock is subject to redemption under specified
circumstances. To the extent that the Fund experiences a
substantial decline in the value of its net assets, it
may be required to redeem Cumulative Preferred Stock to
restore compliance with the applicable asset maintenance
requirements. See "Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption".
Sufficiently sharp declines in the value of the Fund's
assets could leave the Fund with insufficient assets to
redeem all of the Cumulative Preferred Stock for the
full redemption price.
Indebtedness and Other Preferred Stock. Payments to the
holders of Cumulative Preferred Stock of dividends or
upon redemption or in liquidation will be subject to the
prior payments of interest and repayment of principal
then due on any outstanding indebtedness of the Fund and
the contemporaneous payment to holders of any other
outstanding Preferred Stock of dividends, upon
redemption or in liquidation. Assuming the Fund had
issued and sold the Cumulative Preferred Stock and
redeemed the 7.80% Preferred and the 7.30% Preferred as
of June 30, 2003, the Fund would have had no outstanding
indebtedness and no Preferred Stock ranking on parity
with the Cumulative Preferred Stock offered hereby as to
dividends and payment upon liquidation. See "Investment
Goal, Policies and Risks -- Senior Securities". The Fund
may issue additional Preferred Stock under the
circumstances set forth under "Description of Cumulative
Preferred Stock-- Limitations on Issuance of Additional
Preferred Stock".
Certain Corporate Governance Provisions. Certain
provisions of the Fund's Charter and Bylaws may have the
effect of maintaining the continuity of management and
may make it more difficult for the Fund's stockholders
to change the majority of the Board of Directors. See
"Description of Capital Stock -- Certain Corporate
Governance Provisions".
Federal Income Tax
Considerations........................... The Fund has qualified, and intends to remain qualified
11
for Federal income tax purposes, as a regulated
investment company. Qualification requires, among other
things, compliance by the Fund with certain ____
distribution ____ requirements. ____ Limitations ____ on
distributions if the Fund failed to satisfy the Asset
Coverage or Portfolio Calculation requirements could
jeopardize the Fund's ability to meet tax-related
distribution requirements. The Fund presently intends,
however, to the extent possible, to purchase or redeem
Cumulative Preferred Stock and/or any other Preferred
Stock if necessary in order to maintain compliance with
such distribution requirements. See "Taxation" for a
more complete discussion of these and other Federal
income tax considerations.
Investment Adviser......................... Royce has served as the investment adviser to the Fund
since its inception. Royce also serves as investment
adviser to other registered management investment
companies, privately offered funds and institutional
accounts. As of June 30, 2003, Royce managed
approximately $10.7 billion in assets for the Fund and
other client accounts.
Charles M. Royce, Royce's President and Chief Investment
Officer, is primarily responsible for managing the
Fund's portfolio. He is assisted by Royce's investment
staff, including W. Whitney George, Senior Portfolio
Manager, Managing Director and Vice President, Boniface
A. Zaino, Senior Portfolio Manager and Managing
Director, and Charles R. Dreifus, Senior Portfolio
Manager and Principal, and by Jack E. Fockler, Jr.,
Managing Director and Vice President. See "Investment
Advisory and Other Services-- Portfolio Management"
herein and "Directors and Officers" in the Statement of
Additional Information.
12
As compensation for its services under the Investment
Advisory Agreement, Royce receives a fee at a rate
ranging from 0.5% up to 1.5% per annum of the Fund's
average net assets for the applicable performance
period, depending upon the investment performance of the
Fund relative to the investment record of the Standard &
Poor's SmallCap 600 Index (the "S&P 600"), determined
by comparisons made over rolling periods of
60 months. However, Royce will not receive any fee for
any month when the Fund's investment performance,
rounded to the nearest whole point, is negative on an
absolute basis for the 36-month period then ended. For a
more detailed description of the methods by which the
advisory fee is determined, see "Investment Advisory and
Other Services -- Advisory Fee".
Royce has volunteered to waive the portion of
its investment advisory fee attributable to the
liquidation preference of the 7.80% Preferred, the 7.30%
Preferred and the Cumulative Preferred Stock (net of the
liquidation preference of the 7.80% Preferred and the
7.30% Preferred) for any month when the Fund's net asset
value average annual total return since the initial
issuance of the 7.80% Preferred, the 7.30% Preferred or
the Cumulative Preferred Stock fails to exceed the
blended dividend rate on those assets.
Custodian, Dividend-Paying Agent, Transfer
Agent and Registrar..................... State Street Bank and Trust Company, acts as custodian of
the cash and other assets of the Fund. Equiserve Trust
Company, N.A. acts as transfer agent, dividend-paying
agent and registrar for the Fund's shares and as agent
to provide notice of redemption and certain voting
rights for the Cumulative Preferred Stock. See
"Custodian, Dividend-Paying Agent, Transfer Agent and
Registrar".
13
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the periods presented and reflects financial
results for a single share of the Fund's Common Stock. The total returns in
the table represent the rate that an investor would have earned on an
investment in the Fund's Common Stock (assuming reinvestment of all dividends
and distributions). The information for the six months ended June 30, 2003 has
not been audited and is included in the Fund's 2003 Semiannual Report to
Stockholders, which is available upon request. The information for each of the
five years in the period ended December 31, 2002 has been audited by ____,
______ & _____, whose report, along with the Fund's financial statements, is
included in the Fund's 2002 Annual Report to Stockholders, which is available
upon request.
14
Six months
ended Years ended December 31,
June 30, 2003 -------------------------------------------------------------------
(unaudited) 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $ $17.31 $16.56 $15.77 $15.72 $16.91
INVESTMENT OPERATIONS(a):
Net investment income (loss)..... (0.02) 0.05 0.18 0.26 0.17
Net realized and unrealized
gain on investments.............. (2.25) 2.58 2.58 1.65 0.67
------------- ------------ ------------- ------------ ------------- -------------
Total investment operations..... (2.27) 2.63 2.76 1.91 0.84
------------- ------------ ------------- ------------ ------------- -------------
DISTRIBUTIONS TO PREFERRED
STOCKHOLDERS:
Net investment income... (0.01) (0.01) (0.03) (0.04) (0.03)
Net realized gain on
investments..................... (0.28) (0.30) (0.30) (0.32) (0.26)
Quarterly distributions* - - - - -
------------- ------------ ------------- ------------ ------------- -------------
Total distribution to
Preferred Stockholders......... (0.29) (0.31) (0.33) (0.36) (0.29)
------------- ------------ ------------- ------------ ------------- -------------
DISTRIBUTIONS TO COMMON
STOCKHOLDERS:
Net investment income........... (0.07) (0.05) (0.13) (0.15) (0.16)
Net realized gain on
investments..................... (1.44) (1.44) (1.35) (1.22) (1.38)
Quarterly distributions* - - - -
------------- ------------ ------------- ------------ ------------- -------------
Total distribution to
Common Stockholders............ (1.51) (1.49) (1.48) (1.37) (1.54)
------------- ------------ ------------- ------------ ------------- -------------
CAPITAL STOCK TRANSACTIONS:
Effect of reinvestment
of distributions
by Common Stockholder........... (0.02) (0.08) (0.16) (0.13) (0.09)
Effect of Preferred
Stock offering.................. - - - - (0.11)
------------- ------------ ------------- ------------ ------------- -------------
Total capital stock
transactions................... (0.02) (0.08) (0.16) (0.13) (0.20)
============= ============ ============= ============ ============= =============
NET ASSET VALUE, END OF $ $13.22 $17.31 $16.56 $15.77 $15.72
PERIOD(a)
============= ============ ============= ============ ============= =============
MARKET VALUE, END OF PERIOD $ $13.25 $15.72 $14.438 $13.063 $13.75
============= ============ ============= ============ ============= =============
TOTAL RETURN(b):
Market Value....................... %*** (6.9)% 20.0% 22.7% 5.7% 1.5%
Net Asset Value(a)................. %*** (15.6)% 15.2% 16.6% 11.7% 3.3%
RATIOS BASED ON AVERAGE
NET ASSETS APPLICABLE TO
COMMON STOCKHOLDERS:
Total expenses (c, d).............. %** 1.72% 1.61% 1.43% 1.39% 1.31%
Management fee expense.......... %** 1.56% 1.45% 1.25% 1.18% 1.10%
Interest expense................ - - - - -
Other operating expenses ....... %** 0.16% 0.16% 0.18% 0.21% 0.21%
Net investment income (loss)....... %** (0.09)% 0.35% 1.18% 1.47% 1.11%
SUPPLEMENTAL DATA:
Net Assets; End of Period
(in thousands)..................... $ $720,776 $849,141 $783,262 $712,928 $676,963
Portfolio Turnover Rate............ % 35% 30% 36% 41% 43%
Average Commission Rate Paid....... - - - - - -
PREFERRED STOCK:
Total shares outstanding........... 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000
Asset coverage per share........... $ $112.62 $132.68 $122.38 $111.40 $105.78
Liquidation preference per share... $25.00 $25.00 $25.00 $25.00 $25.00 $25.00
Average market value per share:
7.80% Cumulative
Preferred Stock (e)............. $ $26.37 $25.70 $23.44 $24.98 $25.91
7.30% Tax-Advantaged
Cumulative Preferred Stock(e)... $ $25.82 $25.37 $22.35 $24.24 $25.43
NOTES:
Total amount outstanding
(in thousands)..................... - - - - - -
Asset coverage per note............ - - - - - - $
Average market value per note(e)... - - - - - -
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $14.32 $13.56 $12.34 $13.47 $12.50
INVESTMENT OPERATIONS(a):
Net investment income (loss)..... 0.21 0.26 0.04 0.04 0.09
Net realized and unrealized
gain on investments.............. 3.85 1.92 2.70 0.09 2.12
------------ ------------- ------------ ------------- ------------
Total investment operations..... 4.06 2.18 2.74 0.13 2.21
------------ ------------- ------------ ------------- ------------
DISTRIBUTIONS TO PREFERRED
STOCKHOLDERS:
Net investment income... (0.03) (0.01) - - -
Net realized gain on
investments..................... (0.15) (0.06) - - -
Quarterly distributions* - - - - -
------------ ------------- ------------ ------------- ------------
Total distribution to
Preferred Stockholders......... (0.18) (0.07) - - -
------------ ------------- ------------ ------------- ------------
DISTRIBUTIONS TO COMMON
STOCKHOLDERS:
Net investment income........... (0.19) (0.15) (0.03) (0.01) (0.09)
Net realized gain on
investments..................... (1.02) (1.00) (1.26) (1.04) (1.06)
Quarterly distributions* - - - - -
------------ ------------- ------------ ------------- ------------
Total distribution to
Common Stockholders............ (1.21) (1.15) (1.29) (1.05) (1.15)
------------ ------------- ------------ ------------- ------------
CAPITAL STOCK TRANSACTIONS:
Effect of reinvestment
of distributions
by Common Stockholder........... (0.08) (0.11) (0.11) (0.07)+ (0.01)
Effect of Preferred
Stock offering.................. - (0.09) - - -
------------ ------------- ------------ ------------- ------------
Total capital stock
transactions................... (0.08) (0.20) (0.23) (0.21) (0.09)
============ ============= ============ ============= ============
NET ASSET VALUE, END OF $16.91 $14.32 $13.56 $12.34 $13.47
PERIOD(a)
============ ============= ============ ============= ============
MARKET VALUE, END OF PERIOD $15.063 $12.625 $11.875 $11.00 $12.875
============ ============= ============ ============= ============
TOTAL RETURN(b):
Market Value....................... 28.8% 16.3% 19.45% -6.68% 14.91%
Net Asset Value(a)................. 27.5% 15.5% 21.08% 0.06% 17.27%
RATIOS BASED ON AVERAGE
NET ASSETS APPLICABLE TO
COMMON STOCKHOLDERS:
Total expenses (c, d).............. 1.12% 1.28% 2.01% 2.01% 1.33%
Management fee expense.......... 0.39% 0.39% 0.97% 1.21% 1.09%
Interest expense................ - 0.45% 0.64% 0.75% 0.46%
Other operating expenses ....... 0.28% 0.25% 0.29% 0.34% 0.24%
Net investment income (loss)....... 1.53% 1.27% 0.34% 0.31% 0.74%
SUPPLEMENTAL DATA:
Net Assets; End of Period
(in thousands)..................... $554,231 $441,837 $338,970 $269,032 $246,558
Portfolio Turnover Rate............ 29% 34% 32% 35% 33%
Average Commission Rate Paid....... - - - - -
PREFERRED STOCK:
Total shares outstanding........... 2,400,000 2,400,000 - - -
Asset coverage per share........... $165.51 $120.15 - - -
Liquidation preference per share... $25.00 $25.00 - - -
Average market value per share:
7.80% Cumulative
Preferred Stock (e)............. $25.70 $25.20 - - -
7.30% Tax-Advantaged
Cumulative Preferred Stock(e)... - - - - -
NOTES:
Total amount outstanding
(in thousands)..................... $27,801 $40,000 $40,000 $40,000 -
Asset coverage per note............ $2,090.59 $1,201.51 $944.35 $768.67 -
Average market value per note(e)... $107.69 $100.68 $96.62 $95.62 -
15
(a) Commencing June 21, 1995 through December 31, 1997, Net Asset
Value per share, Net Asset Value Total Returns and Income from
Investment Operations were calculated assuming that the then
outstanding convertible notes had been fully converted, except when the
effect of doing so resulted in a higher Net Asset Value per share than
would have been calculated without such assumption. If it were not
assumed that the Notes had been converted, the Net Asset Value per
share would have been increased by $0.31 at December 31, 1997, $0.17 at
December 31, 1996 and $0.09 at December 31, 1995.
(b) The Market Value Total Return is calculated assuming a purchase of
Common Stock on the opening of the first business day and a sale on the
closing of the last business day of each period reported. Dividends and
distributions, if any, are assumed for the purposes of this
calculation, to be reinvested at prices obtained under the Fund's
Distribution Reinvestment and Cash Purchase Plan. Net Asset Value Total
Return is calculated on the same basis, except that the Fund's net
asset value is used on the purchase and sale dates instead of market
value. Net Asset Value and Market Value Total Return, assuming a
continuous stockholder who fully participated in the primary rights
offerings, were _____% and _____%, 22.42% and 19.55%, 0.94% and -6.53%,
and 17.82% and 14.60%, for the six months ended June 30, 2003 and the
years ended December 31, 1995, 1994, and 1993, respectively. These
returns include the positive impact to a stockholder from participation
in the primary subscription of these rights offerings resulting from
the purchase of shares in each such offering at a discount to the
market price and net asset value of the Fund.
(c) Expense ratios based on total average net assets were _____%,
_____%, 1.30%, 1.12%, 1.06%, 1.06%, 0.99%, 1.20%, 2.01%, 2.01% and
1.33% for the six months ended June 30, 2003 and the years ended
December 31, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and
1993, respectively.
(d) Expense ratios based on average net assets applicable to Common
Stockholders before waiver of fees by Royce would have been _____,
_____%, 1.65%, 1.51%, 1.48%, 1.34%, 1.14%, 1.31%, 2.04% and 2.02% for
the six months ended June 30, 2003 and the years ended December 31,
2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995 and 1994, respectively.
(e) The average of month-end market values during the period. The
7.80% Preferred and the 7.30 Preferred will be redeemed with the net
proceeds from the issuance of the Cumulative Preferred Stock.
* To be allocated to net investment income and capital gains at year-end.
** Annualized.
*** Not annualized.
+ Includes distributions paid January 31, 1994 and December 30, 1994.
16
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially all
of its long-term capital gains, qualified dividend income, and Other Ordinary
Income. The Fund is a regulated investment company ("RIC"), and a RIC's
distributions generally retain their character as long-term capital gains,
qualified dividend income, or Other Ordinary Income when received by its
preferred and common stockholders. Thus, distributions paid by the Fund
to holders of the Cumulative Preferred Stock will, for Federal income tax
purposes, consist of varying proportions of long-term capital gains, qualified
dividend income, described below, Other Ordinary Income, and/or returns of
capital.
The 2003 Tax Act reduced the individual Federal income tax rate on
long-term capital gains and qualified dividend income to a maximum of 15%.
Qualified dividend income consists of dividends paid by domestic corporations
and certain foreign corporations. Under the 2003 Tax Act, the maximum
individual Federal income tax rate on Other Ordinary Income is 35%. These tax
rates are scheduled to apply through 2008. Assuming the 2003 Tax Act had been
in effect during the past one, three and five years ended December 31, 2002,
the distributions of taxable income by the Fund would have consisted of
approximately ____%, ____% and ____% long-term capital gains and qualified
dividend income and approximately ____%, ____% and ____% Other Ordinary
Income. No assurance can be given, however, as to what percentage, if any, of
the dividends paid on the Cumulative Preferred Stock will consist of long-term
capital gains and qualified dividend income, which are taxed at lower rates
for individuals than Other Ordinary Income.
Although the Fund is not managed utilizing a tax-focused investment
strategy and does not seek to achieve any particular distribution composition,
its primary investment goal is long-term capital growth. Accordingly,
individual investors in the Cumulative Preferred Stock would, under current
Federal income tax law, also realize a tax advantage on their investment to
the extent that distributions made by the Fund to its stockholders continue to
consist primarily of the less highly taxed long-term capital gains as well as
qualified dividend income. The Federal income tax characteristics of the Fund
and the taxation of its stockholders are described more fully under
"Taxation".
Assumptions
The following table shows examples of the pure Other Ordinary Income
equivalent yield that would be generated by the indicated dividend rate on the
Cumulative Preferred Stock, assuming distributions consisting of three
different proportions of long-term capital gains, qualified dividend income
and Other Ordinary Income for an individual investor in the 35% Federal
marginal income tax bracket. In reading these tables, prospective investors
should understand that a number of factors could affect the actual composition
for Federal income tax purposes of the Fund's distributions each year. Such
factors include (i) the Fund's investment performance for any particular year,
which may result in varying proportions of long-term capital gains, qualified
dividend income, Other Ordinary Income and/or return of capital in the year's
distribution and (ii) the timing of the realization of gains and losses during
the Fund's taxable year.
17
THESE TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN
AS AN INDICATION OF THE ACTUAL COMPOSITION FOR FEDERAL INCOME TAX PURPOSES OF
THE FUND'S FUTURE DISTRIBUTIONS.
Percentage of Cumulative Preferred Stock Annual A Cumulative Preferred Stock
Dividend Composed of Annual Dividend Rate of
-----------------------------------------------------------------------------------------------------------
_____% _____% _____%
Long-Term Capital Gains and
Qualified Dividend Income Other Ordinary Income Is Equivalent to an Other Ordinary Income Yield of
-----------------------------------------------------------------------------------------------------------
90% 10% _____% _____% _____%
75% 25% _____% _____% _____%
50% 50% _____% _____% _____%
Assuming that long-term capital gains and qualified dividend income
comprise 90% of a stated Cumulative Preferred Stock dividend and that Other
Ordinary Income comprises the remaining 10% of that Cumulative Preferred Stock
dividend, the following table shows the pure Other Ordinary Income equivalent
yields that would be generated at the stated dividend rate for taxpayers in
the indicated tax brackets.
A Cumulative Preferred Stock
Annual Dividend Rate of
------------------------------------------------------
_____% _____% _____%
2003 Federal Marginal Income Tax Bracket* Is Equivalent to an Other Ordinary Income Yield of
-------------------------------------------------------------------------------------------------------------------
35.0%................................................... _____% _____% _____%
33.0%................................................... _____% _____% _____%
28.0%................................................... _____% _____% _____%
25.0%**................................................. _____% _____% _____%
______________
* Annual taxable income levels corresponding to the 2003 Federal marginal
tax brackets are as follows: 35.0% -- over $311,950 for both single
and joint returns; 33.0% -- $143,501 - $311,950 for single returns, $174,701 -
$311,950 for joint returns; 28.0% -- $68,801 - $143,500 for single returns,
$114,651 - $174,700 for joint returns; and 25.0% -- $28,401 - $68,800 for
single returns, $56,801 - $114,650 for joint returns. An investor's Federal
marginal income tax rates may exceed the rates shown in the above table due to
the reduction, or possible elimination, of the personal exemption deduction
for high-income taxpayers and an overall limit on itemized deductions. Income
also may be subject to certain state, local and foreign taxes. For investors
who pay alternative minimum tax, equivalent yields may be lower than those
shown above. The tax rates shown above do not apply to corporate taxpayers.
** Assumes that such individuals are taxed at a 15% rate on long-term
capital gains and qualified dividend income received from the Fund.
18
THE FUND
The Fund is a closed-end diversified management investment company,
incorporated under the laws of the State of Maryland on July 1, 1986 and
registered under the 1940 Act. The Fund commenced operations in November 1986.
Assuming the Fund had issued and sold the Cumulative Preferred Stock and
redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003, the
Fund would have had _________ shares of Common Stock issued and outstanding,
with an aggregate net asset value of $_________, and _________ shares of
Cumulative Preferred Stock issued and outstanding, with an aggregate
liquidation preference of $_________. The Fund's principal office is located
at 1414 Avenue of the Americas, New York, New York 10019, and its telephone
number is (800) 221-4268.
The Fund's primary investment goal is long-term capital growth. Royce
normally invests more than 75% of the Fund's assets in the equity securities
of small- and micro-cap companies, generally with stock market capitalizations
ranging from $100 million to $2 billion, that Royce believes are trading
significantly below its estimate of their current worth. The Fund may also
invest up to 25% of its assets in non-convertible fixed income securities. An
investment in the Fund is not appropriate for all investors. No assurance can
be given that the Fund's investment goal will be realized. See "Investment
Goal, Policies and Risks".
USE OF PROCEEDS
The net proceeds from the offering of the Cumulative Preferred Stock
are estimated at $________, after deduction of the underwriting discounts and
estimated offering expenses payable by the Fund. The Fund will use the net
proceeds from the offering of the Cumulative Preferred Stock to redeem the
7.80% Preferred and the 7.30% Preferred. In order for the Fund to redeem the
7.80% Preferred and the 7.30% Preferred, the Fund must pay the 7.80%
Preferred's aggregate liquidation preference of $60,000,000 and the 7.30%
Preferred's aggregate liquidation preference of $100,000,000, plus an amount
equal to accumulated and unpaid dividends (whether or not earned or declared)
on the 7.80% Preferred and the 7.30% Preferred through the applicable
redemption date. Royce expects to invest the proceeds remaining after the
redemption of the 7.80% Preferred and the 7.30% Preferred in accordance with
the Fund's investment goal and policies within approximately six months from
the completion of the offering, depending on market conditions for the types
of securities in which the Fund principally invests. Pending any such
investment, the proceeds will be held in high quality short-term debt
securities and instruments and money market mutual funds. Any delay by Royce
in investing such remaining proceeds may hinder the Fund's ability to achieve
its investment goal.
19
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
June 30, 2003, and as adjusted to give effect to the issuance of the
Cumulative Preferred Stock and the redemption of the 7.80% Preferred and the
7.30% Preferred.
Outstanding As Adjusted
--------------------------------
Stockholders' equity:
Preferred stock, $.001 par value per share, authorized 50,000,000
shares of which the following series have been classified and
designated:
7.80% Cumulative Preferred Stock, authorized 10,000,000 shares,
issued and outstanding 2,400,000 shares.......................... $ 60,000,000 $0
7.30% Tax-Advantaged Cumulative Preferred Stock, authorized
10,000,000 shares, issued and outstanding 4,000,000 shares....... 100,000,000 0
____% Cumulative Preferred Stock, as adjusted, authorized
__________ shares, issued and outstanding _________ shares....... --------------------------------
$160,000,000 $
================================
Common stock, $.001 par value per share:
Authorized 150,000,000 shares, issued and outstanding
__________ shares................................................
Additional paid-in capital............................................ (1)
Undistributed net investment income...................................
Accumulated net realized gains on investments.........................
Net unrealized appreciation on investments............................
--------------------------------
Net assets applicable to outstanding common stock..................... $ $
================================
_____________
(1) After deducting underwriting discounts and estimated costs of this offering of $__________.
20
PORTFOLIO COMPOSITION
The following tables set forth certain information with respect to
the Fund's investment portfolio as of June 30, 2003.
Value Percentage
------------------------
Common stock.......................................... $ %
Preferred stock.......................................
Corporate bonds.......................................
U.S. Treasury obligations.............................
Repurchase agreements.................................
Liabilities less cash and other assets................
------------------------
Total investments.............................. $ %
========================
Sector Weightings in Common Stock Portfolio
Industrial Products................................... $ %
Financial Intermediaries..............................
Industrial Services...................................
Consumer Products.....................................
Technology............................................
Financial Services....................................
Miscellaneous.........................................
Natural Resources.....................................
Retail................................................
Consumer Services.....................................
Health................................................
Utilities.............................................
Total common stock............................. $ %
========================
Other Information Regarding Common Stock Investments
Number of issuers.....................................
Median market capitalization.......................... $
INVESTMENT GOAL, POLICIES AND RISKS
Investment Goal
The Fund's primary investment goal and one of its fundamental
policies is long-term capital growth. Royce normally invests more than 75% of
the Fund's assets in the equity securities of small- and micro-cap companies,
with stock market capitalizations ranging from $100 million to $2 billion.
Stock market capitalization is calculated by multiplying the total number of
common shares issued and outstanding by the per share market price of the
common stock. See "--Changes in Investment Goal and Policies" below. There are
market risks inherent in any investment, and no assurance can be given that
the Fund's primary investment goal will be achieved. Although the Fund may
seek current income by investing in dividend-paying equity securities of
small- and micro-cap companies, this is not the Fund's primary investment
goal.
21
Investment Policies
Royce uses a value method in managing the Fund's assets. In selecting
securities for the Fund, Royce evaluates the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth, basing this assessment on either what it believes a knowledgeable buyer
might pay to acquire the entire company or what it thinks the value of the
company should be in the stock market. This analysis takes a number of factors
into consideration, including the company's future growth prospects and
current financial condition.
Royce invests in securities of companies that are trading
significantly below its estimate of the company's "current worth" in an
attempt to reduce the risk of overpaying for such companies. Royce's value
approach strives to reduce some of the other risks of investing in small- and
micro-cap companies (for the Fund's portfolio taken as a whole) by evaluating
various other risk factors. Royce attempts to lessen financial risk by buying
companies that combine strong balance sheets with low leverage. While no
assurance can be given that this risk-averse value approach will be
successful, Royce believes that it can reduce some of the risks of investing
in the securities of small- and micro-cap companies, which are inherently
fragile in nature and whose securities have substantially greater market price
volatility. Although Royce's approach to security selection seeks to reduce
downside risk to the Fund's portfolio, especially during periods of broad
small-cap market declines, it may also potentially have the effect of limiting
gains in strong small-cap up markets.
Foreign Investments. The Fund may invest up to 10% of its assets in
securities of foreign issuers. Foreign investments involve certain additional
risks, such as political or economic instability of the issuer or of the
country of issue, fluctuating exchange rates, less government regulation of
foreign securities markets and the possibility of imposition of exchange
controls, nationalization or expropriation of assets and more difficulty
obtaining information on the foreign companies.
Fixed Income Securities. The Fund may invest up to 25% of its assets
in direct obligations of the Government of the United States or its agencies
and/or in non-convertible preferred stocks and non-convertible debt securities
of various issuers, including up to 5% of its net assets in below
investment-grade debt securities, also known as high-yield fixed income
securities. Two of the main risks of investing in fixed income securities are
credit risk and interest rate risk. Below investment-grade debt securities may
be in the lowest-grade categories of recognized ratings agencies (C in the
case of Moody's or D in the case of Standard & Poor's) or may be unrated.
High-yield/high-risk investments are primarily speculative and may entail
substantial risk of loss of principal and non-payment of interest, but may
also produce above-average returns for the Fund. Debt securities rated C or D
may be in default as to the payment of interest or repayment of principal. As
of the date of this Prospectus, interest rates are near historical lows which
makes it more likely that they will increase in the future which could, in
turn, result in a decline in the market value of the fixed income securities
held by the Fund.
Warrants, Rights or Options. The Fund may invest up to 5% of its
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
22
interest in the underlying security. A put option gives the holder the right
to sell a particular security at a specified price during the term of the
option. These securities have no voting rights, pay no dividends and have no
liquidation rights. In addition, market prices of warrants, rights or call
options do not necessarily move parallel to the market prices of the
underlying securities; market prices of put options tend to move inversely to
the market prices of the underlying securities.
Securities Lending. The Fund may lend up to 25% of its assets to
brokers, dealers and other financial institutions. However, under the Rating
Agency Guidelines, the Fund may not lend portfolio securities in excess of 15%
of its total assets. The Rating Agency Guidelines may in the future be amended
to permit the Fund to lend a greater percentage of its total assets.
Securities lending allows the Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties that participate in a global securities lending program
organized and monitored by the Fund's custodian and who are deemed by it to be
of good standing. Furthermore, such loans will be made only if, in Royce's
judgment, the consideration to be earned from such loans would justify the
risk.
The current view of the staff of the Commission is that a fund may
engage in such loan transactions only under the following conditions: (i) the
fund must receive 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills or notes) from the borrower; (ii) the borrower must
increase the collateral whenever the market value of the securities loaned
(determined on a daily basis at the close of regular trading) rises above the
value of the collateral; (iii) after giving notice, the fund must be able to
terminate the loan at any time; (iv) the fund must receive reasonable interest
on the loan or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest or other distributions on the securities loaned; (v)
the fund may pay only reasonable custodian fees in connection with the loan;
and (vi) the fund must be able to vote proxies on the securities loaned,
either by terminating the loan or by entering into an alternative arrangement
with the borrower.
Temporary Investments. The assets of the Fund are normally invested
in the equity securities of small- and micro-cap companies. However, for
temporary defensive purposes (i.e., when Royce determines that market
conditions warrant) or when it has uncommitted cash balances, the Fund may
also invest in U.S. Treasury bills, domestic bank certificates of deposit,
repurchase agreements with its custodian bank covering U.S. Treasury and
agency obligations having a term of not more than one week, high-quality
commercial paper and money market funds registered under the 1940 Act, or
retain all or part of its assets in cash. Accordingly, the composition of the
Fund's portfolio may vary from time to time.
Changes in Investment Goal and Policies
The Fund's primary investment goal of long-term capital growth is a
fundamental policy of the Fund and may not be changed without approvals of the
holders of a majority of the Fund's outstanding shares of Common Stock and
Cumulative Preferred Stock and any other Preferred Stock, voting together as a
single class, and a majority of the Cumulative Preferred Stock and any other
Preferred Stock, voting as a separate class (which for this purpose and under
the 1940
23
Act means the lesser of (i) 67% or more of the relevant shares of capital
stock of the Fund present or represented at a meeting of stockholders, at
which the holders of more than 50% of the outstanding relevant shares of
capital stock are present or represented, or (ii) more than 50% of the
outstanding relevant shares of capital stock of the Fund). Except as indicated
under "Investment Restrictions" in the Statement of Additional Information,
the Fund does not consider its other policies, such as seeking current income,
to be fundamental, and such policies may be changed by the Board of Directors
without stockholder approval or prior notice to stockholders.
The Fund's investment policies are subject to certain restrictions.
See "Investment Restrictions" in the Statement of Additional Information.
Risk Factors - Investing in Small- and Micro-Cap Companies
Royce views the large and diverse universe of small-cap companies as
having two investment segments or tiers. Royce defines small-cap as those
companies with market capitalizations between $400 million and $2 billion; it
refers to the segment with market capitalizations less than $400 million as
micro-cap.
The securities of small- and micro-cap companies offer investment
opportunities and additional risks. They may not be well known to the
investing public, may not be significantly owned by institutional investors,
and may not have steady earnings growth. In addition, the securities of such
companies may be more volatile in price, have wider spreads between their bid
and ask prices and have significantly lower trading volumes than larger
capitalization stocks. As a result, the purchase or sale of more than a
limited number of shares of a small- or micro-cap security may affect its
market price. Royce may need a considerable amount of time to purchase or sell
its positions in these securities, particularly when other accounts managed by
Royce or other investors are also seeking to purchase or sell them.
Accordingly, Royce's investment focus on small- and micro-cap companies
generally requires it to have a long-term (at least three years) investment
outlook for a portfolio security.
The micro-cap segment consists of more than 5,900 companies. These
companies are followed by relatively few, if any, securities analysts, and
there tends to be less publicly available information about them. Their
securities generally have even more limited trading volumes and are subject to
even more abrupt or erratic market price movements than are the securities in
the upper tier, and Royce may be able to deal with only a few market-makers
when purchasing and selling these securities. Such companies may also have
limited markets, financial resources or product lines, may lack management
depth and may be more vulnerable to adverse business or market developments.
These conditions, which create greater opportunities to find securities
trading well below Royce's estimate of the company's current worth, also
involve increased risk. This leads Royce to more broadly diversify most of the
Fund's assets invested in micro-cap stocks by holding proportionately smaller
positions in more companies.
The upper tier of the small-cap universe of securities consists of
approximately 1,500 companies. In this segment, there is a relatively higher
level of ownership by institutional investors and more research coverage by
securities analysts than generally exists for micro-cap companies. This
greater attention makes the market for these securities more efficient than
that
24
of micro-cap companies because they have somewhat greater trading volumes and
narrower bid/ask spreads. As a result, Royce normally employs a more
concentrated approach when investing in the upper tier of small-caps, holding
proportionately larger positions in a relatively limited number of securities.
Risk Factors - Liquidity Risk
During an initial period which is not expected to exceed 30 days
after the date of issuance, the Cumulative Preferred Stock will not be listed
on any securities exchange. During such period, the Underwriters intend to
make a market in the Cumulative Preferred Stock; however, they have no
obligation to do so. Consequently, the Cumulative Preferred Stock may be
illiquid during such period. No assurance can be provided that listing on any
securities exchange or market making by the Underwriters will result in the
market for Cumulative Preferred Stock being liquid at any time.
Risk Factors - Credit Rating Risk
The credit rating on the Cumulative Preferred Stock could be reduced
or withdrawn by Moody's while an investor holds shares of Cumulative Preferred
Stock, either as a result of the Fund's termination of compliance with the
Rating Agency Guidelines or otherwise. The credit rating does not eliminate or
mitigate the risks of investing in the Cumulative Preferred Stock. A reduction
or withdrawal of the credit rating by Moody's may have an adverse effect on
the liquidity and market value of the Cumulative Preferred Stock. See
"Description of Cumulative Preferred Stock -- Termination of Rating Agency
Guidelines".
Risk Factors - Leverage and Borrowing
The Fund is authorized to borrow money. So long as the Cumulative
Preferred Stock is rated by Moody's, however, the Fund cannot borrow for
investment leverage purposes. Borrowings create an opportunity for greater
capital appreciation with respect to the Fund's investment portfolio, but at
the same time such borrowing is speculative in that it will increase the
Fund's exposure to capital risk. In addition, borrowed funds are subject to
interest costs that may offset or exceed the return earned on the borrowed
funds.
Senior Securities
The 1940 Act and the Fund's fundamental investment policies and
restrictions (see "Investment Restrictions" in the Statement of Additional
Information) permit the Fund to issue and sell senior securities representing
indebtedness or consisting of Preferred Stock if various requirements are met.
Such requirements include initial asset coverage tests of 300% for
indebtedness and 200% for Preferred Stock and restrictive provisions
concerning Common Stock dividend payments and other distributions, Preferred
Stock dividend payments and other distributions (if indebtedness is incurred),
stock repurchases and maintenance of asset coverage and giving senior
securityholders the right to elect directors in the event specified asset
coverage tests are not met or dividends are not paid. While the issuance and
sale of senior securities allows the Fund to raise additional cash for
investments, it is a speculative investment technique, involving the risk
considerations of leverage, potential dilution and increased share price
volatility for the Fund's Common Stock. In addition, the Fund may be required
to sell
25
investments in order to make required payments to senior securityholders when
it may be disadvantageous to do so.
The Cumulative Preferred Stock offered hereby is a senior security of
the Fund. See "Description of Cumulative Preferred Stock". Payments to the
holders of Cumulative Preferred Stock of dividends or upon redemption or in
liquidation will be subject to the prior payment of interest and repayment of
principal then due on any outstanding indebtedness of the Fund.
Assuming the Fund had issued and sold the Cumulative Preferred Stock
and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003,
the Fund would have had _________ shares of Common Stock issued and
outstanding, with an aggregate net asset value of $________ per share, and
___________ shares of Cumulative Preferred Stock, par value $0.001 per share,
with an aggregate liquidation preference of $____________, issued and
outstanding, and no outstanding indebtedness. Accordingly, assuming the Fund
had issued and sold the Cumulative Preferred Stock and redeemed the 7.80%
Preferred and the 7.30% Preferred as of such date, the Fund could have, under
its investment policies and restrictions, issued and sold senior securities
representing indebtedness of up to $___________ or additional shares of
Preferred Stock having an aggregate involuntary liquidation preference of up
to $__________ or various combinations of lesser amounts of both securities
representing indebtedness and Preferred Stock.
RATINGS AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the
Glossary that appears at the end of this Prospectus.
Moody's has established guidelines in connection with the Fund's
receipt from Moody's of a rating of Aaa for the Cumulative Preferred Stock on
the Date of Original Issue. Moody's, a nationally-recognized securities rating
organization, issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines have been developed by
Moody's in connection with issuances of asset-backed and similar securities,
including debt obligations and various auction rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law, but are being adopted by the Fund in
order to satisfy current requirements necessary for Moody's to issue the
above-described rating for the Cumulative Preferred Stock. The guidelines
provide a set of tests for portfolio composition and discounted asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements of Section 18 of the 1940 Act. The Moody's guidelines are
included in the Articles Supplementary and are referred to in this Prospectus
as the "Rating Agency Guidelines".
The Fund intends to maintain a Portfolio Calculation at least equal
to the Basic Maintenance Amount. If the Fund fails to meet such requirement
and such failure is not cured by the applicable cure date, the Fund will be
required to redeem some or all of the Cumulative Preferred Stock. See
"Description of Cumulative Preferred Stock -- Redemption -- Mandatory
26
Redemption". The Rating Agency Guidelines also: (i) exclude certain types of
securities in which the Fund may invest from Moody's Eligible Assets and,
therefore, from the Portfolio Calculation, (ii) prohibit the Fund's
acquisition of futures contracts or options on futures contracts, (iii)
prohibit reverse repurchase agreements, (iv) limit the writing of options on
portfolio securities and (v) limit the lending of portfolio securities to 15%
of the Fund's total assets. Royce does not believe that compliance with the
Rating Agency Guidelines will have an adverse effect on its management of the
Fund's portfolio or on the achievement of the Fund's investment goal. For a
further discussion of the Rating Agency Guidelines, see "Description of
Cumulative Preferred Stock".
The Fund may, but is not required to, adopt any modifications to the
Rating Agency Guidelines that may hereafter be established by Moody's. Failure
to adopt such modifications, however, may result in a change in the Moody's
rating or a withdrawal of a rating altogether. In addition, Moody's may, at
any time, change or withdraw such rating. The terms of the Cumulative
Preferred Stock provide that the interpretation or applicability of any or
all of the Rating Agency Guidelines, may from time to time be modified by the
Board of Directors of the Fund in its sole discretion based on a determination
by the Board of Directors that such action is necessary or appropriate with
respect to the Cumulative Preferred Stock; provided, however, that the Board
of Directors receives written confirmation from Moody's that any such
modification would not impair the then current rating assigned to the
Cumulative Preferred Stock by Moody's. Furthermore, under certain
circumstances, the Board of Directors of the Fund may determine that it is not
in the best interests of the Fund to continue to comply with the Rating Agency
Guidelines. If the Fund terminates compliance with the Rating Agency
Guidelines, it is likely that Moody's will change its rating on the Cumulative
Preferred Stock or withdraw its rating altogether. However, at the time of
such termination, the Cumulative Preferred Stock must have received a rating
from at least one NRSRO that is at least comparable to the then current rating
from Moody's. The Fund will then be required to comply with the guidelines
established by such successor NRSRO. It is the Fund's present intention to
continue to comply with the Rating Agency Guidelines.
As recently described by Moody's, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the Cumulative Preferred Stock is not a
recommendation to purchase, hold or sell such shares, inasmuch as the rating
does not comment as to market price or suitability for a particular investor.
Moreover, the Rating Agency Guidelines do not address the likelihood that a
holder of Cumulative Preferred Stock will be able to sell such shares. The
rating is based on current information furnished to Moody's by the Fund and
Royce and information obtained from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information.
INVESTMENT ADVISORY AND OTHER SERVICES
Royce & Associates, LLC (which term as used in this Prospectus
includes its corporate predecessor) ("Royce"), a Delaware limited liability
company, is an investment advisory firm whose predecessor was organized in
February 1967. Royce is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Royce became investment adviser
of
27
the Fund in November 1986, when the Fund commenced operations. Royce also
serves as investment adviser to other management investment companies and
institutional accounts. As of June 30, 2003, Royce managed approximately $10.7
billion in assets for the Fund and other client accounts. Substantially all of
Royce's client accounts are managed as small- and micro-cap investment
products. Royce's principal business address is 1414 Avenue of the Americas,
New York, New York 10019.
On October 1, 2001, Royce became an indirect wholly-owned subsidiary
of Legg Mason, Inc. ("Legg Mason"). On March 31, 2002, Royce's corporate
predecessor was merged into Royce Holdings, LLC (a wholly-owned subsidiary of
Legg Mason), which then changed its name to Royce & Associates, LLC. As a
result of this merger, Royce & Associates, LLC became the Fund's investment
adviser and a direct wholly-owned subsidiary of Legg Mason. Founded in 1899,
Legg Mason is a publicly-held financial services company primarily engaged in
providing asset management, securities brokerage, investment banking and
related financial services through its subsidiaries. As of June 30, 2003, Legg
Mason's asset management subsidiaries had aggregate assets under management of
approximately $215.4 billion.
Under the Fund's Articles of Incorporation, as amended and
supplemented (the "Charter"), and Maryland law, the Fund's business and
affairs are managed under the direction of its Board of Directors. Investment
decisions for the Fund are made by Royce, subject to any direction it may
receive from the Fund's Board of Directors, which periodically reviews the
Fund's investment performance.
Portfolio Management
Royce is responsible for the management of the Fund's assets. Royce
has been investing in small-cap companies with a value approach for more than
25 years. Its offices are located at 1414 Avenue of the Americas, New York, NY
10019. Charles M. Royce has been the firm's President and Chief Investment
Officer during this period. He is also the primary portfolio manager of the
Fund.
Royce's investment staff also includes three other Senior Portfolio
Managers: W. Whitney George, Managing Director and Vice President; Boniface A.
Zaino, Managing Director; and Charles R. Dreifus, Principal. Royce's
investment staff is assisted by Jack E. Fockler, Jr., Managing Director and
Vice President. Mr. George has been a Portfolio Manager at Royce since 2000,
and prior thereto was a Senior Analyst. He has been employed by Royce since
1991. Mr. Zaino joined Royce in April 1998 as a Senior Portfolio Manager and
previously was a Portfolio Manager and Group Managing Director at Trust
Company of the West (since 1984). Mr. Dreifus joined Royce in February 1998 as
a Senior Portfolio Manager and previously was a Portfolio Manager and Managing
Director (since June 1995) and General Partner (from 1983 until June 1995) of
Lazard Freres & Co. LLC. Mr. Fockler has been employed by Royce since 1989 as
its Director of Marketing.
Investment Advisory Agreement
Under the Investment Advisory Agreement between the Fund and Royce
dated October 1, 2001 (the "Investment Advisory Agreement"), Royce determines
the composition of the
28
Fund's portfolio, the nature and timing of the changes in it and the manner of
implementing such changes; provides the Fund with investment advisory,
research and related services for the investment of its assets; and pays all
expenses incurred in performing its investment advisory duties under the
Investment Advisory Agreement.
The Fund pays all of its own administrative and other costs and
expenses attributable to its operations and transactions (except those set
forth above), including, without limitation, registrar, transfer agent and
custodian fees; legal, administrative and clerical services; rent for its
office space and facilities; auditing; preparation, printing and distribution
of its proxy statements, stockholder reports and notices; Federal and state
registration fees; listing fees and expenses; Federal, state and local taxes;
non-affiliated Directors fees; interest on its borrowings; brokerage
commissions; and the cost of issue, sale and repurchase of its shares. Thus,
unlike most other investment companies, the Fund is required to pay
substantially all of its expenses, and Royce does not incur substantial fixed
expenses.
Advisory Fee
As compensation for its services under the Investment Advisory
Agreement, Royce is entitled to receive a fee comprised of a Basic Fee (the
"Basic Fee") at the rate of 1% per annum of the Fund's average net assets
(including assets obtained from the sale of Preferred Stock) and an adjustment
to the Basic Fee based on the investment performance of the Fund in relation
to the investment record of the S&P 600 Index. A rolling period of 60 months
ending with the most recent calendar month is utilized for measuring
performance and average net assets, as described below.
The Basic Fee for each such month will be increased or decreased at
the rate of 1/12 of .05% per percentage point, depending on the extent, if
any, by which the investment performance of the Fund exceeds by more than two
percentage points, or is exceeded by more than two percentage points by, the
percentage change in the investment record of the S&P 600 Index for the
performance period. The maximum increase or decrease in the Basic Fee for any
month is 1/12 of 0.5%. Accordingly, for each month the maximum monthly fee
rate as adjusted for performance will be 1/12 of 1.5% and will be payable if
the investment performance of the Fund exceeds the percentage change in the
investment record of the S&P 600 Index by 12 or more percentage points for the
performance period, and the minimum monthly fee rate as adjusted for
performance will be 1/12 of 0.5% and will be payable if the percentage change
in the investment record of the S&P 600 Index exceeds the investment
performance of the Fund by 12 or more percentage points for the performance
period. As a result, the actual investment advisory fee rate may at times be
greater than the fee rate paid by many other funds.
Because the Basic Fee is a function of the Fund's net assets and not
of its total assets, Royce will not receive any fee in respect of those assets
of the Fund equal to the aggregate unpaid principal amount of any indebtedness
of the Fund. Royce will receive a fee in respect of any assets of the Fund
equal to the liquidation preference of the outstanding Cumulative Preferred
Stock and for any other Preferred Stock that may be issued and sold by the
Fund.
The following table illustrates, on an annualized basis, the full
range of permitted increases or decreases to the Basic Fee.
29
Difference between Performance
of Fund and % Change in S & P Adjustment to 1%
600 Index Record Basic Fee Fees as Adjusted
---------------- --------- ----------------
+12 or more +0.50% 1.50%
+11 +0.45% 1.45%
+10 +0.40% 1.40%
+9 +0.35% 1.35%
+8 +0.30% 1.30%
+7 +0.25% 1.25%
+6 +0.20% 1.20%
+5 +0.15% 1.15%
+4 +0.10% 1.10%
+3 +0.05% 1.05%
+/-2 0.00% 1.00%
-3 -0.05% 0.95%
-4 -0.10% 0.90%
-5 -0.15% 0.85%
-6 -0.20% 0.80%
-7 -0.25% 0.75%
-8 -0.30% 0.70%
-9 -0.35% 0.65%
-10 -0.40% 0.60%
-11 -0.45% 0.55%
-12 or less -0.50% 0.50%
In calculating the investment performance of the Fund and the
percentage change in the investment record of the S&P 600 Index, all dividends
and other distributions during the performance period are treated as having
been reinvested at net asset value on the record date, and no effect is given
to gain or loss resulting from capital share transactions of the Fund.
Fractions of a percentage point are rounded to the nearest whole point (to the
higher whole point if exactly one-half).
Notwithstanding the foregoing, Royce will not be entitled to receive
any fee for any month when the investment performance of the Fund for the
rolling 36-month period ending with such month is negative on an absolute
basis. In the event that the Fund's investment performance for such a
performance period is less than zero, Royce will not be required to refund to
the Fund any fee earned in respect of any prior performance period.
Royce has volunteered to waive the portion of its investment advisory
fee attributable to the liquidation preference of the 7.80% Preferred, the
7.30% Preferred and the Cumulative Preferred Stock (net of the liquidation
preference of the 7.80% Preferred and the 7.30% Preferred) for any month when
the Fund's net asset value average annual total return since the initial
issuance of the 7.80% Preferred, the 7.30% Preferred or the Cumulative
Preferred Stock fails to exceed the blended dividend rate on those assets.
Because Royce's fee is partially based on the average net assets of
the Fund (including assets obtained from the sale of the Cumulative Preferred
Stock and other Preferred Stock), Royce has generally benefited from the
Fund's issuance of Preferred Stock.
30
Code of Ethics
The Fund's Board of Directors approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Fund and Royce. The Code of Ethics
establishes procedures for personal investing and restricts certain
transactions. Employees subject to the Code of Ethics may invest in securities
for their personal investment accounts, including, in certain cases,
securities that may be purchased or held by the Fund. See "Code of Ethics and
Related Matters" in the Statement of Additional Information.
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Charter, including the Articles Supplementary,
the form of which is filed as an exhibit to the Fund's Registration Statement,
and the Bylaws. Certain of the capitalized terms used herein are defined in
the Glossary that appears at the end of this Prospectus.
General
The Cumulative Preferred Stock offered hereby is a senior security of
the Fund. Under the terms of the Cumulative Preferred Stock, the Fund is
initially authorized to issue up to ______ shares of Cumulative Preferred
Stock. No fractional shares of Cumulative Preferred Stock will be issued. The
Board of Directors reserves the right to issue additional shares of Cumulative
Preferred Stock or other Preferred Stock from time to time, subject to the
restrictions in the Charter and the 1940 Act. The shares of Cumulative
Preferred Stock will, upon issuance, be fully paid and nonassessable and will
have no 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 as to dividends or other distributions,
qualifications or terms or conditions of redemption. The Fund will not issue
any class of stock senior to the shares of Cumulative Preferred Stock.
Dividends
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if authorized by the Board of Directors and declared by
the Fund out of funds legally available therefor, cumulative cash dividends at
the annual rate of ____% per share of the liquidation preference of $25.00 per
share, payable quarterly on March __, June __, September __ and December __
(each, a "Dividend Payment Date"), commencing on December __, 2003, to the
persons in whose names the shares of Cumulative Preferred Stock are registered
at the close of business on the preceding March __, June __, September __ and
December __, respectively.
Dividends on the shares of Cumulative Preferred Stock will accumulate
from the date on which such shares are originally issued (the "Date of
Original Issue").
31
No dividends will be declared or paid or set apart for payment on
shares of Cumulative Preferred Stock for any dividend period or part thereof
unless full cumulative dividends have been or contemporaneously are declared
and paid on all outstanding shares of Cumulative Preferred Stock through the
most recent Dividend Payment Date thereof. If full cumulative dividends are
not paid on the Cumulative Preferred Stock, all dividends on the shares of
Cumulative Preferred Stock will be paid pro rata to the holders of the shares
of Cumulative Preferred Stock. Holders of Cumulative Preferred Stock will not
be entitled to any dividends, whether payable in cash, property or stock, in
excess of full cumulative dividends. No interest, or sum of money in lieu of
interest, will be payable in respect of any dividend payment that may be in
arrears.
For so long as any shares of Cumulative Preferred Stock are
outstanding, the Fund will not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Common Stock or other stock, if any, ranking junior to the Cumulative
Preferred Stock as to dividends or payment upon liquidation) in respect of the
Common Stock or any other stock of the Fund ranking junior to or on a parity
with the Cumulative Preferred Stock as to dividends or payment upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of its Common Stock or any other junior stock (except
by conversion into or exchange for stock of the Fund ranking junior to or on a
parity with the Cumulative Preferred Stock as to dividends or payment upon
liquidation), unless, in each case, (i) immediately after such transaction,
the Fund will have a Portfolio Calculation for Moody's at least equal to the
Basic Maintenance Amount and the Fund will maintain the Asset Coverage (see
"-- Asset Maintenance" and "-- Redemption" below), (ii) full cumulative
dividends on shares of Cumulative Preferred Stock due on or prior to the date
of the transaction have been declared and paid (or sufficient Deposit
Securities to cover such payment have been deposited with the Paying Agent)
and (iii) the Fund has redeemed the full number of shares of Cumulative
Preferred Stock required to be redeemed by any provision for mandatory
redemption contained in the Charter.
If the Fund fails to pay dividends for two years or more, holders of
the Cumulative Preferred Stock will acquire certain additional voting rights.
See "-- Voting Rights" below. Such rights will be their exclusive remedy for
any such failure.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Cumulative Preferred Stock. These
requirements are summarized below.
Asset Coverage. Under the terms of the Cumulative Preferred Stock,
the Fund will be required to maintain as of the last Business Day of each
March, June, September and December of each year, an "asset coverage" (as
defined by the 1940 Act) of at least 200% (or such higher percentage as may be
required under the 1940 Act) with respect to all outstanding senior securities
of the Fund which are stock, including the Cumulative Preferred Stock (the
"Asset Coverage"). If the Fund fails to maintain the Asset Coverage on such
dates and such failure is not cured in 60 days, the Fund will be required
under certain circumstances to redeem certain of
32
the shares of Cumulative Preferred Stock. See "-- Redemption -- Mandatory
Redemption" below.
Assuming the Fund had issued and sold the Cumulative Preferred Stock
and redeemed the 7.80% Preferred and the 7.30% Preferred as of June 30, 2003,
the Asset Coverage immediately following such issuance and sale of the
Cumulative Preferred Stock and such redemption of the 7.80% Preferred and the
7.30% Preferred (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $______), would
have been computed as follows:
Value of Fund assets less
liabilities not constituting senior securities $
------------------------------------------------------- ---------
Senior securities representing indebtedness plus = $ = ___%
aggregate liquidation preference of
the Cumulative Preferred Stock
Basic Maintenance Amount. Under the terms of the Cumulative Preferred
Stock, the Fund will be required to maintain, as of each Valuation Date,
portfolio holdings meeting specified guidelines of Moody's, as described under
"Rating Agency Guidelines", having an aggregate discounted value (a "Portfolio
Calculation") at least equal to the Basic Maintenance Amount, which is in
general the sum of the aggregate liquidation preferences of the Cumulative
Preferred Stock and any other Preferred Stock, any indebtedness for borrowed
money and current liabilities and dividends. If the Fund fails to meet such
requirement as to any Valuation Date and such failure is not cured within 14
days after such Valuation Date, the Fund will be required to redeem certain of
the shares of Cumulative Preferred Stock. See "-- Redemption -- Mandatory
Redemption" below.
Any security not in compliance with the Rating Agency Guidelines will
be excluded from the Portfolio Calculation.
The Moody's Discount Factors and guidelines for determining the
market value of the Fund's portfolio holdings have been based on criteria
established in connection with the rating of the Cumulative Preferred Stock.
These factors include, but are not limited to, the sensitivity of the market
value of the relevant asset to changes in interest rates, the liquidity and
depth of the market for the relevant asset, the credit quality of the relevant
asset (for example, the lower the rating of a corporate debt obligation, the
higher the related discount factor) and the frequency with which the relevant
asset is marked to market. The Moody's Discount Factor relating to any asset
of the Fund and the Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Board of Directors, provided that, among
other things, such changes will not impair the rating then assigned to the
Cumulative Preferred Stock by Moody's.
On or before the third Business Day after each Quarterly Valuation
Date, the Fund is required to deliver to Moody's a Basic Maintenance Report
("Basic Maintenance Report"). At least once during each fiscal year of the
Fund, within ten Business Days after delivery of such report relating to a
Quarterly Valuation Date, the Fund will deliver a letter prepared by the
Fund's independent accountants regarding the accuracy of the calculations made
by the Fund in
33
such a Basic Maintenance Report randomly selected by the Fund's independent
accountants. If any such letter prepared by the Fund's independent accountants
shows that an error was made in the most recent Basic Maintenance Report, the
calculation or determination made by the Fund's independent accountants will
be conclusive and binding on the Fund.
Redemption
Mandatory Redemption. The Fund will be required to redeem, at a
redemption price equal to $25.00 per share plus accumulated and unpaid
dividends through the date of redemption (whether or not earned or declared)
(the "Redemption Price"), certain of the shares of Cumulative Preferred Stock
(to the extent permitted under the 1940 Act and Maryland law) in the event
that:
(i) the Fund fails to maintain the quarterly Asset Coverage
and such failure is not cured on or before 60 days following such
failure (a "Cure Date"); or
(ii) for so long as the Fund is complying with the Rating
Agency Guidelines, the Fund fails to maintain a Portfolio Calculation
at least equal to the Basic Maintenance Amount as of any Valuation
Date, and such failure is not cured on or before the 14th day after
such Valuation Date (also, a "Cure Date").
The amount of such mandatory redemption will equal the minimum number
of outstanding shares of Cumulative Preferred Stock and/or any other Preferred
Stock the redemption of which, if such redemption had occurred immediately
prior to the opening of business on a Cure Date, would have resulted in the
Asset Coverage having been satisfied or the Fund having a Portfolio
Calculation for Moody's equal to or greater than the Basic Maintenance Amount
on such Cure Date or, if the Asset Coverage or a Portfolio Calculation for
Moody's equal to or greater than the Basic Maintenance Amount, as the case may
be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at
the Redemption Price. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (i) above, the Fund may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred
Stock in order to increase the "asset coverage" (as defined in the 1940 Act)
of the remaining outstanding shares of Cumulative Preferred Stock and any
other Preferred Stock after redemption up to 275%. In the event that shares of
Cumulative Preferred Stock and/or any other Preferred Stock are redeemed due
to the occurrence of (ii) above, the Fund may, but is not required to, redeem
a sufficient number of shares of Cumulative Preferred Stock so that the
Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining
outstanding shares of Cumulative Preferred Stock and any other Preferred Stock
remaining after redemption by up to 10%.
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the shares of Cumulative Preferred
Stock to be redeemed on any redemption date, the Fund is required to redeem on
such redemption date that number of shares for which it has legally available
funds and is otherwise able to redeem, pro rata from each holder whose shares
are to be redeemed, and the remainder of the shares required to be redeemed
will be redeemed on the earliest practicable date on which the Fund will have
funds legally
34
available for the redemption of, or is otherwise able to redeem, such shares
upon written notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be
redeemed, such redemption will be made pro rata from each holder of shares in
accordance with the respective number of shares held by each such holder on
the record date for such redemption. If fewer than all shares of Cumulative
Preferred Stock held by any holder are to be redeemed, the Notice of
Redemption mailed to such holder will specify the number of shares to be
redeemed from such holder. Unless all accumulated and unpaid dividends for all
past dividend periods will have been or are contemporaneously paid or declared
and Deposit Securities for the payment thereof deposited with the Paying
Agent, no redemptions of Cumulative Preferred Stock or any other Preferred
Stock may be made.
Optional Redemption. Prior to __________ __, 2008, the shares of
Cumulative Preferred Stock are not subject to any optional redemption by the
Fund unless such redemption is necessary, in the judgment of the Board of
Directors of the Fund, to maintain the Fund's status as a RIC under the Code.
Commencing __________ __, 2008 and thereafter, the Fund may at its option
redeem shares of Cumulative Preferred Stock at any time in whole or in part at
the Redemption Price. Such redemptions are subject to the limitations of the
1940 Act and Maryland law.
Redemption Procedures. A Notice of Redemption will be given to the
holders of record of Cumulative Preferred Stock selected for redemption not
less than 30 or more than 45 days prior to the date fixed for the redemption.
Each Notice of Redemption will state: (i) the redemption date, (ii) the number
of shares of Cumulative Preferred Stock to be redeemed, (iii) the CUSIP
number(s) of such shares, (iv) the Redemption Price, (v) the place or places
where such shares are to be redeemed, (vi) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date and (vii) the
provision of the Charter under which the redemption is being made. No defect
in the Notice of Redemption or in the mailing thereof will affect the validity
of the redemption proceedings, except as required by applicable law.
Liquidation Rights
Upon a liquidation, dissolution or winding up of the affairs of the
Fund (whether voluntary or involuntary), holders of shares of Cumulative
Preferred Stock then outstanding will be entitled to receive out of the assets
of the Fund available for distribution to stockholders, after satisfying
claims of creditors but before any distribution or payment of assets is made
to holders of the Common Stock or any other class of stock of the Fund ranking
junior to the Cumulative Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $25.00 per share plus an amount
equal to all unpaid dividends accumulated to and including the date fixed for
such distribution or payment (whether or not earned or declared by the Fund,
but excluding interest thereon) (the "Liquidation Preference"), and such
holders will be entitled to no further participation in any distribution
payment in connection with any such liquidation, dissolution or winding up.
If, upon any liquidation, dissolution or winding up of the affairs of the
Fund, whether voluntary or involuntary, the assets of the Fund available for
distribution among the holders of all outstanding shares of Cumulative
Preferred Stock and any other outstanding class or series of Preferred Stock
of the Fund ranking on a parity with the Cumulative Preferred Stock
35
as to payment upon liquidation, will be insufficient to permit the payment in
full to such holders of Cumulative Preferred Stock of the Liquidation
Preference and the amounts due upon liquidation with respect to such other
Preferred Stock, then such available assets will be distributed among the
holders of Cumulative Preferred Stock and such other Preferred Stock ratably
in proportion to the respective preferential amounts to which they are
entitled. Unless and until the Liquidation Preference has been paid in full to
the holders of Cumulative Preferred Stock, no dividends or distributions will
be made to holders of the Common Stock or any other stock of the Fund ranking
junior to the Cumulative Preferred Stock as to liquidation.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of Preferred Stock, will be entitled to participate
equally and ratably in the remaining assets of the Fund.
Voting Rights
Except as otherwise stated in this Prospectus and as otherwise
required by applicable law, holders of shares of Cumulative Preferred Stock
and any other Preferred Stock will be entitled to one vote per share on each
matter submitted to a vote of stockholders and will vote together with holders
of shares of Common Stock as a single class. Also, except as otherwise
required by the 1940 Act, (i) holders of outstanding shares of the Cumulative
Preferred Stock will be entitled as a series, to the exclusion of the holders
of all other securities, including other Preferred Stock, Common Stock and
other classes of capital stock of the Fund, to vote on matters affecting the
Cumulative Preferred Stock that do not materially adversely affect any of the
contract rights of holders of such other securities, including other Preferred
Stock, Common Stock and other classes of capital stock, as expressly set forth
in the Fund's Charter, and (ii) holders of outstanding shares of Cumulative
Preferred Stock will not be entitled to vote on matters affecting any other
Preferred Stock that do not materially adversely affect any of the contract
rights of holders of the Cumulative Preferred Stock, as expressly set forth in
the Charter. The foregoing voting provisions will not apply to any shares of
Cumulative Preferred Stock if, at or prior to the time when the act with
respect to which such vote otherwise would be required will be effected, such
shares will have been (i) redeemed or (ii) called for redemption and
sufficient Deposit Securities provided to the Paying Agent to effect such
redemption.
In connection with the election of the Fund's directors, holders of
shares of Cumulative Preferred Stock and any other Preferred Stock, voting as
a separate class, will be entitled at all times to elect two of the Fund's
directors, and the remaining directors will be elected by holders of shares of
Common Stock and holders of shares of Cumulative Preferred Stock and any other
Preferred Stock, voting together as single class. In addition, if at any time
dividends on outstanding shares of Cumulative Preferred Stock and/or any other
Preferred Stock are unpaid in an amount equal to at least two full years'
dividends thereon and sufficient Deposit Securities shall not have been
deposited with the Paying Agent for the payment of such accumulated dividends,
or if at any time holders of any shares of Preferred Stock are entitled,
together with the holders of shares of Cumulative Preferred Stock, to elect a
majority of the directors of the Fund under the 1940 Act, then the number of
directors constituting the Board of Directors will automatically increase by
the smallest number that, when added to the two directors elected exclusively
by the holders of shares of Cumulative Preferred Stock and any other Preferred
Stock as described above, would constitute a majority of the Board of
Directors as so increased by such
36
smallest number. Such additional directors will be elected at a special
meeting of stockholders which will be called and held as soon as practicable,
and at all subsequent meetings at which directors are to be elected, the
holders of shares of Cumulative Preferred Stock and any other Preferred Stock,
voting as a separate class, will be entitled to elect the smallest number of
additional directors that, together with the two directors which such holders
in any event will be entitled to elect, constitutes a majority of the total
number of directors of the Fund as so increased. The terms of office of the
persons who are directors at the time of that election will continue. If the
Fund thereafter pays, or declares and sets apart for payment in full, all
dividends payable on all outstanding shares of Cumulative Preferred Stock and
any other Preferred Stock for all past dividend periods, the additional voting
rights of the holders of shares of Cumulative Preferred Stock and any other
Preferred Stock as described above will cease, and the terms of office of all
of the additional directors elected by the holders of shares of Cumulative
Preferred Stock and any other Preferred Stock (but not of the directors with
respect to whose election the holders of shares of Common Stock were entitled
to vote or the two directors the holders of shares of Cumulative Preferred
Stock and any other Preferred Stock have the right to elect in any event) will
terminate and the number of directors constituting the Board of Directors will
automatically decrease accordingly.
So long as shares of the Cumulative Preferred Stock are outstanding,
the Fund will not, without the affirmative vote of the holders of a majority
of the shares of Cumulative Preferred Stock outstanding at the time, voting
separately as one class, amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to materially adversely
affect any of the contract rights expressly set forth in the Charter of
holders of shares of the Cumulative Preferred Stock. Under Maryland law, the
terms of stock may be made dependent on facts ascertainable outside of the
charter of a corporation, including an action or determination of the board of
directors. Accordingly, the interpretation or applicability of any or all of
the Rating Agency Guidelines, may from time to time be modified by the Board
of Directors in its sole discretion based on a determination by the Board of
Directors that such action is necessary or appropriate with respect to the
Cumulative Preferred Stock; provided, however, that the Board of Directors
receives written confirmation from Moody's that any such modification would
not impair the then current rating assigned to the Cumulative Preferred Stock
by Moody's. Furthermore, under certain circumstances, without the vote of
stockholders, the Board of Directors of the Fund may determine that it is not
in the best interests of the Fund to continue to comply with the Rating Agency
Guidelines. See "-- Termination of Rating Agency Guidelines" below. The
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of the Cumulative Preferred Stock and any other Preferred
Stock, voting as a separate class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote
of security holders under Section 13(a) of the 1940 Act, including, among
other things, changes in the Fund's primary investment goal or changes in the
investment restrictions described as fundamental policies under "Investment
Restrictions" in the Statement of Additional Information. The class vote of
holders of shares of the Cumulative Preferred Stock and any other Preferred
Stock described above in each case will be in addition to a separate vote of
the requisite percentage of shares of Common Stock and Cumulative Preferred
Stock and any other Preferred Stock, voting together as a single class,
necessary to authorize the action in question. See "Description of Capital
Stock -- Certain Corporate Governance Provisions".
37
Termination of Rating Agency Guidelines
The terms of the Cumulative Preferred Stock provide that if the Board
of Directors of the Fund determines that it is not in the best interests of
the Fund to continue to comply with the Rating Agency Guidelines, the Fund
will no longer be required to comply with such guidelines, provided that (i)
the Fund has given the Paying Agent, Moody's and holders of the Cumulative
Preferred Stock at least 20 calendar days written notice of such termination
of compliance, (ii) the Fund is in compliance with the Rating Agency
Guidelines at the time the notice required in clause (i) above is given and at
the time of termination of compliance with the Rating Agency Guidelines, (iii)
at the time the notice required in clause (i) above is given and at the time
of termination of compliance with the Rating Agency Guidelines, the Cumulative
Preferred Stock is listed on the NYSE or on another exchange registered with
the Commission as a national securities exchange and (iv) at the time of
termination of compliance with the Rating Agency Guidelines, the Cumulative
Preferred Stock must have received a rating from at least one NRSRO that is at
least comparable to the then current rating from Moody's.
If the Fund voluntarily terminates compliance with the Rating Agency
Guidelines, Moody's may change its rating on the Cumulative Preferred Stock or
withdraw its rating altogether. However, the Fund will then be required to
comply with the guidelines established by the successor NRSRO. It is the
Fund's present intention to continue to comply with the Rating Agency
Guidelines.
Limitation on Issuance of Additional Preferred Stock
So long as any shares of Cumulative Preferred Stock are outstanding,
the Charter provides that the Fund may issue and sell up to _________
additional shares of the Cumulative Preferred Stock and/or shares of one or
more other series of Preferred Stock, provided that (i) immediately after
giving effect to the issuance and sale of such additional Preferred Stock and
to the Fund's receipt and application of the proceeds thereof, the Fund will
maintain the Asset Coverage of the shares of Cumulative Preferred Stock and
all other Preferred Stock of the Fund then outstanding, and (ii) no such
additional Preferred Stock will have any preference or priority over any other
Preferred Stock of the Fund upon the distribution of the assets of the Fund or
in respect of the payment of dividends.
Board's Ability to Modify Articles Supplementary
The terms of the Cumulative Preferred Stock provide that, to the
extent permitted by law, the Board of Directors may modify or interpret the
terms of the Cumulative Preferred Stock to resolve any inconsistency or
ambiguity or remedy any formal defect so long as such modification or
interpretation does not materially adversely affect any of the contract rights
expressly set forth in the Charter of holders of shares of the Cumulative
Preferred Stock or any other capital stock of the Fund adversely affect the
then current rating on the Cumulative Preferred Stock by Moody's or any
successor NRSRO.
Repurchase of Cumulative Preferred Stock
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem
their shares of the Fund.
38
Redemption of the Cumulative Preferred Stock is subject to the terms of the
Cumulative Preferred Stock. The Fund may, however, repurchase shares of the
Cumulative Preferred Stock and/or any other Preferred Stock when it is deemed
advisable by the Board of Directors in compliance with the requirements of the
1940 Act and the rules and regulations thereunder and Maryland law.
Book-Entry
Shares of Cumulative Preferred Stock will initially be held in the
name of Cede & Co. ("Cede"), as nominee for The Depository Trust Company
("DTC"). The Fund will treat Cede as the holder of record of the Cumulative
Preferred Stock for all purposes. In accordance with the procedures of DTC,
however, purchasers of Cumulative Preferred Stock will be deemed the
beneficial owners of shares purchased for purposes of dividends, voting and
liquidation rights. Purchasers of Cumulative Preferred Stock may obtain
registered certificates by contacting Equiserve Trust Company, N.A., as
transfer agent for the Cumulative Preferred Stock.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The Fund is authorized to issue 150,000,000 shares of Common Stock,
par value $.001 per share. Each share of Common Stock has equal voting,
dividend, distribution and liquidation rights. The shares of Common Stock
outstanding are fully paid and non-assessable. The shares of Common Stock are
not redeemable and have no preemptive, exchange, conversion or cumulative
voting rights. Under Maryland law and the rules of the NYSE, the Fund
generally is required to hold annual meetings of its stockholders.
Preferred Stock
The Fund's Board of Directors has authority to cause the Fund to
issue and sell up to 50,000,000 shares of Preferred Stock, par value $.001 per
share, including shares that may be convertible into shares of the Fund's
Common Stock. The terms of such Preferred Stock would be fixed by the Board of
Directors and would materially limit and/or qualify the rights of the holders
of the Fund's Common Stock. The Board of Directors has designated _________
shares of Preferred Stock as the Cumulative Preferred Stock, _________ of
which are being offered hereby. See "Description of Cumulative Preferred
Stock". The Board of Directors also has classified and designated 10,000,000
shares of Preferred Stock as 7.80% Preferred, 2,400,000 of which are issued
and outstanding, and 10,000,000 shares of Preferred Stock as 7.30% Preferred,
4,000,000 of which are issued and outstanding. The terms of the 7.80%
Preferred and the 7.30% Preferred are substantially similar to the terms of
the Cumulative Preferred Stock. The Fund will use the net proceeds from the
issuance and sale of the Cumulative Preferred Stock to redeem the 7.80%
Preferred and 7.30% Preferred.
39
________________________
The following table shows as of June 30, 2003 the number of shares
of: (i) capital stock authorized, (ii) capital stock held by the Fund for its
own account and (iii) capital stock outstanding for each class of authorized
securities of the Fund.
Amount Outstanding
(Exclusive of
Amount Amount Held by Fund Amount Held by Fund
Title of Class Authorized for its Own Account for its Own Account)
--------------------------------------------------------------
Common Stock.......................... 150,000,000 0 _________
Preferred Stock....................... 50,000,000 0 6,400,000
7.80% Preferred Stock 10,000,000 0 2,400,000
7.30% Preferred Stock 10,000,000 0 4,000,000
Certain Corporate Governance Provisions
The six Fund Directors who are elected by the holders of Common Stock
and Preferred Stock voting together are divided into three classes, each
having a staggered term of three years. The two Directors elected only by the
holders of Preferred Stock stand for election at each annual meeting of
stockholders. Accordingly, it likely would take a number of years for
stockholders to change a majority of the Board of Directors. Vacancies on the
Board of Directors for one or more of the six classified positions may be
filled by the remaining Directors for the balance of the term of the class.
The Fund's Bylaws permit stockholders to call a special meeting of
stockholders only if certain procedural requirements are met and the request
is made by stockholders entitled to cast at least a majority of the votes
entitled to be cast at such a meeting. The Bylaws also require that advance
notice be given to the Fund in the event a stockholder desires to nominate a
person for election to the Board of Directors or to transact any other
business at an annual meeting of stockholders. With respect to an annual
meeting of stockholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not
less than 90 calendar days nor more than 120 calendar days prior to the
anniversary of the date of mailing of the notice for the preceding year's
annual meeting (subject to certain exceptions). Any advance notice by a
stockholder must be accompanied by certain information as provided in the
Bylaws. The Bylaws contain similar advance notice provisions with respect to
special meetings of stockholders.
Certain provisions of the 1940 Act and the Charter require a separate
additional vote of the holders of Preferred Stock to approve certain
transactions, including certain mergers, asset dispositions and conversion of
the Fund to open-end status.
These provisions may have the effect of maintaining the continuity of
management and thus may make it more difficult for the Fund's stockholders to
change the majority of Directors.
40
TAXATION
The Fund intends to continue to qualify for the special tax treatment
afforded RICs under the Internal Revenue Code of 1986, as amended (the
"Code"). As long as it so qualifies, in any taxable year in which it
distributes at least 90% of its investment company taxable income ("ICTI") (as
that term is defined in the Code without regard to the deduction for dividends
paid) for such taxable year, the Fund will not be subject to Federal income
tax on the part of its ICTI and net capital gains (i.e., the excess of the
Fund's net realized long-term capital gains over its net realized short-term
capital losses), if any, that it distributes to its stockholders in each
taxable year. The Fund intends to distribute substantially all of such income.
Under the 2003 Tax Act, Fund distributions comprised of dividends
from domestic corporations and certain foreign corporations (generally,
corporations incorporated in a possession of the United States, some
corporations eligible for treaty benefits under a treaty with the United
States and corporations whose stock is readily tradable on an established
securities market in the United States) are eligible for taxation at a maximum
tax rate of 15% also applicable to capital gains in the hands of individual
shareholders. Capital gain dividends likewise, are taxed at the reduced
maximum rate of 15% for non-corporate taxpayers. These tax rates are scheduled
to apply through 2008. Not later than 60 days after the close of its taxable
year, the Fund will provide its stockholders with a written notice designating
the amounts of any long-term capital gains, qualified dividend income and
Other Ordinary Income.
If the Fund does not meet the asset coverage requirements of the 1940
Act or the Charter, the Fund will be required to suspend distributions to
holders of its Common Stock until the asset coverage is restored. See
"Description of Cumulative Preferred Stock -- Dividends". Such a suspension of
distributions might prevent the Fund from distributing 90% of its ICTI, as is
required in order to avoid Fund-level taxation of such income. Upon any
failure to meet the asset coverage requirements of the 1940 Act or the
Articles Supplementary, the Fund may, and in certain circumstances will be
required to, partially redeem shares of its Cumulative Preferred Stock in
order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its stockholders of failing to qualify as
a RIC. If asset coverage were restored, the Fund would again be able to pay
dividends and might be able to avoid Fund-level taxation of its income.
The Internal Revenue Service (the "IRS") currently requires that a
RIC that has two or more classes of stock allocate to each class proportionate
amounts of each type of its income (e.g., capital gains, qualified dividend
income and Other Ordinary Income). Accordingly, the Fund intends to designate
dividends paid to holders of Cumulative Preferred Stock as comprised of
capital gains, qualified dividend income and/or Other Ordinary Income, as
applicable, in proportion to the Cumulative Preferred Stock's share of total
dividends paid during the year.
If the Fund pays a dividend in January which was declared in the
previous October, November or December to stockholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its stockholders on
December 31 of the year in which such dividend was declared.
41
Stockholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, stockholders with
capital losses are urged to consult their tax advisers.
In the opinion of Sidley Austin Brown & Wood LLP, the shares of
Cumulative Preferred Stock will be treated as stock of the Fund for Federal
income tax purposes and distributions with respect to such shares (other than
distributions in redemption of the Cumulative Preferred Stock under section
302(b) of the Code) will constitute dividends to the extent of the Fund's
current and accumulated earnings and profits, as calculated for Federal income
tax purposes. Nevertheless, the IRS might take a contrary position, asserting,
for example, that the shares of Cumulative Preferred Stock constitute debt of
the Fund. The Fund believes this position, if asserted, would be unlikely to
prevail. If this position were upheld, however, the discussion of the
treatment of distributions herein, and in the Statement of Additional
Information, would not apply. Instead, distributions by the Fund to holders of
shares of Cumulative Preferred Stock would constitute taxable interest income,
whether or not they exceeded the earnings and profits of the Fund. In such
event, the designations of particular types of income, such as capital gains
and qualified dividend income, would not be effective.
Ordinary income dividends (but not capital gain dividends) paid to
stockholders who are non-resident aliens or foreign entities generally will be
subject to a 30% United States withholding tax unless a lower treaty rate
applies.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Stockholders generally will not be entitled to claim a credit or
deduction with respect to such taxes paid by the Fund.
By law, unless you qualify for an exemption from backup withholding
(for instance, if you are a corporation), your dividends and redemption
proceeds will be subject to a backup withholding tax (currently 28%) if you
have not provided a tax identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under Federal tax
law of an investment in Cumulative Preferred Stock of the Fund. It is not a
substitute for personal tax advice. Consult your personal tax adviser about
the potential tax consequences of purchasing and holding Cumulative Preferred
Stock in the Fund under all applicable tax laws. For additional tax
discussion, see "Taxation" in the Statement of Additional Information.
CUSTODIAN, DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company, Two Heritage Drive, North
Quincy, Massachusetts 02171, acts as custodian of the cash and other assets of
the Fund. Equiserve Trust Company, N.A., 225 Franklin Street, Boston,
Massachusetts 02110, acts as transfer agent, dividend-paying agent and
registrar for the Fund's shares and as agent to provide notice of redemption
and certain voting rights for the Cumulative Preferred Stock. Stockholder
inquiries should be directed to P.O. Box 8200, Boston, Massachusetts
02266-8200 (Tel. No. (800) 426-5523).
42
UNDERWRITING
Citigroup Global Markets Inc. and UBS Securities LLC are acting as
Underwriters in this offering. Subject to the terms and conditions stated in
the Fund's underwriting agreement dated ______________, 2003 (the
"Underwriting Agreement"), each Underwriter named below has severally agreed
to purchase, and the Fund has agreed to sell to such Underwriter, the number
of shares of Cumulative Preferred Stock set forth opposite the name of such
Underwriter.
Number of Shares of
Underwriter Cumulative Preferred Stock
----------- --------------------------
Citigroup Global Markets Inc.
UBS Securities LLC
Total
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Cumulative Preferred Stock included in this
offering are subject to approval of legal matters by counsel and to other
conditions. The Underwriters are obligated to purchase all the Cumulative
Preferred Stock if they purchase any such shares.
The Underwriters propose to offer some of the Cumulative Preferred
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and some of the Cumulative Preferred Stock to
dealers at the public offering price less a concession not to exceed
$_________ per share of Cumulative Preferred Stock. The sales load or
underwriting discount the Fund will pay of $_________ per share of Cumulative
Preferred Stock is equal to _____% of the initial offering price. The
Underwriters may allow, and such dealers may reallow, a concession not to
exceed $_________ per share on sales to certain other dealers. After the
initial public offering, the Underwriters may change the public offering price
and other selling terms. Investors must pay for any Cumulative Preferred Stock
purchased on or before __________________, 2003.
In the Underwriting Agreement, the Fund and Royce have each agreed to
indemnify the several Underwriters or contribute to losses arising out of
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act").
The Fund anticipates that from time to time the representatives of
the Underwriters and certain other Underwriters may act as brokers or dealers
in connection with the execution of the Fund's portfolio transactions after
they have ceased to be Underwriters and, subject to certain restrictions, may
act as brokers while they are Underwriters. Citigroup Global Markets Inc. and
UBS Securities LLC acted as financial advisers to Royce in connection with its
acquisition by Legg Mason on October 1, 2001. In addition, certain of the
Underwriters have in the past and may in the future act as financial advisers
to Royce or have other investment banking relationships with Royce.
Prior to the offering, there has been no public market for the
Cumulative Preferred Stock. Application will be made to list the Cumulative
Preferred Stock on the NYSE. However, during
43
an initial period which is not expected to exceed 30 days after the date of
this Prospectus, the Cumulative Preferred Stock will not be listed on any
securities exchange. During such period, the Underwriters intend to make a
market in the Cumulative Preferred Stock; however, they have no obligation to
do so. Consequently, an investment in the Cumulative Preferred Stock may be
illiquid during such period.
In connection with the offering, the Underwriters may purchase and
sell shares of Cumulative Preferred Stock in the open market. These
transactions may include short sales and stabilizing transactions. Short sales
involve syndicate sales of shares in excess of the number of shares to be
purchased by the Underwriters in the offering, which creates a syndicate short
position. Stabilizing transactions consist of bids for or purchases of shares
in the open market while the offering is in progress.
The Underwriters may also impose a penalty bid. Penalty bids permit
the Underwriters to reclaim a selling concession from a syndicate member when
the Underwriters repurchase shares originally sold by that syndicate member in
order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of the stock. They may also cause the
price of the Cumulative Preferred Stock to be higher than the price that would
otherwise exist in the open market in the absence of these transactions. The
Underwriters may conduct these transactions on the NYSE or in the
over-the-counter market, or otherwise. If the Underwriters commence any of
these transactions, they may discontinue them at any time.
The principal business address of Citigroup Global Markets Inc. is
388 Greenwich Street, New York, NY 10013. The principal business address of
UBS Securities LLC is 299 Park Avneue, New York, NY 10171.
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 Sidley
Austin Brown & Wood LLP, New York, New York, special counsel to the Fund, and
by Simpson Thacher & Bartlett LLP, counsel to the Underwriters. Sidley Austin
Brown & Wood LLP and Simpson Thacher & Bartlett LLP will each rely as to
matters of Maryland law on the opinion of Venable, Baetjer and Howard, LLP.
EXPERTS
____, ______ & _____, 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 ____, ______ & _____ for the periods
indicated in its reports with respect thereto, and are included in reliance
upon such reports and upon the authority of such firm as experts in accounting
and auditing.
44
____, ______ & _____ has an office at _______________________________________,
and also performs tax and other professional services for the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act")
and the 1940 Act and, in accordance therewith, files reports and other
information with the Commission. Reports, proxy statements and other
information filed by the Fund with the Commission pursuant to the
informational requirements of such Acts can be inspected and copied at the
public reference facilities maintained by the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov. containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission.
The Fund's Common Stock is listed on the NYSE, and reports, proxy
statements and other information concerning the Fund and filed with the
Commission by the Fund can be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005. Application will be made to list the
Cumulative Preferred Stock on the NYSE.
This Prospectus constitutes part of a Registration Statement filed by
the Fund with the Commission under the Securities Act and the 1940 Act. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Fund and the
Cumulative Preferred Stock offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference. The
complete Registration Statement may be obtained from the Commission upon
payment of the fee prescribed by its rules and regulations or free of charge
through the Commission's web site (http://www.sec.gov).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors and Special Considerations" in the Statement of Additional
Information and elsewhere in this Prospectus. As a result of the foregoing and
other factors, no assurance can be given as to the future results, levels of
activity or achievements, and neither the Fund nor any other person assumes
responsibility for the accuracy and completeness of such statements.
45
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated ________, __, 2003 has
been filed with the Commission and is incorporated by reference in this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by writing to the Fund at its address at 1414 Avenue of the
Americas, New York, New York 10019, or by calling the Fund toll-free at (800)
221-4268. The Table of Contents of the Statement of Additional Information is
as follows:
Page
Risk Factors and Special Considerations......................................_
Investment Restrictions......................................................_
Taxation....................................................................._
Principal Stockholders......................................................._
Directors and Officers......................................................._
Code of Ethics and Related Matters..........................................._
Investment Advisory and Other Services......................................._
Brokerage Allocation and Other Practices....................................._
Proxy Voting Policies and Procedures........................................._
Net Asset Value.............................................................._
Financial Statements........................................................._
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund, Royce or the Underwriters. Neither the
delivery of this Prospectus nor any sale made hereunder will, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstance in which such an offer or solicitation is
unlawful.
46
GLOSSARY
"Articles Supplementary" means the Fund's Articles Supplementary
creating and fixing the rights of the Cumulative Preferred Stock.
"Asset Coverage" means asset coverage, as defined in Section 18(h) of
the 1940 Act, of at least 200%, or such higher percentage as may be required
under the 1940 Act, with respect to all outstanding securities of the Fund
which are stock, including all outstanding shares of Cumulative Preferred
Stock.
"Basic Maintenance Amount" means, as of any Valuation Date, the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of Cumulative Preferred Stock outstanding on such Valuation Date multiplied by
the Liquidation Preference; (B) to the extent not included in (A), the
aggregate amount of cash dividends (whether or not earned or declared) that
will have accumulated for each outstanding share of Cumulative Preferred Stock
from the most recent Dividend Payment Date to which dividends have been paid
or duly provided for (or, in the event the Basic Maintenance Amount is
calculated on a date prior to the initial Dividend Payment Date with respect
to the Cumulative Preferred Stock, then from the Date of Original Issue)
through the Valuation Date plus all dividends to accumulate on the Cumulative
Preferred Stock then outstanding during the 70 days following such Valuation
Date; (C) the Fund's other liabilities due and payable as of such Valuation
Date (except that dividends and other distributions payable by the Fund by the
issuance of Common Stock shall not be included as a liability) and such
liabilities projected to become due and payable by the Fund during the 90 days
following such Valuation Date (excluding liabilities for investments to be
purchased and for dividends and other distributions not declared as of such
Valuation Date); (D) any current liabilities of the Fund as of such Valuation
Date to the extent not reflected in any of (i)(A) through (i)(C) (including,
without limitation, and immediately upon determination, any amounts due and
payable by the Fund pursuant to reverse repurchase agreements and any payables
for assets purchased as of such Valuation Date) less (ii) (A) the Discounted
Value of any of the Fund's assets and/or (B) the face value of any of the
Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets are
either cash or securities which mature prior to or on the date of redemption
or repurchase of Cumulative Preferred Stock or payment of another liability
and are either U.S. Government Obligations or securities which have a rating
assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at
least AAA, SP-1+ or A-1+, in both cases irrevocably held by the Fund's
custodian bank in a segregated account or deposited by the Fund with the
Paying Agent for the payment of the amounts needed to redeem or repurchase
Cumulative Preferred Stock subject to redemption or repurchase or, without
duplication, any of (i)(B) through (i)(D) and provided that in the event the
Fund has repurchased Cumulative Preferred Stock at a price of less than the
Liquidation Preference thereof and irrevocably segregated or deposited assets
as described above with its custodian bank or the Paying Agent for the payment
of the repurchase price the Fund may deduct 100% of the Liquidation Preference
of such Cumulative Preferred Stock to be repurchased from (i) above.
"Business Day" means a day on which the New York Stock Exchange is
open for trading and that is neither a Saturday, Sunday nor any other day on
which banks in the City of New York are authorized by law to close.
47
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary), of the Fund on file in
the State Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of
the Fund.
"Cumulative Preferred Stock" means the ____% Cumulative Preferred
Stock, par value $.001 per share, of the Fund.
"Date of Original Issue" means the date on which shares of Cumulative
Preferred Stock are originally issued.
"Deposit Securities" means cash, Short-Term Money Instruments and
U.S. Government Obligations. Except for determining whether the Fund has a
Portfolio Calculation equal to or greater than the Basic Maintenance Amount,
each Deposit Security will be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after
delivery of such Deposit Security but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discounted Value" means, with respect to a Moody's Eligible Asset,
the quotient of (A) in the case of non-convertible fixed income securities,
the lower of the principal amount and the market value thereof, or (B) in the
case of any other Moody's Eligible Assets, the market value thereof, divided
by the applicable Moody's Discount Factor.
"Dividend Payment Date" means each March __, June __, September __
and December __.
"Fitch" means Fitch Ratings or its successor.
"Fund" means Royce Value Trust, Inc., a Maryland corporation.
"Lien" means any material lien, mortgage, pledge, security interest
or security agreement of any kind.
"Liquidation Preference" means $25.00 per share of Cumulative
Preferred Stock plus an amount equal to all unpaid dividends accumulated to
and including the date fixed for such distribution or payment (whether or not
earned or declared by the Fund, but excluding interest thereon).
"Moody's" means Moody's Investors Service, Inc., or its successor.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows:
(i) Preferred securities (non-convertible):
48
Cumulative Non-Cumulative
---------- --------------
Preferred securities issued by issuers in
the utilities industry............................ 155% 165%
Preferred securities issued by issuers in
the industrial and financial
industries and by U.S.
Government Agencies............................... 197% 207%
Auction rate preferred securities issued
by closed-end registered
investment companies.............................. 350% 360%
(ii) Corporate debt securities (non-convertible): The percentage determined by
reference to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below.
Rating Category
Terms To Maturity of ---------------------------------------------------
Corporate Debt Security Below B
----------------------- and
Aaa Aa A Baa Ba B Unrated(1)
--- -- - --- -- - ----------
1 year or less................................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year)....... 115 118 122 125 146 160 250%
3 years or less (but longer than 2 years)...... 120 123 127 131 153 168 250%
4 years or less (but longer than 3 years)...... 126 129 133 138 161 176 250%
5 years or less (but longer than 4 years)...... 132 135 139 144 168 185 250%
7 years or less (but longer than 5 years)...... 139 143 147 152 179 197 250%
10 years or less (but longer than 7 years)..... 145 150 155 160 189 208 250%
15 years or less (but longer than 10 years).... 150 155 160 165 196 216 250%
20 years or less (but longer than 15 years).... 150 155 160 165 196 228 250%
30 years or less (but longer than 20 years).... 150 155 160 165 196 229 250%
Greater than 30 years.......................... 165 173 181 189 205 240 250%
--------------------------
(1) Unless conclusions regarding liquidity risk as well as estimates of both
the probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as presented
by the Fund to Moody's, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch, are
limited to 10% of Moody's Eligible Assets. If a corporate debt security is
unrated by Moody's, S&P and Fitch, the Fund will use the percentage set forth
under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch
are generally accepted by Moody's at face value. However, adjustments to face
value may be made to particular categories of credits for which the S&P and/or
Fitch rating does not seem to approximate a Moody's rating equivalent.
The Moody's Discount Factors presented in the immediately preceding table will
also apply to corporate debt securities that do not pay interest in U.S.
dollars or euros, provided that the Moody's Discount Factor determined from
the table shall be multiplied by a factor of 120% for purposes of calculating
the Discounted Value of such securities.
49
(iii) U.S. Government Obligations and U.S. Treasury Strips:
Remaining Term To Maturity U.S. Government Obligations U.S. Treasury Strips
Discount Factor Discount Factor
---------------------------------------------------------------------------------------------------------
1 year or less....................................... 107% 107%
2 years or less (but longer than 1 year)............. 113 115
3 years or less (but longer than 2 years)............ 118 121
4 years or less (but longer than 3 years)............ 123 128
5 years or less (but longer than 4 years)............ 128 135
7 years or less (but longer than 5 years)............ 135 147
10 years or less (but longer than 7 years)........... 141 163
15 years or less (but longer than 10 years).......... 146 191
20 years or less (but longer than 15 years).......... 154 218
30 years or less (but longer than 20 years).......... 154 244
(iv) Short term instruments and cash: The Moody's Discount Factor applied to
short term portfolio securities, including without limitation short term
corporate debt securities, Short Term Money Market Instruments and short term
municipal debt obligations, will be (A) 100%, so long as such portfolio
securities mature or have a demand feature at par exercisable within the
Moody's Exposure Period; (B) 115%, so long as such portfolio securities mature
or have a demand feature at par not exercisable within the Moody's Exposure
Period; (C) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature
or have a demand feature at par exercisable within the Moody's Exposure
Period; and (D) 148%, if such securities are not rated by Moody's, so long as
such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable greater than the Moody's
Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. A
Moody's Discount Factor of 100% will also apply to money market funds rated by
a NRSRO that comply with Rule 2a-7 under the 1940 Act.
(v) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A
Securities will be 130% of the Moody's Discount Factor which would apply if
the securities registered under the Securities Act.
(vi) Convertible securities (including convertible preferred securities):
Rating Category
---------------------------------------------------------------------------
Below B and
Industry Category Aaa Aa A Baa Ba B Unrated(1)
----------------- --- -- - --- -- - -----------
Utility 162% 167% 172% 188% 195% 199% 300%
Industrial 256% 261% 266% 282% 290% 293% 300%
Financial 233% 238% 243% 259% 265% 270% 300%
Transportation 250% 265% 275% 285% 290% 295% 300%
(1) Unless conclusions regarding liquidity risk as well as estimates of both
the probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as presented
by the Fund to Moody's, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch, are
limited to 10% of Moody's Eligible Assets. If a convertible security is
unrated by Moody's, S&P and Fitch, the Fund will use the percentage set forth
under "Below B and Unrated" in this table. Ratings assigned by S&P or Fitch
are generally accepted by Moody's at face value. However, adjustments to face
50
value may be made to particular categories of credits for which the S&P and/or
Fitch rating does not seem to approximate a Moody's rating equivalent.
(vii) Common stock: The Moody's Discount Factor applied to common stock will
be 300%.
The Moody's Discount Factor for any Moody's Eligible Asset other than the
securities set forth above will be the percentage provided in writing by
Moody's.
"Moody's Eligible Assets" means:
(i) Cash (including interest and dividends due on assets
rated (A) Baa3 or higher by Moody's if the payment date is
within five Business Days of the Valuation Date, (B) A2 or
higher if the payment date is within thirty days of the
Valuation Date, and (C) A1 or higher if the payment date is
within the Moody's Exposure Period) and receivables for
assets sold if the receivable is due within five Business
Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing
house firms with respect to which the Fund has received
prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long term debt rating of at
least Baa3 or (2) with counterparties having a Moody's Short
Term Money Market Instrument rating of at least P-1.
(ii) Short Term Money Market Instruments, so long as (A)
such securities are rated at least P-1 or if not rated by
Moody's, rated at least A-1+/AA or SP-1+/AA by S&P, (B) in
the case of demand deposits, time deposits and overnight
funds, the supporting entity is rated at least A2, or (C) in
all other cases, the supporting entity (1) is rated A2 and
the security matures within one month, (2) is rated A1 and
the security matures within three months or (3) is rated at
least Aa3 and the security matures within six months. In
addition, money market funds that comply with Rule 2a-7
under the 1940 Act are Moody's Eligible Assets;
(iii) U.S. Government Obligations and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Corporate debt securities, except as noted below, if
(A)(1) such securities are rated B3 or higher by Moody's;
(2) for securities, which provide for conversion or exchange
at the option of the issuer into equity capital at some time
over their lives, the issuer must be rated at least B3 by
Moody's; or (3) for debt securities rated Ba1 and below, no
more than 10% of the original amount of such issue may
constitute Moody's Eligible Assets; (B) such securities
provide for the periodic payment of interest in cash in U.S.
dollars or euros, except that such securities that do not
pay interest in U.S. dollars or euros shall be considered
Moody's Eligible Assets if they are rated by Moody's or S&P;
and (C) such securities have been registered under the
Securities Act or are restricted as to resale under Federal
securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act, except that such securities
that are not subject to U.S. Federal
51
securities laws shall be considered Moody's Eligible Assets
if they are publicly traded.
In order to merit consideration as Moody's Eligible Asset,
debt securities are issued by entities which have not filed
for bankruptcy within the past three years, are current on
all principal and interest in their fixed income
obligations, are current on all preferred security dividends
and possess a current, unqualified auditor's report without
qualified, explanatory language.
Corporate debt securities not rated at least B3 by Moody's
or not rated by Moody's shall be considered to be Moody's
Eligible Assets only to the extent the market value of such
corporate debt securities does not exceed 10% of the
aggregate market value of all Moody's Eligible Assets.
(vi) Preferred securities if (A) such preferred securities
pay cumulative or non-cumulative dividends, (B) such
securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars or euros, (C) the issuer or
the parent company of the issuer of such a preferred
security has common stock listed on either the New York
Stock Exchange, the American Stock Exchange or Nasdaq or is
a U.S. Government Agency, (D) the issuer or the parent
company of the issuer of such a preferred security has a
senior debt rating or a preferred security rating from
Moody's of Baa3 or higher and (E) such preferred security
has paid consistent cash dividends in U.S. dollars or euros
over the last three years or has a minimum rating of A1 (if
the issuer of such preferred security or the parent company
of the issuer has other preferred issues outstanding that
have been paying dividends consistently for the last three
years, then a preferred security without such a dividend
history would also be eligible). In addition, the preferred
securities must have the diversification requirements set
forth in the table below and the preferred securities issue
must be greater than $50 million.
Diversification Table:
----------------------
The table below establishes maximum limits for inclusion as Moody's Eligible
Assets (other than common stock as set forth below) prior to applying Moody's
Discount Factors to Moody's Eligible Assets.
Minimum Maximum Maximum Maximum Single
Issue Size Single Single Industry Industry
Ratings(1) ($ in Million)(2) Issuer (3)(4) Non-Utility (4)(5) Utility(4)(5)
---------- ----------------- ------------- ------------------ -------------
Aaa.................. $100 100% 100% 100%
Aa................... 100 20 60 30
A.................... 100 10 40 25
Baa.................. 100 6 20 20
Ba................... 50(6) 4 12 12
B1-B2................ 50(6) 3 8 8
B3 or below.......... 50(6) 2 5 5
(1) Refers to the preferred security and senior debt rating of the portfolio
holding.
(2) Except for preferred security, which has a minimum issue size of $50
million.
(3) Companies subject to common ownership of 25% or more are considered as one
issuer.
(4) Percentages represent a portion of the aggregate market value of the
Fund's total assets.
52
(5) Industries are determined according to Moody's Industry Classifications,
as defined herein.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Fund's total assets.
(vii) Common stocks (A) (i) which are traded in the United
States on a national securities exchange or in the
over-the-counter market, (ii) which, if cash dividend
paying, pay cash dividends in U.S. dollars, and (iii) which
may be sold without restriction by the Fund; provided,
however, that common stock which, while a Moody's Eligible
Asset owned by the Fund, ceases paying any regular cash
dividend will no longer be considered a Moody's Eligible
Asset until 71 days 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 (B)
which are securities denominated in any currency other than
the U.S. dollar or securities of issuers formed under the
laws of jurisdictions other than the United States, its
states, commonwealths, territories and possessions,
including the District of Columbia, for which there are
dollar-denominated American Depository Receipts ("ADRs")
which are traded in the United States on a national
securities exchange or in the over-the-counter market and
are issued by banks formed under the laws of the United
States, its states, commonwealths, territories and
possessions, including the District of Columbia; provided,
however, that the aggregate market value of the Fund's
holdings of securities denominated in currencies other than
the U.S. dollar and ADRs in excess of (i) 6% of the
aggregate market value of the outstanding shares of common
stock and ADRs of the issuer thereof or (ii) 10% of the
market value of Moody's Eligible Assets with respect to
issuers formed under the laws of any single such non-U.S.
jurisdiction , other than Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland and the United Kingdom, shall not be a Moody's
Eligible Asset;
Common Stock Diversification Table:
-----------------------------------
Maximum Single Maximum Single Maximum Single
Industry Category Issuer (%)(1) Industry (%)(1) State (%)(1)
----------------- ------------- --------------- ------------
Utility 4 50 7(2)
Other 6 20 N/A
-------------------
(1) Percentages represent both a portion of the aggregate
market value and the number of outstanding shares of the
common stock portfolio.
(2) Utility companies operating in more than one state should
be diversified according to the state of incorporation.
(viii) Financial contracts, as such term is defined in
Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise
provided for in this definition but only upon receipt by the
Fund of a letter from Moody's specifying any conditions on
including such financial contract in Moody's Eligible Assets
and assuring the Fund that including such financial contract
in the manner so specified would not affect the credit
rating assigned by Moody's to the AMPS.
When the Fund sells a portfolio security and agrees to
repurchase it at a future date, the Discounted Value of such
security will constitute a Moody's Eligible
53
Asset and the amount the Fund is required to pay upon
repurchase of such security will count as a liability for
purposes of calculating the Basic Maintenance Amount. When
the Fund purchases a security and agrees to sell it at a
future date to another party, cash receivable by the Fund
thereby will constitute a Moody's Eligible Asset if the long
term debt of such other party is rated at least A2 by
Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such security will
constitute a Moody's Eligible Asset. For the purpose of
calculation of Moody's Eligible Assets, portfolio securities
which have been called for redemption by the issuer thereof
shall be valued at the lower of market value or the call
price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be
considered a Moody's Eligible Asset to the extent that it
has been irrevocably deposited for the payment of (i)(A)
through (i)(D) under the definition of Basic Maintenance
Amount or to the extent it is subject to any Liens,
including assets segregated under margin account
requirements in connection with the engagement in hedging
transactions, except for (A) Liens which are being contested
in good faith by appropriate proceedings and which Moody's
has indicated to the Fund will not affect the status of such
assets as a Moody's Eligible Asset, (B) Liens for taxes that
are not then due and payable or that can be paid thereafter
without penalty, (C) Liens to secure payment for services
rendered or cash advanced to the Fund by Royce, the Fund's
custodian, transfer agent or registrar or the Auction Agent
and (D) Liens arising by virtue of any repurchase agreement.
"Moody's Exposure Period" means the period commencing on a given
Valuation Date and ending 49 days thereafter.
"Moody's Industry Classifications" means, for the purposes of
determining Moody's Eligible Assets, each of the following industry
classifications (or such other classifications as Moody's may from time to
time approve for application to the Cumulative Preferred Stock):
Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum,
Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
54
Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
Containers, Packaging and Glass: Glass, Fiberglass, Containers made
of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, Televisions, Tape Machines, Speakers,
Printers, Drivers, Technology
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals,
Hospital Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records,
Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games,
Toy Manufacturing, Motion Picture Production Theaters, Motion Picture
Distribution
Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
55
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales of the foregoing
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, Television, Cable Broadcasting Equipment
Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas
Diversified Sovereigns: Semi-sovereigns, Canadian Provinces,
Supra-national agencies
The Fund will use its discretion in determining which industry classification
is applicable to a particular investment in consultation with the Fund's
independent accountants and Moody's, to the extent the Fund considers
necessary.
"Nasdaq" means the Nasdaq Stock Market, Inc.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" means written notice by the Fund to holders of
Cumulative Preferred Stock in compliance with the provisions of the Articles
Supplementary of the Fund's intention to redeem shares of Cumulative Preferred
Stock.
"NRSRO" means any nationally reorganized statistical rating
organization, as that term is used in Rule 15a3-1 under the Securities
Exchange Act or any successor provisions.
"Other Ordinary Income" means ordinary income other than qualified
dividend income but including short-term capital gains, interest income and
non-qualified dividend income.
"Paying Agent" means Equiserve Trust Company, N.A. and its successors
or any other paying agent appointed by the Fund.
56
"Portfolio Calculation" means the aggregate Discounted Value of all
Moody's Eligible Assets.
"Preferred Stock" means the issued and outstanding shares of
preferred stock, par value $.001 per share, of the Fund, and includes the
Cumulative Preferred Stock.
"Quarterly Valuation Date" means the last Valuation Date of March,
June, September and December, commencing ______________ ___, 2003.
"Redemption Price" means $25.00 per share plus accumulated and unpaid
dividends through the date of redemption (whether or not earned or declared).
"Rule 144A Securities" means securities that are restricted as to
resale under U.S. Federal securities laws but are eligible for resale pursuant
to Rule 144A under the Securities Act or successor provisions.
"7.80% Preferred" means, so long as any shares of such series are
issued and outstanding, the 7.80% Cumulative Preferred Stock, par value $.001
per share, of the Fund.
"7.30% Preferred" means, so long as any shares of such series are
issued and outstanding, the 7.30% Tax-Advantaged Cumulative Preferred Stock,
par value $.001 per share, of the Fund.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) Commercial paper rated P-1 by Moody's, F1 by Fitch or
A-1 by S&P if such commercial paper matures in 30 days or less, or
P-1 by Moody's and either F1 by Fitch or A-1+ by S&P if such
commercial paper matures in over 30 days;
(ii) Demand or time deposits in, and banker's acceptances
and certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of America
or any state thereof or the District of Columbia or (B) a United
States branch office or agency of a foreign depository institution
(provided that such branch office or agency is subject to banking
regulation under the laws of the United States, any state thereof or
the District of Columbia);
(iii) Overnight funds;
(iv) U.S. Government Obligations; and
(v) Eurodollar demand or time deposits in, or certificates
of deposit of, the head office or the London branch office of a
depository institution or trust company if the certificates of
deposit, if any, and the long-term unsecured debt obligations (other
than such obligations the ratings of which are based on the credit of
a person or entity other than such depository institution or trust
company) of such depository institution or trust company that have
(1) credit ratings on such Valuation Date of at least P-1 from
Moody's and either F1+ from Fitch or A-1+ from S&P, in the case of
commercial paper or
57
certificates of deposit, and (2) credit ratings on each Valuation
Date of at least Aa3 from Moody's and either AA- from Fitch or AA-
from S&P, in the case of long-term unsecured debt obligations;
provided, however, that in the case of any such investment that
matures in no more than one Business Day from the date of purchase or
other acquisition by the Fund, all of the foregoing requirements
shall be applicable except that the required long-term unsecured debt
credit rating of such depository institution or trust company from
Moody's, Fitch and S&P shall be at least A2, A and A, respectively;
and provided further, however, that the foregoing credit rating
requirements shall be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or
trust company is the principal depository institution in a holding
company system, (2) the certificates of deposit, if any, of such
depository institution or trust company are not rated on any
Valuation Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and
there is no long-term rating, and (3) the holding company shall meet
all of the foregoing credit rating requirements (including the
preceding proviso in the case of investments that mature in no more
than one Business Day from the date of purchase or other acquisition
by the Fund); and provided further, that the interest receivable by
the Fund shall not be subject to any withholding or similar taxes.
"S&P" means Standard & Poor's or its successor.
"2003 Tax Act" means the Jobs and Growth Tax Relief Reconciliation
Act of 2003, Public Law 108-27.
"U.S. Government Agency" means any agency, sponsored enterprise or
instrumentality of the United States of America.
"U.S. Government Obligations" means direct obligations of the United
States or U.S. Government Agencies that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills
and U.S. Treasury Strips, provide for the periodic payment of interest and the
full payment of principal at maturity.
"U.S. Treasury Strips" means securities based on direct obligations
of the United States Treasury created through the Separate Trading of
Registered Interest and Principal of Securities program.
"Valuation Date" means every Friday or, if such day is not a Business
Day, the immediately preceding Business Day.
58
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60
========================================================================
$___________________
ROYCE VALUE TRUST, INC.
_________ SHARES
____% CUMULATIVE PREFERRED STOCK
___________________
PROSPECTUS
______ __, 2003
___________________
Citigroup UBS Investment Bank
___________________
========================================================================
The information in this Statement of Additional Information is not complete
and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
SUBJECT TO COMPLETION, DATED __________, __, 2003
STATEMENT OF ADDITIONAL INFORMATION
_________ SHARES
ROYCE VALUE TRUST, INC.
____% CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
The ____% Cumulative Preferred Stock, liquidation preference $25.00
per share (the "Cumulative Preferred Stock"), to be issued by Royce Value
Trust, Inc. (the "Fund") will be senior securities of the Fund. The Fund will
use the net proceeds from the offering of the Cumulative Preferred Stock to
redeem the issued and outstanding shares of 7.80% Tax-Advantaged Cumulative
Preferred Stock, par value $.001 per share, of the Fund, and the issued and
outstanding shares of 7.30% Tax-Advantaged Cumulative Preferred Stock, par
value $.001 per share, of the Fund. Royce expects to use the proceeds
remaining after the redemption of the 7.80% Preferred and the 7.30% Preferred
to purchase additional portfolio securities in accordance with the Fund's
investment goal and policies.
The Fund is a closed-end diversified management investment company.
The Fund's primary investment goal is long-term capital growth, which it seeks
by normally investing more than 75% of its assets in equity securities of
small- and micro-cap companies. The Fund's address is 1414 Avenue of the
Americas, New York, New York 10019, and its telephone number is (212)
355-7311. Royce & Associates, LLC is the Fund's investment adviser.
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Fund's Prospectus (dated __________ __,
2003). Please retain this document for future reference. To obtain an
additional copy of the Prospectus, the Fund's Annual Report to Stockholders
for the year ended December 31, 2002, or the Fund's Semi-Annual Report to
Stockholders for the six months ended June 30, 2003 please call Investor
Information at 1-800-221-4268. Defined terms used in this Statement of
Additional Information have the meanings given to them in the Prospectus.
Table of Contents
Page
----
Risk Factors and Special Considerations..................................._
Investment Restrictions..................................................._
Taxation.................................................................._
Principal Stockholders...................................................._
Directors and Officers...................................................._
Code of Ethics and Related Matters........................................_
Investment Advisory and Other Services...................................._
Brokerage Allocation and Other Practices.................................._
Proxy Voting Policies and Procedures......................................_
Net Asset Value..........................................................._
Financial Statements......................................................_
Date: __________ __, 2003
RISK FACTORS AND SPECIAL CONSIDERATIONS
Fund's Rights as Stockholder
The Fund may not invest in a company for the purpose of exercising
control of management. However, the Fund may exercise its rights as a
stockholder and communicate its views on important matters of policy to
management, the board of directors and/or stockholders if Royce or the Board
of Directors determines that such matters could have a significant effect on
the value of the Fund's investment in the company. The activities that the
Fund may engage in, either individually or in conjunction with others, may
include, among others, supporting or opposing proposed changes in a company's
corporate structure or business activities; seeking changes in a company's
board of directors or management; seeking changes in a company's direction or
policies; seeking the sale or reorganization of a company or a portion of its
assets; or supporting or opposing third party takeover attempts. This area of
corporate activity is increasingly prone to litigation, and it is possible
that the Fund could be involved in lawsuits related to such activities. Royce
will monitor such activities with a view to mitigating, to the extent
possible, the risk of litigation against the Fund and the risk of actual
liability if the Fund is involved in litigation. However, no assurance can be
given that litigation against the Fund will not be undertaken or liabilities
incurred.
The Fund may, at its expense or in conjunction with others, pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if Royce and the Board of Directors
determine this to be in the best interests of the Fund's stockholders.
High-Yield and Investment Grade Debt Securities
The Fund may invest up to 5% of its net assets in high-yield,
non-convertible debt securities. They may be rated from Ba to Ca by Moody's or
from BB to D by S&P or may be unrated. These securities have poor protection
with respect to the payment of interest and repayment of principal and may be
in default as to the payment of principal or interest. These securities are
often speculative and involve greater risk of loss or price changes due to
changes in the issuer's capacity to pay. The market prices of high-yield debt
securities may fluctuate more than those of higher-rated debt securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates.
The market for high-yield debt securities may be thinner and less
active than that for higher-rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations cease to be
readily available for a high-yield debt security in which the Fund has
invested, the security will then be valued in accordance with procedures
established by the Board of Directors. Judgment may play a greater role in
valuing high-yield debt securities than is the case for securities for which
more external sources for quotations and last sale information are available.
Adverse publicity and changing investor perceptions may affect the Fund's
ability to dispose of high-yield debt securities.
2
Since the risk of default is higher for high-yield debt securities,
Royce's research and credit analysis may play an important part in managing
securities of this type for the Fund. In considering such investments for the
Fund, Royce will attempt to identify those issuers of high-yield debt
securities whose financial condition is adequate to meet future obligations,
has improved or is expected to improve in the future. Royce's analysis may
focus on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects and the experience and managerial
strength of the issuer.
The Fund may also invest in non-convertible debt securities in the
lowest rated category of investment grade debt. Such securities may have
speculative characteristics, and adverse changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
The Fund may also invest in higher rated investment grade
non-convertible debt securities. Such securities include those rated Aaa by
Moody's or AAA by S&P (which are considered to be of the highest credit
quality and where the capacity to pay interest and repay principal is
extremely strong), those rated Aa by Moody's or AA by S&P (where the capacity
to repay principal is considered very strong, although elements may exist that
make risks appear somewhat larger than expected with securities rated Aaa or
AAA), securities rated A by Moody's or A by S&P (which are considered to
possess adequate factors giving security to principal and interest) and
securities rated Baa by Moody's or BBB by S&P (which are considered to have an
adequate capacity to pay interest and repay principal, but may have some
speculative characteristics).
Foreign Investments
The Fund may invest up to 10% of its total assets in the securities
of foreign issuers. (For purposes of this restriction, securities issued by a
foreign domiciled company that are registered with the Commission under
Section 12(b) or (g) of the Securities Exchange Act are not treated as
securities of foreign issuers.) Foreign investments involve certain risks
which typically are not present in securities of domestic issuers. There may
be less information publicly available about a foreign company than a domestic
company; foreign companies may not be subject to accounting, auditing and
reporting standards and requirements comparable to those applicable to
domestic companies; and foreign markets, brokers and issuers are generally
subject to less extensive government regulation than their domestic
counterparts. Markets for foreign securities may be less liquid and may be
subject to greater price volatility than those for domestic securities.
Foreign brokerage commissions and custodial fees are generally higher than
those in the United States. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, thereby making it difficult to conduct such transactions. Delays
or problems with settlements might affect the liquidity of the Fund's
portfolio. Foreign investments may also be subject to local economic and
political risks, political, economic and social instability, military action
or unrest or adverse diplomatic developments, and possible nationalization of
issuers or expropriation of their assets, which might adversely affect the
Fund's ability to realize on its investment in such securities. Royce may not
be able to anticipate these potential events or counter their effects.
Furthermore, some foreign securities are subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the cost of
3
such investment and reducing the realized gain or increasing the realized loss
on such securities at the time of sale. Foreign markets may also give less
protection to investors such as the Fund.
Although changes in foreign currency rates may adversely affect the
Fund's foreign investments, Royce does not expect to purchase or sell foreign
currencies for the Fund to hedge against declines in the U.S. dollar or to
lock in the value of any foreign securities it purchases for the Fund.
Consequently, the risks associated with such investments may be greater than
if the Fund were to engage in foreign currency transactions for hedging
purposes.
Exchange control regulations in such foreign markets may also
adversely affect the Fund's foreign investments, and the Fund's ability to
make certain distributions necessary to maintain its eligibility as a
regulated investment company and avoid the imposition of income and excise
taxes may, to that extent, be limited.
The considerations noted above are generally intensified for
investments in developing countries. Developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities.
The Fund may purchase the securities of foreign companies in the form
of American Depositary Receipts ("ADRs"). ADRs are certificates held in trust
by a bank or similar financial institution evidencing ownership of securities
of a foreign-based issuer. Designed for use in U.S. securities markets, ADRs
are alternatives to the purchase of the underlying foreign securities in their
national markets and currencies.
Depositories may establish either unsponsored or sponsored ADR
facilities. While ADRs issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions and the performance of other services. The depository of an
unsponsored facility frequently is under no obligation to distribute
stockholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. Depositories create sponsored ADR facilities in
generally the same manner as unsponsored facilities, except that the issuer of
the deposited securities enters into a deposit agreement with the depository.
The deposit agreement sets out the rights and responsibilities of the issuer,
the depository and the ADR holders. With sponsored facilities, the issuer of
the deposited securities generally will bear some of the costs relating to the
facility (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of
stockholder meetings and voting instructions and to provide stockholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
4
Repurchase Agreements
In a repurchase agreement, the Fund in effect makes a loan by
purchasing a security and simultaneously committing to resell that security to
the seller at an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement requires or obligates the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at least equal to
the amount of the agreed upon resale price and marked to market daily) of the
underlying security.
The Fund may engage in repurchase agreements, provided that such
agreements are collateralized by cash or securities issued by the U.S.
Government or its agencies having a value at least equal to the amount loaned.
Repurchase agreements could involve certain risks if the custodian defaults or
becomes insolvent, including possible delays or restrictions upon the Fund's
ability to dispose of collateral. While it does not presently appear possible
to eliminate all risks from these transactions (particularly the possibility
of a decline in the market value of the underlying securities, as well as
delays and costs to the Fund in connection with bankruptcy proceedings), it is
the policy of the Fund to enter into repurchase agreements only with its
custodian, State Street Bank and Trust Company, and having a term of seven
days or less.
Warrants, Rights and Options
The Fund may invest up to 5% of its total assets in warrants, rights
and options. A warrant, right or call option entitles the holder to purchase a
given security within a specified period for a specified price and does not
represent an ownership interest. A put option gives the holder the right to
sell a particular security at a specified price during the term of the option.
These securities have no voting rights, pay no dividends and have no
liquidation rights. In addition, their market prices do not necessarily move
parallel to the market prices of the underlying securities.
The sale of warrants, rights or options held for more than one year
generally results in a long-term capital gain or loss to the Fund, and the
sale of warrants, rights or options held for one year or less generally
results in a short term capital gain or loss to the Fund. The holding period
for securities acquired upon exercise of a warrant, right or call option,
however, generally begins on the day after the date of exercise, regardless of
how long the warrant, right or option was held. The securities underlying
warrants, rights and options could include shares of common stock of a single
company or securities market indices representing shares of the common stocks
of a group of companies, such as the S&P 600 Index.
Investing in warrants, rights and call options on a given security
allows the Fund to hold an interest in that security without having to commit
assets equal to the market price of the underlying security and, in the case
of securities market indices, to participate in a market without having to
purchase all of the securities comprising the index. Put options, whether on
shares of common stock of a single company or on a securities market index,
would permit the Fund to protect the value of a portfolio security against a
decline in its market price and/or to benefit from an anticipated decline in
the market price of a given security or of a market. Thus,
5
investing in warrants, rights and options permits the Fund to incur additional
risk and/or to hedge against risk.
Investment in Other Investment Companies
The Fund may invest in other investment companies whose investment
goals and policies are consistent with those of the Fund. In accordance with
the 1940 Act, the Fund may invest up to 10% of its total assets in securities
of other investment companies. In addition, under the 1940 Act the Fund may
not own more than 3% of the total outstanding voting stock of any investment
company and not more than 5% of the value of the Fund's total assets may be
invested in securities of any one investment company. If the Fund acquires
shares in investment companies, stockholders would bear both their
proportionate share of expenses in the Fund (including advisory fees) and,
indirectly, the expenses of such investment companies (including management
and advisory fees).
Investment Restrictions
The policies set forth below are fundamental policies of the Fund and
may not be changed without the affirmative vote of the holders of a majority
of the Fund's outstanding voting securities, as indicated in the Prospectus
under "Investment Goal, Policies and Risks -- Changes in Investment Goal and
Policies". The Fund may not:
1. Issue any class of senior security, or sell any such security of
which it is the issuer, except as permitted by the 1940 Act.
2. Purchase on margin or write call options on its portfolio
securities.
3. Sell securities short.
4. Underwrite the securities of other issuers, or invest in
restricted securities unless such securities are redeemable shares
issued by money market funds registered under the 1940 Act.
5. Invest more than 25% of its total assets in any one industry.
6. Purchase or sell real estate or real estate mortgage loans, or
invest in the securities of real estate companies unless such
securities are publicly-traded.
7. Purchase or sell commodities or commodity contracts.
8. Make loans, except for (a) purchases of portions of issues of
publicly distributed bonds, debentures and other securities, whether
or not such purchases are made on the original issuance of such
securities, (b) repurchase agreements with any bank that is the
custodian of its assets covering U.S. Treasury and agency
obligations and having a term of not more than one week, and (c)
except that the Fund may loan up to 25% of its assets to qualified
brokers, dealers or institutions for their use relating to short
sales or other
6
security transactions (provided that such loans are secured by
collateral equal at all times to at least 100% of the value of the
securities loaned).
9. Invest in companies for the purpose of exercising control of
management.
10. Purchase portfolio securities from or sell such securities
directly to any of its officers, directors, employees or investment
adviser, as principal for their own accounts.
11. Invest in the securities of any one issuer (other than the
United States or any agency or instrumentality of the United States)
if, at the time of acquisition, the Fund would own more than 10% of
the voting securities of such issuer or, as to 75% of the Fund's
total assets, more than 5% of such assets would be invested in the
securities of such issuer.
12. Invest more than 5% of its total assets in warrants, rights or
options.
If a percentage restriction is met at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total assets is not considered a violation
of any of the above restrictions.
In addition to issuing and selling senior securities as set forth in
No. 1 above, the Fund may obtain (i) temporary bank borrowings (not in excess
of 5% of the value of its total assets) for emergency or extraordinary
purposes and (ii) such short-term credits (not in excess of 5% of the value of
its total assets) as are necessary for the clearance of securities
transactions. Under the 1940 Act and the Articles Supplementary, such
temporary bank borrowings would be treated as indebtedness in determining
whether or not asset coverage was at least 300% for senior securities of the
Fund representing indebtedness.
Although there are no liquidity restrictions on investments made by
the Fund and the Fund may, therefore, invest without limit in illiquid
securities, the Fund expects to invest only in securities for which market
quotations are readily available.
TAXATION
The Fund has elected to be treated as a RIC, and has qualified and
intends to continue to qualify for the special tax treatment afforded RICs
under the Code. As long as it so qualifies, in any taxable year in which it
distributes at least 90% of its investment company taxable income ("ICTI") (as
that term is defined in the Code without regard to the deduction for dividends
paid) for such taxable year, the Fund will not be subject to Federal income
tax on the part of its ICTI and net capital gains (i.e., the excess of the
Fund's net realized long-term capital gains over its net realized short-term
capital losses), if any, that it distributes to its stockholders in each
taxable year. The Fund intends to distribute substantially all of such income.
The Code requires RIC to pay a non-deductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus 100% of
undistributed amounts from previous years. For these purposes, the Fund will
be
7
deemed to have distributed any income or gains on which it paid corporate
income tax. While the Fund intends to distribute its ordinary income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's ordinary
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
In the opinion of Sidley Austin Brown & Wood LLP, the shares of
Cumulative Preferred Stock will be treated as stock of the Fund for Federal
income tax purposes and distributions with respect to such shares (other than
distributions in redemption of the Cumulative Preferred Stock under section
302(b) of the Code) will constitute dividends to the extent of the Fund's
current and accumulated earnings and profits, as calculated for Federal income
tax purposes. Nevertheless, the IRS might take a contrary position, asserting,
for example, that the shares of Cumulative Preferred Stock constitute debt of
the Fund. The Fund believes this position, if asserted, would be unlikely to
prevail. If this position were upheld, however, the discussion of the
treatment of distributions below would not apply. Instead, distributions by
the Fund to holders of shares of Cumulative Preferred Stock would constitute
taxable interest income, whether or not they exceeded the earnings and profits
of the Fund. In such event, the designations of particular types of income,
such as capital gains and qualified dividend income, as discussed below, would
not be effective.
Dividends paid by the Fund from its ICTI (such dividends are referred
to in this section as "ordinary income dividends") are taxable to stockholders
as ordinary income (some of which may represent qualified dividend income,
taxable at a reduced rate, as discussed below) to the extent of the Fund's
earnings and profits. Distributions made from net capital gains (including
gains or losses from certain transactions in warrants, rights and options) and
properly designated by the Fund (such distributions are referred to in this
section as "capital gain dividends") are taxable to stockholders as long-term
capital gains, regardless of the length of time the stockholder has owned Fund
shares. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset).
The Fund may elect to retain its net capital gains or a portion
thereof for investment and be taxed at corporate rates on the amount retained.
In such case, it may designate the retained amount as undistributed capital
gains in a notice to its stockholders, who will be treated as if each received
a distribution of his pro rata share of such gains, with the result that each
stockholder will (i) be required to report his pro rata share of such gains on
his tax return as long-term capital gain, (ii) receive a refundable tax credit
for his pro rata share of tax paid by the Fund on the gains and (iii) increase
the tax basis for his shares by an amount equal to the deemed distributions
less the tax credit.
Gain or loss, if any, recognized on the sale or other disposition of
shares of the Fund will be taxed as a capital gain or loss if the shares are
capital assets in the stockholder's hands. Such
8
gain or loss will be long-term or short-term, depending upon the stockholder's
holding period for the shares. Generally, a stockholder's gain or loss will be
a long-term gain or loss if the shares have been held for more than one year.
Any loss realized upon the sale or exchange of Fund shares will be disallowed
to the extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the original
shares. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized upon the sale or exchange of
Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the stockholder
(or amounts credited to the stockholder as undistributed capital gains) with
respect to such shares.
Under the 2003 Tax Act, Fund distributions comprised of dividends
from domestic corporations and certain foreign corporations (generally,
corporations incorporated in a possession of the United States, some
corporations eligible for treaty benefits under a treaty with the United
States and corporations whose stock is readily tradable on an established
securities market in the United States) are eligible for taxation at a maximum
tax rate of 15% also applicable to capital gains in the hands of individual
stockholders, provided holding period and other requirements are satisfied.
Capital gain dividends likewise, are taxed at the reduced maximum rate of 15%
for non-corporate taxpayers. The 15% income tax rate applicable to capital
gains and qualified dividend income is scheduled to expire after December 31,
2008. After this date, absent extension or modification of the relevant
legislative provisions, long-term capital gain dividends paid by the Fund
generally will be taxable at the previously applicable maximum 20% rate and
distributions attributable to qualified dividend income will be taxed to the
stockholder at his or her marginal Federal income tax rate (which generally
will be higher than 15%).
A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction ("DRD") allowed to corporations under the
Code, if certain requirements are met. For these purposes, the Fund will
allocated any dividends eligible for the DRD between the holders of Common
Stock, Cumulative Preferred Stock and any other Preferred Stock in proportion
to the total dividends paid to each class during the taxable year, or
otherwise as required by applicable law. A holder of shares of Cumulative
Preferred stock (a) that is taxed as a corporation for Federal income tax
purposes, (b) meets applicable holding period and taxable income requirements
of section 246 of the Code, (c) is not subject to the "debt-financed portfolio
stock" rules of section 246A of the Code with respect to an investment in the
Fund and (d) is otherwise entitled to the DRD can claim a deduction equal to
70% of the dividends received on the Cumulative Preferred Stock which are
designated by the Fund as qualifying for the DRD.
The IRS has taken the position in Revenue Ruling 89-81 that if a RIC
has more than one class of shares, it may designate distributions made to each
class in any year as consisting of no more than such class's proportionate
share of particular types of income, such as long-term capital gains and
qualified dividend income. A class's proportionate share of a particular type
of income is determined according to the percentage of total dividends paid by
the RIC during such year that was paid to such class. Consequently, the Fund
will designate distributions made to the Common Stock and Cumulative Preferred
Stock and any other Preferred Stock as consisting of particular types of
income in accordance with the classes' proportionate shares of such income.
The amount of long-term capital gains, qualified dividend income, and Other
Ordinary Income allocable among the Cumulative Preferred Stock, other
Preferred Stock, and the Common Stock
9
will depend upon the amount of such long-term capital gains, qualified
dividend income, and Other Ordinary Income realized by the Fund and the total
dividends paid by the Fund on shares of Common Stock, Cumulative Preferred
Stock and other Preferred Stock during a taxable year.
In the opinion of Sidley Austin Brown & Wood LLP, under current law,
the manner in which the Fund intends to allocate long-term capital gains,
qualified dividend income and Other Ordinary Income among shares of Common
Stock, Cumulative Preferred Stock and other Preferred Stock will be respected
for Federal income tax purposes. However, there is currently no direct
guidance from the IRS or other sources specifically addressing whether the
Fund's method of allocation will be respected for Federal income tax purposes,
and that the IRS could disagree with counsel's opinion and attempt to
reallocate the Fund's long-term capital gains, qualified dividend income or
Other Ordinary Income. Sidley Austin Brown & Wood LLP has advised the Fund
that, in its opinion, if the IRS were to challenge in court the Fund's
allocations, the IRS would be unlikely to prevail. The opinion of Sidley
Austin Brown & Wood LLP, however, represents only its best legal judgment and
is not binding on the IRS or courts.
If the Fund does not meet the asset coverage requirements of the 1940
Act or the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the Common Stock until the asset coverage is
restored. See "Description of Cumulative Preferred Stock -- Dividends" in the
Prospectus. Such a suspension of distributions might prevent the Fund from
distributing 90% of its ICTI, as is required in order to avoid Fund-level
taxation of such income, or might prevent it from distributing enough ordinary
income and capital gains to avoid completely imposition of the excise tax.
Upon any failure to meet the asset coverage requirements of the 1940 Act or
the Articles Supplementary, the Fund may, and in certain circumstances will be
required to, partially redeem the shares of Cumulative Preferred Stock in
order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its stockholders of failing to qualify as
a RIC. If asset coverage were restored, the Fund would again be able to pay
dividends and might be able to avoid Fund-level taxation of its income.
Qualification as a RIC requires, among other things, that at least
90% of the Fund's gross income in each taxable year consist of certain types
of income, including dividends, interest, gains from the disposition of stocks
and securities and other investment-type income. In addition, the Fund's
investments must meet certain diversification standards. If the Fund were
unable to satisfy the 90% distribution requirement or otherwise were to fail
to qualify to be taxed as a RIC in any year, it would be subject to tax in
such year on all of its taxable income, whether or not the Fund made any
distributions. To qualify again to be taxed as a RIC in a subsequent year, the
Fund would be required to distribute to Cumulative Preferred Stockholders and
Common Stockholders as an ordinary income dividend, its earnings and profits
attributable to non-RIC years reduced by an interest charge on 50% of such
earnings and profits payable by the Fund to the IRS. In addition, if the Fund
failed to qualify as a RIC for a period greater than one taxable year, the
Fund would be required to recognize and pay tax on any net built-in gains (the
excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if the Fund had been liquidated) or,
alternatively, to elect to be subject to taxation on such built-in-gains
recognized for a period of 10 years, in order to qualify as a RIC in a
subsequent year.
10
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income (and to distribute
such income in accordance with the distribution requirements of the Code) for
Federal income tax purposes before amounts due under the obligations are paid.
The Fund may also invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"). A portion of the interest payments on
such high yield securities may be treated as dividends for Federal income tax
purposes.
Certain transactions of the Fund are subject to complex federal
income tax provisions that may, among other things, a) affect the character of
gains and losses realized, b) disallow, suspend or otherwise limit the
allowance of certain losses or deductions, and c) accelerate the recognition
of income. Operation of these rules could, therefore, affect the character,
amount and timing of distributions to stockholders. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the
effect of these provisions.
Foreign currency gains or losses from certain debt instruments or
arising from delays between accrual and receipt of investment income will
generally be treated as ordinary income or loss, and will therefore generally
increase or decrease the amount of the Fund's net investment income available
for distribution as ordinary income dividends. If substantial in relation to
net investment income, such foreign currency losses could affect the ability
of the Fund to distribute ordinary income dividends in a taxable year, and
could require all or a portion of distributions made before the losses were
realized, but in the same taxable year, to be recharacterized as a return of
capital.
If the Fund invests in stock of a passive foreign investment company
("PFIC"), it may be subject to Federal income tax at ordinary rates and an
additional charge in the nature of interest, on a portion of its distributions
from the PFIC and on gain from the disposition of the shares of the PFIC, even
if such distributions and gain are paid by the Fund as a dividend to its
stockholders. In some cases, the Fund may be able to elect to include annually
in income its pro rata share of the ordinary earnings and capital gains
(whether or not distributed) of the PFIC. Alternatively, the Fund could elect
to mark to market at the end of each taxable year its shares in PFICs; in this
case, the Fund would recognize as ordinary income any increase in the value of
such shares, and as ordinary loss any decrease in such value to the extent it
did not exceed prior increases included in income. Under either election, the
Fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year. Dividends paid by PFICs will not qualify as qualified
dividend income eligible for taxation at reduced rates under the 2003 Tax Act.
Under certain provisions of the Code, some stockholders may be
subject to a withholding tax (28% for 2003) on ordinary income dividends,
capital gain dividends and redemption payments ("backup withholding"). A
stockholder, however, may generally avoid becoming subject to this requirement
by filing an appropriate form with the payor (i.e., the financial institution
or brokerage firm where the stockholder maintains his or her account),
certifying under penalties of perjury that such stockholder's taxpayer
identification number is correct and that such stockholder (i) has never been
notified by the IRS that he or she is subject to backup withholding, (ii) has
been notified by the IRS that he or she is no longer subject to backup
withholding, or (iii) is exempt from backup withholding. Corporate
stockholders and
11
certain other stockholders are exempt from backup withholding. Backup
withholding is not an additional tax. Any amounts withheld under the backup
withholding rules from payments made to a stockholder may be refunded or
credited against such stockholder's Federal income tax liability, provided
the required information is furnished to the IRS.
Ordinary income dividends (but not capital gain dividends) paid to
stockholders who are non-resident aliens or foreign entities generally will be
subject to a 30% United States withholding tax under existing provisions of
the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. However, if ordinary income dividends or capital gain dividends received
by a non-resident stockholder are effectively connected with the conduct by
such stockholder of a trade or business in the United States, the dividends
will be subject to United States federal income tax at regular income tax
rates. Non-resident stockholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding and income
taxes.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Stockholders generally will not be entitled to claim a credit or
deduction with respect to such taxes paid by the Fund.
Under recently promulgated Treasury regulations, if a stockholder
recognizes a loss on the disposition of shares of Cumulative Preferred Stock
of $2 million or more for an individual stockholder or $10 million or more for
a corporate stockholder in any single taxable year (or a greater loss over a
combination of years), the stockholder must file with the IRS a disclosure
statement on Form 8886. The fact that a loss is reportable under these
regulations does not affect the legal determinations of whether the taxpayer's
treatment of the loss is proper. Stockholders should consult their tax
advisers to determine the applicability of these regulations in light of their
individual circumstances.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect and
discusses .some of the consequences under Federal tax law of an investment in
Cumulative Preferred Stock of the Fund. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury regulations
promulgated thereunder. The Code and the Treasury regulations are subject to
change by legislative, judicial or administrative action, either prospectively
or retroactively. The discussion above is not a substitute for personal tax
advice. Distributions may also be subject to additional state, local and
foreign taxes, depending on each stockholder's particular situation.
Stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Cumulative
Preferred Stock.
12
PRINCIPAL STOCKHOLDERS
As of ____________ __, 2003, there were ___________ shares of Common
Stock and 6,400,000 shares of Preferred Stock of the Fund outstanding. The
following persons were known to the Fund to be beneficial owners or owners of
record of 5% or more of its outstanding shares of Common Stock or Preferred
Stock as of the Record Date:
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF OWNER CLASS/SERIES OF STOCK OF OWNERSHIP CLASS/SERIES
--------------------------- --------------------- ----------------------------- ------------
Cede & Co.* Common Stock _____ shares--Record %
Depository Trust Company
P.O. Box #20
Bowling Green Station 7.80% Cumulative Preferred
New York, NY 10028 Stock _____ shares--Record %
7.30% Tax-Advantaged _____ shares--Record %
Cumulative Preferred Stock
-----------------
* Shares held by brokerage firms, banks and other financial
intermediaries on behalf of beneficial owners are registered in the
name of Cede & Co.
13
DIRECTORS AND OFFICERS
The Board of Directors of the Fund is comprised of the eight
individuals named below. Two of the Directors, William L. Koke and David L.
Meister, are elected annually by the holders of Preferred Stock, voting as a
separate class. The remaining six Directors are divided into three classes and
are elected by the holders of Common Stock and Preferred Stock, voting
together as a single class. The Class I Directors, Charles M. Royce and G.
Peter O'Brien, have terms that expire in 2003; the Class II Directors, Mark R.
Fetting and Richard M. Galkin, have terms that expire in 2004; and the Class
III Directors, Donald R. Dwight and Stephen L. Isaacs, have terms that expire
in 2005. To the extent permitted by the 1940 Act and Maryland law, vacancies
on the Board can be filled by the remaining Directors for the remainder of the
term of the respective Board position.
There are no family relationships between any of the Fund's Directors
and officers. Each Director will hold office until his term expires and his
successor has been duly elected or until his earlier resignation or removal.
Each of the Fund's Directors is also a director/trustee of the other
management investment companies comprising "The Royce Funds", which have
seventeen portfolios.
Directors
Interested Directors. Certain biographical and other information
concerning the Directors who are "interested persons" as defined in the 1940
Act, of the Fund, including their designated classes, is set forth below.
Officers are elected by and serve at the pleasure of the Board of Directors.
Each officer will hold office for the year ending December 31, 2003, and
thereafter until his respective successor is duly elected and qualified.
TERM OF NUMBER OF OTHER PUBLIC
OFFICE AND ROYCE FUNDS' COMPANY
NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS
ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR
------------------- ---------------- ---------------- ------------------------------- ----------- ----------------
Charles M. Royce** Class I Director Term as Director President, Chief Investment 18 None
(63) and President expires 2003; Officer and Member of Board of
Director and Managers of Royce; and
Officer since President of The Royce Funds.
1986
Mark R. Fetting** Class II Director Term as Director Executive Vice President of 18 Director/Trustee
(48) expires 2004; Legg Mason; Member of Board of of registered
Director since Managers of Royce; and Division investment
2001 President and Senior Officer of companies
Prudential Financial Group, constituting the
Inc. and related companies, 22 Legg Mason
including Fund Boards and Funds
consulting services to
subsidiary companies (from 1991
to 2000). Mr. Fetting's prior
business experience also
includes having served as
Partner, Greenwich Associates,
and Vice President, T. Rowe
Price Group, Inc.
---------------------
* Mr. Royce's address is c/o Royce, 1414 Avenue of the Americas, New York, New York 10019. Mr. Fetting's address is
c/o Legg Mason, 100 Light Street, Baltimore, Maryland 21202.
** Messrs. Royce and Fetting are "interested persons" of the
Fund within the meaning of Section 2(a)(19) of the 1940 Act due to
the positions they hold with Royce and for Mr. Fetting, Legg Mason,
and their ownership in Legg Mason.
14
Non-Interested Directors. Certain biographical and other information
concerning the Fund Directors who are not "interested persons," as defined in
the 1940 Act, of the Fund, including their designated classes, is set forth
below. Each non-interested Director is also a member of the Fund's audit
committee.
TERM OF NUMBER OF OTHER PUBLIC
OFFICE AND ROYCE FUNDS' COMPANY
NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS
ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR
------------------- ---------------- ---------------- ------------------------------- ----------- ----------------
Donald R. Dwight Class III Term as President of Dwight 18 None
(72) Director Director Partners, Inc., corporate
expires 2005; communications
Director since consultants; and Chairman
1998 (from 1982 until March
1998) of Newspapers
New England, Inc.
Mr. Dwight's prior
experience includes
having served as
Lieutenant Governor
of the Commonwealth
of Massachusetts,
President and Publisher of
Minneapolis Star and
Tribune Company and as Trustee
of the registered investment
companies constituting the
94 Eaton Vance Funds.
Richard M. Galkin Class II Term as Private investor. Mr. 18 None
(65) Director Director Galkin's prior business
expires 2004; of Richard M. Galkin
Director Associates, Inc.,
since 1986 telecommunications
consultants, President of
Manhattan Cable
Television (a subsidiary
of Time Inc.), President
of Haverhills Inc.
(another Time Inc.
subsidiary), President of
Rhode Island Cable
Television and Senior
Vice President of
Satellite Television
Corp. (a subsidiary of
Comsat).
Stephen L. Isaacs Class III Term as President of The Center 18 None
(63) Director Director for Health and Social
expires 2005; Policy (since September
Director since 1996); Attorney and
1986 President of Health
Policy Associates, Inc.,
consultants. Mr. Isaacs'
prior experience includes
having served as Director
of Columbia University
Development Law and
Policy Program and
Professor at Columbia
University.
William L. Koke Director elected Term as Financial planner with 18 None
(68) by Preferred Director Shoreline Financial
Stockholders expires Consultants. Mr. Koke's
annually; prior business experience
Director since includes having served as
2001 Director of Financial
Relations of SONAT, Inc.,
Treasurer of Ward Foods,
Inc. and President of
CFC, Inc.
15
TERM OF NUMBER OF OTHER PUBLIC
OFFICE AND ROYCE FUNDS' COMPANY
NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING PORTFOLIOS DIRECTORSHIPS
ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS OVERSEEN HELD BY DIRECTOR
------------------- ---------------- ---------------- ------------------------------- ----------- ----------------
David L. Meister Director elected Term as Tennis Channel (since 18 None
(63) by Preferred Director June 2000); and Chief
Stockholders expires Executive Officer of
annually; Seniorlife.com (from
Director since December 1999 to May
1986 2000). Mr. Meister's
prior business experience
includes having served as
a consultant to the
communications industry,
President of
Financial News
Network, Senior Vice
President of HBO,
President of
Time-Life Films and
Head of Broadcasting
for Major League
Baseball.
G. Peter O'Brien Class I Term as Trustee of Colgate 18 Director/Trustee of
(57) Director Director University, President of the registered
expires 2003; Hill House, Inc. and investment companies
Director since Managing Director/Equity constituting the
2001 Capital Markets Group of 22 Legg Mason Funds;
Merrill Lynch & Co. (from Director of Renaissance
1971 to 1999). Capital Greenwich Fund.
---------------
* Messrs. Dwight, Galkin, Isaacs, Koke, Meister and O'Brien's address is
c/o Royce, 1414 Avenue of the Americas, New York, New York 10019
Officers
Certain biographical and other information concerning the officers of
the Fund is set forth below. Officers are elected by and serve at the pleasure
of the Board of Directors. Each officer will hold office for the year ending
December 31, 2002, and thereafter until his respective successor is duly
elected and qualified.
TERM OF
OFFICE AND
NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING
ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS
------------------- ---------------- ---------------- -------------------------------
John D. Diederich (52) Vice President, Officer since 2001 Member of Board of Managers, Chief
Director of Operating Officer (since October
Administration and 2001), Chief Financial Officer (since
Treasurer March 2002) and Managing Director of
Royce; Vice President, Treasurer and
Director of Administration of the
other Royce Funds; and President of
Royce Fund Services, Inc.
Jack E. Fockler, Jr. (44) Vice President Officer since 1995 Managing Director and Vice President
of Royce; Vice President of The Royce
Funds.
W. Whitney George (45) Vice President Officer since 1995 Managing Director and Vice President
of Royce; and Vice President of The
Royce Funds.
Daniel A. O'Byrne (41) Vice President and Officer since 1994 Principal and Vice President of Royce;
Assistant Secretary and Vice President of The Royce Funds.
16
TERM OF
OFFICE AND
NAME, AGE AND POSITION(S) LENGTH OF PRINCIPAL OCCUPATIONS DURING
ADDRESS* WITH THE FUND TIME SERVED PAST FIVE YEARS
------------------- ---------------- ---------------- -------------------------------
John E. Denneen (36) Secretary and Officer from 1996 to General Counsel of Royce (Deputy
General Counsel 2001 and since April General Counsel prior to 2003);
2002 Principal, Chief Legal and Compliance
Officer and Secretary of Royce (since
March 2002); Secretary of The Royce
Funds (1996-2001 and since April
2002); Associate General Counsel,
Principal and Chief Compliance Officer
of Royce (1996-2001); and Principal of
Credit Suisse First Boston Private
Equity (2001-2002).
-------------------
* The address of each officer is c/o Royce, 1414 Avenue of the Americas, New York, New York 10019.
17
Ownership of Securities
Information relating to each Director's share ownership in the Fund
and in The Royce Funds as of December 31, 2002 is set forth in the tables
below.
Aggregate Dollar Range of Aggregate Dollar Range of Equity
Name Equity Securities in the Fund Securities in The Royce Funds
------------------------------------------ ----------------------------- --------------------------------
Interested Directors
Charles M. Royce..................... Over $100,000 Over $100,000
Mark R. Fetting*...................... None Over $100,000
Non-Interested Directors
Donald R. Dwight..................... $1-$10,000 Over $100,000
Richard M. Galkin.................... $1-$10,000 Over $100,000
Stephen L. Isaacs.................... $10,001-$50,000 $10,001-$50,000
William L. Koke**.................... $50,001-$100,000 Over $100,000
David L. Meister..................... None Over $100,000
G. Peter O'Brien..................... $10,001-$50,000 Over $100,000
---------------
* As of the date of this Statement of Additional Information, the aggregate
dollar range of equity securities in the Fund held by Mr. Fetting was
_____________.
** As of the date of this Statement of Additional Information, the aggregate
dollar range of equity securities in the Fund held by Mr. Koke was
_____________.
As of the date of this Statement of Additional Information, all
Directors and officers of the Fund as a group owned less than 1% of the Fund's
outstanding Common Stock and Preferred Stock. As of the date of this Statement
of Additional Information, none of the non-interested Directors of the Fund
nor any of their immediate family members owned beneficially or of record any
securities issued by Legg Mason or any of its affiliates (other than
registered investment companies).
Board Committees and Meetings
The Board of Directors has an Audit Committee, comprised of Donald R.
Dwight, Richard M. Galkin, Stephen L. Isaacs, William L. Koke, David L.
Meister and G. Peter O'Brien. The Audit Committee is responsible for, among
other things, the appointment, compensation, and oversight of the work of the
Fund's independent accountants including the resolution of disagreements
regarding financial reporting between Fund management and such independent
accountants. The Fund has adopted an Audit Committee charter. Mr. Galkin
serves as Chairman of the Audit Committee. The members of the Audit Committee
are "independent" within the meaning of the 1940 Act and the New York Stock
Exchange corporate governance standards for audit committees. The Fund's Audit
Committee held three meetings during the year ended December 31, 2002.
Although the Board of Directors does not have a standing compensation
committee or a nominating committee, the non-interested Directors review and
nominate candidates to serve as non-interested Directors. The non-interested
Directors generally will not consider nominees recommended by stockholders of
the Fund.
18
Compensation of Directors and Certain Officers
For the year ended December 31, 2002, the following Directors of the
Fund received compensation from the Fund and The Royce Funds, as follows:
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits from The Royce Funds
Name from Fund Part of Fund Expenses upon Retirement paid to Directors
--------------------- ------------ ---------------------- --------------- ---------------------
Donald R. Dwight, $15,000 None None $65,250
Director(1)
Richard M. Galkin, $15,000 None None $65,250
Director(2)
Stephen L. Isaacs, $15,000 None None $65,250
Director
William L. Koke, $15,000 None None $65,250
Director
David L. Meister, $15,000 None None $65,250
Director
G. Peter O'Brien, $15,000 None None $65,250
Director
-------------
(1) Includes $2,250 from the Fund ($9,562.50 from the Fund and other Royce Funds) deferred during 2002
at the election of Mr. Dwight under The Royce Funds' Deferred Compensation Plan for
Trustees/Directors.
(2) Includes $15,000 from the Fund ($63,750 from the Fund and other Royce Funds) deferred during 2002 at
the election of Mr. Galkin under The Royce Funds' Deferred Compensation Plan for Trustees/Directors.
Directors' Consideration of Investment Advisory Agreement
The Board of Directors determined at meetings held on June 4 and 5,
2003, to approve the continuance of the current Investment Advisory Agreement
relating to the Fund. In making their determination, the Directors considered
a wide range of information of the type they regularly consider when
determining whether to continue a fund's advisory arrangements as in effect
from year to year. In its consideration of the current Investment Advisory
Agreement, the Board of Directors focused on information it had received
relating to, among other things: (a) the nature, quality and extent of the
advisory and other services to be provided to the Fund by Royce, (b)
comparative data with respect to advisory fees paid by other funds with
similar investment objectives, (c) the operating expenses and expense ratio of
the Fund compared to funds with similar investment objectives, (d) the
performance of the Fund as compared to such comparable funds, including
risk-adjusted performance information prepared by Morningstar Inc., (e) the
relative profitability of the arrangements to Royce, (f) information about the
services to be performed and the personnel performing such services under the
current Investment Advisory Agreement, (g) the general reputation and
financial resources of Royce and Legg Mason, (h) compensation payable by the
Fund to affiliates of Royce for other services and (i) Royce's practices
regarding the selection and compensation of brokers that execute portfolio
19
transactions for the Fund and the brokers' provision of brokerage and research
services to Royce. The Board of Directors was advised by separate legal
counsel in connection with its review of the investment advisory arrangements
of the Fund.
Information Concerning Royce
On October 1, 2001, Royce became an indirect wholly-owned subsidiary
of Legg Mason. On March 31, 2002, Royce's corporate predecessor was merged
into Royce Holdings, LLC (a wholly-owned subsidiary of Legg Mason), which then
changed its name to Royce & Associates, LLC. As a result of this merger, Royce
& Associates, LLC became the Fund's investment adviser and a direct
wholly-owned subsidiary of Legg Mason.
CODE OF ETHICS AND RELATED MATTERS
Royce and the Fund have adopted a Code of Ethics under which
directors (other than non-management directors), officers and employees of
Royce ("Royce-related persons") and interested trustees/directors, officers
and employees of the Fund are generally prohibited from personal trading in
any security which is then being purchased or sold or considered for purchase
or sale by the Fund or any other Royce account. The Code of Ethics permits
such persons to engage in other personal securities transactions if (i) the
securities involved are certain debt securities, money market instruments,
shares of registered open-end investment companies or shares acquired from an
issuer in a rights offering or under an automatic dividend reinvestment or
employer-sponsored automatic payroll deduction cash purchase plan, (ii) the
transactions are either non-volitional or are effected in an account over
which such person has no direct or indirect influence or control or (iii) they
first obtain permission to trade from Royce's Compliance Officer and either an
executive officer or Senior Portfolio Manager of Royce. The Code contains
standards for the granting of such permission, and permission to trade will
usually be granted only in accordance with such standards.
Royce's clients include several private investment companies in which
Royce, Royce-related persons and/or other Legg Mason affiliates have (and,
therefore, may be deemed to beneficially own) a share of up to 15% of the
company's realized and unrealized net capital gains from securities
transactions, but less than 25% of the company's equity interests. The Code of
Ethics does not restrict transactions effected by Royce for such private
investment company accounts, and transactions for such accounts are subject to
Royce's allocation policies and procedures. See "Brokerage Allocation and
Other Practices".
The Code of Ethics can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The Code of Ethics is available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov. Copies of the Code of Ethics
may be obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
As of June 30, 2003, Royce-related persons, interested trustees/
directors, officers and employees of The Royce Funds and members of their
immediate families beneficially owned
20
shares of The Royce Funds having a total value of over $48.2 million, and such
persons beneficially owned equity interests in Royce-related private
investment companies totaling approximately $9.9 million.
INVESTMENT ADVISORY AND OTHER SERVICES
Advisory Fee
For the years ended December 31, 2002, 2001 and 2000, Royce received
investment advisory fees from the Fund of $10,024,212, $9,410,553 and
$7,342,211 (net of $665,068, $249,670 and $505,624 voluntarily waived by
Royce), respectively.
Other
The Investment Advisory Agreement provides that the Fund may use
"Royce" as part of its name only for as long as the Investment Advisory
Agreement remains in effect. The name "Royce" is a property right of Royce,
and it may at any time permit others, including other investment entities, to
use such name.
The Investment Advisory Agreement protects and indemnifies Royce
against liability to the Fund, its stockholders or others for any action taken
or omitted to be taken by Royce in connection with the performance of any of
its duties or obligations under Investment Advisory Agreement or otherwise as
an investment adviser to the Fund. However, Royce is not protected or
indemnified against liabilities to which it would otherwise be subject by
reason of willful malfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its duties
and obligations under the Investment Advisory Agreement.
Royce's services to the Fund are not deemed to be exclusive, and
Royce or any of its affiliates may provide similar services to other
investment companies and other clients or engage in other activities.
The Investment Advisory Agreement will remain in effect until June
30, 2004 and may be continued in effect from year to year thereafter if such
continuance is specifically approved at least annually by the Board of
Directors or by the vote of a majority of the Fund's outstanding voting
securities and, in either case, by a majority of the directors who are not
parties to the Agreement or interested persons of any such party. The
Investment Advisory Agreement will automatically terminate if it is assigned
(as defined by the 1940 Act and the rules thereunder) and may be terminated
without penalty by vote of a majority of the Fund's outstanding voting
securities or by either party thereto on not less than 60 days' written
notice.
Service Contract with State Street
State Street Bank and Trust Company ("State Street"), the custodian
of the Fund's assets, provides certain management-related services to the
Fund. Such services include keeping books of accounts and rendering such
financial and other statements as may be requested by the Fund from time to
time generally assisting in the preparation of reports to the Fund's
stockholders, to the Commission and others and in the auditing of accounts and
in other ministerial matters of
21
like nature, as agreed to between the Fund and State Street. For the fiscal
years ended December 31, 2002, 2001 and 2000, the Fund paid $213,265, $235,710
and $218,247 in fees to the Fund's custodian and transfer agent.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Royce is responsible for selecting the brokers who effect the
purchases and sales of the Fund's portfolio securities. No broker is selected
to effect a securities transaction for the Fund unless such broker is believed
by Royce to be capable of obtaining the best price for the security involved
in the transaction. Best price and execution is comprised of several factors,
including the liquidity of the security, the commission charged, the
promptness and reliability of execution, priority accorded the order and other
factors affecting the overall benefit obtained. In addition to considering a
broker's execution capability, Royce generally considers the brokerage and
research services which the broker has provided to it, including any research
relating to the security involved in the transaction and/or to other
securities. Such services may include general economic research, market and
statistical information, industry and technical research, strategy and company
research and performance measurement, and may be written or oral. Brokers that
provide both research and execution services are generally paid higher
commissions than those paid to brokers who do not provide such research and
execution services. Royce determines the overall reasonableness of brokerage
commissions paid, after considering the amount another broker might have
charged for effecting the transaction and the value placed by Royce upon the
brokerage and/or research services provided by such broker, viewed in terms of
either that particular transaction or Royce's overall responsibilities with
respect to its accounts.
Royce is authorized, under Section 28(e) of the Securities Exchange
Act and under its Investment Advisory Agreement with the Fund, to pay a broker
a commission in excess of that which another broker might have charged for
effecting the same transaction, in recognition of the value of brokerage and
research services provided by the broker.
Brokerage and research services furnished by brokers through whom the
Fund effects securities transactions may be used by Royce in servicing all of
its accounts, and not all of such services may be used by Royce in connection
with the Fund.
Even though investment decisions for the Fund are made independently
from those for the other accounts managed by Royce, securities of the same
issuer are frequently purchased, held or sold by more than one Royce account
because the same security may be suitable for all of them. When the same
security is being purchased or sold for more than one Royce account on the
same trading day, Royce may seek to average the transactions as to price and
allocate them as to amount in a manner believed to be equitable to each. Such
purchases and sales of the same security are generally effected pursuant to
Royce's Trade Allocation Guidelines and Procedures. Under such Guidelines and
Procedures, unallocated orders are placed with and executed by broker-dealers
during the trading day. The securities purchased or sold in such transactions
are then allocated to one or more of Royce's accounts at or shortly following
the close of trading, using the average net price obtained. Such allocations
are done based on a number of judgmental factors that Royce believes should
result in fair and equitable treatment to those of its accounts for which the
securities may be deemed suitable. In some cases, this procedure may adversely
22
affect the price paid or received by the Fund or the size of the position
obtained for the Fund. In addition, from time to time, certain other Royce
accounts managed by Royce portfolio managers other than Charles M. Royce, may
establish short positions in securities in which the Fund has a long position.
The Fund may effect brokerage transactions on a securities exchange
with Legg Mason Wood Walker, Incorporated ("Legg Mason Wood Walker") and any
other affiliated broker-dealers in accordance with the procedures and
requirements set forth in Rule 17e-1 under the 1940 Act. Any such transactions
would involve the use of the affiliated broker-dealer for execution purposes
only and/or for locating the purchasers or sellers involved in the
transaction. The affiliated broker-dealer would not be compensated because of
any other research-related service or product provided or to be provided by it
and may not be used to effect brokerage transactions in Nasdaq or other
over-the-counter securities. Although the Fund will not effect any principal
transactions with any affiliated broker-dealers, they may purchase securities
that are offered in certain underwritings in which an affiliated broker-dealer
is a participant in accordance with the procedures and requirements set forth
in Rule 10f-3 under the 1940 Act. Charles M. Royce and/or trusts primarily for
the benefit of members of his family may own or acquire substantial amounts of
Legg Mason common stock.
During the year ended December 31, 2002, the Fund did not acquire any
securities of any of its regular brokers (as defined in Rule 10b-1 under the
1940 Act) or of any of their parents.
During each of the three years ended December 31, 2002, 2001 and
2000, the Fund paid brokerage commissions of approximately $1,043,502,
$602,336 and $694,188, respectively. Since October 1, 2001, when Royce became
an indirect wholly-owned subsidiary of Legg Mason, the Fund paid no brokerage
commissions to Legg Mason Wood Walker or to any other affiliates of Legg
Mason.
PROXY VOTING POLICIES AND PROCEDURES
In June 2003, in response to rules adopted by the Commission, Royce
adopted written proxy voting policies and procedures (the "Proxy Voting
Procedures") for itself, the Fund, and all The Royce Funds and clients
accounts for which Royce is responsible for voting proxies. The Board of
Directors of the Fund has delegated all proxy voting decisions to Royce. In
voting proxies, Royce is guided by general fiduciary principles. Royce's goal
is to act prudently, solely in the best interest of the beneficial owners of
the accounts it manages. Royce attempts to consider all factors of its vote
that could affect the value of the investment and will vote proxies in the
manner it believes will be consistent with efforts to enhance and/or protect
stockholder value.
Royce personnel are responsible for monitoring receipt of all proxies
and ensuring that proxies are received for all securities for which Royce has
proxy voting responsibility. Royce divides proxies into "regularly recurring"
and "non-regularly recurring" matters. Examples of regularly recurring matters
include non-contested elections of directors and non-contested approvals of
independent auditors. Regularly recurring matters are usually voted as
recommended by the issuer's board of directors or management. Non-regularly
recurring
23
matters are brought to the attention of portfolio manger(s) for the applicable
account(s) and, after giving consideration to advisories provided by an
independent third party research firm, the portfolio manager(s) directs that
such matters be voted in a way that he believes should better protect or
enhance the value of the investment. If the portfolio manager determines that
information relating to a proxy requires additional analysis, is missing, or
is incomplete, the portfolio manager will give the proxy to an analyst or
another portfolio manager for review and analysis. Under certain
circumstances, Royce may vote against a proposal from the issuer's board of
directors or management. Royce's portfolio managers decide these issues on a
case-by-case-basis. A Royce portfolio manager may, on occasion, decide to
abstain from voting a proxy or a specific proxy item when such person
concludes that the potential benefit of voting is outweighed by the cost or
when it is not in the client's best interest to vote.
In furtherance of Royce's goal to vote proxies in the best interests
of its clients, Royce follows specific procedures outlined in the Proxy Voting
Procedures to identify, assess and address material conflicts that may arise
between Royce's interests and those of its clients before voting proxies on
behalf of such clients. In the event such a material conflict of interest is
identified, the proxy will be voted by Royce in accordance with the
recommendation given by an independent third party research firm.
NET ASSET VALUE
The net asset value ("NAV") of the Fund's shares of Common Stock is
calculated as of the close of regular trading on the NYSE (generally 4:00 p.m.
Eastern time) every day that the NYSE is open. The Fund makes this information
available daily by telephone (800-221-4268) and via its web site
(www.roycefunds.com) and through electronic distribution for media
publication, including major internet-based financial services web sites and
portals (bloomberg.com, yahoo.com, cbsmarketwatch.com, etc.). Currently, The
Wall Street Journal, The New York Times and Barron's publish NAVs for
closed-end investment companies weekly.
The NAV per share of the Fund's Common Stock is calculated by
dividing the current value of the Fund's total assets less the sum of all of
its liabilities and the aggregate liquidation preferences of its outstanding
shares of Preferred Stock, by the total number of outstanding shares of Common
Stock. The Fund's investments are valued based on market value or, if market
quotations are not readily available, at their fair value as determined in
good faith under procedures established by the Fund's Board of Directors.
For the years ended December 31, 2002, 2001 and 2000, the Fund's
portfolio turnover rates were 35%, 30% and 36%, respectively.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Stockholders for the fiscal year ended December 31, 2002, together with
the report of ____, ______ & _____ thereon, and the unaudited financial
statements included in the Semi-Annual Report to the Fund's Stockholders for
the six months ended June 30, 2003, are incorporated herein by reference.
24
Part C
Other Information
Item 24. Financial Statements and Exhibits
1. a. The following audited financial statements of Royce Value
Trust, Inc. (the "Fund") are included in the Fund's Annual
Report to Stockholders for the fiscal year ended December 31,
2002, filed with the Securities and Exchange Commission ("SEC")
under Section 30 (b) (1) of the Investment Company Act of 1940,
as amended ("1940 Act"), and are incorporated in Part B hereof
by reference:
Schedule of Investments, December 31, 2002; Statement of
Assets and Liabilities, December 31, 2002; Statement of
Operations for the fiscal year ended December 31, 2002;
Statement of Changes in Net Assets for the years ended
December 31, 2002 and 2001; Notes to Financial Statements
at December 31, 2002; Financial Highlights for the five
fiscal years ended December 31, 2002; and Report of
Independent Accountants.
b. The following unaudited financial statements of
the Fund are included in the Fund's Semi-Annual Report to
Stockholders for the six months ended June 30, 2003, filed
with the SEC under Section 30(b)(1) of the 1940 Act, and
are incorporated in Part B hereof by reference:
To be provided by amendment.
2. Exhibits
(a) (1) Articles of Incorporation dated July 1, 1986. (1)
(2) Articles of Amendment dated May 6, 1988. (1)
(3) Articles of Amendment dated April 28, 1989. (1)
(4) Articles of Amendment dated March 2, 1998. (1)
(5) Articles of Amendment dated March 19, 1998. (1)
(6) Certificate of Correction dated May 11, 1998. (1)
(7) Form of Articles Supplementary creating the 7.80% Cumulative Preferred Stock ("7.80%
Preferred"). (2)
(8) Form of Articles Supplementary creating the 7.30% Tax-Advantaged Cumulative Preferred Stock
("7.30% Preferred"). (3)
(9) Form of Articles Supplementary dated February 5, 2003. (1)
(10) Form of Articles Supplementary creating the ___% Cumulative Preferred Stock (the "Cumulative
Preferred Stock").*
(b) Amended and Restated By-laws. (1)
(c) Not applicable.
(d) (1) Form of specimen share certificate for Common Stock. (1)
(2) Form of share certificate for 7.80% Preferred. (4)
(3) Form of share certificate for 7.30% Preferred. (3)
(4) Form of share certificate for the Cumulative Preferred Stock.*
(e) Amended and Restated Distribution Reinvestment and Cash Purchase Plan. (5)
(f) Not applicable.
(g) Investment Advisory Agreement dated October 1, 2001 between the Fund and Royce & Associates,
Inc. ("R & A"). (6)
(h) Form of Underwriting Agreement.*
(i) Not applicable.
(j) (1) Custodian Contract with State Street Bank and Trust Company ("State Street") dated October 20,
1986. (1)
(2) Amendment to Custodian Contract dated December 11, 1987. (1)
3
(3) Amendment to Custodian Contract dated May 13, 1988. (1)
(4) Amendment to Custodian Contract dated April 2, 1992. (1)
(5) Amendment to Custodian Contract dated November 3, 1997. (1)
(6) Amendment to Custodian Contract dated September 14, 2000. (1)
(7) Form of Amendment to Custodian Contract dated April 16, 2003. (1)
(k) (1) Registrar, Transfer Agency and Service Agreement with State Street (Common Stock) dated October
20, 1986. (1)
(2) Registrar, Transfer Agency and Service Agreement with State Street (7.80% Preferred Stock) dated
August 21, 1996. (1)
(3) First Amendment to Registrar, Transfer Agency and Paying Agency Agreement (7.80% Preferred and
7.30% Preferred) dated May 18, 1998. (7)
(4) Second Amendment to Registrar, Transfer Agency and Paying Agency Agreement (Cumulative Preferred
Stock)*
(5) Form of Subscription Certificate. (1)
(6) Form of Subscription Agent Agreement. (1)
(7) Form of Information Agent Agreement. (1)
(l) Opinion and Consent of Venable llp.*
(m) Not applicable.
(n) Consent of ____, ______ & _____, independent auditors for the Fund.*
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics. (1)
________
(1) Incorporated by reference to the Fund's Registration Statement on Form
N-2, filed with the SEC on January 3, 2003 (File No. 333-102349).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's
Registration Statement on Form N-2, filed with the SEC on August 9, 1996
(File No. 333-8039).
(3) Incorporated by reference to the Fund's Registration Statement on Form
N-2, filed with the SEC on April 29, 1998 (File No. 333-51295).
(4) Incorporated by reference to the Fund's Registration Statement on Form
N-2, filed with the SEC on July 12, 1996 (File No. 333-8039).
(5) Incorporated by reference to the Fund's Registration Statement on Form
N-2, filed with the SEC on August 11, 1995 (File No. 811-4875).
(6) Incorporated by reference to the Fund's Form NSAR-B, filed with the SEC
on February 28, 2002.
(7) Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's
Registration Statement on Form N-2, filed with the SEC on May 14, 1998
(File No. 333-51295).
* To be filed by amendment.
Item 25. Marketing Arrangements
Please see Exhibit (h) to this Registration Statement.
4
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration Statement:
Estimated
Category Expenses
------------------------------------------------------------------------- ----------
Registration fees........................................................ *
New York Stock Exchange listing fees..................................... *
Printing expenses (other than stock certificates)........................ *
Rating agency fees....................................................... *
Accounting fees and expenses............................................. *
Legal fees and expenses.................................................. *
Miscellaneous............................................................ *
*
----------
Total.................................................................... *
==========
*To be provided by amendment.
Item 27. Person Controlled by or Under Common Control with Fund
None.
Item 28. Number of Holders of Securities
The following information is given as of _______ __, 2003:
Title of Class Number of Record Holders
--------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value..................................................................... *
7.80% Cumulative Preferred Stock, $.001 par value................................................. *
7.30% Tax-Advantaged Cumulative Preferred Stock, $.001 par value.................................. *
*
*To be provided by amendment.
Item 29. Indemnification
Reference is made to Section 2-418 of the Maryland General
Corporation Law, Article VI and VII of the Fund's Articles of Incorporation,
as amended, Article V of the Fund's Amended and Restated By-laws, and the
Investment Advisory Agreement, each of which provide for indemnification.
The Investment Advisory Agreement between the Fund and R & A
obligates the Fund to indemnify R & A and hold it harmless from and against
all damages, liabilities, costs and expenses (including reasonable attorneys'
fees) incurred by R & A in or by reason of any action, suit, investigation or
other proceeding arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by R & A in connection with the
performance of any of its duties or obligations under the Agreement or
otherwise as an investment adviser of the Fund. R & A is not entitled to
indemnification in respect of any liability to the Fund or its security
holders to which it would otherwise be subject by reason of its willful
misfeasance, bad faith or gross negligence.
Under the Underwriting Agreement relating to the Cumulative Preferred
Stock offered hereby, the Registrant agrees to indemnify the Underwriters and
each person, if any, who controls the Underwriters within the
5
meaning of the Securities Act of 1933, as amended (the "1933 Act"), against
certain types of civil liabilities arising in connection the Registration
Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liability arising under the 1933 Act,
may be permitted to directors, officers and controlling persons of the Fund
pursuant to the foregoing provisions or otherwise, the Fund has been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent or
such claim is to be paid under insurance policies, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Fund, its officers and directors, R & A and certain others are
presently insured under a Directors and Officers/Errors and Omissions
Liability Insurance Policy issued by ICI Mutual Insurance Company, which
generally covers claims by the Fund's stockholders and third persons based on
or alleging negligent acts, misstatements or omissions by the insureds and the
costs and expenses of defending those claims, up to a limit of $15,000,000,
with a deductible amount of $250,000.
Item 30. Business and other Connections of Investment Adviser
Reference is made to Schedules D and F to Royce's amended Form ADV
(File No. 801-8268), which are incorporated herein by reference.
Item 31. Location of Accounts and Records
Records are located at:
1. Royce Value Trust, Inc.
10th Floor
1414 Avenue of the Americas
New York, New York 10019
(Corporate records and records relating to the function of Royce as investment
adviser)
2. State Street Bank and Trust Company
Two Heritage Drive
North Quincy, Massachusetts 02171
Attention: Royce Value Trust, Inc.
(Records relating to its functions as Custodian for the Fund)
3. Equiserve Trust Company, N.A. 225 Franklin Street
Boston, Massachusetts 02110 Attention: Royce Value Trust,
Inc.
(Records relating to its functions as Registrar and Transfer Agent and Dividend
Paying Agent for the Fund)
Item 32. Management Services
Not applicable.
Item 33. Undertakings
6
(1) Not applicable.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Fund undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Fund pursuant to Rule 497(h)
will be deemed to be a part of the Registration Statement as of the time it
was declared effective. The Fund undertakes that, for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
(6) The Fund undertakes to send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 1st day of August, 2003.
ROYCE VALUE TRUST, INC.
(Registrant)
By:/s/ Charles M. Royce
---------------------------
Charles M. Royce, President
Each person whose signature appears below hereby authorizes Charles
M. Royce, John D. Diederich, and John E. Denneen, or any of them, as
attorney-in-fact, to sign on his behalf, individually and in each capacity
stated below, any amendments to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Charles M. Royce President (Principal Executive Officer) August 1, 2003
----------------------------
Charles M. Royce and Director
/s/ John D. Diederich Vice President and Treasurer (Principal August 1, 2003
---------------------------- Financial and Accounting Officer)
John D. Diederich
/s/ Donald R. Dwight Director August 1, 2003
----------------------------
Donald R. Dwight
/s/ Mark R. Fetting Director August 1, 2003
----------------------------
Mark R. Fetting
/s/ Richard M. Galkin Director August 1, 2003
----------------------------
Richard M. Galkin
/s/ Stephen L. Isaacs Director August 1, 2003
----------------------------
Stephen L. Isaacs
/s/ William L. Koke Director August 1, 2003
----------------------------
William L. Koke
/s/ David L. Meister Director August 1, 2003
----------------------------
David L. Meister
/s/ G. Peter O'Brien Director August 1, 2003
----------------------------
G. Peter O'Brien
8