<PAGE>
<PAGE>
PROSPECTUS
800,000 SHARES
ROYCE GLOBAL TRUST, INC.
7.45% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
--------------------
The 7.45% Cumulative Preferred Stock, liquidation preference $25.00 per
share (the 'Cumulative Preferred Stock'), to be issued by Royce Global Trust,
Inc. (the 'Fund'), will be senior securities of the Fund. Prior to this
offering, there has been no public market for the Cumulative Preferred Stock.
The Fund is a closed-end diversified management investment company. The Fund's
investment objective is long-term capital appreciation, which it seeks by
normally investing more than 75% of its assets in common stocks, convertible
preferred stocks, convertible debentures and other equity securities. Royce &
Associates, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of 7.45% of the liquidation preference, are cumulative from the Date of
Original Issue thereof and are payable quarterly on March 23, June 23, September
23 and December 23, commencing on December 23, 1997.
Dividends paid on the Cumulative Preferred Stock may consist of varying
proportions of long-term capital gains (derived from the sale of assets held
longer than 18 months), mid-term capital gains (derived from the sale of assets
held longer than one year but not longer than 18 months), ordinary income,
short-term capital gains and/or returns of capital. See 'Taxation'. No assurance
can be given, however, as to what percentage, if any, of such dividends will
consist of the less highly taxed long-term capital gains and mid-term capital
gains. Royce expects that, under current market conditions, the dividend to be
paid on the Cumulative Preferred Stock in December 1997 will consist primarily
of ordinary income and short-term capital gains, which are taxed at higher rates
than long-term capital gains and mid-term capital gains.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with
the receipt of such rating, the composition of the Fund's portfolio must reflect
guidelines established by Moody's, and the Fund will be required to maintain a
certain discounted asset coverage with respect to the Cumulative Preferred
Stock.
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 225% or to maintain the discounted asset coverage required by Moody's
or if certain corporate actions are authorized by the Fund's Board of Directors
and Common Stockholders. Commencing December 1, 2002 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 December 1, 2002, 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'.
(Continued on next page)
--------------------
THE CUMULATIVE PREFERRED STOCK HAS BEEN APPROVED FOR LISTING ON THE AMERICAN
STOCK EXCHANGE (THE 'AMEX'), SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. TRADING
OF THE CUMULATIVE PREFERRED STOCK ON THE AMEX IS EXPECTED TO COMMENCE
WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE 'UNDERWRITING'.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================
UNDERWRITING
PRICE TO DISCOUNTS OR PROCEEDS
PUBLIC(1) COMMISSIONS(2) TO FUND(3)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Per Share.............................. $25.00 $0.7875 $24.2125
- -----------------------------------------------------------------------------------------------
Total(3)............................... $20,000,000 $630,000 $19,370,000
===============================================================================================
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the investment adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(3) Before deducting offering expenses payable by the Fund, estimated at
$190,000.
---------------------
The shares of Cumulative Preferred Stock are being offered by the
Underwriter named herein, subject to prior sale, when, as and if accepted by it
and subject to certain conditions. It is expected that delivery of the shares of
Cumulative Preferred Stock will be made in book-entry form through the
facilities of The Depository Trust Company on or about November 21, 1997.
------------------
SMITH BARNEY INC.
November 18, 1997
<PAGE>
<PAGE>
(Continued from cover page)
If the Fund voluntarily terminates compliance with the Moody's guidelines,
the dividend rate payable on the Cumulative Preferred Stock will be increased
and, among other things, the Fund will no longer be required to maintain the
discounted asset coverage required by Moody's. See 'Investment Objective and
Policies -- Rating Agency Guidelines' and 'Description of Cumulative Preferred
Stock -- Termination of Rating Agency Guidelines'.
This Prospectus sets forth certain information an investor should know
before investing and should be retained for future reference.
A Statement of Additional Information dated November 18, 1997 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 34 of this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by writing to
the Fund at its address at 1414 Avenue of the Americas, New York, New York
10019, or calling the Fund toll-free at (800) 221-4268.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE
PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE 'UNDERWRITING'.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the
Statement of Additional Information. Capitalized terms not defined in this
Summary are defined in the Glossary that appears at the end of this Prospectus.
<TABLE>
<S> <C>
The Fund; Investment Objective and
Policies................................... Royce Global Trust, Inc. (the 'Fund') has been engaged in business
as a closed-end management investment company since its initial
public offering in March 1988. Since November 1, 1996, when
Royce & Associates, Inc. ('Royce') became its investment
adviser, the Fund's investment objective has been long-term
capital appreciation, which it seeks to achieve by normally
investing more than 75% of its assets in common stocks,
convertible preferred stocks, convertible debentures and other
equity securities. No assurance can be given that the Fund's
investment objective will be achieved. Royce invests the Fund's
assets in a limited number of domestic and foreign companies,
selected using a value approach. While the Fund is not
restricted as to stock market capitalization, Royce focuses the
Fund's investments primarily in small-cap companies (companies
with stock market capitalizations below $1 billion) with
significant business activities in the United States. The Fund's
total return on the net asset value of its Common Stock for the
eleven month period from November 1, 1996 to September 30, 1997,
was 32.6%, and is not intended to indicate future performance.
See 'Investment Objective and Policies'.
The Investment Adviser; Fees................. Royce also serves as investment adviser to other management
investment companies, with aggregate net assets of approximately
$2.3 billion as of September 30, 1997, and manages other
institutional accounts. The Fund had another investment adviser
and operated under a different investment strategy prior to
November 1, 1996.
Charles M. Royce, Royce's President, Chief Investment Officer and
sole voting shareholder, is primarily responsible for managing
the Fund's portfolio. He is assisted by Royce's investment
staff, including W. Whitney George, Portfolio Manager and
Managing Director, and by Jack E. Fockler, Jr., Managing
Director. See 'Investment Advisory and Other
Services -- Portfolio Management' herein and 'Directors and
Officers' in the Statement of Additional Information.
As compensation for its services under the Investment Advisory
Agreement, Royce is entitled to receive a monthly fee equal to
1/12 of 1% (1% on an annualized basis) of the average net assets
of the Fund for each month during the term of the Agreement.
Royce will voluntarily waive the portion of its investment
advisory fee that is attributable to the amount of the proceeds
to the Fund of this offering and of any other Preferred Stock
</TABLE>
3
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<PAGE>
<TABLE>
<S> <C>
offering for any month when the Fund's average annual NAV total
return from the date of the Preferred Stock's original issue
fails to exceed the Preferred Stock dividend rate during that
period. Royce had voluntarily waived its fee until such time as
the market price of the Fund's Common Stock closed for a period
of 20 consecutive trading days at or above $5.28, the Fund's net
asset value on October 31, 1996. This condition was satisfied on
August 20, 1997. See 'Investment Advisory and Other
Services -- Advisory Fee'.
The Offering................................. The Fund is offering 800,000 shares of 7.45% Cumulative Preferred
Stock, par value $.01 per share, liquidation preference $25.00
per share (the 'Cumulative Preferred Stock'), at a purchase
price of $25.00 per share.
Dividends.................................... Dividends on the Cumulative Preferred Stock, at the annual rate of
7.45% of the liquidation preference, are cumulative from the
Date of Original Issue and are payable, when, as and if declared
by the Board of Directors of the Fund out of funds legally
available therefor, quarterly on March 23, June 23, September 23
and December 23, commencing on December 23, 1997, to holders of
record on the preceding March 6, June 6, September 6 and
December 6, respectively. See 'Description of Cumulative
Preferred Stock -- Dividends'.
Tax Attributes of Preferred Stock
Dividends.................................. The Fund is required to allocate income taxed as long-term capital
gains, as well as other types of income, proportionately among
holders of shares of Common Stock and shares of Cumulative
Preferred Stock in accordance with the current position of the
Internal Revenue Service (the 'IRS'). Dividends paid on the
Cumulative Preferred Stock may consist of varying proportions of
long-term capital gains, mid-term capital gains, ordinary
income, short-term capital gains and/or returns of capital.
Royce expects that in December 1997, under current market
conditions, the dividend paid on the Cumulative Preferred Stock
will consist primarily of ordinary income and short-term capital
gains. Certain investors in the Cumulative Preferred Stock may
realize a tax benefit to the extent that dividends paid by the
Fund on those shares are composed of the less highly taxed
long-term capital gains and mid-term capital gains. See 'Tax
Attributes of Preferred Stock Dividends'. No assurance can be
given, however, as to what percentage, if any, of such dividends
will consist of long-term or mid-term capital gains. To the
extent that dividends on the shares of Cumulative Preferred
Stock are not paid from long-term or mid-term capital gains,
they will be paid from net investment income (which includes
both ordinary income and short-term capital gains) and taxed as
ordinary income or will represent a return of capital.
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Capital Gains Rate Reduction................. Under recently enacted legislation, 'long-term capital gain' has
been broken down into additional categories of gain, taxable at
different rates for individual taxpayers. These categories
include mid-term gain. Under this legislation, net mid-term
gains on securities held for more than one year but not more
than 18 months will be taxed at an individual taxpayer's
marginal Federal income tax rate, but not higher than 28%. Net
long-term gains on securities held for more than 18 months will
be taxed to individual taxpayers at a maximum rate of 20%. For
individual taxpayers in the 15% marginal Federal income tax
bracket, the tax rate on such gains now will be 10%. Different
categories of long-term capital gains included in capital gains
distributed to stockholders by the Fund or by any other RIC will
generally be passed through to such stockholders, including
preferred stockholders, and taxed at the related rate. See
'Taxation'.
Rating....................................... It is a condition to its issuance that the Cumulative Preferred
Stock be issued with a rating of 'aaa' from Moody's Investors
Service, Inc. ('Moody's'). The Articles Supplementary creating
and fixing the rights and preferences of the Cumulative
Preferred Stock (the 'Articles Supplementary') contain certain
provisions which reflect guidelines established by Moody's (the
'Rating Agency Guidelines') in order to obtain such rating on
the Cumulative Preferred Stock on the Date of Original Issue.
Although it is the Fund's present intention to continue to
comply with the Rating Agency Guidelines, the Board of Directors
of the Fund may determine that it is not in the best interests
of the Fund to continue to do so. If the Fund voluntarily
terminates compliance with the Rating Agency Guidelines, the
dividend rate payable on the Cumulative Preferred Stock will be
increased by .375% per annum and, among other things, the Fund
will no longer be required to maintain a Portfolio Calculation
at least equal to the Basic Maintenance Amount. See 'Description
of Cumulative Preferred Stock -- Termination of Rating Agency
Guidelines'.
Asset Coverage............................... The Fund will be required to maintain, as of the last Business Day
of March, June, September and December of each year, Asset
Coverage of at least 225% with respect to the Cumulative
Preferred Stock. This required Asset Coverage is greater than
the 200% asset coverage required by Section 18 of the Investment
Company Act of 1940, as amended (the '1940 Act'). If the Fund
had issued and sold the Cumulative Preferred Stock offered
hereby as of June 30, 1997 and September 30, 1997, the Asset
Coverage would have been 350% and 376%, respectively. See
'Description of Cumulative Preferred Stock -- Asset
Maintenance'.
</TABLE>
5
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<PAGE>
<TABLE>
<S> <C>
Also, pursuant to the Rating Agency Guidelines, the Fund will be
required to maintain a Portfolio Calculation for Moody's at
least equal to the Basic Maintenance Amount. The discount
factors and guidelines for determining the Portfolio Calculation
have been established by Moody's in connection with the Fund's
receipt of a rating on the Cumulative Preferred Stock on its
Date of Original Issue of 'aaa' from Moody's. See 'Investment
Objective and Policies -- Rating Agency Guidelines'.
Voting Rights................................ At all times, holders of shares of Cumulative Preferred Stock and
any other Preferred Stock will elect two members of the Fund's
Board of Directors, and holders of Cumulative Preferred Stock,
any other Preferred Stock and Common Stock, voting as a single
class, will elect the remaining directors. However, upon a
failure by the Fund to pay dividends on the Cumulative Preferred
Stock and/or any other Preferred Stock in an amount equal to two
full years' dividends, holders of Cumulative Preferred Stock,
voting as a separate class with any other outstanding shares of
Preferred Stock of the Fund, will have the right to elect the
smallest number of directors that would constitute a majority of
the directors until cumulative dividends have been paid or
provided for. Holders of Cumulative Preferred Stock and any
other Preferred Stock will vote separately as a class on certain
other matters, as required under the Fund's Articles
Supplementary, the 1940 Act and Maryland law. Except as
otherwise indicated in this Prospectus and as otherwise required
by applicable law, holders of Cumulative Preferred Stock will be
entitled to one vote per share on each matter submitted to a
vote of stockholders and will vote together with holders of
shares of Common Stock as a single class. See 'Description of
Cumulative Preferred Stock -- Voting Rights'.
Mandatory Redemption......................... The Cumulative Preferred Stock is subject to mandatory redemption
in whole or in part by the Fund in the event that the Fund fails
to maintain the quarterly Asset Coverage or to maintain a
Portfolio Calculation at least equal to the Basic Maintenance
Amount required by Moody's and does not cure such failure by the
applicable cure date. Any such redemption will be made for cash
at a price equal to $25.00 per share plus accumulated and unpaid
dividends (whether or not earned or declared) to the redemption
date (the 'Redemption Price'). In the event that shares are
redeemed due to a failure to maintain the quarterly Asset
Coverage, the Fund may redeem a sufficient number of shares of
Cumulative Preferred Stock in order that the asset coverage, as
defined in the 1940 Act, of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock after
redemption, is up to 250%. In the event that shares are redeemed
due to a failure to
</TABLE>
6
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<PAGE>
<TABLE>
<S> <C>
maintain a Portfolio Calculation at least equal to the Basic
Maintenance Amount, the Fund may redeem a sufficient number of
shares of Cumulative Preferred Stock in order that the Portfolio
Calculation exceeds the Basic Maintenance Amount of the
remaining outstanding shares of Cumulative Preferred Stock and
any other Preferred Stock by up to 10%. The Cumulative Preferred
Stock is also subject to mandatory redemption in whole by the
Fund at the Redemption Price if the Fund's Board of Directors
and Common Stockholders authorize the dissolution of the Fund,
any amendment to the Articles of Incorporation which makes any
class of the Fund's stock a redeemable security (as that term is
defined in the 1940 Act), any plan of reorganization (as that
term is defined in the 1940 Act) adversely affecting the
Cumulative Preferred Stock or any other action requiring a vote
of the Fund's security holders as provided in Section 13(a) of
the 1940 Act. See 'Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption'.
Optional Redemption.......................... Commencing December 1, 2002 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
December 1, 2002, the Cumulative Preferred Stock will be
redeemable at the option of the Fund at the Redemption Price
only to the extent necessary for the Fund to continue to qualify
for tax treatment as a regulated investment company. See
'Description of Cumulative Preferred Stock --
Redemption -- Optional Redemption'.
Liquidation Preference....................... The liquidation preference of each share of Cumulative Preferred
Stock is $25.00 plus an amount equal to accumulated and unpaid
dividends (whether or not earned or declared) to the date of
distribution. See 'Description of Cumulative Preferred Stock --
Liquidation Rights'.
Use of Proceeds.............................. The Fund will use the net proceeds from the offering of the
Cumulative Preferred Stock to purchase additional portfolio
securities in accordance with its investment objective and
policies. See 'Use of Proceeds'.
Listing...................................... Prior to this offering, there has been no public market for the
Cumulative Preferred Stock. The shares of Cumulative Preferred
Stock have been approved for listing on the American Stock
Exchange (the 'AMEX'), subject to official notice of issuance.
However, during an initial period, which is not expected to
exceed 30 days from the date of this Prospectus, the Cumulative
Preferred Stock may not be listed on such Exchange. During such
period, the Underwriter intends to make a market in the
Cumulative Preferred Stock; however, it has no obligation to do
so. Consequently, an investment in the Cumulative Preferred
Stock may be illiquid during such period.
</TABLE>
7
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<PAGE>
<TABLE>
<S> <C>
Special Considerations and Risk Factors...... The market price for the Cumulative Preferred Stock will be
influenced by changes in interest rates, the perceived credit
quality of the Cumulative Preferred Stock and other factors.
As indicated above, the Cumulative Preferred Stock is subject to
redemption under specified circumstances. To the extent that the
Fund experiences a substantial decline in the value of its net
assets, it may be required to redeem Cumulative Preferred Stock
to restore compliance with the applicable asset coverage
requirements. See 'Description of Cumulative Preferred Stock --
Redemption'.
The credit rating on the Cumulative Preferred Stock could be
reduced or withdrawn while an investor holds shares either as a
result of the Fund's termination of compliance with the Rating
Agency Guidelines or otherwise, and the credit rating does not
eliminate or mitigate the risks of investing in the Cumulative
Preferred Stock. A reduction or withdrawal of the credit rating
may have an adverse effect on the market value of the Cumulative
Preferred Stock. See 'Description of Cumulative Preferred
Stock -- Termination of Rating Agency Guidelines'.
Payments to the holders of Cumulative Preferred Stock of dividends
or upon redemption or in liquidation will be subject to the
prior payments of interest and repayment of principal then due
on any outstanding indebtedness of the Fund. As of September 30,
1997, the Fund had no outstanding indebtedness and had not
issued any Preferred Stock. See 'Investment Objective and
Policies -- Senior Securities'.
The Fund invests a portion of its assets in securities of foreign
issuers. Investments in such securities and in securities
denominated in foreign currencies involve risks not typically
present in domestic investments, including fluctuations in
foreign exchange rates, future foreign political and economic
developments and the possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions
applicable to such investments. See 'Investment Objective and
Policies -- Investment Policies and Risk Factors'.
All equity securities are subject to price volatility, the
potential bankruptcy of the issuer, general movements in
markets, overall economic conditions and perceptions of
potential growth. The Fund primarily invests in common stocks,
convertible preferred stocks, convertible debentures and other
equity securities. See 'Investment Objective and
Policies -- Investment Policies and Risk Factors'.
Federal Income Tax Considerations............ The Fund has qualified, and intends to remain qualified, for
Federal income tax purposes, as a regulated investment company.
Qualification requires, among other things,
</TABLE>
8
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<PAGE>
<TABLE>
<S> <C>
compliance by the Fund with certain distribution requirements.
Limitations on distributions if the Fund failed to satisfy the
Asset Coverage or Portfolio Calculation requirements could
jeopardize the Fund's ability to meet the distribution
requirements. The Fund presently intends, however, to the extent
possible, to purchase or redeem Cumulative Preferred Stock if
necessary in order to maintain compliance with such
requirements. See 'Taxation' for a more complete discussion of
these and other Federal income tax considerations.
Custodian, Transfer and Dividend-Paying Agent
and Registrar.............................. State Street Bank and Trust Company ('State Street') serves as the
Fund's custodian and, with respect to the Cumulative Preferred
Stock, as transfer and dividend paying agent and registrar and
as agent to provide notice of redemption and certain voting
rights. See 'Custodian, Transfer and Dividend -- Paying Agent
and Registrar'.
</TABLE>
9
<PAGE>
<PAGE>
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially all of its
net capital gains and net investment income. The Fund is a regulated investment
company ('RIC'), and a RIC's distributions generally retain their character as
capital gain or ordinary income when received by its preferred and common
stockholders. Thus, the stated 7.45% dividends paid by the Fund to holders of
the Cumulative Preferred Stock may, for Federal income tax purposes, consist of
varying proportions of long-term and mid-term capital gains, ordinary income
and/or returns of capital.
Long-term capital gains on assets held longer than 18 months by the Fund
('L/T Capital Gains') are currently taxable to individuals at a maximum rate of
20%. Mid-term capital gains on assets held longer than one year but not longer
than 18 months by the Fund ('M/T Capital Gains') are currently taxable to
individuals at a maximum rate of 28%. Ordinary income and short-term capital
gains of the Fund ('Ordinary Income') are currently taxable to individuals at a
maximum rate of 39.6%. Returns of capital would not be taxable to individuals in
the year of receipt, but instead would reduce such investors' tax basis in the
Cumulative Preferred Stock and thereby increase capital gain or reduce capital
loss by the amount of such basis reductions upon such investors' sale of such
stock.
Although the Fund is not managed utilizing a tax-focused investment
strategy and does not seek to achieve any particular distribution composition,
individual investors in the Cumulative Preferred Stock would, under current
Federal income tax law, realize a tax advantage on their investment to the
extent that distributions by the Fund to its stockholders were partially
composed of the less highly taxed L/T Capital Gains and M/T Capital Gains. In
contrast, preferred stockholders of corporations that are not RICs receive
stated dividends comprised, for Federal income tax purposes, only of ordinary
income.
In 1994 and 1995, the Fund's distributions consisted entirely of Ordinary
Income, and the Fund did not make any distributions in 1996. The Fund had
another investment adviser and operated under a different investment strategy
when the income included in these distributions was earned. Royce became the
Fund's investment adviser and commenced implementing the Fund's current
investment strategy on November 1, 1996. Royce expects that the stated dividend
to be paid on the Cumulative Preferred Stock in December 1997 will, for Federal
income tax purposes, consist primarily of Ordinary Income.
The Federal income tax characteristics of the Fund and the taxation of its
stockholders are described more fully under 'Taxation'.
ASSUMPTIONS
The following table shows examples of the pure Ordinary Income equivalent
yield that would be generated by the stated dividend rate on the Cumulative
Preferred Stock, assuming distributions for Federal income tax purposes
consisting of four different proportions of L/T Capital Gains, M/T Capital Gains
and Ordinary Income for an individual in the 31.0% Federal marginal income tax
bracket. Both this table and the table that follows it assume the indicated
proportions of L/T Capital Gains and M/T Capital Gains and pass-throughs of the
20% L/T Capital Gains and 28% M/T Capital Gains maximum tax rates. 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
L/T Capital Gains, M/T Capital Gains, Ordinary Income and/or return of capital
in the year's distributions, (ii) the timing of the realization of gains and
losses during the Fund's taxable year and (iii) revocation or revision of the
IRS revenue ruling requiring the proportionate allocation of L/T Capital Gains
and M/T Capital Gains among holders of various classes of a closed-end RICs'
capital stock.
10
<PAGE>
<PAGE>
THESE TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN AS AN
INDICATION OF THE ACTUAL COMPOSITION FOR FEDERAL INCOME TAX PURPOSES OF THE
FUND'S FUTURE DISTRIBUTIONS.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
STATED ANNUAL
DIVIDEND RATE OF
PERCENTAGE OF CUMULATIVE PREFERRED STOCK 7.45%
STATED ANNUAL DIVIDEND COMPRISED OF IS EQUIVALENT FOR AN INDIVIDUAL
- ---------------------------------------------------- IN THE 31% FEDERAL INCOME
ORDINARY TAX BRACKET TO AN ORDINARY
L/T CAPITAL GAINS M/T CAPITAL GAINS INCOME INCOME YIELD OF
- ------------------ ------------------ -------- --------------------------------
<S> <C> <C> <C>
33.3% 33.3% 33.3% 7.95%
25.0% 25.0% 50.0% 7.83%
16.7% 16.7% 66.6% 7.70%
-- -- 100.0% 7.45%
</TABLE>
Assuming a stated Cumulative Preferred Stock dividend consisting of 33.3%
L/T Capital Gains, 33.3% M/T Capital Gains and 33.3% Ordinary Income, the
following table shows the pure Ordinary Income equivalent yields that would be
generated at the stated dividend rate for individuals in the indicated tax
brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
STATED ANNUAL
DIVIDEND RATE OF
7.45%
IS EQUIVALENT
TO AN ORDINARY
1997 FEDERAL INCOME TAX BRACKET'D' INCOME YIELD OF
- --------------------------------------------------------- ------------------------------------
<S> <C>
39.6%.................................................... 8.73%
36.0%.................................................... 8.38%
31.0%.................................................... 7.95%
28.0%.................................................... 7.73%
15.0%'DD'................................................ 7.60%
</TABLE>
- ------------
'D' Annual taxable income levels corresponding to the 1997 Federal marginal tax
brackets are as follows: 39.6% -- over $271,050 for both single and joint
returns; 36.0% -- $124,651 - $271,050 for single returns,
$151,751 - $271,050 for joint returns; 31.0% -- $59,751 - $124,650 for
single returns, $99,601 - $151,750 for joint returns;
28.0% -- $24,651 - $59,750 for single returns, $41,201 - $99,600 for joint
returns; and 15.0% -- up to and including $24,650 for single returns and up
to and including $41,200 for joint returns. An investor's Federal marginal
income tax rates may exceed the rates shown in the above tables 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.
'DD' Assumes pass-through of 10.0% L/T Capital Gain tax rate and 15.0% M/T
Capital Gain tax rate.
11
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<PAGE>
FINANCIAL HIGHLIGHTS
The selected data set forth below is for a share of Common Stock
outstanding for the periods presented. The financial information was derived
from and should be read in conjunction with the financial statements of the Fund
incorporated by reference into this Prospectus and the Statement of Additional
Information. The financial information for the year ended December 31, 1996 has
been audited by Ernst & Young LLP, independent auditors, as stated in their
unqualified report accompanying such financial statements. The financial
information for each of the seven years in the period ended December 31, 1995
and for the period from March 2, 1988 (commencement of operations) to December
31, 1988 has been audited by KPMG Peat Marwick LLP, independent accountants,
whose reports thereon were unqualified. Financial information for the six months
ended June 30, 1997 is unaudited.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1997 ------------------------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 5.52 $ 5.09 $ 4.70 $ 5.24 $ 4.99 $ 6.01 $ 5.59 $ 5.91 $ 5.52
----------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS:
Net investment
income............. 0.04 0.06 0.13 0.19 0.04 0.04 0.21 0.25 0.24
Net realized and
unrealized gain on
investments and
foreign currency... 0.80 0.35 0.36 (0.62) 0.46 (0.64) 0.49 (0.28) 0.41
----------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations......... 0.84 0.41 0.49 (0.43) 0.50 (0.60) 0.70 (0.03) 0.65
----------- ------- ------- ------- ------- ------- ------- ------- -------
DIVIDENDS AND
DISTRIBUTIONS:
Net investment
income............. -- -- (0.16) (0.11) (0.03) (0.02) (0.17) (0.24) (0.23)
Net realized gain on
investments and
foreign currency... -- -- (0.01) -- (0.22) (0.05) (0.11) (0.05) (0.03)
Other sources........ -- -- -- -- -- (0.35) -- --
----------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions...... -- -- (0.17) (0.11) (0.25) (0.42) (0.28) (0.29) (0.26)
----------- ------- ------- ------- ------- ------- ------- ------- -------
CAPITAL STOCK
TRANSACTIONS......... -- 0.02 0.07 -- -- -- -- -- --
----------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD............... $ 6.36 $ 5.52 $ 5.09 $ 4.70 $ 5.24 $ 4.99 $ 6.01 $ 5.59 $ 5.91
----------- ------- ------- ------- ------- ------- ------- ------- -------
----------- ------- ------- ------- ------- ------- ------- ------- -------
MARKET VALUE, END OF
PERIOD............... $ 5.00 $ 4.59 $ 4.19 $ 3.56 $ 4.31 $ 4.06 $ 4.63 $ 5.25 $ 4.75
----------- ------- ------- ------- ------- ------- ------- ------- -------
----------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN:(a)
Net asset value.... 15.2% -- -- -- -- -- -- -- --
Market value....... 8.8% 9.6% 22.3% (17.4%) 9.3% (3.3%) (4.5%) 16.9% (17.0%)
RATIOS BASED ON AVERAGE
NET ASSETS:
Total
expenses(b)...... 0.64%* 1.91% 2.14% 2.27% 2.43% 2.21% 2.36% 2.48% 1.99%
Net investment
income........... 1.58%* 1.80% 2.80% 3.81% 0.74% 0.67% 4.01% 4.33% 4.34%
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)....... $50,839 $44,154 $41,385 $41,106 $45,839 $43,615 $52,540 $48,830 $51,710
Portfolio turnover
rate............. 34% 159% 76% 483% 445% 267% 269% 312% 244%
Average commission
rate paid'D'..... $0.0623 $0.0396 -- -- -- -- -- -- --
<CAPTION>
PERIOD FROM
(COMMENCEMENT OF
OPERATION) MARCH 2,
1988 TO DECEMBER 31,
1988
--------------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 5.57
-------
INVESTMENT OPERATIONS:
Net investment
income............. 0.28
Net realized and
unrealized gain on
investments and
foreign currency... (0.03)
-------
Total from investment
operations......... 0.25
-------
DIVIDENDS AND
DISTRIBUTIONS:
Net investment
income............. (0.25)
Net realized gain on
investments and
foreign currency... --
Other sources........ (0.05)
-------
Total dividends and
distributions...... (0.30)
-------
CAPITAL STOCK
TRANSACTIONS......... --
-------
NET ASSET VALUE, END OF
PERIOD............... $ 5.52
-------
-------
MARKET VALUE, END OF
PERIOD............... $ 6.00
-------
-------
TOTAL RETURN:(a)
Net asset value.... --
Market value....... (2.7%)
RATIOS BASED ON AVERAGE
NET ASSETS:
Total
expenses(b)...... 2.17%*
Net investment
income........... 6.76%*
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)....... $ 45,509
Portfolio turnover
rate............. 30%
Average commission
rate paid'D'..... --
</TABLE>
- ------------
(a) The Net Asset Value and Market Value Total Returns assume a continuous
stockholder who reinvested all net investment income dividends and capital
gain distributions. The Market Value and Market Value Total Returns for the
periods ended 1988, 1989 and 1990 are unaudited.
(b) Expense ratios are shown after fee waivers by the investment adviser. For
the periods ended June 30, 1997 and December 31, 1996, the expense ratios
before the waivers would have been 1.64% and 2.08%, respectively.
'D' For fiscal years beginning on or after October 1, 1995, the Fund is
required to disclose its average commission rate paid per share for
purchases and sales of investments.
* Annualized.
12
<PAGE>
<PAGE>
THE FUND
Royce Global Trust, Inc. (the 'Fund') is a closed-end diversified
management investment company. It was incorporated under the name 'America's All
Season Fund, Inc.' under the laws of the State of Maryland on October 30, 1987
and is registered under the 1940 Act. The Fund commenced operations in March
1988. As of September 30, 1997, the Fund had 7,998,419 shares of Common Stock
issued and outstanding, with an aggregate net asset value of $56,011,472. The
Fund's principal office is located at 1414 Avenue of the Americas, New York, New
York 10019, and its telephone number is (800) 221-4268.
The Fund seeks to achieve its investment objective of long-term capital
appreciation by normally investing more than 75% of its assets in common stocks,
convertible preferred stocks, convertible debentures and other equity
securities. See 'Investment Objective and Policies'.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $19,180,000, after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. The Fund's investment adviser expects to invest such proceeds in
accordance with the Fund's investment objective and policies within six months
from the completion of the offering, depending on market conditions for the
types of securities in which the Fund principally invests. Pending such
investment, the proceeds will be held in high quality short-term debt securities
and instruments in which the Fund may invest. See 'Investment Objective and
Policies -- Investment Policies and Risk Factors'.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of June 30, 1997, and as adjusted to give effect to this offering.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
----------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value:
No shares authorized, issued or outstanding; as adjusted,
5,000,000 shares of 7.45% Cumulative Preferred Stock
authorized, and 800,000 of such shares issued and
outstanding............................................. -- $20,000,000
----------- -----------
----------- -----------
Common Stock, $.01 par value:
Authorized 100,000,000 shares; 7,998,419 shares issued and
outstanding; as adjusted, 95,000,000 shares
authorized.............................................. $ 79,984 $ 79,984
Additional paid-in capital................................ 39,913,578 39,093,578(1)
Undistributed net investment income....................... 1,191,440 1,191,440
Accumulated net realized gain on investments and foreign
currency................................................ 3,995,308 3,995,308
Net unrealized appreciation on investments and foreign
currency................................................ 5,658,983 5,658,983
----------- -----------
Net assets applicable to outstanding Common Stock.............. $50,839,293 $50,019,293
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) After deducting underwriting discounts and estimated costs of this offering
of $820,000.
13
<PAGE>
<PAGE>
PORTFOLIO COMPOSITION
The following tables set forth certain unaudited information with respect
to the Fund's investment portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
VALUE PERCENTAGE
----------- ----------
<S> <C> <C>
Common stock...................................................... $42,226,556 83.0%
U.S. Treasury obligations......................................... 4,006,880 7.9
Fixed income obligations.......................................... 791,687 1.6
Cash and other assets less liabilities............................ 3,814,170 7.5
----------- ----------
Total investments............................................ $50,839,293 100.0%
----------- ----------
----------- ----------
</TABLE>
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
<TABLE>
<CAPTION>
VALUE PERCENTAGE
----------- ----------
<S> <C> <C>
Industrial services............................................... $ 8,059,189 15.8%
Industrial products............................................... 7,183,730 14.1
Consumer products................................................. 5,425,519 10.7
Financial services................................................ 5,384,012 10.6
Financial intermediaries.......................................... 4,406,675 8.7
Retail............................................................ 4,050,337 8.0
Technology........................................................ 2,446,600 4.8
Consumer services................................................. 2,354,000 4.6
Health............................................................ 1,662,675 3.3
Natural resources................................................. 1,253,819 2.4
----------- ----------
Total common stock........................................... $42,226,556 83.0%
----------- ----------
----------- ----------
</TABLE>
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS
<TABLE>
<S> <C>
Number of issuers................................................... 72
Median market capitalization (total portfolio)...................... $518 million
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by normally investing more than 75% of its assets in
common stocks, convertible preferred stocks, convertible debentures and other
equity securities. There are market risks inherent in any investment, and there
is no assurance that the investment objective of the Fund will be achieved.
The Fund will normally invest more than 65% of its assets in securities of
companies of at least three countries, including the United States. In most
instances, investments will be made in companies principally based in the United
States or the other developed countries of North America, Europe, Asia and
Australia and not in emerging markets countries. Royce intends to invest
primarily in American Depository Receipts ('ADRs'), in U.S. exchange-listed
securities and in Nasdaq National Market System securities.
The assets of the Fund that are not required to be invested in the equity
securities of domestic and foreign companies may be invested in direct
obligations of the U.S. Government or its agencies and in the non-convertible
preferred stocks and debt securities of domestic and foreign companies.
INVESTMENT POLICIES AND RISK FACTORS
Royce invests the Fund's assets primarily in a limited number of companies
which, it believes, have unusually strong returns on assets, cash flows and
balance sheets or unusual business strengths and/or prospects. Other
characteristics, such as a company's growth potential and valuation
considerations, are also used in selecting investments for the Fund. While it
does not limit the stock market capitalizations
14
<PAGE>
<PAGE>
of the companies in which the Fund may invest, Royce has historically focused on
small-cap equity securities (companies with stock market capitalizations below
$1 billion). Currently, the Fund invests primarily in companies which are either
domiciled in the United States with global business activities or domiciled in
foreign countries but with a substantial U.S. presence.
Royce uses a 'value' method in managing the Fund's assets. Royce's value
method is based on its belief that the securities of certain companies may sell
at a discount from its estimate of such companies' 'private worth', that is,
what a knowledgeable buyer would pay for the entire company. Royce attempts to
identify and invest in these securities for the Fund, with the expectation that
this 'value discount' will narrow in time and thus provide capital appreciation
for the Fund's portfolio.
Foreign Investments. The Fund invests a portion of its assets in securities
of foreign issuers. Foreign investments involve certain risks which typically
are not present in securities of domestic issuers.
There may be less information 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. Foreign securities may be less liquid and may be subject to
greater price volatility than 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. There is no assurance that Royce will be able to anticipate these
potential events or counter their effects. Furthermore, some foreign securities
are subject to brokerage taxes levied by foreign governments, which have the
effect of increasing the cost of such investment and reducing the realized gain
or increasing the realized loss on such securities at the time of sale.
The Fund does not expect to purchase or sell foreign currencies to hedge
against declines in the U.S. dollar or to lock in the value of the foreign
securities it purchases, and its foreign investments may be adversely affected
by changes in foreign currency rates. Consequently, the risks associated with
such investments may be greater than if the Fund did engage in foreign currency
transactions for hedging purposes. Foreign investments may also be adversely
affected by exchange control regulations, if any, in such foreign markets, and
the Fund's ability to make certain distributions necessary to maintain
eligibility as a regulated investment company and avoid the imposition of income
and excise taxes may to that extent be limited.
Income earned or received by the Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Any
such taxes paid by the Fund will reduce its cash available for distribution to
stockholders. The Fund is required to calculate its distributable income and
capital gains for U.S. Federal income tax purposes by reference to the U.S.
dollar. Fluctuations in applicable foreign currency exchange rates may cause the
Fund's distributable income and capital gains for U.S. Federal income tax
purposes to differ from the value of its investments calculated by reference to
foreign currencies. If the Fund invests in stock of a so-called passive foreign
investment company, the Fund may make certain elections that will affect the
calculation of its net investment income and capital gains. See 'Taxation'.
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of sponsored or unsponsored ADRs, European Depositary
Receipts ('EDRs') and Global Depositary Receipts ('GDRs') (collectively,
'Depositary Receipts') or other securities convertible into securities of
foreign issuers. Depositary Receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by an American bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe that evidence a similar ownership
arrangement. GDRs are receipts issued throughout the world that evidence a
similar arrangement. Generally, ADRs, in registered form, are designed for use
in the U.S. securities markets, and EDRs, in bearer form, are
15
<PAGE>
<PAGE>
designed for use in European securities markets. GDRs are tradeable both in the
U.S. and in Europe and are designed for use throughout the world. Depositary
Receipts are alternatives to the purchase of the underlying foreign securities
in their national markets and currencies. The Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and, therefore,
there may be less information available regarding such issuers and there may not
be a correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts also involve the risks associated with other
investments in foreign securities, as discussed above.
Fixed Income Securities. Up to 25% of the Fund's total assets may be
invested in direct obligations of the U.S. Government or its agencies and in
non-convertible preferred stocks and debt securities of various domestic and
foreign issuers. Within this category, up to 5% of the Fund's total assets may
be invested in below investment-grade debt securities, also known as
high-yield/high-risk securities. Such debt securities may be in the lowest-rated
categories of recognized rating agencies (C in the case of Moody's or D in the
case of Standard & Poor's Ratings Services) or may be unrated. Such
high-yield/high-risk investments are primarily speculative and may entail
substantial risk of loss of principal and non-payment of interest, but may also
produce above-average returns for the Fund. Debt securities rated C or D may be
in default as to the payment of interest or repayment of principal.
Warrants, Rights or Options. The Fund may invest up to 5% of its total
assets in warrants, rights or options. A warrant, right or call option entitles
the holder to purchase a given security within a specified period for a
specified price and does not represent an ownership interest in the underlying
security. A put option gives the holder the right to sell a particular security
at a specified price during the term of the option. These securities have no
voting rights, pay no dividends and have no liquidation rights. In addition,
market prices of warrants, rights or call options do not necessarily move
parallel to the market prices of the underlying securities; market prices of put
options tend to move inversely to the market prices of the underlying
securities. The securities underlying warrants, rights and options could include
shares of common stock of a single company or securities market indices
representing shares of the common stocks of a group of companies, such as the
Standard & Poor's 500 Composite Stock Price Index.
Other Investment Companies. The Fund may also indirectly invest in the
securities of domestic and foreign companies by investing in the securities of
other investment companies that invest primarily in such companies. The other
investment companies in which the Fund may invest may be domestic companies
registered under the 1940 Act or foreign companies that are not so registered or
otherwise regulated. They usually have their own management fees and expenses,
and Royce will also earn its fee on Fund assets invested in such other
companies, which would result in a duplication of fees to the extent of any such
investment. However, Royce will waive its management fee on any Fund assets
invested in open-end investment companies, and no sales charge will be incurred
on such an investment. See 'Investment Advisory and Other Services -- Advisory
Fee'.
Temporary Investments. The assets of the Fund are normally invested as
described above. However, for temporary defensive purposes (i.e., when Royce
determines that market conditions warrant) or when it has uncommitted cash
balances, the Fund may also invest in U.S. Treasury bills, domestic bank
certificates of deposit, repurchase agreements with its custodian bank covering
U.S. Treasury and agency obligations having a term of not more than one week,
high-quality commercial paper and money market funds registered under the 1940
Act or retain all or part of its assets in cash. Accordingly, the composition of
the Fund's portfolio may vary from time to time.
Repurchase agreements are in effect loans by the Fund to its custodian, and
the agreements for such transactions require the custodian to maintain
securities having a value at least equal to the amount loaned as collateral.
Repurchase agreements could involve certain risks if the custodian defaults or
becomes insolvent, including possible delays or restrictions upon the Fund's
ability to dispose of collateral.
Securities Lending. The Fund is authorized to lend up to 25% of its assets
to qualified institutional investors for the purpose of realizing additional
income. The Rating Agency Guidelines, however, limit the amount that the Fund
may lend to 5% of its total assets. Loans of securities of the Fund will be
collateralized by cash or securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities. The collateral will equal at least 100% of
the current market value of the loaned
16
<PAGE>
<PAGE>
securities. The risks of securities lending include possible delays in receiving
additional collateral or in recovery of loaned securities or loss of rights in
the collateral if the borrower defaults or becomes insolvent.
Reverse Repurchase Agreements. The Fund is also authorized to enter into
reverse repurchase agreements. However, the Rating Agency Guidelines prohibit
such transactions. Such agreements involve the sale of securities held by the
Fund pursuant to an agreement to repurchase the securities at an agreed-upon
price, date and interest payment. When effecting reverse repurchase
transactions, liquid securities of a dollar amount equal in value to the
securities subject to the agreement are required to be maintained in a
segregated account with the Fund's custodian bank, and the reverse repurchase
agreement is required to be marked to market each day.
Senior Securities. The 1940 Act and the Fund's fundamental investment
policies and restrictions (see ' -- Investment Restrictions') permit the Fund to
issue and sell senior securities representing indebtedness or consisting of
Preferred Stock if various requirements are met. Such requirements include
initial asset coverage tests of 300% for indebtedness and 200% for Preferred
Stock and restrictive provisions concerning Common Stock dividend payments,
other Common Stock distributions, 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 Common Stock of the Fund. In addition, the Fund
may be required to sell investments in order to make required payments to senior
securityholders when it may be disadvantageous to do so.
The Cumulative Preferred Stock offered hereby is a senior security of the
Fund. See 'Description of Cumulative Preferred Stock'. Payments to the holders
of Cumulative Preferred Stock of dividends or upon redemption or in liquidation
will be subject to the prior payment of interest and repayment of principal then
due on any outstanding indebtedness of the Fund.
As of September 30, 1997, the Fund had total assets of $56,127,373 and
total liabilities of $115,900 and had not issued any debt securities or
Preferred Stock. Accordingly, as of such date, the Fund could have, under such
policies and restrictions, issued and sold senior securities representing
indebtedness of up to $28,005,736 or Preferred Stock having an involuntary
liquidation preference of up to $56,011,472 or various combinations of lesser
amounts of both securities representing indebtedness and such Preferred Stock.
The Fund's investment policies are subject to certain restrictions. See
' -- Investment Restrictions'.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
Moody's has established guidelines in connection with the Fund's receipt of
a rating for the Cumulative Preferred Stock on their Date of Original Issue of
'aaa' by Moody's. Moody's, a nationally-recognized securities rating
organization, issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines have been developed by
Moody's in connection with issuances of asset-backed and similar securities,
including debt obligations and various 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, the Fund will be
17
<PAGE>
<PAGE>
required to redeem some or all of the Cumulative Preferred Stock. See
'Description of Cumulative Preferred Stock -- Redemption -- Mandatory
Redemption'. The Rating Agency Guidelines also exclude from Moody's Eligible
Assets and, therefore, from the Portfolio Calculation, certain types of
securities in which the Fund may invest and prohibit the Fund's acquisition of
futures contracts or options on futures contracts, prohibit reverse repurchase
agreements, limit the writing of options on portfolio securities and limit the
lending of portfolio securities to 5% of the Fund's total assets. Royce does not
believe that compliance with the Rating Agency Guidelines will have an adverse
effect on its management of the Fund's portfolio or on the achievement of the
Fund's investment objective. For a further discussion of the Rating Agency
Guidelines, see 'Description of Cumulative Preferred Stock'.
The Fund may, but is not required to, adopt any modifications to the
Moody's guidelines that may hereafter be established by Moody's. Failure to
adopt such modifications, however, may result in a change in the Moody's rating
or a withdrawal of a rating altogether. In addition, Moody's may, at any time,
change or withdraw such rating. As set forth in the Articles Supplementary, the
Board of Directors of the Fund may, without stockholder approval, adjust,
modify, alter or change the Rating Agency Guidelines if Moody's advises the Fund
in writing that such adjustment, modification, alteration or change will not
adversely affect its then current rating on the Cumulative Preferred Stock.
Furthermore, under certain circumstances, the Board of Directors of the Fund may
determine that it is not in the best interests of the Fund to continue to comply
with the Rating Agency Guidelines. If the Fund terminates compliance with the
Rating Agency Guidelines, it is likely that Moody's will change its rating on
the Cumulative Preferred Stock or withdraw its rating altogether, which may have
an adverse effect on the market value of the Cumulative Preferred Stock. It is
the Fund's present intention to continue to comply with the Rating Agency
Guidelines.
As recently described by Moody's, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Cumulative Preferred Stock is not a recommendation to
purchase, hold or sell such shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. Moreover, the Rating
Agency Guidelines do not address the likelihood that a holder of Cumulative
Preferred Stock will be able to sell such shares. The rating is based on current
information furnished to Moody's by the Fund and Royce and information obtained
from other sources. The rating may be changed, suspended or withdrawn as a
result of changes in, or the unavailability of, such information.
CHANGES IN INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective of long-term capital appreciation
principally through investment in common stocks, convertible preferred stocks,
convertible debentures and other equity securities is a fundamental policy of
the Fund and may not be changed without approvals of holders of a majority of
the Fund's outstanding shares of Common Stock and outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock, voting as a single
class, and a majority of the outstanding shares of Cumulative Preferred Stock
and any other Preferred Stock, voting as a separate class (which for this
purpose and under the 1940 Act means the lesser of (i) 67% or more of the
relevant shares of capital stock of the Fund present or represented at a meeting
of stockholders, at which the holders of more than 50% of the outstanding
relevant shares of capital stock are present or represented, or (ii) more than
50% of the outstanding relevant shares of capital stock of the Fund). Except as
indicated under ' -- Investment Restrictions' below, the Fund does not consider
its other policies to be fundamental, and such policies may be changed by the
Board of Directors without stockholder approval or prior notice to stockholders.
INVESTMENT RESTRICTIONS
The policies set forth below are fundamental policies of the Fund and may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting securities, as indicated above under ' -- Changes in
Investment Objective and Policies'. The Fund may not:
1. As to 75% of the Fund's total assets, invest more than 5% of its
total assets in the securities of any one issuer. (This limitation does not
apply to cash and cash items or to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.)
18
<PAGE>
<PAGE>
2. Invest in any investment company if a purchase of its shares would
result in the Fund and its affiliates owning more than 3% of the total
outstanding stock of such company.
3. Purchase more than 10% of the voting securities or more than 10% of
any class of securities of any issuer. For purposes of this restriction,
all outstanding fixed income securities of an issuer are considered as one
class.
4. Purchase or sell commodities or commodity future contracts. (This
restriction does not limit the Fund's use of financial futures and options
thereon, or the investment of not more than 25% of the Fund's assets in
gold and silver bullion or certificates for such precious metals. Illiquid
investments in either gold, silver or certificates for gold or silver are
limited to 10% of the Fund's assets.)
5. Make loans of money or securities, except (i) by the purchase of
fixed income obligations in which the Fund may invest consistent with its
investment objective and policies; (ii) by entering into securities lending
transactions described in 'Investment Objective and Policies'; and (iii) by
entering into reverse repurchase agreements, as described in 'Investment
Objective and Policies'.
6. Invest in the securities of any company if, to the knowledge of the
Fund, any officer or director of the Fund or the investment adviser owns
more than .5% of the outstanding securities of such company and such
officers and directors (who own more than .5%) in the aggregate own more
than 5% of the outstanding securities of such company.
7. Borrow money, except to the extent that it may (i) borrow from
banks for temporary or emergency purposes in an amount not exceeding 5% of
the Fund's assets or (ii) borrow in an amount up to 33 1/3% of the value of
the Fund's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made; provided that the Fund may engage in reverse repurchase
agreements, as set forth in 'Investment Objective and Policies'.
8. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 33 1/3% of the value of its net assets, but only
to secure borrowings authorized by Restriction 7 above.
9. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
10. Purchase or sell real estate or interests therein, although it may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein.
11. Invest for the purpose of exercising control or management of
another company.
12. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
13. Concentrate its investments in any industry.
14. Make purchases of securities on 'margin' from an affiliated
person, provided that the Fund may engage in short sales and may satisfy
margin requirements with respect to futures transactions.
Notwithstanding Restriction 4 above, the Fund has no current intention of
investing in financial futures and options thereon, gold and silver bullion or
certificates for such precious metals.
The policies set forth below are operating policies of the Fund and may be
changed by the Board of Directors without stockholder approval or prior notice
to stockholders. The Fund may not:
a. Make investments which would cause more than 50% of the Fund's
assets to be invested in equity securities traded exclusively in markets
outside the United States.
b. Invest in emerging market countries.
Limitations a. and b. above do not prevent the Fund from purchasing
sponsored or unsponsored depository receipts trading within the U.S. and/or
developed markets in Europe which represent an interest in foreign equity
securities trading in other markets, including securities of issuers
located or trading in emerging market countries.
c. Make investments which would cause more that 25% of the Fund's
assets to be invested in non-equity securities traded exclusively in
markets outside the U.S.
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d. Make investments which would cause more than 5% of the Fund's
assets to be invested in below investment grade non-convertible debt
securities.
e. Deal in foreign currency futures, either for speculative or hedging
purposes.
f. Engage in 'swaps,' or invest more than 10% of its assets in
illiquid securities.
g. Make short sales of securities, other than short sales
against-the-box in which, at the time of the short sale, the Fund holds or
has an unrestricted right to receive the security to be sold short.
h. Invest in derivative securities of a speculative nature. (This
limitation is not intended to prevent the Fund from using investments in
repurchase agreements, reverse repurchase agreements, warrants, rights,
options and convertible securities.)
i. Borrow from banks for leveraging purposes. (The Fund may, however,
issue other senior securities under Section 18 of the 1940 Act.)
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.
INVESTMENT ADVISORY AND OTHER SERVICES
Royce is a New York corporation organized in February 1967, with its
principal office at 1414 Avenue of the Americas, New York, New York 10019. It
became the investment adviser of the Fund on November 1, 1996, succeeding
another company that managed the Fund's assets using a different investment
strategy from that used by Royce. Royce also serves as investment adviser to
other management investment companies, with aggregate net assets of
approximately $2.3 billion as of September 30, 1997, and manages other
institutional accounts.
Under the Fund's Articles of Incorporation, as amended, and the Maryland
General Corporation Law, the Fund's business and affairs are managed under the
direction of its Board of Directors. Investment decisions for the Fund are made
by Royce, subject to any direction it may receive from the Fund's Board of
Directors, which periodically reviews the Fund's investment performance.
PORTFOLIO MANAGEMENT
Charles M. Royce, Royce's President, Chief Investment Officer and sole
voting shareholder since 1972, is primarily responsible for managing the Fund's
portfolio. He is assisted by Royce's investment staff, including W. Whitney
George, Portfolio Manager and Managing Director, and by Jack E. Fockler, Jr.,
Managing Director. Mr. George is a Managing Director (since April 1997), Vice
President (since August 1993) and Senior Analyst (since 1991) of Royce. Mr.
Fockler is a Managing Director (since April 1997), Vice President (since August
1993) and Senior Associate (since 1989) of Royce. See 'Directors and Officers'
in the Statement of Additional Information.
INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Fund and Royce, Royce
determines the composition of the Fund's portfolio, the nature and timing of the
changes in it and the manner of implementing such changes; provides the Fund
with investment advisory, research and related services for the investment of
its assets; furnishes, without expense to the Fund, the services of those of its
executive officers and full-time employees who may be duly elected directors or
executive officers of the Fund and pays their compensation and expenses; and
pays all expenses incurred in performing its investment advisory duties under
the Agreement.
The Fund pays all of its own administrative and other costs and expenses
attributable to its operations and transactions (except those set forth above),
including, without limitation, registrar, transfer agent and custodian fees;
legal, administrative and clerical services; rent for its office space and
facilities; auditing; preparation, printing and distribution of its proxy
statements, stockholder reports and notices; Federal and state registration
fees; listing fees and expenses; Federal, state and local taxes; non-affiliated
directors fees; interest on its borrowings; brokerage commissions; and the cost
of issue, sale and repurchase of its shares. Thus, unlike most other investment
companies, the Fund is required to pay substantially all of its expenses, and
Royce does not incur substantial fixed expenses.
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ADVISORY FEE
As compensation for its services under the Investment Advisory Agreement,
Royce is entitled to receive a monthly fee equal to 1/12 of 1% (1% on an
annualized basis) of the average of the net assets of the Fund. Because the fee
is computed based on the Fund's net assets and not on 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. However,
because preferred stock is a form of equity, Royce will receive a fee in respect
of any assets of the Fund equal to the liquidation preference of and any
potential redemption premium for any Preferred Stock that may be issued and sold
by the Fund, including the Cumulative Preferred Stock.
Royce has agreed to reduce the monthly fees payable to it under the
Investment Advisory Agreement to the extent necessary so that the ratio of the
expenses of the Fund (including the fees payable to Royce, but excluding
interest, dividends on securities sold short, taxes, brokerage commissions,
distribution fees, amortization of organization expenses and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) will not exceed, for each of the fiscal
years of the Fund ending December 31, 1997 and 1998, 1.75% of the Fund's average
net assets for such fiscal year. Royce will voluntarily reduce this ratio to
1.375%, effective for the period from the Date of Original Issue to December 31,
1997 and for the fiscal year ending December 31, 1998.
Royce will also waive the portion of its investment advisory fee that is
attributable to the amount of the proceeds to the Fund of this offering and of
any other Preferred Stock offering for any month when the Fund's average NAV
annual total return (before reduction for that portion of the fee for the month
that is subject to potential waiver) from the date of the Preferred Stock's
original issue fails to exceed the Preferred Stock dividend rate during that
period.
Royce had voluntarily waived the investment advisory fees payable to it by
the Fund until such time as the market price of the Fund's Common Stock,
adjusted for any distributions to stockholders or other capital transactions,
closed for a period of 20 consecutive trading days at or above $5.28, the net
asset value of a share of the Fund's Common Stock on October 31, 1996. As a
result, Royce received no investment advisory fees from the Fund for the period
from November 1, 1996 through August 20, 1997, when this condition was
satisfied.
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Articles Supplementary, the form of which is filed
as an exhibit to the Fund's Registration Statement. Certain of the capitalized
terms used herein are defined in the Glossary that appears at the end of this
Prospectus.
GENERAL
Under the Articles Supplementary, the Fund will be authorized to issue up
to 5,000,000 shares of Cumulative Preferred Stock, 800,000 of which are being
offered hereby. No fractional shares of Cumulative Preferred Stock will be
issued. As of the date of this Prospectus, there were no shares of Cumulative
Preferred Stock or any other Preferred Stock of the Fund issued or outstanding.
The Board of Directors reserves the right to issue additional shares of
Cumulative Preferred Stock or other Preferred Stock from time to time, subject
to the restrictions in the Articles Supplementary and the 1940 Act. The shares
of Cumulative Preferred Stock will, upon issuance, be fully paid and
nonassessable and will have no preemptive, exchange or conversion rights. Any
shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be
classified as authorized but unissued Preferred Stock. The Board of Directors
may by resolution classify or reclassify any authorized but unissued Preferred
Stock from time to time by setting or changing the preferences, rights, voting
powers, restrictions, limitations or terms of redemption. The Fund will not
issue any class of stock senior to the shares of Cumulative Preferred Stock.
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DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, cumulative cash dividends, at the annual rate
of 7.45% of the liquidation preference of $25.00 per share, payable quarterly on
March 23, June 23, September 23 and December 23 (each, a 'Dividend Payment
Date'), commencing on December 23, 1997, to the persons in whose names the
shares of Cumulative Preferred Stock are registered at the close of business on
the preceding March 6, June 6, September 6 and December 6, respectively.
Dividends on the shares of Cumulative Preferred Stock will accumulate from
the date on which such shares are originally issued (the 'Date of Original
Issue').
No dividends will be declared or paid or set apart for payment on shares of
Cumulative Preferred Stock for any dividend period or part thereof unless full
cumulative dividends have been or contemporaneously are declared and paid on all
outstanding shares of Cumulative Preferred Stock through the most recent
Dividend Payment Date thereof. If full cumulative dividends are not paid on the
Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred
Stock will be paid pro rata to the holders of the shares of Cumulative Preferred
Stock. Holders of Cumulative Preferred Stock will not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other stock, if any, ranking junior to the Cumulative Preferred Stock as to
dividends or 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 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 the Cumulative Preferred Stock as to dividends and upon
liquidation), unless, in each case, (i) immediately after such transaction, the
Fund will have a Portfolio Calculation for Moody's at least equal to the Basic
Maintenance Amount and the Fund will maintain the Asset Coverage (see ' -- Asset
Maintenance' and ' -- Redemption' below), (ii) full cumulative dividends on
shares of Cumulative Preferred Stock due on or prior to the date of the
transaction have been declared and paid (or sufficient Deposit Securities to
cover such payment have been deposited with the Paying Agent) and (iii) the Fund
has redeemed the full number of shares of Cumulative Preferred Stock required to
be redeemed by any provision for mandatory redemption contained in the Articles
Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Asset Coverage. The Fund will be required under the Articles Supplementary
to maintain as of the last Business Day of each March, June, September and
December of each year, an 'asset coverage' (as defined by the 1940 Act) of at
least 225% (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'). This required
Asset Coverage is higher than the 200% asset coverage required by the 1940 Act.
If the Fund fails to maintain the Asset Coverage on such dates and such failure
is not cured in 60 days, the Fund will be required under certain circumstances
to redeem certain of the shares of Cumulative Preferred Stock. See
' -- Redemption' below.
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold on June 30, 1997, the Asset Coverage immediately following such
issuance and sale (after giving effect to the
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deduction of the underwriting discounts and estimated offering expenses for such
shares of $820,000), would have been computed as follows:
<TABLE>
<S> <C>
Value of Fund assets less liabilities not
constituting senior securities $70,019,293
---------------------------------------------------------------- = ----------- = 350%
Senior securities representing indebtedness plus liquidation $20,000,000
preference of the Cumulative Preferred Stock
</TABLE>
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold on September 30, 1997 (after giving effect to the deduction of
underwriting discounts and estimated offering expenses), the Asset Coverage
would have been approximately 376%.
Basic Maintenance Amount. The Fund will be required under the Articles
Supplementary to maintain, as of each Valuation Date, portfolio holdings meeting
specified guidelines of Moody's, as described under 'Investment Objective and
Policies -- Rating Agency Guidelines', having an aggregate discounted value (a
'Portfolio Calculation') at least equal to the Basic Maintenance Amount, which
is in general the sum of the aggregate liquidation preference of the Cumulative
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' 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. Within
ten Business Days after delivery of such report relating to the Quarterly
Valuation Date, the Fund will deliver a letter prepared by the Fund's
independent accountants regarding the accuracy of the calculations made by the
Fund in its most recent Basic Maintenance Report. If any such letter prepared by
the Fund's independent accountants shows that an error was made in the most
recent Basic Maintenance Report, the calculation or determination made by the
Fund's independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price equal to $25.00 per share plus accumulated and unpaid dividends through
the date of redemption (whether or not earned or declared) (the 'Redemption
Price'), certain of the shares of Cumulative Preferred Stock (to the extent
permitted under the 1940 Act and Maryland law) in the event that:
(i) the Fund fails to maintain the quarterly Asset Coverage, and such
failure is not cured on or before 60 days following such failure (a 'Cure
Date'); or
(ii) for so long as the Fund is complying with the Rating Agency
Guidelines, the Fund fails to maintain a Portfolio Calculation at least
equal to the Basic Maintenance Amount as of any Valuation Date, and such
failure is not cured on or before the 14th day after such Valuation Date
(also, a 'Cure Date').
If the Board of Directors and the holders of the number of shares of the
Common Stock of the Fund entitled and required by applicable law to be cast
thereon vote to authorize the dissolution of the
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Fund, any amendment to the Articles of Incorporation which makes any class of
the Fund's stock a redeemable security (as that term is defined in the 1940
Act), any plan of reorganization (as that term is defined in the 1940 Act)
adversely affecting the Cumulative Preferred Stock or any other action requiring
a vote of security holders of the Fund as provided in Section 13(a) of the 1940
Act, then, notwithstanding the vote or failure to vote on such actions of the
holders of shares of the Cumulative Preferred Stock, the Fund (i) may take such
actions, subject to satisfying any futher requirements of applicable law, and
(ii) shall, prior to taking such actions, give a Notice of Redemption with
respect to the redemption of all shares of the Cumulative Preferred Stock then
outstanding and redeem such shares.
The amount of such mandatory redemption will equal the minimum number of
outstanding shares of Cumulative Preferred Stock the redemption of which, if
such redemption had occurred immediately prior to the opening of business on a
Cure Date, would have resulted in the Asset Coverage having been satisfied or
the Fund having a Portfolio Calculation 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 250%. In the event
that shares of Cumulative Preferred Stock are redeemed due to the occurrence of
(ii) above, the Fund may, but is not required to, redeem a sufficient number of
shares of Cumulative Preferred Stock so that the Portfolio Calculation exceeds
the Basic Maintenance Amount of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock remaining after redemptions 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, ratably from each holder whose shares are to be
redeemed, and the remainder of the shares required to be redeemed will be
redeemed on the earliest practicable date on which the Fund will have funds
legally available for the redemption of, or is otherwise able to redeem, such
shares upon written notice of redemption ('Notice of Redemption').
If fewer than all shares of Cumulative Preferred Stock are to be redeemed,
such redemption will be made pro rata from each holder of shares in accordance
with the respective number of shares held by each such holder on the record date
for such redemption. If fewer than all shares of Cumulative Preferred Stock held
by any holder are to be redeemed, the Notice of Redemption mailed to such holder
will specify the number of shares to be redeemed from such holder. Unless all
accumulated and unpaid dividends for all past dividend periods will have been or
are contemporaneously paid or declared and Deposit Securities for the payment
thereof deposited with the Paying Agent, no redemptions of Cumulative Preferred
Stock may be made.
Optional Redemption. Prior to December 1, 2002, the shares of Cumulative
Preferred Stock are not subject to any optional redemption by the Fund unless
such redemption is necessary, in the judgment of the Fund, to maintain the
Fund's status as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the 'Code'). Commencing December 1, 2002 and thereafter,
the Fund may at any time redeem shares of Cumulative Preferred Stock in whole or
in part at the Redemption Price. Such redemptions are subject to the limitations
of the 1940 Act and Maryland law.
Redemption Procedures. A Notice of Redemption will be given to the holders
of record of Cumulative Preferred Stock selected for redemption not less than 30
or more than 45 days prior to the date fixed for the redemption. Each Notice of
Redemption will state (i) the redemption date, (ii) the number of shares of
Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such
shares, (iv) the Redemption Price, (v) the place or places where such shares are
to be redeemed, (vi) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date and (vii) the provision of the Articles
Supplementary under which the redemption is being made. No defect
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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 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 class, 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.
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 a single class. In addition, if at any time
dividends on outstanding shares of Cumulative Preferred Stock and/or any other
Preferred Stock are unpaid in an amount equal to at least two full years'
dividends thereon and sufficient Deposit Securities shall not have been
deposited with the Paying Agent for the payment of such accumulated dividends;
or if at any time holders of any shares of Preferred Stock are entitled,
together with the holders of shares of Cumulative Preferred Stock, to elect a
majority of the directors of the Fund under the 1940 Act, then the number of
directors constituting the Board of Directors automatically will be increased by
the smallest number that, when added to the two directors elected exclusively by
the holders of shares of Cumulative Preferred Stock and any other Preferred
Stock as described above, would constitute a majority of the Board of Directors
as so
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increased by such smallest number. Such additional directors will be elected at
a special meeting of stockholders which will be called and held as soon as
practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of Cumulative Preferred Stock and any other
Preferred Stock, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders in any event will be entitled to elect, constitutes a
majority of the total number of directors of the Fund as so increased. The terms
of office of the persons who are directors at the time of that election will
continue. If the Fund thereafter pays, or declares and sets apart for payment in
full, all dividends payable on all outstanding shares of Cumulative Preferred
Stock and any other Preferred Stock for all past dividend periods, the
additional voting rights of the holders of shares of Cumulative Preferred Stock
and any other Preferred Stock as described above will cease, and the terms of
office of all of the additional directors elected by the holders of shares of
Cumulative Preferred Stock and any other Preferred Stock (but not of the
directors with respect to whose election the holders of shares of Common Stock
were entitled to vote or the two directors the holders of shares of Cumulative
Preferred Stock and any other Preferred Stock have the right to elect in any
event) will terminate automatically.
So long as shares of the Cumulative Preferred Stock are outstanding, the
Fund will not, without the affirmative vote of the holders of two-thirds of the
shares of Cumulative Preferred Stock outstanding at the time, voting separately
as one class, amend, alter or repeal the provisions of the Charter, whether by
merger, consolidation or otherwise, so as to materially adversely affect any of
the contract rights expressly set forth in the Charter of holders of shares of
the Cumulative Preferred Stock. The Board of Directors, however, without
stockholder approval, may amend, alter or repeal the Rating Agency Guidelines in
the event the Fund receives confirmation from Moody's that any such amendment,
alteration or repeal would not impair the rating then assigned to the Cumulative
Preferred Stock. Furthermore, under certain circumstances, without the vote of
stockholders, the Board of Directors of the Fund may determine that it is not in
the best interests of the Fund to continue to comply with the Rating Agency
Guidelines. See ' -- Termination of Rating Agency Guidelines' below. The
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of the Cumulative Preferred Stock and any other Preferred
Stock, voting as a separate class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under 'Investment Objective and
Policies'. The class vote of holders of shares of the Cumulative Preferred Stock
and any other Preferred Stock described above in each case will be in addition
to a separate vote of the requisite percentage of shares of Common Stock and
Cumulative Preferred Stock and any other Preferred Stock, voting together as a
single class, necessary to authorize the action in question. See 'Description of
Capital Stock -- Certain Voting Requirements'.
The foregoing voting provisions will not apply to any shares of Cumulative
Preferred Stock if, at or prior to the time when the act with respect to which
such vote otherwise would be required will be effected, such shares will have
been (i) redeemed or (ii) called for redemption and sufficient Deposit
Securities provided to the Paying Agent to effect such redemption.
TERMINATION OF RATING AGENCY GUIDELINES
The Articles Supplementary provide that the Board of Directors of the Fund
may determine that it is not in the best interests of the Fund to continue to
comply with the Rating Agency Guidelines, in which case the Fund will no longer
be required to comply with such guidelines, provided that (i) the Fund has given
the Paying Agent, Moody's and holders of the Cumulative Preferred Stock at least
20 calendar days written notice of such termination of compliance, (ii) the Fund
is in compliance with the Rating Agency Guidelines at the time the notice
required in clause (i) above is given and at the time of termination of
compliance with the Rating Agency Guidelines, (iii) at the time the notice
required in clause (i) above is given and at the time of termination of
compliance with the Rating Agency Guidelines, the Cumulative Preferred Stock is
listed on the AMEX or on another exchange registered with the Commission as a
national securities exchange and (iv) at the time of termination of compliance
with the Rating Agency Guidelines, the cumulative cash dividend rate payable on
the Cumulative Preferred Stock is increased by .375% per annum.
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If the Fund terminates compliance with the Rating Agency Guidelines,
Moody's may change its rating on the Cumulative Preferred Stock or withdraw its
rating altogether, which may have an adverse effect on the market value of the
Cumulative Preferred Stock. It is the Fund's present intention to continue to
comply with the Rating Agency Guidelines.
LIMITATION ON ISSUANCE OF ADDITIONAL PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding, the
Articles Supplementary provide that the Fund may issue and sell up to 4,200,000
additional shares of the Cumulative Preferred Stock and/or shares of one or more
other series of the 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.
ABILITY TO MODIFY ARTICLES SUPPLEMENTARY
The Articles Supplementary provide that, to the extent permitted by law,
the Board of Directors may, without the vote of the holders of the Cumulative
Preferred Stock or any other capital stock of the Fund, amend the provisions of
the Articles Supplementary to resolve any inconsistency or ambiguity or remedy
any formal defect, so long as the amendment does not materially adversely affect
any of the contract rights set forth in the Charter of holders of shares of the
Cumulative Preferred Stock or any other capital stock of the Fund or, if the
Fund has not previously terminated compliance with the Rating Agency Guidelines,
adversely affect the then current rating on the Cumulative Preferred Stock by
Moody's.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem their
shares of the Fund. The Fund may, however, repurchase shares of the Cumulative
Preferred Stock when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and regulations
thereunder.
BOOK-ENTRY
Shares of Cumulative Preferred Stock will initially be held in the name of
Cede & Co. ('Cede'), as nominee for The Depositary Trust Company ('DTC'). The
Fund will treat Cede as the holder of record of the Cumulative Preferred Stock
for all purposes. In accordance with the procedures of DTC, however, purchasers
of Cumulative Preferred Stock will be deemed the beneficial owners of shares
purchased for purposes of dividends, voting and liquidation rights. Purchasers
of Cumulative Preferred Stock may obtain registered certificates by contacting
the Transfer Agent (as defined below).
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
Common Stock. The Fund is authorized to issue 95,000,000 shares of Common
Stock, par value $.01 per share. Each share of Common Stock has equal voting,
dividend, distribution and liquidation rights. The shares of Common Stock
outstanding are fully paid and non-assessable. The shares of Common Stock are
not redeemable and have no preemptive, exchange, conversion or cumulative voting
rights. As a Nasdaq National Market System-listed company, the Fund is required
to hold annual meetings of its stockholders.
Preferred Stock. The Board of Directors is authorized to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares. In this regard, the Board of Directors has reclassified
5,000,000 shares of unissued Common
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Stock as Cumulative Preferred Stock, of which 800,000 are offered hereby. The
terms of the Cumulative Preferred Stock materially limit and/or qualify the
rights of the holders of the Fund's Common Stock. See 'Description of Cumulative
Preferred Stock'.
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund as
of the date of this Prospectus.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
(EXCLUSIVE
OF
AMOUNT HELD AMOUNT HELD
BY FUND BY FUND
AMOUNT FOR ITS OWN FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
- -------------------------------------------------- ----------------- ----------- ------------
<S> <C> <C> <C>
Common Stock...................................... 95,000,000 shares -0- 7,998,419
Cumulative Preferred Stock........................ 5,000,000 shares -0- -0-
</TABLE>
CERTAIN VOTING REQUIREMENTS
Under the Fund's Charter, (i) the dissolution of the Fund; (ii) a merger or
consolidation of the Fund (in which the Fund is not the surviving corporation);
(iii) the sale, lease, exchange or other disposal of all or substantially all
the property and assets of the Fund to any individual or entity; or (iv) any
amendment of the Articles of Incorporation which makes any class of the Fund's
stock redeemable securities (as that term is defined in the 1940 Act) will have
to be approved by the holders of at least 66 2/3% of the outstanding shares of
the Fund's Common Stock and Preferred Stock, voting together as a single class.
Such 66 2/3% vote, which will also be required to alter, amend or repeal the
provision of the Fund's Charter containing these voting requirements, is the
vote provided for certain of these matters by the Maryland General Corporation
Law in the absence of the Charter providing for a greater or lesser percentage.
The foregoing voting requirements could have the effect of limiting the
ability of third parties to acquire control of the Fund. This could in turn have
the effect of depriving stockholders of potential opportunities to sell their
shares at above market prices.
TAXATION
The following Federal income tax discussion is based on the advice of Brown
& Wood LLP, special counsel to the Fund. The discussion reflects applicable tax
laws of the United States as of the date of this Prospectus, which tax laws are
subject to being changed retroactively or prospectively.
The Fund intends to continue to qualify for the special tax treatment
afforded RICs under Subchapter M of the Code. If it so qualifies, the Fund (but
not its stockholders) will not be subject to Federal income tax on the part of
its net investment income (i.e., its investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and net capital gains (i.e., the excess of the Fund's net
realized long-term capital gains over its net realized short-term capital
losses), if any, that it distributes to its stockholders in each taxable year,
provided that it distributes at least 90% of its net investment income for such
taxable year to them. The Fund intends to distribute substantially all of such
income.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund from its net investment income (such dividends
referred to hereafter as 'ordinary income dividends') are taxable to
stockholders as ordinary income. Distributions made from net capital gains
(including gains or losses from certain transactions in warrants, rights and
options) and properly designated by the Fund ('capital gain dividends') are
taxable to stockholders as long-term capital gains, regardless of the length of
time the stockholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the stockholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
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adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Capital gain dividends may be taxed at a lower rate than ordinary income
dividends for certain non-corporate taxpayers. Under recent legislation,
'long-term capital gain' has been broken down into additional categories of
gain, taxable at different rates for individual taxpayers. These categories
include mid-term gain as well as certain other categories of gain that the Fund
does not expect to realize. Net mid-term gains on securities held longer than
one year but not longer than 18 months are taxed at the taxpayer's marginal
Federal income tax rate, but not higher than 28%. Net long-term gains on
securities held longer than 18 months are taxed at a maximum rate of 20%.
Not later than 60 days after the close of its taxable year, the Fund will
provide its stockholders with a written notice designating the amounts of any
ordinary income dividends or capital gain dividends as well as the portions of
its capital gain dividends that constitute mid-term gain and long-term gain. If
the Fund pays a dividend in January which was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its stockholders on December 31 of the year in which
such dividend was declared.
Stockholders may be entitled to offset their capital gain dividends with
capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, stockholders with
capital losses are urged to consult their tax advisers.
The Code provides that capital gain recognized on the termination of a
position held as part of a 'conversion transaction' will be treated as ordinary
income, to the extent it does not exceed the interest that would have accrued on
the net investment in the conversion transaction at an interest rate prescribed
by the Code. A 'conversion transaction,' for these purposes, is a transaction
substantially all of the return from which is attributable to the time value of
the net investment in the transaction, and which is marketed as producing
capital gains, but having the characteristics of a loan. Although there are no
regulations construing this provision, the conversion transaction rules would
not apply to an investment in the Cumulative Preferred Stock because dividends
paid with respect to the Cumulative Preferred Stock will not constitute gain
which is recognized on the disposition or other termination of any position
which was held as part of a conversion transaction.
Ordinary income dividends (but not capital gain dividends) paid to
stockholders who are non-resident aliens or foreign entities will be subject to
a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). A stockholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form with the payor (i.e., the financial institution or brokerage firm where the
stockholder maintains his or her account), certifying under penalties of perjury
that such stockholder's taxpayer identification number is correct and that such
stockholder (i) has never been notified by the IRS that he or she is subject to
backup withholding, (ii) has been notified by the IRS that he or she is no
longer subject to backup withholding, or (iii) is exempt from backup
withholding. Corporate stockholders and certain other stockholders are exempt
from backup withholding. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules from payments made to a
stockholder may be credited against such stockholder's Federal income tax
liability.
At the time of a stockholder's purchase, the market price of the Fund's
Common Stock or Cumulative Preferred Stock may reflect undistributed net
investment income or net capital gains. A subsequent distribution of these
amounts by the Fund will be taxable to the stockholder even though
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the distribution economically is a return of part of the stockholder's
investment. Investors should carefully consider the tax implications of
acquiring shares just prior to a distribution, as they will receive a
distribution that would nevertheless be taxable to them.
Gain or loss, if any, recognized on the sale or other disposition of shares
of the Fund will be taxed as a capital gain or loss if the shares are capital
assets in the stockholder's hands. A loss realized on a sale or exchange of
shares of the Fund will be disallowed if other Fund shares of the same class are
acquired within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The
IRS has taken the position in Revenue Ruling 89-81 that if a RIC has more than
one class of shares, it may designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, such as long-term capital gains. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was paid
to such class. Consequently, the Fund will designate distributions made to the
Common Stock and Cumulative Preferred Stock and any other Preferred Stock as
consisting of particular types of income in accordance with the classes'
proportionate shares of such income. Because of this rule, the Fund is required
to allocate a portion of its net capital gains to holders of Common Stock and
holders of Cumulative Preferred Stock. The amount of net capital gains and other
types of income allocable among the Cumulative Preferred Stock and the Common
Stock will depend upon the amount of such net capital gains and other income
realized by the Fund and the total dividends paid by the Fund on shares of
Common Stock and Cumulative Preferred Stock during a taxable year.
In the opinion of Brown & Wood LLP, under current law, the manner in which
the Fund intends to allocate net capital gains and other taxable income between
shares of Common Stock and Cumulative Preferred Stock will be respected for
Federal income tax purposes. However, there is currently no direct guidance from
the IRS or other sources specifically addressing whether the Fund's method of
allocation will be respected for Federal income tax purposes, and it is possible
that the IRS could disagree with counsel's opinion and attempt to reallocate the
Fund's net capital gains or other taxable income. Brown & Wood LLP has advised
the Fund that, in its opinion, if the IRS were to challenge in court the Fund's
allocation of income and gain, the IRS would be unlikely to prevail. The opinion
of Brown & Wood LLP, however, represents only its best legal judgment and is not
binding on the IRS or the courts.
TAXATION OF THE FUND
Qualification as a RIC requires, among other things, (i) 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, and (ii) that for the Fund's
taxable year beginning on January 1, 1997, less than 30% of its gross income be
derived from the sale of certain types of securities held for less than three
months (the 'short-short test'). The short-short test for RIC qualification has
been repealed for the Fund's taxable years beginning on January 1, 1998 and
thereafter. In addition, the Fund's investments must meet certain
diversification standards.
The Code requires a RIC to pay a non-deductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its ordinary
income and capital gains in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
ordinary income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the 1940 Act
or the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the Common Stock until the asset coverage is
restored. See 'Description of Cumulative Preferred Stock -- Dividends'. Such a
suspension of distributions might prevent the Fund from distributing 90% of its
net investment income, as is required in order to avoid Fund-level taxation of
such income, or might prevent it from
30
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<PAGE>
distributing enough ordinary income and capital gains to avoid completely
imposition of the excise tax. Upon any failure to meet the asset coverage
requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in
certain circumstances will be required to, partially redeem the shares of
Cumulative Preferred Stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its stockholders of
failing to qualify as a RIC. If asset coverage were restored, the Fund would
again be able to pay dividends and might be able to avoid Fund-level taxation of
its income.
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. To qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to Cumulative
Preferred Stockholders and Common Stockholders as an ordinary income dividend,
its earnings and profits attributable to non-RIC years reduced by an interest
charge on 50% of such earnings and profits payable by the Fund to the IRS. In
addition, if the Fund failed to qualify as a RIC for a period greater than one
taxable year, then, except as provided in regulations to be promulgated, the
Fund would be required to recognize and pay tax on any net built-in gains (the
excess of aggregate gains, including items of income, over aggregate losses that
would have been realized if the Fund had been liquidated) in order to qualify as
a RIC in a subsequent year.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ('high yield securities'). Some of these high yield securities may be
purchased at a discount and may therefore cause the Fund to accrue income (and
to be required to distribute such income) before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield securities may be treated as dividends for Federal income tax
purposes.
Foreign currency gains or losses from certain debt instruments or arising
from delays between accrual and receipt of investment income will generally be
treated as ordinary income or loss, and will therefore generally increase or
decrease the amount of the Fund's net investment income available for
distribution as ordinary income dividends. If substantial in relation to net
investment income, such foreign currency losses could affect the ability of the
Fund to distribute ordinary income dividends in a taxable year, and could
require all or a portion of distributions made before the losses were realized,
but in the same taxable year, to be recharacterized as a return of capital.
If the Fund invests in stock of a so-called 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, under recent
legislation, the Fund could elect to mark to market at the end of each taxable
year its shares in PFICs; in this case, the Fund would recognize as ordinary
income any increase in the value of such shares, and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases included
in income. Under either election, the Fund might be required to recognize in a
year income in excess of its distributions from PFICs and its proceeds from
dispositions of PFIC stock during that year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
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OTHER TAXATION
Distributions may also be subject to additional state, local and foreign
taxes, depending on each stockholder's particular situation. Stockholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Cumulative Preferred Stock.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
State Street Bank, which is located at 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian of the securities, cash and other assets
of the Fund, as dividend-paying agent and as transfer agent and registrar for
the Fund's Cumulative Preferred Stock. Stockholder inquiries should be directed
to P.O. Box 8100, Boston, Massachusetts 02266-8100 (Tel. No. (800) 426-5523).
UNDERWRITING
Upon the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, Smith Barney Inc. (the 'Underwriter') has
agreed to purchase, and the Fund has agreed to sell to the Underwriter, the
800,000 shares of Cumulative Preferred Stock offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the shares of Cumulative Preferred Stock
offered hereby is subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriter is obligated to take and pay
for all shares of Cumulative Preferred Stock offered hereby if any are taken.
The Underwriter proposes to offer the shares of Cumulative Preferred Stock
offered hereby directly to the public at the public offering price set forth on
the cover page of this Prospectus. After the initial offering of the shares of
Cumulative Preferred Stock to the public, the public offering price may be
changed by the Underwriter. The underwriting discount of $0.7875 per share is
equal to 3.15% of the initial offering price. Investors must pay for any shares
of Cumulative Preferred Stock purchased on or before November 21, 1997.
The Fund and Royce have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriter has advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Cumulative Preferred Stock at
a level above that which might otherwise prevail in the open market. A
'stabilizing bid' is a bid for or the purchase of the Cumulative Preferred Stock
on behalf of the Underwriter for the purpose of fixing or maintaining the price
of the Cumulative Preferred Stock. A 'covering transaction' is a bid for or
purchase of the Cumulative Preferred Stock on behalf of the Underwriter to
reduce a short position incurred by the Underwriter in connection with the
offering. A 'penalty bid' is an arrangement permitting the Underwriter to
reclaim the selling concession otherwise accruing to the Underwriter in
connection with the offering if any of the Cumulative Preferred Stock originally
sold by the Underwriter is purchased in a covering transaction and has therefore
not been effectively placed by the Underwriter. The Underwriter has advised the
Fund that such transactions may be effected on the AMEX or otherwise and, if
commenced, may be discontinued at any time.
The Underwriter has acted in the past and may continue to act from time to
time, during and subsequent to the completion of the offering of Cumulative
Preferred Stock hereunder, as a broker or dealer in connection with the
execution of portfolio transactions for the Fund. See 'Brokerage Allocation and
Other Practices' in the Statement of Additional Information.
Prior to the offering, there has been no public market for the Cumulative
Preferred Stock. The Cumulative Preferred Stock has been approved for listing on
the AMEX, subject to official notice of issuance. However, during an initial
period, which is not expected to exceed 30 days from the date of this
Prospectus, the Cumulative Preferred Stock will not be listed on any securities
exchange. During such period, the Underwriter intends to make a market in the
Cumulative Preferred Stock; however, it has no obligation to do so.
Consequently, an investment in the Cumulative Preferred Stock may be illiquid
during such period.
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The Fund has agreed that it will not sell or otherwise dispose of any
senior securities of the Fund, or grant any options or warrants to purchase
senior securities of the Fund, for a period of 60 days after the date of this
Prospectus, without the prior written consent of the Underwriter.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Stradley Ronon Stevens & Young,
LLP, Philadelphia, Pennsylvania, counsel to the Fund. Certain legal matters will
be passed on by Brown & Wood LLP, New York, New York, special counsel to the
Fund, and by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York, counsel to the Underwriter.
Brown & Wood LLP and Simpson Thacher & Bartlett will each rely as to matters of
Maryland law on the opinion of Stradley Ronon Stevens & Young, LLP.
EXPERTS
Ernst & Young LLP are the current independent auditors of the Fund. The
audited financial statements of the Fund and certain of the information
appearing under the caption 'Financial Highlights' at December 31, 1996, and for
the year then ended, included in this Prospectus have been audited by Ernst &
Young LLP, independent auditors, and for periods prior to 1996 by KPMG Peat
Marwick LLP, independent auditors, as set forth in their reports with respect
thereto, and are included in reliance upon such reports and upon the authority
of such firms as experts in accounting and auditing. Ernst & Young LLP has an
office at 787 Seventh Avenue, New York, New York 10019, and also performs tax
and other professional services for the Fund. The address of KPMG Peat Marwick
LLP is 111 North Orange Avenue, Suite 1600, Orlando, Florida 32802.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
files reports and other information with the Commission. Reports, proxy
statements and other information filed by the Fund with the Commission pursuant
to the informational requirements of such Acts can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Northeast Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional
Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648;
and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such material
can be obtained from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Fund, that file electronically with the Commission.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the Commission under the Securities Act of 1933, as amended, and the
1940 Act. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the Fund
and the Cumulative Preferred Stock offered hereby. Any statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission.
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.
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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated November 18, 1997, has been
filed with the Commission and is incorporated by reference in this Prospectus.
The Table of Contents of the Statement of Additional Information is as follows:
PAGE
----
Principal Stockholders.............................................. B-2
Directors and Officers.............................................. B-2
Code of Ethics and Related Matters.................................. B-5
Investment Advisory and Other Services.............................. B-5
Brokerage Allocation and Other Practices............................ B-6
Net Asset Value..................................................... B-7
Financial Statements................................................ B-7
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GLOSSARY
'Articles Supplementary' means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
'Asset Coverage' has the meaning set forth on page 22 of this Prospectus.
'Basic Maintenance Amount' means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
Liquidation Preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Cumulative Preferred Stock from the
most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the initial Dividend Payment Date with respect to the Cumulative
Preferred Stock, then from the Date of Original Issue) through the Valuation
Date plus all dividends to accumulate on the Cumulative Preferred Stock then
outstanding during the 70 days following such Valuation Date; (C) the Fund's
other liabilities due and payable as of such Valuation Date (except that
dividends and other distributions payable by the Fund by the issuance of Common
Stock will not be included as a liability) and such liabilities projected to
become due and payable 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 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.
'Charter' means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Fund on file in the Maryland
State Department of Assessments and Taxation.
'Common Stock' means the Common Stock, par value $.01 per share, of the
Fund.
'Cumulative Preferred Stock' means the 7.45% Cumulative Preferred Stock,
par value $.01 per share, of the Fund.
'Date of Original Issue' has the meaning set forth on page 22 of this
Prospectus.
'Deposit Securities' means cash, Short-Term Money Market Instruments and
U.S. Government Obligations. Except for determining whether the Fund has a
Portfolio Calculation equal to or greater than the Basic Maintenance Amount,
each Deposit Security will be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after delivery
of such Deposit Security but only if payable on or prior to the applicable
payment date in advance of which the relevant deposit is made.
35
<PAGE>
<PAGE>
'Discounted Value' means, with respect to a Moody's Eligible Asset, the
quotient of (A) in the case of non-convertible fixed income securities, the
lower of the principal amount and the market value thereof, or (B) in the case
of any other Moody's Eligible Assets, the market value thereof, divided by the
applicable Moody's Discount Factor.
'Dividend Payment Date' has the meaning set forth on page 22 of this
Prospectus.
'Fund' means Royce Global Trust, Inc., a Maryland corporation.
'Liquidation Preference' has the meaning set forth on page 25 of this
Prospectus.
'Moody's' means Moody's Investors Service, Inc.
'Moody's Discount Factor' means, with respect to a Moody's Eligible Asset
specified below, the following applicable number:
<TABLE>
<CAPTION>
TYPE OF MOODY'S ELIGIBLE ASSET MOODY'S DISCOUNT FACTOR
- ------------------------------------------------------------------------ ---------------------------
<S> <C>
Moody's Short-Term Money Market Instruments (other than U.S. Government
Obligations set forth below) and other commercial paper:
Demand or time deposits, certificates of deposit and bankers'
acceptances includible in Moody's Short-Term Money Market
Instruments...................................................... 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or
less............................................................. 1.00
Commercial paper rated P-1 by Moody's maturing in more than 30 days
but in 270 days or less.......................................... 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less.... 1.25
Repurchase obligations includible in Moody's Short-Term Money
Market Instruments if term is less than 30 days and counterparty
is rated at least A2............................................. 1.00
Other repurchase obligations....................................... Discount Factor applicable
to underlying assets
Common stocks........................................................... 3.00
Preferred stocks:
Auction rate preferred stocks...................................... 3.50
Other preferred stocks issued by issuers in the financial and
industrial industries............................................ 2.35
Other preferred stocks issued by issuers in the utilities
industry......................................................... 1.60
U.S. Government Obligations (other than U.S. Treasury Securities Strips
set forth below) with remaining terms to maturity of:
1 year or less..................................................... 1.08
2 years or less.................................................... 1.15
3 years or less.................................................... 1.20
4 years or less.................................................... 1.26
5 years or less.................................................... 1.31
7 years of less.................................................... 1.40
10 years or less................................................... 1.48
15 years or less................................................... 1.54
20 years or less................................................... 1.61
30 years or less................................................... 1.63
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TYPE OF MOODY'S ELIGIBLE ASSET MOODY'S DISCOUNT FACTOR
- ------------------------------------------------------------------------ ---------------------------
<S> <C>
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less..................................................... 1.08
2 years or less.................................................... 1.16
3 years or less.................................................... 1.23
4 years or less.................................................... 1.30
5 years or less.................................................... 1.37
7 years or less.................................................... 1.51
10 years or less................................................... 1.69
15 years or less................................................... 1.99
20 years or less................................................... 2.28
30 years or less................................................... 2.56
Corporate bonds:
Corporate bonds rated Aaa with remaining terms to maturity of:
1 year or less................................................ 1.14
2 years or less............................................... 1.21
3 years or less............................................... 1.26
4 years or less............................................... 1.32
5 years or less............................................... 1.38
7 years or less............................................... 1.47
10 years or less.............................................. 1.55
15 years or less.............................................. 1.62
20 years or less.............................................. 1.69
30 years or less.............................................. 1.71
Corporate bonds rated Aa with remaining terms to maturity of:
1 year or less................................................ 1.19
2 years of less............................................... 1.26
3 years or less............................................... 1.32
4 years or less............................................... 1.38
5 years or less............................................... 1.44
7 years or less............................................... 1.54
10 years or less.............................................. 1.63
15 years or less.............................................. 1.69
20 years or less.............................................. 1.77
30 years or less.............................................. 1.79
Corporate bonds rated A with remaining terms to maturity of:
1 year or less................................................ 1.24
2 years or less............................................... 1.32
3 years or less............................................... 1.38
4 years or less............................................... 1.45
5 years or less............................................... 1.51
7 years or less............................................... 1.61
10 years or less.............................................. 1.70
15 years or less.............................................. 1.77
20 years or less.............................................. 1.85
30 years or less.............................................. 1.87
</TABLE>
37
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TYPE OF MOODY'S ELIGIBLE ASSET MOODY'S DISCOUNT FACTOR
- ------------------------------------------------------------------------ ---------------------------
<S> <C>
Convertible corporate bonds with senior debt securities rated Aa issued
by the following types of issuers:
Utility............................................................ 1.80
Industrial......................................................... 2.97
Financial.......................................................... 2.92
Transportation..................................................... 4.27
Convertible corporate bonds with senior debt securities rated A issued
by the following types of issuers:
Utility............................................................ 1.85
Industrial......................................................... 3.02
Financial.......................................................... 2.97
Transportation..................................................... 4.32
Convertible corporate bonds with senior debt securities rated Baa issued
by the following types of issuers:
Utility............................................................ 2.01
Industrial......................................................... 3.18
Financial.......................................................... 3.13
Transportation..................................................... 4.48
Convertible corporate bonds with senior debt securities rated Ba issued
by the following types of issuers:
Utility............................................................ 2.02
Industrial......................................................... 3.19
Financial.......................................................... 3.14
Transportation..................................................... 4.49
Convertible corporate bonds with senior debt securities rated B1 or B2
issued by the following types of issuers:
Utility............................................................ 2.12
Industrial......................................................... 3.29
Financial.......................................................... 3.24
Transportation..................................................... 4.59
</TABLE>
'Moody's Eligible Assets' means:
(i) cash (including, for this purpose, receivables for investments
sold to a counterparty whose senior debt securities are rated at least Baa3
by Moody's or a counterparty approved by Moody's and payable within five
Business Days following such Valuation Date and dividends and interest
receivable within 70 days on investments);
(ii) Short-Term Money Market Instruments;
(iii) commercial paper that is not includible as a Short-Term Money
Market Instrument having on the Valuation Date a rating from Moody's of at
least P-1 and maturing within 270 days;
(iv) preferred stocks (A) which either (1) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (2) are rated
at least 'baa3' by Moody's (or in the event an issuer's senior debt
securities or preferred stock is not rated by Moody's, which either (1) are
issued by an issuer whose senior debt securities are rated at least A by
S&P or (2) are rated at least A by S&P and for this purpose have been
assigned a Moody's equivalent rating of at least 'baa3'), (B) of issuers
which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New
York Stock Exchange or the American Stock Exchange, (C) which have a
minimum issue size (when taken together with other of the issuer's issues
of similar tenor) of $50,000,000, (D) which have paid cash dividends
consistently during the preceding three-year period (or, in the case of new
issues without a dividend history, are rated at least 'a1' by Moody's or,
if not rated by Moody's, are rated at least AA by S&P), (E) which pay
cumulative cash dividends in U.S. dollars, (F) which are not convertible
into any other
38
<PAGE>
<PAGE>
class of stock and do not have warrants attached, (G) which are not issued
by issuers in the transportation industry and (H) in the case of auction
rate preferred stocks, which are rated at least 'aa' by Moody's, or if not
rated by Moody's, AAA by S&P or are otherwise approved in writing by
Moody's and have never had a failed auction; provided, however, that for
this purpose the aggregate market value of the Company's holdings of any
issue of preferred stock will not be less than $500,000 nor more than
$5,000,000;
(v) common stocks (A) (i) which are traded in the United States on a
national securities exchange or in the over-the-counter market, (ii) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (iii)
which may be sold without restriction by the Fund; provided, however, that
(1) common stock which, while a Moody's Eligible Asset owned by the Fund,
ceases paying any regular cash dividend will no longer be considered a
Moody's Eligible Asset until 71 days after the date of the announcement of
such cessation, unless the issuer of the common stock has senior debt
securities rated at least A3 by Moody's and (2) the aggregate market value
of the Fund's holdings of the common stock of any issuer shall not exceed
4% in the case of utility common stock and 6% in the case of non-utility
common stock of the number of outstanding shares times the market value of
such common stocks, and (B) which are securities denominated in any
currency other than the U.S. dollar or securities of issuers formed under
the laws of jurisdictions other than the United States, its states,
commonwealths, territories and possessions, including the District of
Columbia, for which there are dollar-denominated American Depository
Receipts ('ADRs') which are traded in the United States on a national
securities exchange or in the over-the-counter market and are issued by
banks formed under the laws of the United States, its states,
commonwealths, territories and possessions, including the District of
Columbia; provided, however, that the aggregate market value of the Fund's
holdings of securities denominated in currencies other than the U.S. dollar
and ADRs in excess of (i) 6% of the aggregate market value of the
outstanding shares of common stock of the issuer thereof or (ii) 10% of the
market value of Moody's Eligible Assets with respect to issuers formed
under the laws of any single such non-U.S. jurisdiction, other than
Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland and the United Kingdom, shall not be a Moody's Eligible Asset;
(vi) U.S. Government Obligations;
(vii) corporate bonds (A) which may be sold without restriction by the
Fund and are rated at least B3 (Caa subordinate) by Moody's (or, in the
event the bond is not rated by Moody's, the bond is rated at least BB- by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), with such rating confirmed on each
Valuation Date, (B) which have a minimum issue size of at least (x)
$100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3,
(C) which are U.S. dollar denominated and pay interest in cash in U.S.
dollars, (D) which are not convertible or exchangeable into equity of the
issuing corporation and have a maturity of not more than 30 years, (E) for
which, if rated below Baa3, the aggregate market value of the Fund's
holdings do not exceed 10% of the aggregate market value of any individual
issue of corporate bonds calculated at the time of original issuance, (F)
the cash flow from which must be controlled by an Indenture Trustee and (G)
which are not issued in connection with a reorganization under any
bankruptcy law;
(viii) convertible corporate bonds (A) which are issued by issuers
whose senior debt securities are rated at least B2 by Moody's (or, in the
event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least BB by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), (B) which are convertible into common
stocks which are traded on the New York Stock Exchange or the American
Stock Exchange or are quoted on the NASDAQ National Market System and (C)
which, if cash dividend paying, pay cash dividends in U.S. dollars;
provided, however, that once convertible corporate bonds have been
converted into common stock, the common stock issued upon conversion must
satisfy the criteria set forth in clause (v) above and other relevant
criteria set forth in this definition in order to be a Moody's Eligible
Asset;
39
<PAGE>
<PAGE>
provided, however, that the Fund's investment in preferred stock, common stock,
corporate bonds and convertible corporate bonds described above must be within
the following diversification requirements (utilizing Moody's industry and
sub-industry categories) in order to be included in Moody's Eligible Assets:
Issuer:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY
MAXIMUM SINGLE MAXIMUM SINGLE
MOODY'S RATING(1)(2) ISSUER(3)(4) ISSUER(3)(4)
- ---------------------------------------------------------- -------------- --------------
<S> <C> <C>
'aaa', Aaa................................................ 100% 100%
'aa', Aa.................................................. 20 20
'a', A.................................................... 10 10
CS/CB, 'Baa', Baa(5)...................................... 6 4
Ba........................................................ 4 4
B1/B2..................................................... 3 3
B3 (Caa subordinate)...................................... 2 2
</TABLE>
Industry and State:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY MAXIMUM
MAXIMUM SINGLE SINGLE UTILITY MAXIMUM
MOODY'S RATING(1) INDUSTRY(3) SUB-INDUSTRY(3)(6) SINGLE STATE(3)
- ----------------------------------------- -------------- ------------------ ---------------
<S> <C> <C> <C>
'aaa', Aaa............................... 100% 100% 100%
'aa', Aa................................. 60 60 20
'a', A................................... 40 50 10(7)
CS/CB, 'baa', Baa(5)..................... 20 50 7(7)
Ba....................................... 12 12 N/A
B1/B2.................................... 8 8 N/A
B3 (Caa subordinate)..................... 5 5 N/A
</TABLE>
- ------------
(1) The equivalent Moody's rating must be lowered one full rating category for
preferred stocks, corporate bonds and convertible corporate bonds rated by
S&P but not by Moody's.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited
to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate bonds, which are
diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility bonds
and utility convertible bonds, the definition of industry refers to
sub-industries (electric, water, hydro power, gas, diversified). Investments
in other sub-industries are eligible only to the extent that the combined
sum represents a percentage position of the Moody's Eligible Assets less
than or equal to the percentage limits in the diversification tables above.
(7) Such percentage will be 15% in the case of utilities regulated by
California, New York and Texas.
and provided, further, that the Fund's investments in auction rate preferred
stocks described in clause (iv) above will be included in Moody's Eligible
Assets only to the extent that the aggregate market value of such stocks does
not exceed 10% of the aggregate Market Value of all of the Fund's investments
meeting the criteria set forth in clauses (i) through (viii) above less the
aggregate market value of those investments excluded from Moody's Eligible
Assets pursuant to the immediately preceding proviso; and
(ix) no assets which are subject to any lien or irrevocably deposited
by the Fund for the payment of amounts needed to meet the obligations
described in clauses (i)(A) through (i)(E) of the definition of 'Basic
Maintenance Amount' may be includible in Moody's Eligible Assets.
'1940 Act' means the Investment Company Act of 1940, as amended.
'Notice of Redemption' has the meaning set forth on page 24 of this
Prospectus.
40
<PAGE>
<PAGE>
'Paying Agent' means State Street Bank and Trust Company and its successors
or any other paying agent appointed by the Fund.
'Portfolio Calculation' means the aggregate Discounted Value of all Moody's
Eligible Assets.
'Preferred Stock' means the preferred stock, par value $.01 per share, of
the Fund, and includes the Cumulative Preferred Stock.
'Redemption Price' has the meaning set forth on page 23 of this Prospectus.
'Short-Term Money Market Instruments' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the Fund
(or, in the case of an instrument specified by clauses (i) and (ii) below, on
the Valuation Date), the remaining terms to maturity thereof are not in excess
of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by Moody's and is issued by
an issuer (or guaranteed or supported by a person or entity other than the
issuer) whose long-term unsecured debt obligations are rated at least Aa by
Moody's;
(iii) demand or time deposits in or certificates of deposit of or
banker's acceptances issued by (A) a depository institution or trust
company incorporated under the laws of the United States of America or any
state thereof or the District of Columbia or (B) a United States branch
office or agency of a foreign depository institution (provided that such
branch office or agency is subject to banking regulation under the laws of
the United States, any state thereof or the District of Columbia) if, in
each case, the commercial paper, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of which are based on
the credit of a person or entity other than such depository institution or
trust company) of such depository institution or trust company at the time
of purchase or acquisition and the Valuation Date, have (1) credit ratings
from Moody's of at least P-1 in the case of commercial paper and (2) credit
ratings from Moody's of at least Aa in the case of long-term unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase or
other acquisition by the Fund, all of the foregoing requirements will be
applicable except that the required long-term unsecured debt credit rating
of such depository institution or trust company from Moody's will be at
least A2; and provided, further, however, that the foregoing credit rating
requirements will be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or trust
company is the principal depository institution in a holding company
system, (2) the commercial paper, if any, of such depository institution or
trust company is not rated below P-1 by Moody's and (3) the holding company
will meet all of the foregoing credit rating requirements (including the
preceding proviso in the case of investments that mature in no more than
one Business Day from the date of purchase or other acquisition by the
Fund);
(iv) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust company or
securities dealer (acting as principal) which is rated (A) at least Aa3 if
the maturity is three months or less, (B) at least A1 if the maturity is
two months or less and (C) at least A2 if the maturity is one month or
less; and
(v) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or the London branch office of a depository institution
or trust company meeting the credit rating requirements of commercial paper
and long-term unsecured debt obligations specified in clause (iii) above,
provided that the interest receivable by the Fund will be payable in U.S.
dollars and will not be subject to any withholding or similar taxes.
'S&P' means Standard & Poor's Ratings Services.
41
<PAGE>
<PAGE>
'U.S. Government Obligations' means direct non-callable obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills and U.S. Treasury Securities Strips, provide for
the periodic payment of interest and the full payment of principal at maturity.
'Valuation Date' means every Friday or, if such day is not a Business Day,
the immediately preceding Business Day.
42
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
================================== ====================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, 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, ITS INVESTMENT ADVISER OR THE UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. 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.
------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................... 3
Tax Attributes of Preferred Stock Dividends............................. 10
Financial Highlights.................................................... 12
The Fund................................................................ 13
Use of Proceeds......................................................... 13
Capitalization.......................................................... 13
Portfolio Composition................................................... 14
Investment Objective and Policies....................................... 14
Investment Advisory and Other Services.................................. 20
Description of Cumulative Preferred Stock............................... 21
Description of Capital Stock............................................ 27
Taxation................................................................ 28
Custodian, Transfer Agent and Dividend-Paying Agent..................... 32
Underwriting............................................................ 32
Legal Matters........................................................... 33
Experts................................................................. 33
Additional Information.................................................. 33
Table of Contents of Statement of Additional Information................ 34
Glossary................................................................ 35
800,000 SHARES
ROYCE GLOBAL
TRUST, INC.
7.45% CUMULATIVE PREFERRED STOCK
------------
PROSPECTUS
NOVEMBER 18, 1997
------------
SMITH BARNEY INC.
================================== ====================================
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
800,000 SHARES
ROYCE GLOBAL TRUST, INC.
7.45% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
The 7.45% Cumulative Preferred Stock, liquidation preference $25.00 per
share (the 'Cumulative Preferred Stock'), to be issued by Royce Global Trust,
Inc. (the 'Fund') will be senior securities of the Fund. The Fund will use the
net proceeds of the offering to purchase additional portfolio securities in
accordance with its investment objective and policies.
The Fund is a closed-end diversified management investment company. The
Fund's investment objective is long-term capital appreciation, which it seeks by
normally investing more than 75% of its assets in common stocks, convertible
preferred stocks, convertible debentures and other equity securities. The Fund's
address is 1414 Avenue of the Americas, New York, New York 10019, and its
telephone number is (212) 355-7311. Royce & Associates, Inc. is its investment
adviser.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Fund's Prospectus (dated November 18, 1997). 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, 1996 or the Fund's Semi-Annual Report to Stockholders for the six months
ended June 30, 1997, please call Investor Information at 1-800-221-4268. Defined
terms used herein have the meanings assigned to them in the Prospectus.
------------------------
TABLE OF CONTENTS
PAGE
----
Principal Stockholders................................................ B-2
Directors and Officers................................................ B-2
Code of Ethics and Related Matters.................................... B-5
Investment Advisory and Other Services................................ B-5
Brokerage Allocation and Other Practices.............................. B-6
Net Asset Value........................................................ B-7
Financial Statements................................................... B-7
Dated November 18, 1997
<PAGE>
<PAGE>
PRINCIPAL STOCKHOLDERS
As of September 30, 1997, the following persons owned of record or were
known by the Fund to have owned beneficially 5% or more of the 7,998,419 shares
of its Common Stock then outstanding:
<TABLE>
<CAPTION>
NAME AND ADDRESS TYPE AND PERCENTAGE OF OWNERSHIP
- --------------------------------------------- ------------------------------------
<S> <C> <C>
Charles M. Royce 625,400 shares -- Beneficial (sole 7.8%
1414 Avenue of the Americas voting and sole investment power)
New York, NY 10019
Magten Asset Management Corp. 1,373,000 shares -- Beneficial 17.2%(1)
35 East 21st Street (shared voting and sole investment
New York, NY 10022 power)
Financial & Investment Management 591,515 shares -- Beneficial (shared 7.4%
Group, Ltd. voting and sole investment power)
417 St. Joseph Street
P.O. Box 40
Suttons Bay, MI 49682
Wachovia Corporation 581,182 shares -- Beneficial (voting 7.3%
100 North Main Street and sole investment power)
Winston Salem, NC 27150
Depository Trust Company 6,904,594 shares -- Record 86.3%
Cede & Co.
P.O. Box 20 Bowling Green Station
New York, NY 10274
</TABLE>
- ------------
(1) Of this 17.2%, General Motors Employees Domestic Group Pension Trust, an
advisory client of Magten Asset Management Corp., has an interest with
respect to more than 5% of the Fund's outstanding shares of Common Stock.
All directors and officers of the Fund as a group owned approximately 8.2%
of the Fund's outstanding shares of Common Stock as of such date.
DIRECTORS AND OFFICERS
The following table sets forth certain information as to each director and
officer of the Fund.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
NAME AND ADDRESS THE FUND DURING THE LAST FIVE YEARS
- ------------------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
Charles M. Royce* (58) Director, President and President, Managing Director (since April
1414 Avenue of the Americas Treasurer 1997), Secretary, Treasurer, sole director
New York, NY 10019 and sole voting shareholder of Royce &
Associates, Inc. ('Royce'), formerly named
Quest Advisory Corp., the Fund's investment
adviser; Trustee, President and Treasurer of
The Royce Fund ('TRF'), an open-end
diversified management investment company of
which Royce is the principal investment
adviser, and its predecessors; Director,
President and Treasurer of Royce Micro-Cap
Trust, Inc. ('RMCT') (since September 1993),
Royce Value Trust, Inc. ('RVT') and the Fund
(since October 1996), closed-end diversified
management investment companies of which
Royce is the investment adviser; Presi-
</TABLE>
B-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
NAME AND ADDRESS THE FUND DURING THE LAST FIVE YEARS
- ------------------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
dent and Treasurer of Royce Capital, Fund
('RCF') (since December 1996), an open-end
diversified management investment company of
which Royce is the investment adviser (TRF,
RMCT, RVT, RCF and the Fund collectively,
'The Royce Funds'); Secretary and sole di-
rector and shareholder of Royce Fund
Services, Inc. ('RFS'), formerly named Quest
Distributors, Inc., the distributor of TRF's
shares; and managing general partner of Royce
Management Company ('RMC'), formerly named
Quest Management Company, a registered in-
vestment adviser, and its predecessor.
Richard M. Galkin (59) Director Private investor and President of Richard M.
5284 Boca Marina Galkin Associates, Inc., tele- communications
Boca Raton, FL 33487 consultants.
Stephen L. Isaacs (58) Director President of The Center for Health and Social
65 Harmon Avenue Policy since September 1996; President of
Pelham, NY 10803 Stephen L. Isaacs Associates, Consultants;
and Director of Columbia University
Development Law and Policy Program and
Professor at Columbia University until August
1996.
William L. Koke (63) Director Registered investment adviser and financial
73 Pointince Road planner with Shoreline Financial Consultants.
Westbrook, CT 06498
David L. Meister (57) Director Consultant to the communications industry
111 Marquez Place since January 1993; and Executive Officer of
Pacific Palisades, CA 90272 Digital Planet Inc. from April 1991 to
December 1992.
John D. Diederich* (46) Vice President Director of Administration of The Royce
1414 Avenue of the Americas Funds; Vice President of the Fund (since
New York, NY 10019 October 1996), of RMCT and RVT (since April
1997) and of RCF (since December 1996);
Director of RMCT and RVT (since July 1997);
President of RFS (since November 1995); and
President of Fund/Plan Services, Inc. from
January 1988 to December 1992.
Jack E. Fockler, Jr.* (39) Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce,
New York, NY 10019 having been employed by Royce since October
1989; Vice President of the Fund (since
October 1996), of RCF (since December 1996)
and of the other Royce Funds (since April
1995); and General Partner of RMC and its
predecessor.
W. Whitney George* (39) Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce,
New York, NY 10019 having been employed by Royce since October
1991; Trustee and Vice President of RCF
(since December 1996); Vice President of the
Fund (since October 1996) and of the other
Royce Funds (since April 1995); and General
Partner of RMC and its predecessor.
</TABLE>
B-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
NAME AND ADDRESS THE FUND DURING THE LAST FIVE YEARS
- ------------------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
Daniel A. O'Byrne* (35) Vice President and Vice President of Royce (since May 1994),
1414 Avenue of the Americas Assistant Secretary having been employed by Royce since October
New York, NY 10019 1986; and Vice President of the Fund (since
October 1996), of RCF (since December 1996)
and of the other Royce Funds (since July
1994).
John E. Denneen* (30) Secretary Associate General Counsel and Chief
1414 Avenue of the Americas Compliance Officer of Royce (since May 1996);
New York, NY 10019 Secretary of the Fund (since October 1996),
of RCF (since December 1996) and of the other
Royce Funds (since June 1996); and Associate
of Seward & Kissel from September 1992 to May
1996.
</TABLE>
- ------------
* An 'interested person' of the Fund and/or Royce under Section 2(a)(19) of the
1940 Act.
------------------------
Normally, holders of shares of the Preferred Stock of the Fund, including
the Cumulative Preferred Stock, voting as a separate class, will elect two
members of the Fund's Board of Directors, and holders of the Preferred Stock,
including Cumulative Preferred Stock, and the Common Stock, voting as a single
class, will elect the remaining directors. See 'Description of Cumulative
Preferred Stock -- Voting Rights' in the Prospectus. Messrs. Isaacs and Meister
have been designated as the Preferred Stock directors, subject to election at
the first meeting of the Fund's stockholders to be called after issuance of the
Cumulative Preferred Stock.
All of the Fund's directors are also trustees of TRF and, with the
exception of Mr. Koke, trustees of RCF and directors of RMCT and RVT.
The Board of Directors has an Audit Committee, comprised of Richard M.
Galkin, Stephen L. Isaacs and David L. Meister. The Audit Committee is
responsible for recommending the selection and nomination of the independent
auditors for the Fund and for conducting post-audit reviews of its financial
condition with such auditors.
REMUNERATION OF DIRECTORS
Set forth below is the compensation paid by the Fund and the other
registered investment companies comprising The Royce Funds to each director of
the Fund for the year ended December 31, 1996.
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM FROM THE FUND AND
DIRECTOR THE FUND OTHER ROYCE FUNDS
- -------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Charles M. Royce.............................................. $ 0 $ 0
Richard M. Galkin............................................. 3,500 64,000
Stephen L. Isaacs............................................. 3,500 64,000
William L. Koke............................................... 0 25,750
David L. Meister.............................................. 3,500 64,000
</TABLE>
Fees paid to these directors aggregated $10,500 for the year ended December
31, 1996.
For 1996, each of the Fund's current non-affiliated directors received a
base fee at the annual rate of $7,500 plus $750 for each meeting of the Board of
Directors attended. No current director of the Fund received remuneration for
services as a director for the year ended December 31, 1996 in addition to or in
lieu of this standard arrangement. For 1997, the Fund's non-affiliated directors
will receive a base fee of $2,500 plus $250 for each meeting attended.
B-4
<PAGE>
<PAGE>
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS and RMC
('Royce-related persons') and interested trustees/directors, officers and
employees of The Royce Funds are prohibited from personal trading in any
security which is then being purchased or sold or considered for purchase or
sale by a Royce Fund or any other Royce or RMC account. Such persons are
permitted to engage in other personal securities transactions if (i) the
securities involved are U.S. Government debt securities, municipal debt
securities, money market instruments, shares of affiliated or non-affiliated
registered open-end investment companies or shares acquired from an issuer in a
rights offering or under an automatic dividend reinvestment plan or
employer-sponsored automatic payroll deduction cash purchase plan or (ii) they
first obtain permission to trade from Royce's Compliance Officer and an
executive officer of Royce. The Code contains standards for the granting of such
permission, and it is expected that permission to trade will be granted only in
a limited number of instances.
Royce's and RMC's clients include several private investment companies in
which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr.
and/or W. Whitney George may be deemed to beneficially own) a share of up to 15%
of the company's realized and unrealized net capital gains from securities
transactions, but less than 5% of the company's equity interests. The Code of
Ethics does not restrict transactions effected by Royce or RMC for such private
investment company accounts. Transactions for such private investment company
accounts are subject to Royce's and RMC's allocation guidelines and procedures.
See 'Brokerage Allocation and Other Practices'.
As of September 30, 1997, Royce-related persons, interested
trustees/directors, officers and employees of The Royce Funds and members of
their immediate families beneficially owned shares of The Royce Funds having a
total value of approximately $34.1 million, and their equity interests in
Royce-related private investment companies totalled approximately $3.5 million.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY FEE
For the six months ended June 30, 1997, Royce voluntarily waived its total
investment advisory fee of $226,989. For the period from November 1, 1996
through December 31, 1996, Royce likewise waived the total investment advisory
fee of $73,772.
Prior to November 1, 1996, the Fund was party to a management agreement
with Veitia and Associates, Inc. to conduct the management and investment
activity of the Fund. That agreement provided for management fees, computed
daily and payable monthly, at an annualized rate of 1.0% of the Fund's average
daily net assets up to the first $100 million of net assets; 0.85% of 1% of
average daily net assets in excess of $100 million and up to $250 million; and
0.70% of 1% of average daily net assets in excess of $250 million. For the
period January 1, 1996 through October 31, 1996, the Fund accrued and paid
management fees totaling $349,725. For the years ended December 31, 1995 and
1994, the Fund accrued and paid management fees totaling $413,686 and $434,386,
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 the 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.
B-5
<PAGE>
<PAGE>
Royce's services to the Fund are not deemed to be exclusive, and Royce or
any of its affiliates may provide similar services to other investment companies
and other clients or engage in other activities.
The Investment Advisory Agreement will remain in effect until April 30,
1998 and may be continued in effect from year to year thereafter if such
continuance is specifically approved at least annually by the Board of Directors
or by the vote of a majority of the Fund's outstanding voting securities and, in
either case, by a majority of the directors who are not parties to the Agreement
or interested persons of any such party. The Investment Advisory Agreement will
automatically terminate if it is assigned (as defined by the 1940 Act and the
rules thereunder) and may be terminated without penalty by vote of a majority of
the Fund's outstanding voting securities or by either party thereto on not less
than 60 days' written notice.
SERVICE CONTRACT WITH STATE STREET
State Street Bank and Trust Company, the custodian of the Fund's assets,
provides certain management-related services to the Fund. Such services include
keeping books of accounts and rendering such financial and other statements as
may be requested by the Fund from time to time, and generally assisting in the
preparation of reports to the Fund's stockholders, to the Commission and others,
in the auditing of accounts and in other ministerial matters of like nature, as
agreed to between the Fund and the Bank. For the fiscal years ended December 31,
1996, 1995 and 1994, the Fund paid $99,627, $159,916 and $208,485, respectively,
in fees to the Fund's custodians and transfer agents.
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. 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. Royce determines the overall reasonableness of brokerage
commissions paid, after considering the amount another broker might have charged
for effecting the transaction and the value placed by Royce upon the brokerage
and/or research services provided by such broker, viewed in terms of either that
particular transaction or Royce's overall responsibilities with respect to its
accounts.
Royce is authorized, under Section 28(e) of the Securities Exchange Act of
1934 and under its Investment Advisory Agreement with the Fund, to pay a broker
a commission in excess of that which another broker might have charged for
effecting the same transaction, in recognition of the value of brokerage and
research services provided by the broker.
Brokerage and research services furnished by brokers through whom the Fund
effects securities transactions may be used by Royce in servicing all of its
accounts and those of RMC, and not all of such services may be used by Royce in
connection with the Fund.
Even though investment decisions for the Fund are made independently from
those for the other accounts managed by Royce and RMC, securities of the same
issuer are frequently purchased, held or sold by more than one Royce/RMC account
because the same security may be suitable for all of them. When the same
security is being purchased or sold for more than one Royce/RMC account on the
same trading day, Royce seeks to average the transactions as to price and
allocate them as to amount in a manner believed to be equitable to each. Such
purchases and sales of the same security are generally effected pursuant to
Royce/RMC's Trade Allocation Guidelines and Procedures. Under such Guidelines
and Procedures, unallocated orders are placed with and executed by
broker-dealers during the trading day. The securities purchased or sold in such
transactions are then allocated to one or more of Royce's and RMC's accounts at
or shortly following the close of trading, using the average net price obtained.
Such allocations are done based on a number of judgmental factors that Royce and
RMC believe should result in fair and equitable treatment to those of its
accounts for which the securities may be
B-6
<PAGE>
<PAGE>
deemed suitable. In some cases, this procedure may adversely affect the price
paid or received by the Fund or the size of the position obtained for the Fund.
During the year ended December 31, 1996, 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, 1996, 1995 and 1994, the
Fund paid brokerage commissions of approximately $204,000, $160,000 and $52,000,
respectively.
The Underwriter has effected purchases and sales of the portfolio
securities of the Fund and of other accounts managed by Royce and RMC and may be
chosen to effect future transactions for the Fund and such other accounts.
NET ASSET VALUE
The Fund calculates the net asset value of its shares of Common Stock daily
and makes that information available daily by telephone (800-221-4268) and
weekly for publication. Currently, The Wall Street Journal, The New York Times
and Barron's publish net asset values for closed-end investment companies
weekly. Net asset value per share of Common Stock is determined at the close of
regular trading on the New York Stock Exchange (currently 4:00 P.M., Eastern
time) on each day on which the Exchange is open. The net asset value of the
Fund's Common Stock is calculated by dividing the current value of the Fund's
total assets less the sum of all of its liabilities and the aggregate
liquidation preference of its outstanding shares of Preferred Stock, by the
total number of shares of the Common Stock outstanding.
In determining net asset value, securities listed on an exchange or on the
National Association of Securities Dealers Automated Quotation System are valued
on the basis of the last reported sale prior to the time the valuation is made
or, if no sale is reported for such day, at their electronically-reported bid
price for exchange-listed securities and at the average of their
electronically-reported bid and asked prices for Nasdaq securities. Quotations
are taken from the market where the security is primarily traded. Other
over-the-counter securities for which market quotations are readily available
are valued at their electronically-reported bid price or, if there is no such
price, then at their representative bid price. Securities for which market
quotations are not readily available are valued at their fair value under
procedures established and supervised by the Fund's Board of Directors.
Notwithstanding the above, bonds and other fixed income securities may be valued
by reference to other securities with comparable ratings, interest rates and
maturities, using established independent pricing services.
The offering costs of the Cumulative Preferred Stock (including the
underwriting discount) will be charged to additional paid-in capital.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Stockholders for the fiscal year ended December 31, 1996, together with
the report of Ernst & Young LLP thereon, and the unaudited financial statements
included in the Semi-Annual Report to the Fund's Stockholders for the six months
ended June 30, 1997 are incorporated herein by reference.
B-7
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as......................'D'
The double dagger symbol shall be expressed as..............'DD'
<PAGE>
