<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
SECURITIES ACT FILE NO. 333-28615
INVESTMENT COMPANY ACT FILE NO. 811-8030
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[x] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 5
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
ROYCE MICRO-CAP TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
1414 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(800) 221-4268
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
CHARLES M. ROYCE, PRESIDENT
ROYCE MICRO-CAP TRUST, INC.
1414 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
FRANK P. BRUNO, ESQ. HOWARD J. KASHNER, ESQ. GARY S. SCHPERO, ESQ.
BROWN & WOOD LLP ROYCE MICRO-CAP TRUST, INC. SIMPSON THACHER & BARTLETT
ONE WORLD TRADE CENTER 1414 AVENUE OF THE AMERICAS 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10048-0557 NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
------------------------
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended (the 'Securities Act'), other than securities offered in
connection with a dividend reinvestment plan, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
============================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(1) OFFERING PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
% Cumulative Preferred Stock 1,600,000 Shares $25.00 $40,000,000 $12,121.21
============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-2 CAPTION IN PROSPECTUS
- -------------------------------------------------------------------------- --------------------------------------
<S> <C>
PART A -- INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Page.............................. Inside Front and Outside Back Cover
Page; Underwriting
3. Fee Table and Synopsis................................................ Not Applicable
4. Financial Highlights.................................................. Financial Highlights
5. Plan of Distribution.................................................. Outside Front Cover Page; Prospectus
Summary; Underwriting
6. Selling Shareholders.................................................. Not Applicable
7. Use of Proceeds....................................................... Use of Proceeds; Investment Objective
and Policies
8. General Description of the Registrant................................. Front Cover Page; Prospectus Summary;
The Fund; Investment Objective and
Policies
9. Management............................................................ Prospectus Summary; Investment
Advisory and Other Services;
Custodian, Transfer Agent and
Dividend-Paying Agent
10. Capital Stock, Long-Term Debt, and Other Securities................... Front Cover Page; Prospectus Summary;
Ordinary Income Equivalent Yield
Tables; Capitalization; Investment
Objective and Policies; Description
of Cumulative Preferred Stock;
Description of Capital Stock;
Taxation
11. Defaults and Arrears on Senior Securities............................. Not Applicable
12. Legal Proceedings..................................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information......................................................... Table of Contents of Statement of
Additional Information
PART B -- INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page............................................................ Front Cover Page
15. Table of Contents..................................................... Front Cover Page
16. General Information and History....................................... Not Applicable
17. Investment Objective and Policies..................................... Not Applicable
18. Management............................................................ Directors and Officers; Investment
Advisory and Other Services
19. Control Persons and Principal Holders of Securities................... Principal Stockholders
20. Investment Advisory and Other Services................................ Investment Advisory and Other Services
21. Brokerage Allocation and Other Practices.............................. Brokerage Allocation and Other
Practices
22. Tax Status............................................................ Not Applicable
23. Financial Statements.................................................. Financial Statements
PART C -- OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C
to this Registration Statement.
</TABLE>
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 20, 1997
PROSPECTUS 1,600,000 SHARES
ROYCE MICRO-CAP TRUST, INC.
% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------
The % Cumulative Preferred Stock, liquidation preference $25.00 per
share (the 'Cumulative Preferred Stock'), to be issued by Royce Micro-Cap 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 to seek long-term capital appreciation by investing primarily in
equity securities of companies that, at the time of investment, have market
capitalizations of $300 million or less. Royce & Associates, Inc. is the Fund's
investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of % 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 September 23, 1997.
During the Fund's most recent fiscal year, distributions paid by the Fund
on its Common Stock consisted primarily of long-term capital gains, and under
current market conditions the investment adviser expects that dividends paid on
the Cumulative Preferred Stock similarly will consist primarily of long-term
capital gains. No assurance can be given, however, as to what percentage, if
any, of the dividends paid on the Cumulative Preferred Stock will consist of
long-term capital gains.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with
the receipt of such rating, the composition of the Fund's portfolio must reflect
guidelines established by Moody's, and the Fund will be required to maintain a
certain discounted asset coverage with respect to the Cumulative Preferred
Stock.
The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Fund for cash at a price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) (the
'Redemption Price') if the Fund fails to maintain a quarterly asset coverage of
at least 225% or to maintain the discounted asset coverage required by Moody's.
Commencing July 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 July 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)
------------------
APPLICATION HAS BEEN MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE
AMERICAN STOCK EXCHANGE (THE 'AMEX'). 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 PROCEEDS
PUBLIC(1) OR COMMISSIONS(2) TO FUND(3)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Per Share.................................................. $25.00 $ $
- ------------------------------------------------------------------------------------------------------------------------
Total(3)................................................... $40,000,000 $ $
========================================================================================================================
</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
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(3) Before deducting offering expenses payable by the Fund, estimated at
$240,000.
------------------
The shares of Cumulative Preferred Stock are being offered by the
Underwriters named herein, subject to prior sale, when, as and if accepted by
them 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 June , 1997.
------------------
SMITH BARNEY INC. PAINEWEBBER INCORPORATED
June , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<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 June , 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 31 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 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, SYNDICATE
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 Micro-Cap Trust, Inc. (the 'Fund') has been engaged in business
as a closed-end diversified management investment company since its
initial offering in December 1993. The investment objective of the
Fund is long-term capital appreciation, which it seeks by investing
at least 65% of its assets in common stocks, convertible securities
and warrants of companies that, at the time of investment, have
market capitalizations of $300 million or less ('micro-cap
companies'). No assurance can be given that the Fund's investment
objective will be achieved. The Fund's average annual total returns
on the net asset values of its Common Stock for the one year and
three year periods ended May 31, 1997, and from inception on
December 14, 1993 to May 31, 1997, were 9.4%, 17.0% and 14.9%,
respectively. Total return figures are based on the Fund's
historical performance, assume reinvestment of distributions and
full primary participation in its 1994 rights offering, and are not
intended to indicate future performance. See 'Investment Objective
and Policies'.
The Investment Adviser.................... Royce & Associates, Inc. ('Royce'), formerly known as Quest Advisory
Corp., has served as the investment adviser to the Fund since its
inception. Royce also serves as investment adviser to other
management investment companies, with aggregate net assets of
approximately $1.7 billion as of May 31, 1997, and manages other
institutional accounts.
As compensation for its services under the present Investment
Advisory Agreement, Royce will receive a fee at a rate ranging from
.5% up to 1.5% per annum of the Fund's average net assets for the
applicable performance period, depending upon the investment
performance of the Fund relative to the investment record of the
Russell 2000 Index (the 'Russell 2000'), over rolling periods of
up to 36 months. For a more detailed description of the method
by which the advisory fee is determined, see 'Investment Advisory
and Other Services -- Advisory Fee'.
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.
The Offering.............................. The Fund is offering 1,600,000 shares of % Cumulative Preferred
Stock, par value $.001 per share, liquidation
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
preference $25.00 per share (the 'Cumulative Preferred Stock'), at
a purchase price of $25 per share.
Dividends................................. Dividends on the Cumulative Preferred Stock, at the annual rate of
% 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 September 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'.
Potential Tax Benefit to Certain
Investors............................... 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'). During the Fund's most recent
fiscal year, distributions paid by the Fund on its Common
Stock consisted primarily of income taxed as long-term capital
gains, and under current market conditions Royce expects that
dividends paid on the Cumulative Preferred Stock similarly will
consist primarily of such income. Certain investors in the
Cumulative Preferred Stock may realize a tax benefit to the extent
that dividends paid by the Fund on those shares are composed of
long-term capital gains. See 'Ordinary Income Equivalent Yield
Tables'. Subject to statutory limitations, investors may also be
entitled to offset the portion of their dividends on Cumulative
Preferred Stock that consists of long-term capital gains with
capital losses incurred by such investors. See 'Taxation'. No
assurance can be given, however, as to what percentage, if any, of
the dividends to be paid on the Cumulative Preferred Stock will
consist of long-term capital gains. To the extent that dividends on
the shares of Cumulative Preferred Stock are not paid from
long-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.
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
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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 December 31, 1996
and May 31, 1997, the Asset Coverage would have been 381% and 399%,
respectively. See 'Description of Cumulative Preferred
Stock -- Asset Maintenance'.
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 per
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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 maintain a Portfolio Calculation at
least equal to the Basic Maintenance Amount, the Fund may redeem a
sufficient number of shares of Cumulative Preferred Stock in order
that the Portfolio Calculation exceeds the Basic Maintenance Amount
of the remaining outstanding shares of Cumulative Preferred Stock
and any other Preferred Stock by up to 10%. See 'Description of
Cumulative Preferred Stock -- Redemption -- Mandatory Redemption'.
Optional Redemption....................... Commencing July 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 July 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 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. Application has been made to list the
shares of Cumulative Preferred Stock on the American Stock
Exchange. However, during an initial period, which is not expected
to exceed 30 days from the date of this Prospectus, the Cumulative
Preferred Stock may not be listed on such Exchange. During such
period, the Underwriters intend to make a market in the Cumulative
Preferred Stock; however, they have no obligation to do so.
Consequently, an investment in the Cumulative Preferred Stock may
be illiquid during such period.
Special Considerations and Risk Factors... The market price for the Cumulative Preferred Stock will be
influenced by changes in interest rates, 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
</TABLE>
6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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 May 31, 1997, the Fund
had no outstanding indebtedness and had not issued any Preferred
Stock. See 'Investment Objective and Policies -- Senior Securities
and Borrowing of Money'.
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 micro-cap securities, for which these
characteristics are particularly pronounced and which are more
volatile in price and less liquid than the equity securities of
larger-cap companies. 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, 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.
Administrator............................. Mitchell Hutchins Asset Management Inc., an affiliate of PaineWebber
Incorporated, serves as the Fund's administrator. See 'Investment
Advisory and Other Services -- Administration Agreement' and
'Underwriting'.
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>
7
<PAGE>
<PAGE>
ORDINARY INCOME EQUIVALENT YIELD TABLES
For the fiscal year of the Fund ended December 31, 1996, distributions paid
by the Fund on its Common Stock consisted of 85% long-term capital gains ('L/T
Capital Gains') and 15% ordinary income/short-term capital gains ('Ordinary
Income'). Individual investors in the Cumulative Preferred Stock who are in a
Federal marginal income tax bracket higher than the current 28.0% maximum
Federal tax rate on long-term capital gains would, under the current position of
the IRS, realize a tax advantage on their investment to the extent that
distributions by the Fund to its stockholders continue to be partially composed
of the less highly taxed long-term capital gains.
The following table shows examples of the pure Ordinary Income equivalent
yield that would be generated by the indicated dividend rates on the Cumulative
Preferred Stock, assuming distributions consisting of four different proportions
of L/T Capital Gains and Ordinary Income for an investor in the 39.6% Federal
marginal tax bracket and assuming no change in the current maximum Federal
long-term capital gain tax rate for individuals of 28.0%.
<TABLE>
<CAPTION>
PERCENTAGE OF CUMULATIVE
PREFERRED A CUMULATIVE PREFERRED
STOCK DIVIDEND COMPOSED OF* STOCK DIVIDEND RATE OF
- ------------------------------ ------------------------
<S> <C> <C> <C> <C>
7.50% 7.625% 7.75%
<CAPTION>
ORDINARY IS EQUIVALENT TO AN
L/T CAPITAL GAINS INCOME ORDINARY INCOME YIELD OF
- ----------------- -------- ------------------------
<S> <C> <C> <C> <C>
85.0% 15.0% 8.72% 8.87% 9.02%
75.0% 25.0% 8.58% 8.72% 8.87%
50.0% 50.0% 8.22% 8.36% 8.49%
25.0% 75.0% 7.86% 7.99% 8.12%
</TABLE>
- ------------
1 The Fund commenced operations in December 1993. For the fiscal years of the
Fund ended December 31, 1995 and 1994, distributions paid by the Fund on its
Common Stock consisted of 36% L/T Capital Gains and 64% Ordinary Income and no
L/T Capital Gains and 100% Ordinary Income, respectively.
* A number of factors could affect the composition of the Fund's distributions.
Such factors include (i) active management of the Fund's assets, which may
result in varying proportions of L/T Capital Gains, Ordinary Income and/or
return of capital in Fund distributions; and (ii) possible revocation or
revision of the IRS revenue ruling requiring the proportionate allocation of
L/T Capital Gains among holders of various classes of capital stock.
8
<PAGE>
<PAGE>
As illustrated in the table below, the yield advantage of the lower Federal
long-term capital gain tax rate would be diminished for investors in tax
brackets below the 39.6% rate assumed in the table above, and there would be no
effect on the yield for an investor in a Federal marginal income tax bracket of
28.0% or lower. Assuming a Cumulative Preferred Stock dividend composed of 85%
L/T Capital Gains and 15% Ordinary Income (representing the composition of
distributions paid by the Fund for its most recent fiscal year), the following
table shows the pure Ordinary Income equivalent yields that would be generated
at the assumed dividend rates for taxpayers in the indicated tax brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF
----------------------------------------------
<S> <C> <C> <C>
7.50% 7.625% 7.75%
<CAPTION>
1997 FEDERAL
TAX BRACKET`D' IS EQUIVALENT TO AN ORDINARY INCOME YIELD OF
- --------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C>
39.6%.................................................... 8.72% 8.87% 9.02%
36.0%.................................................... 8.30% 8.44% 8.57%
31.0%.................................................... 7.78% 7.91% 8.04%
28.0% or lower........................................... 7.50% 7.625% 7.75%
</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; and 28.0% -- $24,651-$59,750 for single
returns, $41,201-$99,600 for joint returns. An investor's marginal tax rate
may exceed the rates shown in the above table due to the reduction, or
possible elimination, of the personal exemption deduction for high-income
taxpayers and an overall limit on itemized deductions. Income also may be
subject to certain state, local and foreign taxes. For investors who pay
alternative minimum tax, equivalent yields may be lower than those shown
above. The tax rates shown above do not apply to corporate taxpayers.
-------------------------
The tax characteristics of the Fund are described more fully under
'Taxation'.
The two preceding charts are for illustrative purposes only and cannot be
taken as an indication of the composition of the Fund's future distributions.
As of the date of this Prospectus, legislation has been proposed that would
reduce the maximum Federal long-term capital gain tax rate for individuals from
28.0% to 20.0%. If such legislation were enacted, the Ordinary Income equivalent
yields would be higher than those presented in the tables above. For example, a
Cumulative Preferred Stock dividend at the annual rate of 7.625%, consisting of
85% L/T Capital Gains and 15% Ordinary Income paid to an individual in the
39.6%, bracket would be equivalent to an Ordinary Income yield of 9.73%; for the
36.0% bracket, the Ordinary Income equivalent yield would be 9.25%; for the
31.0% bracket, the Ordinary Income equivalent yield would be 8.66%; for the
28.0% bracket, the Ordinary Income equivalent yield would be 8.35%. No
assurance can be given, however, that such legislation will be enacted.
9
<PAGE>
<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 each of the years ended December 31,
1996 and 1995 has been audited by Ernst & Young LLP, independent auditors, as
stated in their unqualified reports accompanying such financial statements. The
financial information for the year ended December 31, 1994 and the period from
December 14, 1993 (commencement of operations) to December 31, 1993 has been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon was unqualified.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, DEC. 14, 1993*
------------------------------- TO
1996 1995 1994 DEC. 31, 1993
-------- -------- ------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $8.89 $7.58 $7.27 $7.25
-------- -------- ------- -----------
INVESTMENT OPERATIONS:
Net investment income.............................. 0.09 0.02 0.01 --
Net realized and unrealized gain on investments.... 1.32 1.69 0.41 0.02
-------- -------- ------- -----------
Total from investment operations.............. 1.41 1.71 0.42 0.02
-------- -------- ------- -----------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income.............................. (0.10) (0.02) (0.02) --
Net realized gain on investments................... (0.70) (0.34) (0.03) --
-------- -------- ------- -----------
Total dividends and distributions............. (0.80) (0.36) (0.05) --
-------- -------- ------- -----------
CAPITAL STOCK TRANSACTIONS:
Effect of rights offering.......................... -- -- (0.06) --
Effect of reinvestment of distributions............ (0.12) (0.04) -- --
-------- -------- ------- -----------
Total capital stock transactions.............. (0.12) (0.04) (0.06) --
-------- -------- ------- -----------
NET ASSET VALUE, END OF PERIOD.......................... $9.38 $8.89 $7.58 $7.27
-------- -------- ------- -----------
-------- -------- ------- -----------
MARKET VALUE, END OF PERIOD............................. $8.25 $8.00 $7.00 $7.50
-------- -------- ------- -----------
-------- -------- ------- -----------
TOTAL RETURN: (a)
Net Asset Value.................................... 16.6% 22.9% 6.0% 0.3%
Market Value....................................... 13.9% 19.8% (5.1%) 0.0%
RATIOS BASED ON AVERAGE NET ASSETS:
Total expenses..................................... 0.85% 1.36% 1.88% 1.92% (b)**
Management fee expense........................... 0.47% 0.77% 1.20% 0.00%
Other operating expenses......................... 0.38% 0.59% 0.68% 1.92%**
Net investment income (loss)....................... 0.88% 0.26% 0.21% (0.06%)(b)**
SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)........... $113,953 $100,065 $82,534 $ 71,126
Portfolio Turnover Rate............................ 51% 51% 23% 0%
Average Commission Rate Paid`D'.................... $ 0.0485 -- -- --
</TABLE>
- ------------
* Commencement of operations.
** Annualized.
(a) Net Asset Value and Market Value Total Return assume a continuous
stockholder who reinvested all net investment income dividends and capital
gain distributions and fully participated in the 1994 primary rights
offering.
(b) Presented after waivers by the investment adviser and the administrator.
For the period ended December 31, 1993, the ratios of expenses and net
investment loss to average net assets would have been 2.12% and (0.26)%,
respectively, absent such waivers.
`D' For fiscal years beginning after October 1, 1995, the Fund is required to
disclose its average commission rate paid per share for purchases and sales
of investments.
10
<PAGE>
<PAGE>
THE FUND
Royce Micro-Cap Trust, Inc. (the 'Fund') is a closed-end diversified
management investment company. It was incorporated under the name 'Royce OTC
Micro-Cap Fund, Inc.' under the laws of the State of Maryland on September 9,
1993 and is registered under the 1940 Act. The Fund commenced operations in
December 1993. As of May 31, 1997, the Fund had 12,153,511 shares of Common
Stock issued and outstanding, with an aggregate net asset value of $121,272,315.
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 principally through investment in common stocks, convertible
securities and warrants of companies that, at the time of investment, have
market capitalizations of $300 million or less ('micro-cap companies'). See
'Investment Objective and Policies'.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $38,500,000, 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 capitalization of the Fund as of
December 31, 1996, and as adjusted to give effect to this offering.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
------------ ------------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.001 par value:
No shares authorized, issued or outstanding;
as adjusted, 5,000,000 shares of % Cumulative
Preferred Stock authorized, and 1,600,000 of such
shares issued and outstanding................................................ -- $ 40,000,000
------------ ------------
------------ ------------
Common Stock, $.001 par value:
Authorized 150,000,000 shares; 12,153,511 shares issued
and outstanding; as adjusted, 145,000,000 shares authorized.................. $ 12,154 $ 12,154
Additional paid-in capital................................................ 88,111,021 86,611,021(1)
Dividends in excess of net investment income.............................. (152,608) (152,608)
Accumulated net realized gain on investments.............................. 4,709,893 4,709,893
Net unrealized appreciation on investments................................ 21,272,562 21,272,562
------------ ------------
Net assets applicable to outstanding Common Stock......................... $113,953,022 $112,453,022
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) After deducting underwriting discounts and estimated costs of this offering
of $1,500,000.
11
<PAGE>
<PAGE>
PORTFOLIO COMPOSITION
The following tables set forth certain information with respect to the
Fund's investment portfolio as of December 31, 1996.
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Common stock.................................................................... $103,252,141 90.6%
Repurchase agreement............................................................ 10,200,000 9.0
Cash and other assets less liabilities.......................................... 500,881 0.4
------------ ----------
Total investments.......................................................... $113,953,022 100.0%
------------ ----------
------------ ----------
</TABLE>
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Consumer Products............................................................... $ 22,762,068 20.0%
Industrial Products............................................................. 19,202,941 16.9
Industrial Services............................................................. 14,527,874 12.7
Financial Intermediaries........................................................ 13,615,920 11.9
Technology...................................................................... 10,581,797 9.3
Financial Services.............................................................. 5,365,412 4.7
Retail.......................................................................... 5,261,116 4.6
Natural Resources............................................................... 4,003,775 3.5
Health.......................................................................... 1,253,700 1.1
Consumer Services............................................................... 868,150 0.8
Utilities....................................................................... 288,655 0.3
Miscellaneous................................................................... 5,520,733 4.8
------------ -----
Total common stock......................................................... $103,252,141 90.6%
------------ -----
------------ -----
</TABLE>
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS
<TABLE>
<S> <C>
Number of issuers............................................................................ 183
Median market capitalization (total portfolio)............................................... $156 million
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve its objective primarily through investment in common stocks and
securities convertible into or exchangeable for common stocks of companies with
market capitalizations of $300 million or less ('micro-cap companies'). The
market capitalization of a company is calculated by multiplying the number of
its common shares that are issued and outstanding by the per share market price
of the common stock. There are market risks inherent in any investment, and
there is no assurance that the investment objective of the Fund will be
achieved.
To achieve its investment objective, the Fund, under normal market
conditions, invests at least 65% of its total assets in common stocks,
convertible securities and warrants of micro-cap companies. For purposes of
calculating this 65% minimum, securities purchased before a company's market
capitalization increases to above $300 million will continue to be classified as
securities of a micro-cap company. Up to 35% of the Fund's total assets may be
invested in non-micro-cap company equity securities and non-convertible debt
securities.
INVESTMENT POLICIES AND RISK FACTORS
In selecting portfolio investments, Royce uses a value approach to managing
the Fund's assets. Accordingly, Royce puts primary emphasis on analysis of
various internal returns indicative of
12
<PAGE>
<PAGE>
profitability, balance sheets, cash flows and a company's future prospects and
the relationships that these factors have to the price of a given security in
order to determine if the securities are undervalued in relation to Royce's
estimate of the 'private worth' of the company, that is, what a knowledgeable
buyer would pay for the entire company in a private transaction.
The Fund invests primarily in securities of micro-cap companies based on
Royce's belief that, because the securities of such companies may have fewer
market makers, wider spreads between their quoted bid and asked prices and lower
trading volumes, resulting in comparatively greater price volatility and less
liquidity, and may not be followed by many securities analysts or be well-known
to the investing public, they may also be available for purchase at substantial
discounts from Royce's estimate of such companies' 'private worth'. Royce
attempts to identify and to have the Fund invest in such securities, with the
expectation that such value 'discounts' will narrow over time and thus provide
capital appreciation for the Fund's portfolio.
Many micro-cap companies in which the Fund is likely to invest may be more
vulnerable than larger companies to adverse business or economic developments,
may have limited product lines, markets or financial resources and may lack
management depth. In addition, most micro-cap companies are not well-known to
the investing public, do not have significant institutional ownership and are
followed by relatively few securities analysts, with the result that there may
tend to be less publicly available information concerning such companies
compared to what is available for larger capitalization securities. The
securities of these companies may have more limited trading volumes and be
subject to more abrupt or erratic market movements than the securities of
larger-capitalization companies and/or the market averages in general. Finally,
the securities of micro-cap companies traded in the over-the-counter market may
have fewer market makers, wider spreads between their quoted bid and asked
prices and lower trading volumes, resulting in comparatively greater price
volatility and less liquidity than those of larger capitalization companies.
Thus, the Fund may involve considerably more risk than an investment company
investing in the more liquid equity securities of larger-cap companies. Although
there are no liquidity restrictions on investments made by the Fund and the Fund
may, therefore, invest without limit in illiquid securities, the Fund expects to
invest only in securities for which market quotations are readily available.
The price movements, earnings and other developments of each portfolio
security are closely monitored, with a view to selling securities when price
objectives are reached or when a security no longer meets Royce's criteria under
its value approach.
Foreign Investments. The Fund may invest up to 10% of its assets in
securities of foreign issuers. Foreign investments involve certain risks, such
as political or economic instability of the issuer or of the country of issue,
fluctuating exchange rates and the possibility of imposition of exchange
controls. These securities may also be subject to greater fluctuations in price
than the securities of U.S. corporations, and there may be less publicly
available information about their operations. Foreign companies may not be
subject to accounting standards or governmental supervision comparable to U.S.
companies, and foreign markets may be less liquid or more volatile than U.S.
markets and may offer less protection to investors such as the Fund.
Lower-rated Debt Securities. Up to 10% of the Fund's total assets may be
invested in non-convertible debt securities of various domestic 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 S&P) 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
13
<PAGE>
<PAGE>
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.
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 and
high-quality commercial paper, or retain all or part of its assets in cash.
Accordingly, the composition of the Fund's portfolio may vary from time to time.
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 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.
Senior Securities and Borrowing of Money. The 1940 Act and the Fund's
fundamental policies (see 'Investment Restrictions') permit the Fund to borrow
money from banks and certain other lenders and 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, except for indebtedness
to banks and certain other lenders, restrictive provisions concerning Common
Stock dividend payments, other Common Stock distributions, stock repurchases and
maintenance of asset coverage and giving senior security holders 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 May 31, 1997, the Fund had total assets of $121,442,035 and total
liabilities of $169,720 and had not borrowed any money or issued any Preferred
Stock. Accordingly, as of such date, the Fund could have issued and sold senior
securities representing indebtedness of up to $60,636,158 or Preferred Stock
having an involuntary liquidation preference of up to $121,272,315 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.
14
<PAGE>
<PAGE>
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 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 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 and securities convertible into
or exchangeable for common stocks of micro-cap companies 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
15
<PAGE>
<PAGE>
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:
<TABLE>
<S> <C>
1. Purchase securities on margin or write call options on its portfolio securities.
2. Sell securities short.
3. Borrow money or issue any senior securities, except for (i) borrowings and/or senior securities
representing indebtedness having an asset coverage of at least 300% immediately after such borrowing
and/or issuance and (ii) preferred stock having an asset coverage of at least 200% immediately after
such issuance.
4. Underwrite the securities of other issuers.
5. Invest in restricted securities unless such securities are redeemable shares issued by money market
funds registered under the 1940 Act.
6. Engage in repurchase agreement ('repo') transactions, except for repo transactions with any bank
that is the custodian of the Fund's assets covering U.S. Treasury and agency obligations and having
a term of not more than one week.
7. Invest in the securities of any one issuer (other than the United States or an agency or
instrumentality of the United States) if, at the time of acquisition, the Fund would own more than
10% of the voting securities of such issuer or, as to 75% of the Fund's total assets, more than 5%
of the Fund's assets would be invested in the securities of such issuer.
8. Invest more than 25% of its total assets in any one industry.
9. Purchase or sell real estate or real estate mortgage loans, or invest in the securities of real
estate companies unless such securities are publicly traded.
10. Purchase or sell commodities or commodity contracts.
11. Make loans, except for purchases of portions of issues of publicly distributed bonds, debentures and
other securities, whether or not such purchases are made upon the original issuance of such
securities, and except that the Fund may loan up to 25% of its assets to qualified brokers, dealers
or institutions for their use relating to short sales or other security transactions (provided that
such loans are secured by collateral equal at all times to at least 100% of the value of the
securities loaned).
12. Invest in companies for the purpose of exercising control of management.
13. Purchase portfolio securities from or sell such securities directly to any of its officers,
directors, employees or investment adviser, as principal for their own accounts.
14. Invest more than 5% of its total assets in warrants, rights or options.
</TABLE>
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 will not be considered a
violation of the above restrictions.
In addition to issuing and selling senior securities as set forth in No. 3
above, the Fund may obtain (i) temporary bank borrowings (not in excess of 5% of
the value of its total assets) for emergency or extraordinary purposes and (ii)
such short-term credits (not in excess of 5% of the value of its total assets)
as are necessary for the clearance of securities transactions. Under the 1940
Act and the Articles Supplementary, such temporary bank borrowings would be
treated as indebtedness in determining
16
<PAGE>
<PAGE>
whether or not asset coverage was at least 300% for senior securities of the
Fund representing indebtedness.
INVESTMENT ADVISORY AND OTHER SERVICES
Royce is a New York corporation organized in February 1967, with offices at
1414 Avenue of the Americas, New York, New York 10019. It became the investment
adviser of the Fund in December 1993, when the Fund commenced operations. Royce
also serves as investment adviser to other management investment companies, with
aggregate net assets of approximately $1.7 billion as of May 31, 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. 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 expenses (except those set forth above),
including, without limitation, registrar, transfer agent and custodian fees;
legal, administrative and clerical services; rent for its office space and
facilities; auditing; preparation, printing and distribution of its proxy
statements, stockholder reports and notices; Federal and state registration
fees; Nasdaq 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,
like most other investment companies, the Fund is required to pay
substantially all of its expenses, and Royce does not incur substantial fixed
expenses.
ADVISORY FEE
As compensation for its services under the Investment Advisory Agreement,
Royce receives a fee comprised of a basic fee (the 'Basic Fee') and an
adjustment to the Basic Fee based on the investment performance of the Fund in
relation to the investment record of the Russell 2000 Index (the 'Russell 2000')
for certain prescribed performance periods, as described below.
The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized
basis) of the average of the net assets of the Fund at the end of each month
included in a period consisting of the rolling 36 months ending with such month.
The performance period for each such month is from January 1, 1997 to the most
recent month-end, until the Investment Advisory Agreement has been in effect for
36 full calendar months, when the performance period will become a rolling 36
month period ending with such month.
The Basic Fee for each such month may be increased or decreased at the rate
of 1/12 of .5% per percentage point, depending on the extent, if any, by which
the investment performance of the Fund exceeds by more than two percentage
points, or is exceeded by more than two percentage points by, the percentage
change in the investment record of the Russell 2000 for the performance period.
The
17
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<PAGE>
maximum increase or decrease in the Basic Fee for any month may not exceed 1/12
of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted
for performance is 1/12 of 1.5% and would be payable if the investment
performance of the Fund exceeded the percentage change in the investment record
of the Russell 2000 by 12 or more percentage points for the performance period,
and the minimum monthly fee rate as adjusted for performance is 1/12 of .5% and
would be payable if the percentage change in the investment record of the
Russell 2000 exceeded the investment performance of the Fund by 12 or more
percentage points for the performance period.
In order to avoid the impact of short-term differences between the
investment performance of the Fund and the record of the Russell 2000, Royce
will not collect any accrued portion of the Basic Fee, as adjusted for
performance, in excess of .5% until January 1998.
The present Investment Advisory Agreement replaced a similar investment
advisory agreement between the Fund and Royce, under which the Fund's investment
performance was measured against the record of the Nasdaq Composite over a
rolling period of up to 36 months. The present Investment Advisory Agreement
provides that, for the 18 month period from January 1, 1997 to June 30, 1998,
the monthly fee payable to Royce will be the lower of the fee calculated under
such Agreement or the fee that would have been payable to Royce for the month
involved under the prior agreement.
Because the Basic Fee is computed based on the Fund's net assets and not of
its total assets, Royce will not receive any fee in respect of those assets of
the Fund equal to the aggregate unpaid principal amount of any indebtedness of
the Fund. 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.
See 'Investment Advisory and Other Services' in the Statement of Additional
Information.
ADMINISTRATION AGREEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins' or the
'Administrator'), an affiliate of PaineWebber Incorporated, one of the
Representatives of the Underwriters, with offices at 1285 Avenue of the
Americas, New York, New York 10019, has acted as Administrator for the Fund and
has performed certain administrative services for it since December 1993. As
compensation for its services under the Administration Agreement, the
Administrator receives a monthly fee at the annual rate of $50,000 plus 0.05% of
the Fund's average daily net assets up to $125 million and 0.03% of the Fund's
average daily net assets in excess of $125 million.
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, 1,600,000 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
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or terms of redemption. The Fund will not issue any class of stock senior to the
shares of Cumulative Preferred Stock.
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, cumulative cash dividends, at the annual rate
of % of the liquidation preference of $25 per share, payable quarterly on
March 23, June 23, September 23 and December 23 (each, a 'Dividend Payment
Date'), commencing on September 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 December 31, 1996, the Asset Coverage immediately following such
issuance and sale (after giving
19
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<PAGE>
effect to the deduction of the underwriting discounts and estimated offering
expenses for such shares of $1,500,000), would have been computed as follows:
<TABLE>
<S> <C> <C>
Value of Fund assets less liabilities not
constituting senior securities $152,453,022
------------------------------------------------------------ = ------------ = 381%
Senior securities representing indebtedness plus liquidation $40,000,000
preference of the Cumulative Preferred Stock
</TABLE>
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold on May 31, 1997 (after giving effect to the deduction of underwriting
discounts and estimated offering expenses), the Asset Coverage would have been
approximately 399%.
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 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').
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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 July 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 July 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 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
21
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<PAGE>
payments, a liquidation distribution in the amount of $25 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 series, to the exclusion of holders of shares of the Common Stock
and of any other series of the Preferred Stock of the Fund, to vote on matters
affecting the Cumulative Preferred Stock that do not adversely affect such other
class or series, and (ii) holders of shares of any other outstanding series of
Preferred Stock will be entitled, as a series, to the exclusion of holders of
shares of the Cumulative Preferred Stock, to vote on matters affecting such
other series of the Preferred Stock that do not adversely affect the Cumulative
Preferred Stock.
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 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
22
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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 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 American Stock Exchange 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.
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.
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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 3,400,000
additional shares of the Cumulative Preferred Stock and/or shares of one of 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.
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
State Street.
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
Common Stock. The Fund is authorized to issue 150,000,000 shares of capital
stock, par value $.001 per share, all of which shares were initially classified
as Common Stock. 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 Stock as Cumulative Preferred Stock, of
which 1,600,000 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'.
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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
AMOUNT HELD OF AMOUNT
BY FUND HELD BY
AMOUNT FOR ITS OWN FUND FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
- ------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Common Stock........................................... 145,000,000 -0- 12,153,511
Cumulative Preferred Stock............................. 5,000,000 -0- -0-
</TABLE>
CERTAIN VOTING REQUIREMENTS
Under the Fund's Charter, (i) any merger of the Fund into or with another
entity, any consolidation of the Fund with another entity, any share exchange to
which the Fund is a party or any sale, transfer or other disposition not in the
ordinary course of its business of all or substantially all of the Fund's
assets, (ii) any dissolution or other liquidation of the Fund, (iii) any
conversion of the Fund from a closed-end fund to another type of investment
company and (iv) any change in the nature of the Fund's business that would
cause it to cease to be an investment company will have to be recommended by the
Board, including a majority of the non-interested directors, and 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. Other of these matters
would not require a vote under such law in the absence of such provisions in the
Articles of Incorporation.
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 regulated investment companies ('RICs') under Subchapter M of the
Internal Revenue Code of 1986, as amended (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
25
<PAGE>
<PAGE>
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Capital gain dividends may be taxed at a lower rate than ordinary income
dividends for certain non-corporate taxpayers. As of the date of this
Prospectus, legislation has been proposed that would provide for a reduction in
the Federal long-term capital gain tax rate for individuals and corporations. No
assurance can be given, however, that such legislation will be enacted.
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.
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. 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.
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 the
distribution economically is a return of part of the stockholder's investment.
Investors should
26
<PAGE>
<PAGE>
carefully consider the tax implications of acquiring shares just prior to a
distribution, as they will receive a distribution that would nevertheless be
taxable to them.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares of the same class are acquired within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The
IRS has taken the position in Revenue Ruling 89-81 that if a RIC has 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, 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 that less than 30% of its
gross income be derived from the sale of certain types of securities held for
less than three months. 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 a 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 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
27
<PAGE>
<PAGE>
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.
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, proposed legislation
and regulations may permit the Fund 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. 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.
OTHER TAXATION
Distributions may also be subject to additional state, local and foreign
taxes, depending on each stockholder's particular situation. Stockholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Cumulative Preferred Stock.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
State Street, which is located at 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian of the securities, cash and other assets
of the Fund, as dividend-paying agent and as transfer agent and registrar for
the Fund's Cumulative Preferred Stock. Stockholder inquiries should be directed
to P.O. Box 8100, Boston, Massachusetts 02266-8100 (Tel. No. (800) 426-5523).
28
<PAGE>
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, each Underwriter named below, for whom Smith
Barney Inc. and PaineWebber Incorporated are acting as the Representatives (the
'Representatives'), has severally agreed to purchase, and the Fund has agreed to
sell to such Underwriter, the number of shares of Cumulative Preferred Stock set
forth opposite the name of such Underwriter:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------- ---------
<S> <C>
Smith Barney Inc.......................................................
PaineWebber Incorporated...............................................
---------
Total............................................................. 1,600,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the approval of certain legal
matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares of Cumulative Preferred Stock offered
hereby if any are taken.
The Underwriters propose to offer part of the shares of Cumulative
Preferred Stock offered hereby directly to the public at the public offering
price set forth on the cover page of this Prospectus and part of the shares to
certain dealers at a price which represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain other
dealers. After the initial offering of the shares of Cumulative Preferred Stock
to the public, the public offering price and such concessions may be changed by
the Underwriters. The underwriting discount of $ per share is equal to %
of the initial offering price. Investors must pay for any shares of Cumulative
Preferred Stock purchased on or before June , 1997.
The Fund and Royce have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Underwriters have 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,
syndicate 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 Underwriters for the purpose of fixing or
maintaining the price of the Cumulative Preferred Stock. A 'syndicate covering
transaction' is a bid for or purchase of the Cumulative Preferred Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A 'penalty bid' is an arrangement
permitting the Underwriters to reclaim the selling concession otherwise accruing
to an Underwriter or selling group member in connection with the offering if any
of the Cumulative Preferred Stock originally sold by such Underwriter or selling
group member is purchased in a syndicate covering transaction and has therefore
not been effectively placed by such Underwriter or selling group member. The
Underwriters have advised the Fund that such transactions may be effected on the
AMEX or otherwise and, if commenced, may be discontinued at any time.
The Underwriters have 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.
29
<PAGE>
<PAGE>
Prior to the offering, there has been no public market for the Cumulative
Preferred Stock. Application has been made to list the Cumulative Preferred
Stock on the AMEX. However, during an initial period, which is not expected to
exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock
will not be listed on any securities exchange. During such period, the
Underwriters intend to make a market in the Cumulative Preferred Stock; however,
they have no obligation to do so. Consequently, an investment in the Cumulative
Preferred Stock may be illiquid during such period.
Mitchell Hutchins, an affiliate of PaineWebber Incorporated, is a party to
and has an agreement with the Fund to provide various administrative services to
the Fund. See 'Investment Advisory and Other Services -- Administration
Agreement'.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Venable, Baetjer and Howard,
LLP, Baltimore, Maryland. Certain legal matters will be passed on by Brown &
Wood LLP, New York, New York, special counsel to the Fund, and by Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York, counsel to the Underwriters. Brown & Wood LLP and Simpson
Thacher & Bartlett will each rely as to matters of Maryland law on the opinion
of Venable, Baetjer and Howard, LLP.
EXPERTS
Ernst & Young LLP are the independent auditors of the Fund. The audited
financial statements of the Fund and certain of the information appearing under
the caption 'Financial Highlights' included in this Prospectus have been audited
by Ernst & Young LLP and Coopers & Lybrand L.L.P. for the periods indicated in
their reports with respect thereto, and are included in reliance upon such
reports and upon the authority of such firms as experts in accounting and
auditing. Ernst & Young LLP has an office at 787 Seventh Avenue, New York, New
York 10019, and also performs tax and other professional services for the Fund.
The address of Coopers & Lybrand L.L.P. is 1 Post Office Square, Boston,
Massachusetts 02109.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, 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.
30
<PAGE>
<PAGE>
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated June , 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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders................................................................. B-2
Directors and Officers................................................................. B-2
Code of Ethics and Related Matters..................................................... B-4
Investment Advisory and Other Services................................................. B-5
Brokerage Allocation and Other Practices............................................... B-6
Net Asset Value........................................................................ B-7
Financial Statements................................................................... B-8
</TABLE>
31
<PAGE>
<PAGE>
GLOSSARY
'Articles Supplementary' means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
'Asset Coverage' has the meaning set forth on page 19 of this Prospectus.
'Basic Maintenance Amount' means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
Liquidation Preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Cumulative Preferred Stock from the
most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the initial Dividend Payment Date with respect to the Cumulative
Preferred Stock, then from the Date of Original Issue) through the Valuation
Date plus all dividends to accumulate on the Cumulative Preferred Stock then
outstanding during the 70 days following such Valuation Date; (C) the Fund's
other liabilities due and payable as of such Valuation Date (except that
dividends and other distributions payable by the Fund by the issuance of Common
Stock will not be included as a liability) and such liabilities projected to
become due and payable 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 the Articles Supplementary), of the Fund on file in the Maryland
State Department of Assessments and Taxation.
'Common Stock' means the Common Stock, par value $.001 per share, of the
Fund.
'Cumulative Preferred Stock' means the % Cumulative Preferred Stock, par
value $.001 per share, of the Fund.
'Date of Original Issue' has the meaning set forth on page 19 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.
32
<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 19 of this
Prospectus.
'Fund' means Royce Micro-Cap Trust, Inc., a Maryland corporation.
'Liquidation Preference' has the meaning set forth on page 22 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>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET 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>
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET 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>
34
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
- ----------------------------------------------------------------------- ---------------------------
<S> <C>
Convertible corporate bonds with senior debt securities rated Aa
issued by the following type of issuers:
Utility...................................................... 1.80
Industrial................................................... 2.97
Financial.................................................... 2.92
Transportation............................................... 4.27
Convertible corporate bonds with senior debt securities rated A
issued by the following type of issuers:
Utility...................................................... 1.85
Industrial................................................... 3.02
Financial.................................................... 2.97
Transportation............................................... 4.32
Convertible corporate bonds with senior debt securities rated Baa
issued by the following type of issuers:
Utility...................................................... 2.01
Industrial................................................... 3.18
Financial.................................................... 3.13
Transportation............................................... 4.48
Convertible corporate bonds with senior debt securities rated Ba
issued by the following type of issuers:
Utility...................................................... 2.02
Industrial................................................... 3.19
Financial.................................................... 3.14
Transportation............................................... 4.49
Convertible corporate bonds with senior debt securities rated B1
or B2 issued by the following type of issuers:
Utility...................................................... 2.12
Industrial................................................... 3.29
Financial.................................................... 3.24
Transportation............................................... 4.59
</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 of an issuer's senior debt
securities or preferred stock is not rated by Moody's, which either (1) are
issued by an issuer whose senior debt securities are rated at least A by
S&P or (2) are rated at least A by S&P and for this purpose have been
assigned a Moody's equivalent rating of at least 'baa3'), (B) of issuers
which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New
York Stock Exchange or the American Stock Exchange, (C) which have a
minimum issue size (when taken together with other of the issuer's issues
of similar tenor) of $50,000,000, (D) which have paid cash dividends
consistently during the preceding three-year period (or, in the case of new
issues without a dividend history, are rated at least 'a1' by Moody's or,
if not rated by Moody's, are rated at least AA by S&P), (E) which pay
cumulative cash dividends in U.S. dollars, (F) which are not convertible
into any other class of stock and do not have warrants attached, (G) which
are not issued by issuers in the
35
<PAGE>
<PAGE>
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) which are traded on the New York Stock Exchange,
the American Stock Exchange or in the over-the-counter market, (B) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which
are not privately placed; provided, however, that (1) common stock which,
while a Moody's Eligible Asset owned by the Fund, ceases paying any regular
cash dividend will no longer be considered a Moody's Eligible Asset until
71 days after the date of the announcement of such cessation, unless the
issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (2) the aggregate Market Value of the Fund's holdings of the
common stock of any issuer will not exceed 4% in the case of utility common
stock and 6% in the case of non-utility common stock of the number of
outstanding shares times the Market Value of such common stock;
(vi) U.S. Government Obligations;
(vii) corporate bonds (A) which are not privately placed, rated at
least B3 (Caa subordinate) by Moody's (or, in the event the bond is not
rated by Moody's, the bond is rated at least BB-by S&P and which for this
purpose is assigned a Moody's equivalent rating of one full rating category
lower), with such rating confirmed on each Valuation Date, (B) which have a
minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or
(y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated
and pay interest in cash in U.S. dollars, (D) which are not convertible or
exchangeable into equity of the issuing corporation and have a maturity of
not more than 30 years, (E) for which, if rated below Baa3, the aggregate
Market Value of the Company's holdings do not exceed 10% of the aggregate
Market Value of any individual issue of corporate bonds calculated at the
time of original issuance, (F) the cash flow from which must be controlled
by an Indenture trustee and (G) which are not issued in connection with a
reorganization under any bankruptcy law;
(viii) convertible corporate bonds (A) which are issued by issuers
whose senior debt securities are rated at least B2 by Moody's (or, in the
event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least BB by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), (B) which are convertible into common
stocks which are traded on the New York Stock Exchange or the American
Stock Exchange or are quoted on the NASDAQ National Market System and (C)
which, if cash dividend paying, pay cash dividends in U.S. dollars;
provided, however, that once convertible corporate bonds have been
converted into common stock, the common stock issued upon conversion must
satisfy the criteria set forth in clause (v) above and other relevant
criteria set forth in this definition in order to be a Moody's Eligible
Asset;
provided, however, that the Fund's investment in preferred stock, common stock,
corporate bonds and convertible corporate bonds described above must be within
the following diversification requirements (utilizing Moody's industry and
sub-industry categories) in order to be included in Moody's Eligible Assets:
36
<PAGE>
<PAGE>
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 UTILITY
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
MOODY'S RATING(1) INDUSTRY(3) SUB-INDUSTRY(3)(6) 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 21 of this
Prospectus.
37
<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 $.001 per share, of
the Fund, and includes the Cumulative Preferred Stock.
'Redemption Price' has the meaning set forth on page 20 of this Prospectus.
'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.
'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.
38
<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 UNDERWRITERS.
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................................................................... 3
Ordinary Income Equivalent Yield Tables.................................................................................... 8
Financial Highlights....................................................................................................... 10
The Fund................................................................................................................... 11
Use of Proceeds............................................................................................................ 11
Capitalization............................................................................................................. 11
Portfolio Composition...................................................................................................... 12
Investment Objective and Policies.......................................................................................... 12
Investment Advisory and Other Services..................................................................................... 17
Description of Cumulative Preferred Stock.................................................................................. 18
Description of Capital Stock............................................................................................... 24
Taxation................................................................................................................... 25
Custodian, Transfer Agent and Dividend-Paying Agent........................................................................ 28
Underwriting............................................................................................................... 29
Legal Matters.............................................................................................................. 30
Experts.................................................................................................................... 30
Additional Information..................................................................................................... 30
Table of Contents of Statement of Additional Information................................................................... 31
Glossary................................................................................................................... 32
</TABLE>
1,600,000 SHARES
ROYCE MICRO-CAP
TRUST, INC.
% CUMULATIVE PREFERRED STOCK
------------
PROSPECTUS
JUNE , 1997
------------
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
_____________________________ _____________________________
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 20, 1997
STATEMENT OF ADDITIONAL INFORMATION
1,600,000 SHARES
ROYCE MICRO-CAP TRUST, INC.
% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
The % Cumulative Preferred Stock, liquidation preference $25.00 per
share (the 'Cumulative Preferred Stock'), to be issued by Royce Micro-Cap 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
investing at least 65% of its assets in common stocks, convertible securities
and warrants of companies that, at the time of investment, have market
capitalizations of $300 million or less. 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 June , 1997). Please
retain this document for future reference. To obtain an additional copy of the
Prospectus or the Fund's Annual Report to Stockholders for the year ended
December 31, 1996, 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders.................................................................................... B-2
Directors and Officers.................................................................................... B-2
Code of Ethics and Related Matters........................................................................ B-4
Investment Advisory and Other Services.................................................................... B-5
Brokerage Allocation and Other Practices.................................................................. B-6
Net Asset Value........................................................................................... B-7
Financial Statements...................................................................................... B-8
</TABLE>
Dated June , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
<PAGE>
PRINCIPAL STOCKHOLDERS
As of May 31, 1997, the following persons owned of record or were known by
the Fund to have owned beneficially 5% or more of the 12,153,511 shares of its
Common Stock then outstanding:
<TABLE>
<CAPTION>
TYPE AND PERCENTAGE OF
NAME AND ADDRESS OWNERSHIP
- ----------------------------------------------------------------- -------------------------
<S> <C> <C>
Charles M. Royce ................................................ 776,626 shares 6.6%
1414 Avenue of the Americas (Beneficial)
New York, New York 10019
Depository Trust Company ........................................ 11,575,205 95.2%
Cede & Co. (Record only)
P.O. Box 20, Bowling Green Station
New York, New York 10274
</TABLE>
All directors and officers of the Fund as a group owned approximately 6.6%
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* (57) ................ Director, President, Managing Director (since April 1997),
1414 Avenue of the Americas President and Secretary, Treasurer, sole director and sole
New York, NY 10019 Treasurer 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') and its
predecessors; Director, President and Treasurer
of the Fund (since September 1993), Royce Value
Trust, Inc. ('RVT') and Royce Global Trust, Inc.
('RGT') (since October 1996), closed-end
diversified management investment companies of
which Royce is the investment adviser (the Fund,
TRF, RVT and RGT collectively, 'The Royce
Funds'); Secretary and sole director 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 investment adviser, and its
predecessor.
John D. Diederich* (45) ............... Director and Director of Operations of TRF and RVT (since April
1414 Avenue of the Americas Vice President 1993) and of the Fund (since September 1993);
New York, NY 10019 Vice President of RGT (since October 1996) and of
the Fund and RVT (since April 1997); President of
RFS since November 1995; and President of
Fund/Plan Services, Inc. from January 1988 to
December 1992.
</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>
Richard M. Galkin (59) ................ Director Private investor and President of Richard M. Galkin
5284 Boca Marina Associates, Inc., telecommunications consultants.
Boca Raton, FL 33487
Stephen L. Isaacs (57) ................ Director President of The Center for Health and Social
65 Harmon Avenue Policy since September 1996; President of Stephen
Pelham, NY 10803 L. Isaacs Associates, Consultants; and Director
of Columbia University Development Law and Policy
Program; Professor at Columbia University until
August 1996.
David L. Meister (56) ................. Director Consultant to the communications industry since
111 Marquez Place January 1993; and Executive Officer of Digital
Pacific Palisades, CA 90272 Planet Inc. from April 1991 to December 1992.
Jack E. Fockler, Jr.* (38) ............ Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce, having
New York, NY 10019 been employed by Royce since October 1989; Vice
President of RGT (since October 1996) and the
other Royce Funds (since April 1995); and General
Partner of RMC and its predecessor since January
1992.
W. Whitney George* (39) ............... Vice President Managing Director (since April 1997) and Vice
1414 Avenue of the Americas President (since August 1993) of Royce, having
New York, NY 10019 been employed by Royce since October 1991; Vice
President of RGT (since October 1996) and of the
other Royce Funds (since April 1995); and General
Partner of RMC and its predecessor since January
1992.
Daniel A. O'Byrne* (35) ............... Vice President Vice President of Royce (since May 1994), having
1414 Avenue of the Americas and Assistant been employed by Royce since October 1986; and
New York, NY 10019 Secretary Vice President of RGT (since October 1996) and of
the other Royce Funds (since July 1994).
John E. Denneen* (30) ................. Secretary Associate General Counsel and Chief Compliance
1414 Avenue of the Americas Officer of Royce (since May 1996); Secretary of
New York, NY 10019 RGT (since October 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
Investment Company Act of 1940, as amended (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 the 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. Diederich and
Meister have been designated as the Preferred Stock
B-3
<PAGE>
<PAGE>
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 directors of RVT and, except for John
D. Diederich, directors/trustees of RGT and TRF.
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>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE FUND AND
DIRECTOR FROM THE FUND OTHER ROYCE FUNDS
- --------------------------------------------------------------- ----------------- ------------------
<S> <C> <C>
Charles M. Royce............................................... $ 0 $ 0
Thomas R. Ebright.............................................. 0 0
Richard M. Galkin.............................................. 7,500 64,000
Stephen L. Isaacs.............................................. 7,500 64,000
David L. Meister............................................... 7,500 64,000
</TABLE>
Fees paid to the directors aggregated $22,500 for the year ended December
31, 1996.
On June 25, 1997, Thomas R. Ebright resigned as a director of the Fund and
John D. Diederich was elected to fill the vacancy created by his resignation.
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 United States Government debt securities, municipal debt
securities, money market instruments, shares of affiliated or non-affiliated
registered open-end investment companies or shares acquired from an issuer in a
rights offering or under an automatic dividend reinvestment plan or
employer-sponsored automatic payroll deduction cash purchase plan or (ii) they
first obtain permission to trade from 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 May 31, 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 $27.4 million, and their equity interests in Royce-related private
investment companies totaled approximately $3.3 million.
B-4
<PAGE>
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY FEE
The following table illustrates, on an annualized basis, the full range of
permitted increases or decreases to the Basic Fee.
<TABLE>
<CAPTION>
DIFFERENCE BETWEEN
PERFORMANCE OF FUND AND %
CHANGE IN RUSSELL 2000 INDEX ADJUSTMENT TO 1% BASIC FEE FEE AS ADJUSTED
- --------------------------------------------------------- -------------------------- ---------------
<S> <C> <C>
+12 or more.............................................. +.5 % 1.5 %
+11...................................................... +.45% 1.45%
+10...................................................... +.4 % 1.4 %
+9....................................................... +.35% 1.35%
+8....................................................... +.3 % 1.3 %
+7....................................................... +.25% 1.25%
+6....................................................... +.2 % 1.2 %
+5....................................................... +.15% 1.15%
+4....................................................... +.1 % 1.1 %
+3....................................................... +.05% 1.05%
+/-2..................................................... 0 1 %
- -3....................................................... -0.05% .95%
- -4....................................................... -.1 % .9 %
- -5....................................................... -.15% .85%
- -6....................................................... -.2 % .8 %
- -7....................................................... -.25% .75%
- -8....................................................... -.3 % .7 %
- -9....................................................... -.35% .65%
- -10...................................................... -.4 % .6 %
- -11...................................................... -.45% .55%
- -12 or less.............................................. -.5 % .5 %
</TABLE>
In calculating the investment performance of the Fund and the percentage
change in the investment record of the Russell 2000 Index (the 'Russell 2000'),
all dividends and other distributions per share of Common Stock of realized
capital gains and/or of any net investment income and any capital gains taxes
per share of Common Stock paid or payable on undistributed realized long-term
capital gains and all dividends and other distributions on the securities
comprising the Russell 2000 during the performance period are treated as having
been reinvested, and no effect is given to gain or loss resulting from capital
share transactions of the Fund. Fractions of a percentage point are rounded to
the nearest whole point (to the higher whole point if exactly one-half).
For the years ended December 31, 1996, 1995 and 1994, Royce received
investment advisory fees from the Fund of $499,869, $713,033 (net of $2,878
voluntarily waived by Royce) and $881,249, 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.
ADMINISTRATION AGREEMENT
Mitchell Hutchins Asset Management Inc. (the 'Administrator') is a
wholly-owned subsidiary of PaineWebber Incorporated. Under the Administration
Agreement with the Fund (the 'Administration Agreement'), the Administrator is
responsible for (i) preparing all reports required to be filed by the Fund with
the Securities and Exchange Commission (the 'Commission') on Form N-SAR; (ii)
providing to the Fund's independent accountants such information as is necessary
for such accountants to prepare and file the Fund's Federal, state and local tax
returns, and reviewing such returns after they are prepared; (iii) assisting in
the preparation of financial information relating to the Fund for the Fund's
periodic reports to stockholders; (iv) assisting in monitoring compliance of the
Fund's operations with the 1940 Act and with its investment policies and
limitations; (v) reviewing the calculation of the Fund's net asset value in
accordance with the Fund's registration statement under the 1940 Act and the
Securities Act of 1933, as amended (the '1933 Act'), by the Fund's accounting
agent (which may or may not be the same party as the Fund's custodian or an
affiliate of the Fund's custodian), and in monitoring the performance of such
agent in making the Fund's net asset value available for public dissemination;
(vi) assisting in establishing the accounting policies of the Fund; and (vii)
assisting the Fund in determining the amount of dividends or other distributions
available to be paid by the Fund to its stockholders.
The Administration Agreement is terminable without penalty on 60 days'
prior written notice by either party to the other. The Board reviews the
Administrator's performance under the Administration Agreement semi-annually and
will continue, modify or terminate the Agreement, based on what it determines to
be in the best interests of the Fund's stockholders. During the fiscal years
ended December 31, 1996, 1995 and 1994, the Fund paid $119,427, $186,625 and
$147,482, respectively, in fees to the Administrator for administration
services.
SERVICE CONTRACT WITH STATE STREET
State Street Bank and Trust Company ('State Street'), the custodian of the
Fund's assets, provides certain management-related services to the Fund. Such
services include keeping books of accounts and rendering such financial and
other statements as may be requested by the Fund from time to time, and
generally assisting in the preparation of reports to the Fund's stockholders, to
the Commission and others, in the auditing of accounts and in other ministerial
matters of like nature, as agreed to between the Fund and State Street. During
the fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid $59,957,
$63,266 and $55,527, respectively, in fees to State Street for
management-related and custodial services.
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
B-6
<PAGE>
<PAGE>
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 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 $158,000, $122,000 and $83,000, respectively.
One or more of the Underwriters have 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
B-7
<PAGE>
<PAGE>
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, are incorporated herein by reference.
B-8
<PAGE>
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Included in Part A:
<TABLE>
<S> <C>
-- Selected Per Share Data and Ratios for the three years ended December 31, 1996 and the period December
14, 1993 (commencement of operations) to December 31, 1993.
Incorporated by reference in Part B:
-- Schedule of Investments at December 31, 1996*
-- Statement of Assets and Liabilities at December 31, 1996*
-- Statement of Operations for the year ended December 31, 1996*
-- Statement of Changes in Net Assets for the years ended December 31, 1996 and 1995*
-- Statement of Cash Flows for the year ended December 31, 1996*
-- Selected Per Share Data and Ratios for the three years ended December 31, 1996 and the period December
14, 1993 (commencement of operations) to December 31, 1993*
-- Notes to Financial Statements*
-- Report of Independent Auditors*
</TABLE>
- ------------
* Incorporated by reference to the Registrant's 1996 Annual Report to
Stockholders, filed with the Securities and Exchange Commission (the
'Commission') for the year ended December 31, 1996, pursuant to Rule 30b2-1
under the Investment Company Act of 1940, as amended.
2. Exhibits
<TABLE>
<S> <C>
(a) (1) Articles of Amendment and Restatement to the Articles of Incorporation of the Registrant.(1)
(2) Articles of Amendment to the Articles of Incorporation of the Registrant.(2)
(3) Form of Articles Supplementary of the Registrant, to be filed with the Maryland State Department
of Assessments and Taxation.
(b) Amended and Restated By-laws of the Registrant.(4)
(c) Not applicable.
(d) (1) Form of specimen certificate for % Cumulative Preferred Stock.(3)
(2) Portions of the Articles Supplementary of the Registrant defining the rights of holders of %
Cumulative Preferred Stock.(5)
(e) Amended and Restated Distribution Reinvestment and Cash Purchase Plan.(3)
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the Registrant and Royce & Associates, Inc.
('Royce').(3)
(h) (1) Form of Underwriting Agreement between the Fund and Royce and Smith Barney Inc. and
PaineWebber Incorporated, as Representatives of the Underwriters.
(2) Form of Smith Barney Inc. Agreement Among Underwriters.(3)
(i) Not applicable.
(j) Form of Custodian Contract.(1)
(k) (1) Form of Registrar, Transfer Agency and Service Agreement.(1)
(2) Form of Administration Agreement.(1)
(3) Amendment to Administration Agreement.(3)
(4) Form of Registrar, Transfer Agent and Paying Agency Agreement between the Registrant and State
Street Bank and Trust Company.(3)
(l) Opinion and Consent of Venable, Baetjer and Howard, LLP, Maryland counsel to the Registrant.
(m) Not applicable.
(n) (1) Consent of Ernst & Young LLP, independent auditors for the Registrant.
(2) Consent of Coopers & Lybrand L.L.P., independent auditors.(3)
(o) Not applicable.
</TABLE>
C-1
<PAGE>
<PAGE>
<TABLE>
<S> <C>
(p) Not applicable.
(q) Not applicable.
(r) Financial Data Schedule.
</TABLE>
- ------------
(1) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2, filed with the Commission
on December 14, 1993 (File No. 33-68950) (the 'Common Stock Registration
Statement').
(2) Incorporated by reference to the Registrant's Semi-Annual Report on Form
N-SAR'). filed with the Commission on September 14, 1995 (the 'September
1995 N-SAR')
(3) Previously filed with the Registrant's Registration Statement on Form
N-2, filed with the Commission on June 6, 1997 (File No. 333-28615) (the
'Preferred Stock Registration Statement').
(4) Incorporated by reference to the Registrant's Semi-Annual Report on Form
N-SAR, filed with the Commission on February 27, 1997 (the 'February 1997
N-SAR').
(5) Reference is made to (i) Article IV, Article VI and Article VIII of the
Registrant's Articles of Amendment and Restatement to the Articles of
Incorporation, previously filed as Exhibit (a) to the Common Stock
Registration Statement; (ii) Article I and Article IV of the Registrant's
Amended and Restated By-Laws, previously filed as Exhibit (b) to the Common
Stock Registration Statement; and (iii) Article II of the Registrant's
Articles Supplementary, filed as Exhibit (a)(3).
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit (h)(1) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees................................................................. $ 12,121
Listing fees...................................................................... 15,000
Printing expenses (other than stock certificates)................................. 50,000
Accounting fees and expenses...................................................... 4,000
Legal fees and expenses........................................................... 117,000
Rating Agency fees................................................................ 20,000
Miscellaneous..................................................................... 21,879
--------
Total................................................................... $240,000
--------
--------
</TABLE>
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
The following information is given as of May 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- ----------------------------------------------------------------------------- --------------
<S> <C>
Common Stock ($.001 par value)............................................... 390
Preferred Stock ($.001 par value)............................................ 0
</TABLE>
ITEM 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VII of the Registrant's Articles of Amendment and Restatement to the
Articles of Incorporation, previously filed as Exhibit (a) to the Common Stock
Registration Statement, Article V of the Registrant's Amended
C-2
<PAGE>
<PAGE>
and Restated By-laws, previously filed as an Exhibit to the September 1995
N-SAR, the form of Investment Advisory Agreement, previously filed as an
Exhibit to the February 1997 N-SAR and the form of Underwriting Agreement,
filed as Exhibit(h)(1) to the Preferred Stock Registration Statement, each
provide for indemnification.
The Investment Advisory Agreement between the Registrant and Royce
obligates the Registrant to indemnify Royce and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees) incurred by Royce in or by reason of any action, suit,
investigation or other proceeding arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be taken by Royce in connection
with the performance of any of its duties or obligations under the Agreement or
otherwise as an investment adviser of the Registrant. Royce is not entitled to
indemnification in respect of any liability to the Registrant or its security
holders to which it would otherwise be subject by reason of its willful
misfeasance, bad faith or reckless disregard.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent
or such claim is to be paid under insurance policies, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Registrant, its officers and directors, Royce and certain others are
presently insured under a Directors and Officers/Errors and Omissions Liability
Insurance Policy issued by ICI Mutual Insurance Company, which generally covers
claims by the Registrant's stockholders and third persons based on or alleging
negligent acts, misstatements or omissions by the insureds and the costs and
expenses of defending those claims, up to a limit of $10,000,000, with a
deductible amount of $150,000.
Reference is made to Section 8 of the form of Underwriting Agreement, to be
filed as Exhibit (h)(1) to the Preferred Stock Registration Statement, for
provisions relating to indemnification of the Underwriters.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to Schedules D and F to Royce's amended Form ADV (File
No. 801-8268), which are incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Records are located at:
<TABLE>
<S> <C>
1. Royce Micro-Cap Trust, Inc., 10th Floor
1414 Avenue of the Americas
New York, New York 10019
(Corporate records and records relating to the function of Royce as investment adviser)
2. State Street Bank and Trust Company
P.O. Box 9061
Boston, Massachusetts 02205-8686
Attention: Royce Micro-Cap Trust, Inc.
(Records relating to its functions as Custodian, Registrar and Transfer Agent and Dividend Paying Agent
for the Registrant)
</TABLE>
C-3
<PAGE>
<PAGE>
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
<TABLE>
<S> <C>
1. Not applicable.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h)
will be deemed to be a part of the registration statement as of the time it was declared effective.
Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus will be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time
will be deemed to be the initial bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means designed to ensure equally prompt
delivery, within two business days of receipt of a written or oral request, any Statement of Additional
Information constituting Part B of this registration statement.
</TABLE>
C-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
York, and State of New York, on the 20th day of June, 1997.
ROYCE MICRO-CAP TRUST, INC.
(Registrant)
By: /s/ CHARLES M. ROYCE
...................................
CHARLES M. ROYCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------------- ---------------------------------------------- -------------------
<C> <S> <C>
/s/ CHARLES M. ROYCE Director, President and Treasurer (Principal June 20, 1997
........................................ Executive, Financial and Accounting Officer)
(CHARLES M. ROYCE)
/s/ THOMAS R. EBRIGHT Director June 20, 1997
........................................
(THOMAS R. EBRIGHT)
/s/ RICHARD M. GALKIN Director June 20, 1997
........................................
(RICHARD M. GALKIN)
/s/ STEPHEN L. ISSACS Director June 20, 1997
........................................
(STEPHEN L. ISSACS)
/s/ DAVID L. MEISTER Director June 20, 1997
........................................
(DAVID L. MEISTER)
</TABLE>
C-5
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as .........................`D'
<PAGE>
<PAGE>
EXHIBIT 2(a)(3)
ARTICLES SUPPLEMENTARY
CREATING AND FIXING THE RIGHTS OF
__% CUMULATIVE PREFERRED STOCK OF
ROYCE MICRO-CAP TRUST, INC.
ROYCE MICRO-CAP TRUST, INC., a Maryland corporation, having its principal
office in Baltimore City, Maryland (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FOURTH of the Charter of the Corporation, the Board
of Directors has reclassified 5,000,000 authorized and unissued shares of Common
Stock of the Corporation, par value $.001 per share, as shares of preferred
stock, par value $.001 per share, of the Corporation designated as the "___%
Cumulative Preferred Stock" (the "Cumulative Preferred Stock") and has provided
for the issuance of shares of such series.
SECOND: The preferences, voting powers, rights, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption of shares
of the Cumulative Preferred Stock of the Corporation, as set by the Board of
Directors, are as follows:
ARTICLE I
DEFINITIONS
-----------
Unless the context or use indicates another or different meaning or intent,
the following terms when used in these Articles Supplementary shall have the
meanings set forth below, whether such terms are used in the singular or plural
and regardless of their tense:
"Accountant's Confirmation"* means a letter from an Independent Accountant
delivered to Moody's with respect to certain Basic Maintenance Reports
substantially to the effect that:
(i) the Independent Accountant has read the Basic Maintenance Report
for the current Quarterly Valuation Date and a randomly selected Basic
Maintenance Report prepared by the Corporation during the quarter ending on
such Quarterly Valuation Date (the "Reports");
(ii) with respect to the issue size compliance, issuer diversification
and industry diversification calculations,
<PAGE>
<PAGE>
such calculations and the resulting Market Value of Moody's Eligible Assets
and Portfolio Calculation are numerically correct;
(iii) with respect to the calculation of the Basic Maintenance Amount,
such calculation has been compared with the definition of Basic Maintenance
Amount in these Articles Supplementary and is calculated in accordance with
such definition and the results of such calculation have been recalculated
and are numerically correct;
(iv) with respect to the excess or deficiency of the Portfolio
Calculation when compared to the Basic Maintenance Amount calculated for
Moody's, the results of the calculation set forth in the Reports have been
recalculated and are numerically correct;
(v) with respect to the Moody's and S&P ratings on corporate bonds,
convertible corporate bonds and preferred stock, issuer name, issue size
and coupon or dividend rate listed in the Reports, that information has
been traced and agrees with the information listed in the applicable guides
of the respective rating agencies (in the event such information does not
agree or such information is not listed in the applicable guides of the
respective rating agencies, the Independent Accountant will inquire of the
rating agencies what such information is, and provide a listing in its
letter of such differences, if any);
(vi) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value as provided by
these Articles Supplementary) provided by the custodian of the
Corporation's assets for purposes of valuing securities in the portfolio,
the Independent Accountant has traced the price used in the Reports to the
lower of the two bid prices listed in the report provided by such custodian
and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its
letter of such differences); and
(vii) with respect to the description of each security included in the
Reports, the description of Moody's Eligible Assets has been compared to
the definition of Moody's Eligible Assets contained in these Articles
Supplementary, and the description as appearing in the Reports agrees with
the definition of Moody's Eligible Assets as described in these Articles
Supplementary.
Each such letter may state: such Independent Accountant has made no
independent verification of the accuracy of the description of the investment
securities listed in the Reports or
2
<PAGE>
<PAGE>
the Market Value of those securities nor have they performed any procedures
other than those specifically outlined above for the purposes of issuing such
letter; unless otherwise stated in the letter, the procedures specified therein
were limited to a comparison of numbers or a verification of specified
computations applicable to numbers appearing in the Reports and the schedule(s)
thereto; the foregoing procedures do not constitute an examination in accordance
with generally accepted auditing standards and the Reports discussed in the
letter do not extend to any of the Corporation's financial statements taken as a
whole; such Independent Accountant does not express an opinion as to whether
such procedures would enable such Independent Accountant to determine that the
methods followed in the preparation of the Reports would correctly determine the
Market Value or Discounted Value of the investment portfolio; accordingly, such
Independent Accountant expresses no opinion as to the information set forth in
the Reports or in the schedule(s) thereto and make no representation as to the
sufficiency of the procedures performed for the purposes of these Articles
Supplementary.
Such letter shall also state that the Independent Accountant is a
"independent accountant" with respect to the Corporation within the meaning of
the Securities Act of 1933, as amended, and the related published rules and
regulations thereunder.
"Adviser" means Royce & Associates, Inc., a New York corporation.
"Asset Coverage" means, asset coverage, as defined in Section 18(h) of 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
Corporation which are stock, including all outstanding shares of Cumulative
Preferred Stock.
"Asset Coverage Cure Date" means, with respect to the failure by the
Corporation to maintain the Asset Coverage (as required by paragraph 5(a)(i) of
Article II hereof) as of the last Business Day of each March, June, September
and December of each year, 60 days following such Business Day.
"Basic Maintenance Amount"* means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
Liquidation Preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Cumulative Preferred Stock from the
most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the
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initial Dividend Payment Date with respect to the Cumulative Preferred Stock,
then from the Date of Original Issue) through the Valuation Date plus all
dividends to accumulate on the Cumulative Preferred Stock then outstanding
during the 70 days following such Valuation Date; (C) the Corporation's other
liabilities due and payable as of such Valuation Date (except that dividends and
other distributions payable by the Corporation by the issuance of Common Stock
shall not be included as a liability) and such liabilities projected to become
due and payable by the Corporation during the 90 days following such Valuation
Date (excluding liabilities for investments to be purchased and for dividends
and other distributions not declared as of such Valuation Date; (D) any current
liabilities of the Corporation as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(C) (including, without limitation, and
immediately upon determination, any amounts due and payable by the Corporation
pursuant to reverse repurchase agreements and any payables for assets purchased
as of such Valuation Date) less (ii) (A) the Discounted Value of any of the
Corporation's assets and/or (B) the face value of any of the Corporation's
assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash
or securities which mature prior to or on the date of redemption or repurchase
of Cumulative Preferred Stock or payment of another liability and are either
U.S. Government Obligations or securities which have a rating assigned by
Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+
or A- 1+, in both cases irrevocably held by the Corporation's custodian bank in
a segregated account or deposited by the Corporation with the Paying Agent for
the payment of the amounts needed to redeem or repurchase Cumulative Preferred
Stock subject to redemption or repurchase or any of (i)(B) through (i)(D) and
provided that in the event the Corporation has repurchased Cumulative Preferred
Stock at a price of less than the Liquidation Preference thereof and irrevocably
segregated or deposited assets as described above with its custodian bank or the
Paying Agent for the payment of the repurchase price the Corporation may deduct
100% of the Liquidation Preference of such Cumulative Preferred Stock to be
repurchased from (i) above.
"Basic Maintenance Amount Cure Date"* means 14 calendar days following a
Valuation Date, such date being the last day upon which the Corporation's
failure to comply with paragraph 5(a)(ii)(A) of Article II hereof could be
cured.
"Basic Maintenance Report"* means a report signed by the President, the
Treasurer or any Vice President of the Corporation which sets forth, as of the
related Valuation Date, the assets of the Corporation, the Market Value and
Discounted Value thereof (seriatim and in the aggregate), and the Basic
Maintenance Amount.
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"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and that is neither a Saturday, Sunday nor any other day on which banks
in the City of New York are authorized by law to close.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Corporation on file in the
State Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Corporation.
"Corporation" shall mean Royce Micro-Cap Trust, Inc., a Maryland
corporation.
"Cumulative Preferred Stock" means the ___% Cumulative Preferred Stock, par
value $.001 per share, of the Corporation.
"Date of Original Issue" shall have the meaning set forth in paragraph 1(a)
of Article II hereof.
"Deposit Securities" means cash, Short-Term Money Market Instruments and
U.S. Government Obligations. Except for determining whether the Corporation has
a Portfolio Calculation equal to or greater than the Basic Maintenance Amount,
each Deposit Security shall be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after delivery
of such Deposit Security but only if payable on or prior to the applicable
payment date in advance of which the relevant deposit is made.
"Discounted Value"* means, with respect to a Moody's Eligible Asset, the
quotient of (A) in the case of non-convertible fixed income securities, the
lower of the principal amount and the Market Value thereof or (B) in the case of
any other Moody's Eligible Asset, the Market Value thereof, divided by the
applicable Moody's Discount Factor.
"Dividend Payment Date" with respect to the Cumulative Preferred Stock,
means any date on which dividends are payable thereon pursuant to the provisions
of paragraph 1(a) of Article II hereof.
"Dividend Period" shall have the meaning set forth in paragraph 1(a) of
Article II hereof.
"Independent Accountant"* means a nationally recognized accountant, or firm
of accountants, that is with respect to the
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Corporation an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended.
"Liquidation Preference" shall have the meaning set forth in paragraph 2(a)
of Article II hereof.
"Market Value"* means the amount determined by State Street Bank and Trust
Company (so long as prices are provided to it by Telekurs N.A., Inc. or another
pricing service approved by Moody's in writing), or, if Moody's agrees in
writing, the then bank custodian of the Corporation's assets or such other party
approved by Moody's in writing, with respect to specific Moody's Eligible Assets
of the Corporation, as follows: Securities listed on an exchange or on the
Nasdaq System shall be valued on the basis of the last reported sale on the
Valuation Date or, if no sale is reported for such Valuation Date, then at their
electronically-reported bid price for such day for exchange-listed securities
and at the average of their electronically-reported bid and asked prices for
such Valuation Date for Nasdaq System securities. Quotations shall be taken from
the market where the security is primarily traded. Bonds and other fixed income
securities may be valued by reference to other securities with comparable
ratings, interest rates and maturities, using established independent pricing
services.
Notwithstanding the foregoing, "Market Value" may, at the option of the
Corporation, mean the amount determined with respect to specific Moody's
Eligible Assets of the Corporation in the manner set forth below:
(a) as to any corporate bond or convertible corporate bond which is a
Moody's Eligible Asset, (i) the product of (A) the unpaid principal balance of
such bond as of the Valuation Date and (B)(1) if the bond is traded on a
national securities exchange or quoted on the NASDAQ System, the last sales
price reported on the Valuation Date or (2) if there was no reported sales price
on the Valuation Date or if the bond is not traded on a national securities
exchange or quoted on the NASDAQ System, the lower of two bid prices for such
bond provided by two recognized securities dealers with a minimum capitalization
of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one
such securities dealer and any other source (provided that the utilization of
such source would not adversely affect Moody's then-current rating of the
Cumulative Preferred Stock) to the custodian of the Corporation's assets, at
least one of which shall be provided in writing or by telecopy, telex, other
electronic transcription, computer obtained quotation reducible to written form
or similar means, and in turn provided to the Corporation by any such means by
such custodian, plus (ii) accrued interest on such bond or, if two bid prices
cannot be
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obtained, such Moody's Eligible Asset shall have a Market Value of zero;
(b) as to any common or preferred stock which is a Moody's Eligible Asset,
(i) if the stock is traded on a national securities exchange or quoted on the
NASDAQ System, the last sales price reported on the Valuation Date or (ii) if
there was no reported sales price on the Valuation Date, the lower of two bid
prices for such stock provided by two recognized securities dealers with a
minimum capitalization of $25,000,000 (or otherwise approved for such purpose by
Moody's) or by one such securities dealer and any other source (provided that
the utilization of such source would not adversely affect Moody's then-current
rating of the Cumulative Preferred Stock) to the custodian of the Corporation's
assets, at least one of which shall be provided in writing or by telecopy,
telex, other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Corporation by any
such means by such custodian, or, if two bid prices cannot be obtained, such
Moody's Eligible Asset shall have a Market Value of zero;
(c) the product of (i) as to U.S. Government Obligations, Short Term Money
Market Instruments (other than demand deposits, federal funds, bankers'
acceptances and next Business Day's repurchase agreements) and commercial paper,
the face amount or aggregate principal amount of such U.S. Government
Obligations or Short Term Money Market Instruments, as the case may be, and (ii)
the lower of the bid prices for the same kind of securities or instruments, as
the case may be, having, as nearly as practicable, comparable interest rates and
maturities provided by two recognized securities dealers having minimum
capitalization of $25,000,000 (or otherwise approved for such purpose by
Moody's) or by one such securities dealer and any other source (provided that
the utilization of such source would not adversely affect Moody's then-current
rating of the Cumulative Preferred Stock) to the custodian of the Corporation's
assets, at least one of which shall be provided in writing or by telecopy,
telex, other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Corporation by any
such means by such custodian, or, if two bid prices cannot be obtained, such
Moody's Eligible Asset will have a Market Value of zero;
(d) as to cash, demand deposits, federal funds, bankers' acceptances and
next Business Day's repurchase agreements included in Short Term Money Market
Instruments, the face value thereof.
"Moody's" means Moody's Investors Service, Inc., or its successor.
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"Moody's Discount Factor"* means, with respect to a Moody's Eligible Asset
specified below, the following applicable number:
Moody's
Type of Moody's Eligible Asset: Discount Factor:
- ------------------------------ ----------------
Moody's Short Term Money Market Instruments
(other than U.S. Government Obligations
set forth below) and other commercial
paper:
Demand or time deposits,
certificates of deposit and bankers'
acceptances includible in Moody's Short
Term Money Market Instruments............................ 1.00
Commercial paper rated P-1 by Moody's
maturing in 30 days or less.............................. 1.00
Commercial paper rated P-1 by Moody's
maturing in more than 30 days but in 270
days or less............................................. 1.15
Commercial paper rated A-1+ by S&P
maturing in 270 days or less............................. 1.25
Repurchase obligations includible in Moody's
Short Term Money Market Instruments if
term is less than 30 days and
counterparty is rated at least A2........................ 1.00
Other repurchase obligations.................................. Discount Factor
applicable to
underlying
assets
Common stocks................................................. 3.00
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Moody's
Type of Moody's Eligible Asset: Discount Factor:
- ------------------------------ ----------------
Preferred stocks:
Auction rate preferred stocks............................. 3.50
Other preferred stocks issued by issuers
in the financial and industrial
industries........................................... 2.35
Other preferred stocks issued by issuers
in the utilities industry............................ 1.60
U.S. Government Obligations (other than U.S.
Treasury Securities Strips set forth
below) with remaining terms to maturity
of:
1 year or less............................................ 1.08
2 years or less........................................... 1.15
3 years or less........................................... 1.20
4 years or less........................................... 1.26
5 years or less........................................... 1.31
7 years of less........................................... 1.40
10 years or less.......................................... 1.48
15 years or less.......................................... 1.54
20 years or less.......................................... 1.61
30 years or less.......................................... 1.63
U.S. Treasury Securities Strips with
remaining terms to maturity of:
1 year or less............................................ 1.08
2 years or less........................................... 1.16
3 years or less........................................... 1.23
4 years or less........................................... 1.30
5 years or less........................................... 1.37
7 years or less........................................... 1.51
10 years or less.......................................... 1.69
15 years or less.......................................... 1.99
20 years or less.......................................... 2.28
30 years or less.......................................... 2.56
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Moody's
Type of Moody's Eligible Asset: Discount Factor:
- ------------------------------ ----------------
Corporate bonds:
Corporate bonds rated Aaa with remaining
terms to maturity of:
1 year or less............................................ 1.14
2 years or less........................................... 1.21
3 years or less........................................... 1.26
4 years or less........................................... 1.32
5 years or less........................................... 1.38
7 years or less........................................... 1.47
10 years or less.......................................... 1.55
15 years or less.......................................... 1.62
20 years or less.......................................... 1.69
30 years or less.......................................... 1.71
Corporate bonds rated Aa with remaining
terms to maturity of:
1 year or less............................................ 1.19
2 years or less........................................... 1.26
3 years or less........................................... 1.32
4 years or less........................................... 1.38
5 years or less........................................... 1.44
7 years or less........................................... 1.54
10 years or less.......................................... 1.63
15 years or less.......................................... 1.69
20 years or less.......................................... 1.77
30 years or less.......................................... 1.79
Corporate bonds rated A with remaining terms
to maturity of:
1 year or less............................................ 1.24
2 years or less........................................... 1.32
3 years or less........................................... 1.38
4 years or less........................................... 1.45
5 years or less........................................... 1.51
7 years or less........................................... 1.61
10 years or less.......................................... 1.70
15 years or less.......................................... 1.77
20 years or less.......................................... 1.85
30 years or less.......................................... 1.87
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Moody's
Type of Moody's Eligible Asset: Discount Factor:
- ------------------------------ ----------------
Convertible corporate bonds with senior debt
securities rated Aa issued by the
following type of issuers:
Utility.................................................. 1.80
Industrial............................................... 2.97
Financial................................................ 2.92
Transportation........................................... 4.27
Convertible corporate bonds with senior debt
securities rated A issued by the
following type of issuers:
Utility.................................................. 1.85
Industrial............................................... 3.02
Financial................................................ 2.97
Transportation........................................... 4.32
Convertible corporate bonds with senior debt
securities rated Baa issued by the
following type of issuers:
Utility.................................................. 2.01
Industrial............................................... 3.18
Financial................................................ 3.13
Transportation........................................... 4.48
Convertible corporate bonds with senior debt
securities rated Ba issued by the
following type of issuers:
Utility.................................................. 2.02
Industrial............................................... 3.19
Financial................................................ 3.14
Transportation........................................... 4.49
Convertible corporate bonds with senior debt
securities rated B1 or B2 issued by
the following type of issuers:
Utility.................................................. 2.12
Industrial............................................... 3.29
Financial................................................ 3.24
Transportation........................................... 4.59
"Moody's Eligible Assets"* means:
(i) cash (including, for this purpose, receivables for investments
sold to a counterparty whose senior debt securities are rated at least Baa3
by Moody's or a
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counterparty approved by Moody's and payable within five Business Days
following such Valuation Date and dividends and interest receivable within
70 days on investments);
(ii) Short-Term Money Market Instruments;
(iii) commercial paper that is not includible as a Short-Term Money
Market Instrument having on the Valuation Date a rating from Moody's of at
least P-1 and maturing within 270 days;
(iv) preferred stocks (A) which either (1) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (2) are rated
at least "baa3" by Moody's (or in the event an issuer's senior debt
securities or preferred stock is not rated by Moody's, which either (1) are
issued by an issuer whose senior debt securities are rated at least A by
S&P or (2) are rated at least A by S&P and for this purpose have been
assigned a Moody's equivalent rating of at least "baa3"), (B) of issuers
which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New
York Stock Exchange or the American Stock Exchange, (C) which have a
minimum issue size (when taken together with other of the issuer's issues
of similar tenor) of $50,000,000, (D) which have paid cash dividends
consistently during the preceding three-year period (or, in the case of new
issues without a dividend history, are rated at least "a1" by Moody's or,
if not rated by Moody's, are rated at least AA by S&P), (E) which pay
cumulative cash dividends in U.S. dollars, (F) which are not convertible
into any other class of stock and do not have warrants attached, (G) which
are not issued by issuers in the transportation industry and (H) in the
case of auction rate preferred stocks, which are rated at least "aa" by
Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved
in writing by Moody's and have never had a failed auction; provided,
however, that for this purpose the aggregate Market Value of the Company's
holdings of any issue of preferred stock shall not be less than $500,000
nor more than $5,000,000;
(v) common stocks (A) which are traded on the New York Stock Exchange,
the American Stock Exchange or in the over-the-counter market, (B) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which
are not privately placed; provided, however, that (1) common stock which,
while a Moody's Eligible Asset owned by the Corporation, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
until 71 days after the date of the announcement of such cessation, unless
the issuer of the common stock has senior debt securities
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rated at least A3 by Moody's and (2) the aggregate Market Value of the
Corporation's holdings of the common stock of any issuer shall not exceed
4% in the case of utility common stock and 6% in the case of non-utility
common stock of the number of outstanding shares times the Market Value of
such common stock;
(vi) U.S. Government Obligations;
(vii) corporate bonds (A) which are not privately placed, rated at
least B3 (Caa subordinate) by Moody's (or, in the event the bond is not
rated by Moody's, the bond is rated at least BB- by S&P and which for this
purpose is assigned a Moody's equivalent rating of one full rating category
lower), with such rating confirmed on each Valuation Date, (B) which have a
minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or
(y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated
and pay interest in cash in U.S. dollars, (D) which are not convertible or
exchangeable into equity of the issuing corporation and have a maturity of
not more than 30 years, (E) for which, if rated below Baa3, the aggregate
Market Value of the Company's holdings do not exceed 10% of the aggregate
Market Value of any individual issue of corporate bonds calculated at the
time of original issuance, (F) the cash flow from which must be controlled
by an indenture trustee and (G) which are not issued in connection with a
reorganization under any bankruptcy law;
(viii) convertible corporate bonds (A) which are issued by issuers
whose senior debt securities are rated at least B2 by Moody's (or, in the
event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least BB by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), (B) which are convertible into common
stocks which are traded on the New York Stock Exchange or the American
Stock Exchange or are quoted on the NASDAQ National Market System and (C)
which, if cash dividend paying, pay cash dividends in U.S. dollars;
provided, however, that once convertible corporate bonds have been
converted into common stock, the common stock issued upon conversion must
satisfy the criteria set forth in clause (v) above and other relevant
criteria set forth in this definition in order to be a Moody's Eligible
Asset;
provided, however, that the Corporation's investment in preferred stock, common
stock, corporate bonds and convertible corporate bonds described above must be
within the following diversification requirements (utilizing Moody's Industry
and Sub-
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industry Categories) in order to be included in Moody's Eligible Assets:
Issuer:
- ------
Non-Utility Utility Maximum
Moody's Rating Maximum Single Issuer Single Issuer
(1)(2) (3)(4) (3)(4)
------ ------ ------
"aaa", Aaa 100% 100%
"aa", Aa 20% 20%
"a", A 10% 10%
CS/CB, "Baa", Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 (Caa subordinate) 2% 2%
Industry and State:
- ------------------
Utility
Non-Utility Utility Maximum
Maximum Single Maximum Single Single
Moody's Rating(1) Industry(3) Sub-Industry(3)(6) State(3)
- ----------------- ----------- ------------------ --------
"aaa", Aaa 100% 100% 100%
"aa", Aa 60% 60% 20%
"a", A 40% 50% 10%(7)
CS/CB, "baa", Baa(5) 20% 50% 7%(7)
Ba 12% 12% N/A
B1/B2 8% 8% N/A
B3 (Caa subordinate) 5% 5% N/A
- ----------------------------
(1) The equivalent Moody's rating must be lowered one full rating category for
preferred stocks, corporate bonds and convertible corporate bonds rated by
S&P but not by Moody's.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited
to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate bonds, which are
diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility bonds
and utility convertible bonds, the definition of industry refers to
sub-industries (electric,
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water, hydro power, gas, diversified). Investments in other sub-industries
are eligible only to the extent that the combined sum represents a
percentage position of the Moody's Eligible Assets less than or equal to
the percentage limits in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities regulated by
California, New York and Texas.
; and provided, further, that the Corporation's investments in auction rate
preferred stocks described in clause (iv) above shall be included in Moody's
Eligible Assets only to the extent that the aggregate Market Value of such
stocks does not exceed 10% of the aggregate Market Value of all of the
Corporation's investments meeting the criteria set forth in clauses (i) through
(viii) above less the aggregate Market Value of those investments excluded from
Moody's Eligible Assets pursuant to the immediately preceding proviso; and
(ix) no assets which are subject to any lien or irrevocably deposited
by the Corporation for the payment of amounts needed to meet the
obligations described in clauses (i)(A) through (i)(E) of the definition of
"Basic Maintenance Amount" may be includible in Moody's Eligible Assets.
"Moody's Industry and Sub-Industry Categories"* means as set forth below:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors,
Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods,
Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks,
Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes,
Cigars, Leaf/Snuff, Vegetable Oil
Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting,
Engineering, Construction, Hardware, Forest Products (building-related
only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development,
REITs, Land Development
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Chemicals, Plastics and Rubber: Chemicals (non- agriculture), Industrial
Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating
Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only): Soaps,
Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals: Fabricating
Distribution
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers,
Drivers, Technology
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer Products:
Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing,
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Motion Picture Production Theaters, Motion Picture Distribution
Machinery (Non-Agriculture, Non-Construction, Non- Electronic): Industrial,
Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium,
Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production,
Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution
and Sales
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
Personal, Food and Miscellaneous Services
Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks,
Radio, T.V., Cable Broadcasting Equipment
Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra- national agencies
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth in paragraph 3(c)(i) of
Article II hereof.
"Officers' Certificate" means a certificate signed by any two of the
President, a Vice President, the Treasurer or the
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Secretary of the Corporation or by any one of the foregoing and an Assistant
Treasurer or Assistant Secretary of the Corporation.
"Paying Agent" means State Street Bank and Trust Company and its successors
or any other paying agent appointed by the Corporation.
"Portfolio Calculation"* means the aggregate Discounted Value of all
Moody's Eligible Assets.
"Preferred Stock" means the preferred stock, par value $.001 per share, of
the Corporation, and includes the Cumulative Preferred Stock.
"Quarterly Valuation Date"* means the last Valuation Date in March, June,
September and December of each year, commencing September 26, 1997.
"Redemption Price" has the meaning set forth in paragraph 3(a) of Article
II hereof.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Corporation (or, in the case of an instrument specified by clauses (i) and (ii)
below, on the Valuation Date), the remaining terms to maturity thereof are not
in excess of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by Moody's and is issued by
an issuer (or guaranteed or supported by a person or entity other than the
issuer) whose long-term unsecured debt obligations are rated at least Aa by
Moody's;
(iii) demand or time deposits in, or certificates of deposit of, or
banker's acceptances issued by (A) a depository institution or trust
company incorporated under the laws of the United States of America or any
state thereof or the District of Columbia or (B) a United States branch
office or agency of a foreign depository institution (provided that such
branch office or agency is subject to banking regulation under the laws of
the United States, any state thereof or the District of Columbia) if, in
each case, the commercial paper, if any, and the long-term unsecured 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)
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credit ratings from Moody's of at least P-1 in the case of commercial paper
and (2) credit ratings from Moody's of at least Aa in the case of long-term
unsecured debt obligations; provided, however, that in the case of any such
investment that matures in no more than one Business Day from the date of
purchase or other acquisition by the Corporation, all of the foregoing
requirements shall be applicable except that the required long-term
unsecured debt credit rating of such depository institution or trust
company from Moody's shall be at least A2; and provided, further, however,
that the foregoing credit rating requirements shall be deemed to be met
with respect to a depository institution or trust company if (1) such
depository institution or trust company is the principal depository
institution in a holding company system, (2) the commercial paper, if any,
of such depository institution or trust company is not rated below P-1 by
Moody's and (3) the holding company shall meet all of the foregoing credit
rating requirements (including the preceding proviso in the case of
investments that mature in no more than one Business Day from the date of
purchase or other acquisition by the Corporation);
(iv) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust company or
securities dealer (acting as principal) which is rated (A) at least Aa3 if
the maturity is three months or less, (B) at least A1 if the maturity is
two months or less and (C) at least A2 if the maturity is one month or
less; and
(v) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or the London branch office of a depository institution
or trust company meeting the credit rating requirements of commercial paper
and long-term unsecured debt obligations specified in clause (iii) above,
provided that the interest receivable by the Corporation shall be payable
in U.S. dollars and shall not be subject to any withholding or similar
taxes.
"S&P" means Standard & Poor's Ratings Services or its successors.
"U.S. Government Obligations" means direct non-callable obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills and U.S. Treasury Securities Strips, provide for
the periodic payment of interest and the full payment of principal at maturity.
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"Valuation Date"* means every Friday or, if such day is not a Business Day,
the immediately preceding Business Day.
"Voting Period" shall have the meaning set forth in paragraph 4(b) of
Article II hereof.
Those of the foregoing definitions which are marked with an asterisk have
been adopted by the Board of Directors of the Corporation in order to obtain a
"aaa" rating from Moody's on the shares of Cumulative Preferred Stock on their
Date of Original Issue; and the Board of Directors of the Corporation shall have
the authority, without stockholder approval, to amend, alter or repeal from time
to time the foregoing definitions and the restrictions and guidelines set forth
thereunder if Moody's advises the Corporation in writing that such amendment,
alteration or repeal will not adversely affect their then current rating on the
Cumulative Preferred Stock. Furthermore, if the Board of Directors determines
not to continue to comply with the provisions of paragraphs 5(a)(ii), 5(c) and 6
of Article II hereof as provided in paragraph 7 of Article II hereof, then such
definitions marked with an asterisk, unless the context otherwise requires,
shall have no meaning for these Articles Supplementary.
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ARTICLE II
CUMULATIVE PREFERRED STOCK
--------------------------
1. Dividends.
(a) Holders of shares of Cumulative Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cumulative cash dividends at the annual rate of %
per share (computed on the basis of a 360-day year consisting of twelve 30-day
months) of the initial Liquidation Preference of $25.00 per share on the
Cumulative Preferred Stock and no more, payable quarterly on March 23, June 23,
September 23 and December 23 in each year (each, a "Dividend Payment Date"),
commencing September 23, 1997 (or, if any such day is not a Business Day, then
on the next succeeding Business Day), to holders of record of Cumulative
Preferred Stock as they appear on the stock register of the Corporation at the
close of business on the preceding March 6, June 6, September 6 and December 6
(or, if any such day is not a Business Day, then on the next succeeding Business
Day), as the case may be, in preference to dividends on shares of Common Stock
and any other capital stock of the Corporation ranking junior to the Cumulative
Preferred Stock in payment of dividends. Dividends on shares of Cumulative
Preferred Stock shall accumulate from the date on which the first such shares of
Cumulative Preferred Stock are originally issued ("Date of Original Issue").
Each period beginning on and including a Dividend Payment Date (or the Date of
Original Issue, in the case of the first dividend period after issuance of any
such shares) and ending on but excluding the next succeeding Dividend Payment
Date is referred to herein as a "Dividend Period." Dividends on account of
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any Dividend Payment Date, to holders of record on such
date, not exceeding 30 days preceding the payment date thereof, as shall be
fixed by the Board of Directors.
(b)(i) No dividends shall be declared or paid or set apart for payment on
any shares of Cumulative Preferred Stock for any Dividend Period or part thereof
unless full cumulative dividends have been or contemporaneously are declared and
paid on all outstanding shares of Cumulative Preferred Stock through the most
recent Dividend Payment Date therefor. If full cumulative dividends are not
declared and paid on the shares of Cumulative Preferred Stock, any dividends on
the shares of Cumulative Preferred Stock shall be declared and paid pro rata on
all outstanding shares of Cumulative Preferred Stock. No holders of shares of
Cumulative Preferred Stock shall be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends as provided
in this paragraph 1(b)(i) on shares of Cumulative Preferred Stock. No interest
or
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sum of money in lieu of interest shall be payable in respect of any dividend
payments on any shares of Cumulative Preferred Stock that may be in arrears.
(ii) For so long as shares of Cumulative Preferred Stock are outstanding,
the Corporation shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of Common Stock
or other stock, if any, ranking junior to the Cumulative Preferred Stock as to
dividends or upon liquidation) in respect of the Common Stock or any other stock
of the Corporation ranking junior to or on parity with the Cumulative Preferred
Stock as to dividends or upon liquidation, or call for redemption, redeem,
purchase or otherwise acquire for consideration any shares of Common Stock or
any other stock of the Corporation ranking junior to the Cumulative Preferred
Stock as to dividends or upon liquidation (except by conversion into or exchange
for stock of the Corporation ranking junior to or on parity with the Cumulative
Preferred Stock as to dividends and upon liquidation), unless, in each case, (A)
immediately thereafter, the Corporation shall have a Portfolio Calculation at
least equal to the Basic Maintenance Amount and the Corporation shall maintain
the Asset Coverage, (B) full cumulative dividends on all shares of Cumulative
Preferred Stock due on or prior to the date of the transaction have been
declared and paid (or shall have been declared and sufficient funds for the
payment thereof deposited with the Paying Agent) and (C) the Corporation has
redeemed the full number of shares of Cumulative Preferred Stock required to be
redeemed by any provision contained herein for mandatory redemption.
(iii) Any dividend payment made on the shares of Cumulative Preferred Stock
shall first be credited against the dividends accumulated with respect to the
earliest Dividend Period for which dividends have not been paid.
(c) Not later than the Business Day next preceding each Dividend Payment
Date, the Corporation shall deposit with the Paying Agent Deposit Securities
having an initial combined value sufficient to pay the dividends that are
payable on such Dividend Payment Date, which Deposit Securities shall mature on
or prior to such Dividend Payment Date. The Corporation may direct the Paying
Agent with respect to the investment of any such Deposit Securities, provided
that such investment consists exclusively of Deposit Securities and provided
further that the proceeds of any such investment will be available at the
opening of business on such Dividend Payment Date.
(d) The Board of Directors may declare an additional dividend on the
Cumulative Preferred Stock each year in order to permit the Corporation to
distribute its income in accordance
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with Section 855 (or any successor provision) of the Internal Revenue Code of
1986, as amended (the "Code"), and the other rules and regulations under
Subchapter M of the Code. Any such additional dividend shall be payable to
holders of the Cumulative Preferred Stock on the next Dividend Payment Date,
shall be part of a regular quarterly dividend for the year of declaration
payable to holders of record pursuant to paragraph 1(a) hereof and shall not
result in any increase in the amount of cash dividends payable for such year
pursuant to paragraph 1(a) hereof.
2. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of Cumulative Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to stockholders, after
claims of creditors but before any distribution or payment shall be made in
respect of the Common Stock or any other stock of the Corporation ranking junior
to the Cumulative Preferred Stock as to liquidation payments, a liquidation
distribution in the amount of $25.00 per share plus an amount equal to all
unpaid dividends thereon accumulated to and including the date fixed for such
distribution or payment (whether or not earned or declared by the Corporation,
but excluding interest thereon) (the "Liquidation Preference"), and such holders
shall be entitled to no further participation in any distribution or payment in
connection with any such liquidation, dissolution or winding up.
(b) If, upon any liquidation, dissolution or winding up of the affairs of
the Corporation, whether voluntary or involuntary, the assets of the Corporation
available for distribution among the holders of all outstanding shares of
Cumulative Preferred Stock, and any other outstanding class or series of
Preferred Stock of the Corporation ranking on a parity with the Cumulative
Preferred Stock as to payment upon liquidation, shall be insufficient to permit
the payment in full to such holders of Cumulative Preferred Stock of the
Liquidation Preference and the amounts due upon liquidation with respect to such
other Preferred Stock, then such available assets shall be distributed among the
holders of shares of Cumulative Preferred Stock and such other Preferred Stock
ratably in proportion to the respective preferential amounts to which they are
entitled. Unless and until the Liquidation Preference has been paid in full to
the holders of shares of Cumulative Preferred Stock, no dividends or
distributions shall be made to holders of the Common Stock or any other stock of
the Corporation ranking junior to the Cumulative Preferred Stock as to
liquidation.
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3. Redemption.
Shares of the Cumulative Preferred Stock shall be redeemed or redeemable by
the Corporation as provided below:
(a) Mandatory Redemptions.
If the Corporation is required to redeem any shares of Cumulative Preferred
Stock pursuant to paragraphs 5(b) or 5(c) of Article II hereof, then the
Corporation shall, to the extent permitted by the 1940 Act, Maryland law and any
agreement in respect of indebtedness of the Corporation to which it may be a
party or by which it may be bound, by the close of business on such Asset
Coverage Cure Date or Basic Maintenance Amount Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be, fix a redemption date and
proceed to redeem shares as set forth in paragraph 3(c) hereof. On such
redemption date, the Corporation shall redeem, out of funds legally available
therefor, the number of shares of Cumulative Preferred Stock equal to the
minimum number of shares the redemption of which, if such redemption had
occurred immediately prior to the opening of business on such Cure Date, would
have resulted in the Asset Coverage having been satisfied or the Corporation
having a Portfolio Calculation equal to or greater than the Basic Maintenance
Amount, as the case may be, immediately prior to the opening of business on such
Cure Date or, if the Asset Coverage or a Portfolio Calculation equal to or
greater than the Basic Maintenance Amount, as the case may be, cannot be so
restored, all of the shares of Cumulative Preferred Stock, at a price equal to
$25.00 per share plus accumulated but unpaid dividends thereon (whether or not
earned or declared by the Corporation) through the date of redemption (the
"Redemption Price"). In the event that shares of Cumulative Preferred Stock are
redeemed pursuant to paragraph 5(b) of Article II hereof, the Corporation may,
but shall not be required to, redeem a sufficient number of shares of Cumulative
Preferred Stock pursuant to this paragraph 3(a) in order that the "asset
coverage" of a class of senior security which is stock, as defined in Section
18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock after redemption is up to 250%.
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(b) Optional Redemptions.
Prior to July 1, 2002, the Corporation may, at its option, redeem shares of
Cumulative Preferred Stock at the Redemption Price per share only if and to the
extent that any such redemption is necessary, in the judgment of the
Corporation, to maintain the Corporation's status as a regulated investment
company under Subchapter M of the Code. Commencing July 1, 2002 and at any time
and from time to time thereafter, the Corporation may, at its option, to the
extent permitted by the 1940 Act, Maryland law and any agreement in respect of
indebtedness of the Corporation to which it may be a party or by which it may be
bound, redeem the Cumulative Preferred Stock in whole or in part at the
Redemption Price per share.
(c) Procedures for Redemption.
(i) If the Corporation shall determine or be required to redeem
shares of Cumulative Preferred Stock pursuant to this paragraph 3, it shall mail
a written notice of redemption ("Notice of Redemption") with respect to such
redemption by first class mail, postage prepaid, to each holder of the shares to
be redeemed at such holder's address as the same appears on the stock books of
the Corporation on the record date in respect of such redemption established by
the Board of Directors. Each such Notice of Redemption shall state: (A) the
redemption date, which shall be not fewer than 30 days nor more than 45 days
after the date of such notice; (B) the number of shares of Cumulative Preferred
Stock to be redeemed; (C) the CUSIP number(s) of such shares; (D) the Redemption
Price; (E) the place or places where the certificate(s) for such shares
(properly endorsed or assigned for transfer, if the Board of Directors shall so
require and the Notice of Redemption shall so state) are to be surrendered for
payment in respect of such redemption; (F) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date; and (G) the
provisions of this paragraph 3 under which such redemption is made. If fewer
than all shares of Cumulative Preferred Stock held by any holder are to be
redeemed, the Notice of Redemption mailed to such holder also shall specify the
number of shares to be redeemed from such holder. No defect in the Notice of
Redemption or the mailing thereof shall affect the validity of the redemption
proceedings, except as required by applicable law.
(ii) If the Corporation shall give a Notice of Redemption, then by the
close of business on the Business Day preceding the redemption date specified in
the Notice of Redemption the Corporation shall (A) deposit with the Paying Agent
Deposit Securities having an initial combined value sufficient to effect the
redemption of the shares of Cumulative Preferred Stock to be redeemed, which
Deposit Securities shall mature on or prior to such redemption date, and (B)
give the Paying Agent irrevocable
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instructions and authority to pay the Redemption Price to the holders of the
shares of Cumulative Preferred Stock called for redemption on the redemption
date. The Corporation may direct the Paying Agent with respect to the investment
of any Deposit Securities so deposited, provided that the proceeds of any such
investment will be available at the opening of business on such redemption date.
Upon the date of such deposit (unless the Corporation shall default in making
payment of the Redemption Price), all rights of the holders of the shares of
Cumulative Preferred Stock so called for redemption shall cease and terminate
except the right of the holders thereof to receive the Redemption Price thereof,
and such shares shall no longer be deemed outstanding for any purpose. The
Corporation shall be entitled to receive, promptly after the date fixed for
redemption, any cash in excess of the aggregate Redemption Price of the shares
of Cumulative Preferred Stock called for redemption on such date and any
remaining Deposit Securities. Any assets so deposited that are unclaimed at the
end of two years from such redemption date shall, to the extent permitted by
law, be repaid to the Corporation, after which the holders of the shares of
Cumulative Preferred Stock so called for redemption shall look only to the
Corporation for payment thereof. The Corporation shall be entitled to receive,
from time to time after the date fixed for redemption, any interest on the
Deposit Securities so deposited.
(iii) On or after the redemption date, each holder of shares of
Cumulative Preferred Stock that are subject to redemption shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
the Notice of Redemption and shall then be entitled to receive the cash
Redemption Price, without interest.
(iv) In the case of any redemption of less than all of the shares of
Cumulative Preferred Stock pursuant to these Articles Supplementary, such
redemption shall be made pro rata from each holder of shares of Cumulative
Preferred Stock in accordance with the respective number of shares held by each
such holder on the record date for such redemption.
(v) Notwithstanding the other provisions of this paragraph 3, the
Corporation shall not redeem shares of Cumulative Preferred Stock unless all
accumulated and unpaid dividends on all outstanding shares of Cumulative
Preferred Stock for all applicable past Dividend Periods (whether or not earned
or declared by the Corporation) shall have been or are contemporaneously paid or
declared and Deposit Securities for the payment of such dividends shall have
been deposited with the Paying Agent as set forth in paragraph 1(c) of Article
II hereof.
(vi) If the Corporation shall not have funds legally
available for the redemption of, or is otherwise unable to
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redeem, all the shares of the Cumulative Preferred Stock to be redeemed on any
redemption date, the Corporation shall redeem on such redemption date the number
of shares of Cumulative Preferred Stock as it shall have legally available
funds, or is otherwise able, to redeem ratably from each holder whose shares are
to be redeemed, and the remainder of the shares of the Cumulative Preferred
Stock required to be redeemed shall be redeemed on the earliest practicable date
on which the Corporation shall have funds legally available for the redemption
of, or is otherwise able to redeem, such shares.
4. Voting Rights.
(a) General.
Except as otherwise provided by law or as specified in the Charter or
By-Laws, each holder of shares of Cumulative Preferred Stock shall be entitled
to one vote for each share held on each matter submitted to a vote of
stockholders of the Corporation, and the holders of outstanding shares of
Preferred Stock, including Cumulative Preferred Stock, and of shares of Common
Stock shall vote together as a single class; provided that, at any meeting of
the stockholders of the Corporation held for the election of directors, the
holders of outstanding shares of Preferred Stock, including Cumulative Preferred
Stock, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock of the Corporation, to elect two
directors of the Corporation. Subject to paragraph 4(b) of Article II hereof,
the holders of outstanding shares of capital stock of the Corporation, including
the holders of outstanding shares of Preferred Stock (including the Cumulative
Preferred Stock), voting as a single class, shall elect the balance of the
directors. Notwithstanding the foregoing, and except as otherwise required by
the 1940 Act, (i) the holders of outstanding shares of Cumulative Preferred
Stock shall be entitled as a class, to the exclusion of the holders of all other
securities, including other Preferred Stock and classes of capital stock of the
Corporation, to vote on matters affecting the Cumulative Preferred Stock that do
not adversely affect other securities, including other Preferred Stock and
classes of capital stock, and (ii) holders of other outstanding shares of
Preferred Stock shall be entitled, as a class to the exclusion of the holders of
Cumulative Preferred Stock, to vote on matters affecting such other Preferred
Stock that do not adversely affect the holders of the Cumulative Preferred
Stock.
(b) Right to Elect Majority of Board of Directors.
During any period in which any one or more of the conditions described
below shall exist (such period being referred to herein as a "Voting Period"),
the number of directors constituting the Board of Directors shall be
automatically increased by the
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smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred Stock shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), to elect such smallest number of additional directors,
together with the two directors that such holders are in any event entitled to
elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of Cumulative Preferred
Stock equal to at least two full years' dividends shall be due and unpaid
and sufficient Deposit Securities shall not have been deposited with the
Paying Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the
1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 4(b) shall cease, subject always, however, to the reverting of
such voting rights in the holders of Preferred Stock upon the further occurrence
of any of the events described in this paragraph 4(b).
(c) Right to Vote with Respect to Certain Other Matters.
So long as any shares of Cumulative Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the holders of two-thirds
of the shares of Cumulative Preferred Stock outstanding at the time, voting
separately as one class, amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to materially adversely
affect any of the contract rights expressly set forth in the Charter of holders
of shares of Cumulative Preferred Stock. The Corporation shall notify Moody's
ten Business Days prior to any such vote described above. Unless a higher
percentage is provided for under the Charter, the affirmative vote of the
holders of a majority of the outstanding shares of Preferred Stock, including
Cumulative Preferred Stock, voting together as a single class, will be required
to approve any plan of reorganization adversely affecting such shares or any
action requiring a vote of security holders under Section 13(a) of the 1940 Act.
For purposes of the preceding sentence, the phrase "vote of the holders of a
majority of the outstanding shares of Preferred Stock" shall have the meaning
set forth in the 1940 Act. The class vote of holders of shares of Preferred
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Stock, including Cumulative Preferred Stock, described above will be in addition
to a separate vote of the requisite percentage of shares of Common Stock and
shares of Preferred Stock, including Cumulative Preferred Stock, voting together
as a single class, necessary to authorize the action in question. An increase in
the number of authorized shares of Preferred Stock pursuant to the Charter or
the issuance of additional shares of any series of Preferred Stock (including
Cumulative Preferred Stock) pursuant to the Charter shall not in and of itself
be considered to adversely affect the contract rights of the holders of
Cumulative Preferred Stock.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of
shares of Preferred Stock to elect additional directors as described in
paragraph 4(b) above, the Corporation shall call a special meeting of such
holders and instruct the Paying Agent to mail a notice of such special meeting
to such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Paying Agent or if the Corporation does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting held during a Voting Period, such holders of Preferred Stock, voting
together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), shall be entitled to elect the
number of directors prescribed in paragraph 4(b) above. At any such meeting or
adjournment thereof in the absence of a quorum, a majority of such holders
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than by an announcement at the meeting, to a date not more
than 120 days after the original record date.
(ii) For purposes of determining any rights of the holders of Cumulative
Preferred Stock to vote on any matter or the number of shares required to
constitute a quorum, whether such right is created by these Articles
Supplementary, by the other provisions of the Charter, by statute or otherwise,
a share of Cumulative Preferred Stock which is not outstanding shall not be
counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of Preferred Stock,
including Cumulative Preferred Stock, to elect directors shall continue,
notwithstanding the election at such meeting by such holders of the number of
directors that they are entitled to elect, and the persons so elected by such
holders, together with the two incumbent directors elected by the holders
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of Preferred Stock, including Cumulative Preferred Stock, and the remaining
incumbent directors elected by the holders of the Common Stock and Preferred
Stock, shall constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms of
office of the additional directors elected by the holders of Preferred Stock,
including Cumulative Preferred Stock, pursuant to paragraph 4(b) above shall
terminate, the remaining directors shall constitute the directors of the
Corporation and the voting rights of such holders of Preferred Stock, including
Cumulative Preferred Stock, to elect additional directors pursuant to paragraph
4(b) above shall cease, subject to the provisions of the last sentence of
paragraph 4(b).
(e) Exclusive Remedy.
Unless otherwise required by law, the holders of shares of Cumulative
Preferred Stock shall not have any rights or preferences other than those
specifically set forth herein. The holders of shares of Cumulative Preferred
Stock shall have no preemptive rights or rights to cumulative voting. In the
event that the Corporation fails to pay any dividends on the shares of
Cumulative Preferred Stock, the exclusive remedy of the holders shall be the
right to vote for directors pursuant to the provisions of this paragraph 4.
(f) Notification to Moody's.
In the event a vote of holders of Cumulative Preferred Stock is required
pursuant to the provisions of Section 13(a) of the 1940 Act, as long as the
Cumulative Preferred Stock is rated by Moody's, the Corporation shall, not later
than ten Business Days prior to the date on which such vote is to be taken,
notify Moody's that such vote is to be taken and the nature of the action with
respect to which such vote is to be taken and, not later than ten Business Days
after the date on which such vote is taken, notify Moody's of the result of such
vote.
5. Coverage Tests.
(a) Determination of Compliance.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Corporation shall make the following determinations:
(i) Asset Coverage. The Corporation shall maintain, as of the last
Business Day of each March, June, September and December of each year in which
any shares of Cumulative Preferred Stock are outstanding, the Asset Coverage.
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(ii) Basic Maintenance Amount Requirement.
(A) For so long as any shares of Cumulative Preferred Stock are
outstanding, the Corporation shall maintain, on each Valuation Date, a Portfolio
Calculation at least equal to the Basic Maintenance Amount, each as of such
Valuation Date. Upon any failure to maintain the required Portfolio Calculation,
the Corporation shall use its best efforts to reattain a Portfolio Calculation
at least equal to the Basic Maintenance Amount on or prior to the Basic
Maintenance Amount Cure Date, by altering the composition of its portfolio or
otherwise.
(B) The Corporation shall prepare a Basic Maintenance Report relating to
each Valuation Date. On or before 5:00 P.M., New York City time, on the third
Business Day after the first Valuation Date following the Date of Original Issue
of the Cumulative Preferred Stock and after each (A) Quarterly Valuation Date,
(B) Valuation Date on which the Corporation fails to satisfy the requirements of
paragraph 5(a)(ii)(A) above, (C) Basic Maintenance Amount Cure Date following a
Valuation Date on which the Corporation fails to satisfy the requirements of
paragraph 5(a)(ii)(A) above and (D) Valuation Date and any immediately
succeeding Business Day on which the Portfolio Calculation exceeds the Basic
Maintenance Amount by 5% or less, the Corporation shall complete and deliver to
Moody's a Basic Maintenance Report, which will be deemed to have been delivered
to Moody's if Moody's receives a copy or telecopy, telex or other electronic
transcription setting forth at least the Portfolio Calculation and the Basic
Maintenance Amount each as of the relevant Valuation Date and on the same day
the Corporation mails to Moody's for delivery on the next Business Day the full
Basic Maintenance Report. The Corporation also shall provide Moody's with a
Basic Maintenance Report relating to any other Valuation Date on Moody's
specific request. A failure by the Corporation to deliver a Basic Maintenance
Report under this paragraph 5(a)(ii)(B) shall be deemed to be delivery of a
Basic Maintenance Report indicating a Portfolio Calculation less than the Basic
Maintenance Amount, as of the relevant Valuation Date.
(C) Within ten Business Days after the date of delivery to Moody's of a
Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating
to a Quarterly Valuation Date, the Corporation shall deliver to Moody's an
Accountant's Confirmation relating to such Basic Maintenance Report and any
other Basic Maintenance Report, randomly selected by the Independent
Accountants, that was prepared by the Corporation during the quarter ending on
such Quarterly Valuation Date. Also, within ten Business Days after the date of
delivery to Moody's of a Basic Maintenance Report in accordance with paragraph
5(a)(ii)(B) above relating to a Valuation Date on which the Corporation fails to
satisfy the requirements of paragraph 5(a)(ii)(A) and any Basic Maintenance
Amount Cure Date, the
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Corporation shall deliver to Moody's an Accountant's Confirmation relating to
such Basic Maintenance Report. If any Accountant's Confirmation delivered
pursuant to this paragraph 5(a)(ii)(C) shows that an error was made in the Basic
Maintenance Report for such Quarterly Valuation Date, or shows that a lower
Portfolio Calculation was determined by the Independent Accountants, the
calculation or determination made by such Independent Accountants shall be final
and conclusive and shall be binding on the Corporation, and the Corporation
shall accordingly amend the Basic Maintenance Report and deliver the amended
Basic Maintenance Report to Moody's promptly following Moody's receipt of such
Accountant's Confirmation.
(D) In the event the Portfolio Calculation shown in any Basic Maintenance
Report prepared pursuant to paragraph 5(a)(ii)(B) above is less than the
applicable Basic Maintenance Amount, the Corporation shall have until the Basic
Maintenance Amount Cure Date to achieve a Portfolio Calculation at least equal
to the Basic Maintenance Amount, and upon such achievement (and not later than
such Basic Maintenance Amount Cure Date) the Corporation shall inform Moody's of
such achievement in writing by delivery of a revised Basic Maintenance Report
showing a Portfolio Calculation at least equal to the Basic Maintenance Amount
as of the date of such revised Basic Maintenance Report, together with an
Officers' Certificate to such effect.
(E) On or before 5:00 P.M., New York City time, on the first Business Day
after shares of Common Stock are repurchased by the Corporation, the Corporation
shall complete and deliver to Moody's a Basic Maintenance Report as of the close
of business on such date that Common Stock is repurchased. A Basic Maintenance
Report delivered as provided in paragraph 5(a)(ii)(B) above also shall be deemed
to have been delivered pursuant to this paragraph 5(a)(ii)(E).
(b) Failure to Meet Asset Coverage.
If the Asset Coverage is not satisfied as provided in paragraph 5(a)(i)
hereof and such failure is not cured as of the related Asset Coverage Cure Date,
the Corporation shall give a Notice of Redemption as described in paragraph 3 of
Article II hereof with respect to the redemption of a sufficient number of
shares of Cumulative Preferred Stock to enable it to meet the requirements of
paragraph 5(a)(i) above, and, at the Corporation's discretion, such additional
number of shares of Cumulative Preferred Stock in order that the "asset
coverage" of a class of senior security which is stock, as defined in Section
18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock is up to 250%, and deposit with
the Paying Agent Deposit Securities having an initial combined value sufficient
to effect the redemption of
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the shares of Cumulative Preferred Stock to be redeemed, as contemplated by
paragraph 3(a) of Article II hereof.
(c) Failure to Maintain a Portfolio Calculation At Least
Equal to the Basic Maintenance Amount.
If a Portfolio Calculation for Moody's at least equal to the Basic
Maintenance Amount is not maintained as provided in paragraph 5(a)(ii)(A) above
and such failure is not cured by the related Basic Maintenance Amount Cure Date,
the Corporation shall give a Notice of Redemption as described in paragraph 3 of
Article II hereof with respect to the redemption of a sufficient number of
shares of Cumulative Preferred Stock to enable it to meet the requirements of
paragraph 5(a)(ii)(A) above, and, at the Corporation's discretion, such
additional number of shares of Cumulative Preferred Stock in order that the
Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining
outstanding shares of Cumulative Preferred Stock and any other Preferred Stock
by up to 10%, and deposit with the Paying Agent Deposit Securities having an
initial combined value sufficient to effect the redemption of the shares of
Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of
Article II hereof.
(d) Status of Shares Called for Redemption.
For purposes of determining whether the requirements of paragraphs 5(a)(i)
and 5(a)(ii)(A) hereof are satisfied, (i) no share of the Cumulative Preferred
Stock shall be deemed to be outstanding for purposes of any computation if,
prior to or concurrently with such determination, sufficient Deposit Securities
to pay the full Redemption Price for such share shall have been deposited in
trust with the Paying Agent and the requisite Notice of Redemption shall have
been given, and (ii) such Deposit Securities deposited with the Paying Agent
shall not be included in determining whether the requirements of paragraphs
5(a)(i) and 5(a)(ii)(A) hereof are satisfied.
6. Certain Other Restrictions.
(a) For so long as the Cumulative Preferred Stock is rated by Moody's, the
Corporation will not, and will cause the Adviser not to, (i) knowingly and
willfully purchase or sell a portfolio security for the specific purpose of
causing, and with the actual knowledge that the effect of such purchase or sale
will be to cause, the Portfolio Calculation as of the date of the purchase or
sale to be less than the Basic Maintenance Amount as of such date, (ii) in the
event that, as of the immediately preceding Valuation Date, the Portfolio
Calculation exceeded the Basic Maintenance Amount by 5% or less, alter the
composition of the Corporation's portfolio securities in a manner reasonably
expected to reduce the Portfolio Calculation, unless the
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Corporation shall have confirmed that, after giving effect to such alteration,
the Portfolio Calculation exceeded the Basic Maintenance Amount or (iii) declare
or pay any dividend or other distribution on any shares of Common Stock or
repurchase any shares of Common Stock, unless the Corporation shall have
confirmed that, after giving effect to such declaration, other distribution or
repurchase, the Corporation continues to satisfy the requirements of paragraph
5(a)(ii)(A) of Article II hereof.
(b) For so long as the Cumulative Preferred Stock is rated by Moody's, the
Corporation shall not (a) acquire or otherwise invest in (i) future contracts or
(ii) options on futures contracts, (b) engage in reverse repurchase agreements,
(c) engage in short sales, (d) overdraw any bank account, (e) write options on
portfolio securities other than call options on securities held in the
Corporation's portfolio or that the Corporation has an immediate right to
acquire through conversion or exchange of securities held in its portfolio, or
(f) borrow money, except for the purpose of clearing and/or settling
transactions in portfolio securities (which borrowings shall under any
circumstances be limited to the lesser of $10,000,000 and an amount equal to 5%
of the Market Value of the Corporation's assets at the time of such borrowings
and which borrowings shall be repaid within 60 days and not be extended or
renewed), unless in any such case, the Corporation shall have received written
confirmation from Moody's that such investment activity will not adversely
affect Moody's then current rating of the Cumulative Preferred Stock.
Furthermore, for so long as the Cumulative Preferred Stock is rated by Moody's,
unless the Corporation shall have received the written confirmation from Moody's
referred to in the preceding sentence, the Corporation may engage in the lending
of its portfolio securities only in an amount of up to 5% of the Corporation's
total assets, provided that the Corporation receives cash collateral for such
loaned securities which is maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities and, if
invested, is invested only in money market mutual funds meeting the requirements
of Rule 2a-7 under the 1940 Act that maintain a constant $1.00 per share net
asset value. In determining the Portfolio Calculation, the Corporation shall use
the Moody's Discount Factor applicable to the loaned securities rather than the
Moody's Discount Factor applicable to the collateral.
(c) For so long as the Cumulative Preferred Stock is rated by Moody's, the
Corporation shall not consolidate the Corporation with, merge the Corporation
into, sell or otherwise transfer all or substantially all of the Corporation's
assets to another entity or adopt a plan of liquidation of the Corporation, in
each case without providing prior written notification to Moody's.
7. Termination of Rating Agency Provisions.
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(a) The Board of Directors may determine that it is not in the best
interests of the Corporation to continue to comply with the provisions of
paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, in
which case the Corporation will no longer be required to comply with any of the
provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect
to Moody's, provided that (i) the Corporation has given the Paying Agent,
Moody's and holders of the Cumulative Preferred Stock at least 20 calendar days
written notice of such termination of compliance, (ii) the Corporation is in
compliance with the provisions of paragraphs 5(a)(i), 5(a)(ii), 5(c) and 6 of
Article II hereof at the time the notice required in clause (i) hereof is given
and at the time of the termination of compliance with the provisions of
paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's,
(iii) at the time the notice required in clause (i) hereof is given and at the
time of termination of compliance with the provisions of paragraphs 5(a)(ii),
5(c) and 6 of Article II hereof with respect to Moody's the Cumulative Preferred
Stock is listed on the American Stock Exchange or on another exchange registered
with the Securities and Exchange Commission as a national securities exchange
and (iv) at the time of termination of compliance with the provisions of
paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's,
the cumulative cash dividend rate payable on a share of the Cumulative Preferred
Stock pursuant to paragraph 1(a) of Article II hereof shall be increased by
.375% per annum.
(b) On the date that the notice is given in paragraph 7(a) above and on the
date that compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of
Article II hereof with respect to Moody's is terminated, the Corporation shall
provide the Paying Agent and Moody's with an Officers' Certificate as to the
compliance with the provisions of paragraph 7(a) hereof, and the provisions of
paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's
shall terminate on such later date and thereafter have no force or effect.
8. Limitation on Issuance of Additional Preferred Stock.
So long as any shares of Cumulative Preferred Stock are outstanding, the
Corporation may issue and sell additional shares of Cumulative Preferred Stock
authorized hereby and/or shares of one or more other series of Preferred Stock
constituting a series of a class of senior securities of the Corporation
representing stock under Section 18 of the 1940 Act in addition to the shares of
Cumulative Preferred Stock, provided that (i) immediately after giving effect to
the issuance and sale of such additional Preferred Stock and to the
Corporation's receipt and application of the proceeds thereof, the Corporation
will maintain the Asset Coverage of the shares of Cumulative Preferred Stock and
all other Preferred Stock of the Corporation then outstanding, and (ii) no such
additional Preferred Stock shall have any preference
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or priority over any other Preferred Stock of the Corporation upon the
distribution of the assets of the Corporation or in respect of the payment of
dividends.
ARTICLE III
ABILITY OF BOARD OF DIRECTORS TO MODIFY THE ARTICLES
SUPPLEMENTARY
To the extent permitted by law, the Board of Directors, without the vote of
the holders of the Cumulative Preferred Stock or any other capital stock of the
Corporation, may amend the provisions of these 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 of
holders of shares of the Cumulative Preferred Stock or any other capital stock
of the Corporation.
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IN WITNESS WHEREOF, ROYCE MICRO-CAP TRUST, INC. has caused these presents
to be signed in its name and on its behalf by a duly authorized officer, and its
corporate seal to be hereunto affixed and attested by its Secretary, and the
said officers of the Corporation further acknowledge said instrument to be the
corporate act of the Corporation, and state that to the best of their knowledge,
information and belief the matters and facts herein set forth with respect to
approval are true in all material respects, all on June _________, 1997.
ROYCE MICRO-CAP TRUST, INC.
By
-------------------------
Name:
Title:
Attest:
- ---------------------------
John E. Denneen
Secretary
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1,600,000 Shares
ROYCE MICRO-CAP TRUST, INC.
_% Cumulative Preferred Stock
Liquidation Preference $25 Per Share
UNDERWRITING AGREEMENT
June __, 1997
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Royce Micro-Cap Trust, Inc., a Maryland corporation (the
"Fund"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of 1,600,000 shares (the "Shares") of its _% cumulative
preferred stock, liquidation preference $25 per share, $.001 par value per share
(the "Cumulative Preferred Stock"), to the several Underwriters named in
Schedule I hereto. The Cumulative Preferred Stock will be authorized by, and
subject to the terms and conditions of, the Articles Supplementary to be adopted
in connection with the issuance of the Cumulative Preferred Stock (the "Articles
Supplementary").
The Fund and its investment adviser, Royce & Associates, Inc.,
a New York corporation (the "Adviser"), wish to confirm as follows their
agreement with you (the "Representatives") and the other several Underwriters on
whose behalf you are acting, in connection with the several purchases of the
Shares by the Underwriters.
The Fund has entered into an investment advisory agreement
dated as of December 31, 1996 with the Adviser, an administration agreement
dated as of December 14, 1993 and amended as of March 1, 1996 with Mitchell
Hutchins Asset Management Inc., a Delaware corporation, a custodian contract
dated as of December 14, 1993 with State Street Bank and Trust Company, a
Massachusetts corporation, a registrar, transfer agency and service agreement
dated as of December 14, 1993 with State Street Bank and Trust Company with
respect to the Fund's Common Stock and a registrar, transfer agency and paying
agency agreement dated as of June __, 1997 with State Street Bank and Trust
Company with respect to the Cumulative Preferred Stock. Such agreements are
hereinafter referred to as the "Investment
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2
Advisory Agreement", the "Administration Agreement", the "Custodian Contract",
the "Transfer Agency Agreement" and the "Paying Agency Agreement", respectively.
Collectively, the Investment Advisory Agreement, the Administration Agreement,
the Custodian Contract, the Transfer Agency Agreement and the Paying Agency
Agreement are hereinafter referred to as the "Fund Agreements". This
Underwriting Agreement is hereinafter referred to as the "Agreement".
1. Registration Statement and Prospectus. The Fund has
prepared in conformity with the provisions of the Securities Act of 1933, as
amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the
"1940 Act") and the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated under the 1933 Act (the "1933 Act
Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations"
and, together with the 1933 Act Rules and Regulations, the "Rules and
Regulations") a registration statement on Form N-2 (File No. 333-_____) under
the 1933 Act and the 1940 Act (the "registration statement"), including a
prospectus relating to the Shares, and has filed the registration statement and
prospectus in accordance with the 1933 Act and 1940 Act. The Fund also has filed
a notification of registration of the Fund as an investment company under the
1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration
Statement" as used in this Agreement means the registration statement (including
all financial schedules and exhibits), as amended at the time it becomes
effective under the 1933 Act or, if the registration statement became effective
under the 1933 Act prior to the execution of this Agreement, as amended or
supplemented at the time it became effective, prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed under the
1933 Act and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the Fund
has filed an abbreviated registration statement to register an additional amount
of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registrations Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or, if the
prospectus and statement of additional information included in the Registration
Statement omit information in reliance on Rule 430A under the 1933 Act Rules and
Regulations and such information is included in a prospectus and statement of
additional information filed with the Commission pursuant to Rule 497(h) under
the 1933 Act, the term "Prospectus" as used in this Agreement means the
prospectus and statement of additional information in the forms included in the
Registration Statement as supplemented by the addition of the information
contained in the prospectus filed
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3
with the Commission pursuant to Rule 497(h). The term "Prepricing Prospectus" as
used in this Agreement means the prospectus and statement of additional
information subject to completion in the forms included in the registration
statement at the time of filing of amendment No. 1 to the registration statement
with the Commission on [June __, 1997] and as such prospectus and statement of
additional information shall have been amended from time to time prior to the
date of the Prospectus, together with any other prospectus and statement of
additional information relating to the Fund other than the Prospectus approved
in writing by or directly or indirectly prepared by the Fund or the Adviser. It
being understood that the definition of Prepricing Prospectus above shall not
include any Prepricing Prospectus prepared by any Underwriter unless approved in
writing by the Fund or Adviser. The terms "Registration Statement", "Prospectus"
and "Prepricing Prospectus" shall also include any financial statements
incorporated by reference therein.
The Fund has furnished the Representatives with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. The Fund hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Fund and the Adviser herein contained and subject to all the
terms and conditions set forth herein, each Underwriter agrees, severally and
not jointly, to purchase from the Fund, at a purchase price of $[ ] per Share,
the number of Shares set forth opposite the name of such Underwriter in Schedule
I hereto (or such number of Shares increased as set forth in Section 11 hereof).
3. Terms of Public Offering. The Fund and the Adviser have
been advised by you that the Underwriters propose to make a public offering of
their respective portions of the Shares as soon after the Registration Statement
and this Agreement have become effective as in your judgment is advisable and
initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to
the Underwriters of and payment for the Shares shall be made at the office of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 10:00
A.M., New York City time, on June __, 1997 (the "Closing Date"). The place of
closing for the Shares and the Closing Date may be varied by agreement between
you and the Fund.
Certificates for the Shares shall be registered in such names
and in such denominations as you shall request prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date. Such certificates
shall be made
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4
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date. The certificates evidencing the Shares shall be delivered to you on the
Closing Date against payment of the purchase price therefor in immediately
available funds.
5. Agreements of the Fund and the Adviser. The Fund and the
Adviser, jointly and severally, agree with the several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective under the 1933 Act before the offering of the
Shares may commence, the Fund will endeavor to cause the Registration Statement
or such post-effective amendment to become effective under the 1933 Act as soon
as possible and will advise you promptly and, if requested by you, will confirm
such advice in writing when the Registration Statement or such post-effective
amendment has become effective.
(b) The Fund will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request made by the
Commission for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus (or any amendment or supplement to any
of the foregoing) or for additional information, (ii) of the issuance by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD"),
any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official of any order suspending the effectiveness
of the Registration Statement, prohibiting or suspending the use of the
Prospectus, any Prepricing Prospectus or any sales material (as hereinafter
defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purposes, (iii)
of receipt by the Fund, the Adviser, any affiliate of the Fund or the Adviser or
any representative or attorney of the Fund or the Adviser of any other material
communication from the Commission, the NASD, any state securities commission,
any national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Fund (if such communication relating to the Fund is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as hereinafter defined) (or any
amendment or supplement to any of the foregoing), this Agreement or any of the
Fund Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial
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5
or other), business, prospects, properties, net assets or results of operations
of the Fund or the Adviser or of the happening of any event which makes any
statement of a material fact made in the Registration Statement, the Prospectus
or any sales material (as hereinafter defined) (or any amendment or supplement
to any of the foregoing) untrue or which requires the making of any additions to
or changes in the Registration Statement, the Prospectus, any Prepricing
Prospectus or any sales materials (as hereinafter defined) (or any amendment or
supplement to any of the foregoing) in order to state a material fact required
by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or of the necessity to
amend or supplement the Registration Statement, the Prospectus, any Prepricing
Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act,
the Rules and Regulations or any other law or order of any court or regulatory
body. If at any time the Commission, the NASD, any state securities commission,
any national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regularity or administrative agency or any
official shall issue any order suspending the effectiveness of the Registration
Statement, prohibiting or suspending the use of the Prospectus or any sales
material (as hereinafter defined) (or any amendment or supplement to any of the
foregoing) or suspending the qualification of the Shares for offering or sale in
any jurisdiction, the Fund will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
(c) The Fund will furnish to you, without charge, three signed
copies of the registration statement and the 1940 Act Notification as originally
filed with the Commission and of each amendment thereto, including financial
statements and all exhibits thereto, and will also furnish to you, without
charge, such number of conformed copies of the registration statement as
originally filed and of each amendment thereto, but without exhibits, as you may
request.
(d) The Fund will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus, or
any sales material (as hereinafter defined) of which you shall not previously
have been advised or to which you shall object after being so advised or (ii) so
long as, in the opinion of counsel for the Underwriters, a Prospectus is
required by the 1933 Act to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant to
the Securities Exchange Act of 1934, as amended (the "1934 Act"), without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
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6
(e) Prior to the execution and delivery of this Agreement, the
Fund has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Fund consents
to the use, in accordance with the provisions of the 1933 Act and with the state
securities or blue sky laws of the jurisdictions in which the Shares are offered
by the several Underwriters and by dealers, prior to the date of the Prospectus,
of each Prepricing Prospectus so furnished by the Fund.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the 1933 Act to be
delivered in connection with sales by any Underwriter or dealer, the Fund will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Fund consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the 1933
Act and with the state securities or blue sky laws of the jurisdictions in which
the Shares are offered by the several Underwriters and by all dealers to whom
Shares may be sold, both in connection with the offering and sale of the Shares
and for such period of time thereafter as the Prospectus is required by the 1933
Act to be delivered in connection with sales by any Underwriter or dealer. If
during such period of time any event shall occur that in the judgment of the
Fund or in the opinion of counsel for the Underwriters is required to be set
forth in the Registration Statement or the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Registration
Statement or the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules
and Regulations or any other federal law, rule or regulation, or any state
securities or blue sky disclosure laws, rules or regulations, the Fund will
forthwith prepare and, subject to the provisions of paragraph (d) above,
promptly file with the Commission an appropriate supplement or amendment
thereto, and will expeditiously furnish to the Underwriters and dealers, without
charge, a reasonable number of copies thereof. In the event that the Fund and
you, as Representatives of the several Underwriters, agree that the Registration
Statement or the Prospectus should be amended or supplemented, the Fund, if
requested by you, will promptly issue a press release announcing or disclosing
the matters to be covered by the proposed amendment or supplement.
(g) The Fund will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the state
securities or blue sky laws of such jurisdictions as you may designate and will
file
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7
such consents to service of process or other documents necessary or appropriate
in order to effect such registration or qualification; provided that in no event
shall the Fund be obligated to qualify to do business in any jurisdiction where
it is not now so qualified or to take any action which would subject it to
service of process in suits, other than those arising out of the offering or
sale of the Shares, in any jurisdiction where it is not now so subject.
(h) The Fund will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 of the 1933
Act Rules and Regulations.
(i) During the period of five years hereafter, the Fund will
furnish to you (i) as soon as available, a copy of each report of the Fund
mailed to stockholders or filed with the Commission or furnished to the American
Stock Exchange (the "AMEX") other than reports on Form N-SAR, and (ii) from time
to time such other information concerning the Fund as you may request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than pursuant to
the second paragraph of Section 11 hereof or by notice given by you terminating
this Agreement pursuant to Section 11 or Section 12 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Fund or the Adviser to comply with the terms or fulfill any of the
conditions of this Agreement, the Fund and the Adviser, jointly and severally,
agree to reimburse the Representatives for all out-of-pocket expenses (including
fees and expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Fund will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus and in such a manner as to comply with the investment objective,
policies and restrictions of the Fund as described in the Prospectus.
(l) The Fund will timely file the requisite copies of the
Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the
1933 Act Rules and Regulations, whichever is applicable or, if applicable, will
timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and
Regulations and will advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Fund will not
sell, contract to sell, or otherwise dispose of any
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8
senior securities of the Fund, or grant any options or warrants to purchase
senior securities of the Fund, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Smith Barney Inc.
(n) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, neither the Fund nor the Adviser has taken, nor will
it take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Fund to facilitate the sale or resale of the
Shares.
(o) The Fund will use its best efforts to cause the Cumulative
Preferred Stock, prior to the Closing Date, to be assigned a rating of 'aaa' by
Moody's Investors Service, Inc. (the "Rating Agency").
(p) The Fund and the Adviser will use their best efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.
6. Representations and Warranties of the Fund and the Adviser.
The Fund and the Adviser, jointly and severally, represent and warrant to each
Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the Prospectus made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Fund in
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9
writing by or on behalf of any Underwriter through you expressly for use
therein.
(c) All the outstanding shares of Common Stock of the Fund
have been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights and will conform
to the description thereof in the Registration Statement and the Prospectus (and
any amendment or supplement to either of them); and the capital stock of the
Fund conforms to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them).
(d) The Fund is a corporation duly organized and validly
existing in good standing under the laws of the State of Maryland with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Fund; and the Fund has no subsidiaries.
(e) There are no legal or governmental proceedings pending or,
to the knowledge of the Fund, threatened, against the Fund, or to which the Fund
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
(f) The Fund is not in violation of its articles of
incorporation or by-laws, or other organizational documents, or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Fund or of any decree of the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or
governmental agency, body or official having jurisdiction over the Fund, or in
default in any material respect in the performance of any obligation, agreement
or condition contained
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<PAGE>
10
in any bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the Fund is a
party or by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement or any of the Fund
Agreements by the Fund, nor the consummation by the Fund of the transactions
contemplated hereby or thereby (A) requires any consent, approval, authorization
or other order of or registration or filing with, the Commission, the NASD, any
state securities commission, any national securities exchange, any arbitrator,
any court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may have been obtained prior to the date
hereof and such as may be required for compliance with the state securities or
blue sky laws of various jurisdictions which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the articles of
incorporation, including the Articles Supplementary, or bylaws, or other
organizational documents, of the Fund or (B) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, any agreement,
indenture, lease or other instrument to which the Fund is a party or by which it
or any of its properties may be bound, or violates or will violate any statute,
law, regulation or filing or judgment, injunction, order or decree applicable to
the Fund or any of its properties, or will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Fund
pursuant to the terms of any agreement or instrument to which it is a party or
by which it may be bound or to which any of its property or assets is subject.
The Fund is not subject to any order of any court or of any arbitrator,
governmental authority or administrative agency.
(h) The accountants, Ernst & Young LLP, who have certified or
shall certify the financial statements included in the Registration Statement
and the Prospectus (or any amendment or supplement to either of them) are
independent public accountants as required by the 1933 Act, the 1940 Act and the
Rules and Regulations.
(i) The financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Fund on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
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11
in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the Fund.
(j) The execution and delivery of, and the performance by the
Fund of its obligations under, this Agreement and the Fund Agreements have been
duly and validly authorized by the Fund, and this Agreement and the Fund
Agreements have been duly executed and delivered by the Fund and constitute the
valid and legally binding agreements of the Fund, enforceable against the Fund
in accordance with their terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Fund has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Fund, and there has not been any change in the capital stock, or
material increase in the short-term debt or long-term debt, of the Fund, or any
material adverse change, or any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Fund taken as a whole, whether or not arising in the ordinary
course of business.
(l) The Fund has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(m) The Fund has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), subject
to such qualifications as may be set forth in the Prospectus; the Fund has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Fund under any such permit, subject in each case
to such qualification as may be set forth in the Prospectus (and any amendment
or supplement thereto); and, except as described in the Prospectus (and any
amendment or supplement thereto), none of
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<PAGE>
12
such permits contains any restriction that is materially burdensome to the Fund.
(n) The Fund maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) To the Fund's knowledge, neither the Fund nor any employee
or agent of the Fund has made any payment of funds of the Fund or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(p) The Fund has filed all tax returns required to be filed,
which returns are complete and correct, and the Fund is not in default in the
payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto.
(q) No holder of any security of the Fund has any right to
require registration of shares of common stock, Cumulative Preferred Stock or
any other security of the Fund because of the filing of the registration
statement or consummation of the transactions contemplated by this Agreement.
(r) The Fund, subject to the registration statement having
been declared effective and the filing of the Prospectus under Rule 497 under
the Rules and Regulations, has taken all required action under the 1933 Act, the
1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(s) The conduct by the Fund of its business (as described in
the Prospectus) does not require it to be the owner, possessor or licensee of
any patents, patent licenses, trademarks, service marks or trade names which it
does not own, possess or license.
(t) The Fund is registered under the 1940 Act as a closed-end
diversified management investment company and the 1940 Act Notification has been
duly filed with the Commission and, at
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<PAGE>
13
the time of filing thereof and any amendment or supplement thereto, conformed in
all material respects with all applicable provisions of the 1940 Act and the
Rules and Regulations. The Fund is, and at all times through the completion of
the transactions contemplated hereby, will be, in compliance in all material
respects with the terms and conditions of the 1933 Act and the 1940 Act. No
person is serving or acting as an officer, director or investment adviser of the
Fund except in accordance with the provisions of the 1940 Act and the 1940 Act
Rules and Regulations and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and the rules and regulations of the Commission promulgated
under the Advisers Act (the "Advisers Act Rules and Regulations").
(u) Except as stated in this Agreement and in the Prospectus
(and any amendment or supplement thereto), the Fund has not taken, nor will it
take, directly or indirectly, any action designed to or which might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Fund to facilitate the sale or resale of the
Shares, and the Fund is not aware of any such action taken or to be taken by any
affiliates of the Fund.
(v) The Fund has filed in a timely manner each document or
report required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(w) All advertising, sales literature or other promotional
material (including "prospectus wrappers," "broker kits," "road show slides" and
"road show scripts") authorized in writing by or prepared by the Fund or the
Adviser for use in connection with the offering and sale of the Shares
(collectively, "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(x) Each of the Fund Agreements and the Fund's and the
Adviser's obligations under this Agreement and each of the Fund Agreements
comply in all material respects with all applicable provisions of the 1940 Act,
the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules
and Regulations.
<PAGE>
<PAGE>
14
(y) The Shares have been, or prior to the Closing Date will
be, assigned a rating of 'aaa' by the Rating Agency.
(z) At all times since its inception, as required by
Subchapter M of the Code, the Fund has complied with the requirements to qualify
as a regulated investment company under the Code.
(aa) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or
an "affiliated person" (as defined in the 1940 Act) of any Underwriter.
(ab) The Shares have been duly approved for listing upon
notice of issuance on the AMEX.
7. Representations and Warranties of the Adviser. The
Adviser represents and warrants to each Underwriter as follows:
(a) The Adviser is a corporation duly organized and validly
existing in good standing under the laws of the State of New York, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Adviser and its subsidiaries, taken as a whole, or
on the ability of the Adviser to perform its obligations under this Agreement
and the Investment Advisory Agreement.
(b) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Investment Advisory Agreement for the Fund
as contemplated by the Prospectus (or any amendment or supplement thereto).
There does not exist any proceeding or any facts or circumstances the existence
of which could lead to any proceeding which might adversely affect the
registration of the Adviser with the Commission.
(c) There are no legal or governmental proceedings pending or,
to the knowledge of the Adviser, threatened against the Adviser, or to which the
Adviser or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may
<PAGE>
<PAGE>
15
reasonably be expected to involve a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Adviser and its subsidiaries, taken as a whole, or
on the ability of the Adviser to perform its obligations under this Agreement
and the Investment Advisory Agreement.
(d) Neither the execution, delivery or performance of this
Agreement or the Investment Advisory Agreement by the Adviser, nor the
consummation by the Adviser of the transactions contemplated hereby or thereby
(A) requires the Adviser to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of incorporation or bylaws, or
other organizational documents, of the Adviser or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Adviser is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Adviser or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Adviser pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Adviser is subject. The Adviser is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the
Adviser of its obligations under, this Agreement and the Investment Advisory
Agreement have been duly and validly authorized by the Adviser, and this
Agreement and the Investment Advisory Agreement have been duly executed and
delivered by the Adviser and each constitutes the valid and legally binding
agreement of the Adviser, enforceable against the Adviser in accordance with its
terms except as rights to indemnity and contribution hereunder may be limited by
federal or state securities laws.
(f) The Adviser has the financial resources available to it
necessary for the performance of its services and obligations as contemplated in
the Prospectus (or any amendment or supplement thereto) and under this Agreement
and the Investment Advisory Agreement.
(g) The description of the Adviser in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) complied
and comply in all material respects with the provisions the 1933 Act, the 1940
Act, the Advisers Act, the
<PAGE>
<PAGE>
16
Rules and Regulations and the Advisers Act Rules and Regulations and did not and
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(h) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Adviser has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Adviser and its subsidiaries, taken as a whole, and there has
not been any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Adviser and its subsidiaries, taken as a whole,
whether or not arising in the ordinary course of business, or which, in each
case, could have a material adverse effect on the ability of the Adviser to
perform its obligations under this Agreement and the Investment Advisory
Agreement.
(i) The Adviser has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); the Adviser has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Adviser under any such permit; and, except as
described in the Prospectus (and any amendment or supplement thereto), none of
such permits contains any restriction that is materially burdensome to the
Adviser.
(j) Except as stated in this Agreement and in the Prospectus
(and in any amendment or supplement thereto), the Adviser has not taken, nor
will it take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any securities issued by the Fund to facilitate the sale or resale
of the Shares, and the Adviser is not aware of any such action taken or to be
taken by any affiliates of the Adviser.
(k) Charles M. Royce is the validly appointed President and
Chief Investment Officer of the Adviser and is the sole voting shareholder of
the Adviser. W. Whitney George is the portfolio manager of the Fund; Messrs.
Royce and George have not given notice nor made known an intention to give
notice of termination of their employment and the Adviser knows of no
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<PAGE>
17
reason why they should be unable to continue to serve the Adviser in their
current capacities.
8. Indemnification and Contribution. (a) The Fund and the
Adviser, jointly and severally, agree to indemnify and hold harmless each of you
and each other Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
from and against any and all losses, claims, damages, liabilities and expenses,
joint and several (including reasonable costs of investigation) arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Underwriter furnished in writing to the Fund by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the 1933
Act and the 1933 Act Rules and Regulations, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
such Prepricing Prospectus was corrected in the Prospectus, provided that the
Fund has delivered the Prospectus to the several Underwriters in requisite
quantity on a timely basis to permit such delivery or sending. The foregoing
indemnity agreement shall be in addition to any liability which the Fund or the
Adviser may otherwise have.
(b) If any action, suit or proceeding shall be brought against
any Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Fund or the Adviser, such Underwriter or
such controlling person shall promptly notify the Fund or the Adviser, and the
Fund or the Adviser shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the Fund or the Adviser has agreed in writing
to pay such fees and expenses, (ii)
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<PAGE>
18
the Fund and the Adviser have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such Underwriter or such controlling person and
the Fund or the Adviser and such Underwriter or such controlling person shall
have been advised by its counsel that representation of such indemnified party
and the Fund or the Adviser by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the Fund and the Adviser shall not have
the right to assume the defense of such action, suit or proceeding on behalf of
such Underwriter or such controlling person). It is understood, however, that
the Fund and the Adviser shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be designated
in writing by Smith Barney Inc., and that all such fees and expenses shall be
reimbursed as they are incurred. The Fund and the Adviser shall not be liable
for any settlement of any such action, suit or proceeding effected without its
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
Fund and the Adviser agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Fund and the Adviser, their directors, any
officers who sign the Registration Statement, and any person who controls the
Fund or the Adviser within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, to the same extent as the foregoing indemnity from the Fund
and the Adviser to each Underwriter, but only with respect to information
relating to such Underwriter furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto.
If any action, suit or proceeding shall be brought against the Fund or the
Adviser, any of their directors, any such officer, or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Fund and the
Adviser by paragraph (b) above (except that if the Fund or the Adviser shall
have assumed the defense thereof such
<PAGE>
<PAGE>
19
Underwriter shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Underwriter's expense), and the Fund and the
Adviser, their directors, any such officer, and any such controlling person
shall have the rights and duties given to the Underwriters by paragraph (b)
above. The foregoing indemnity agreement shall be in addition to any liability
which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Fund and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriters on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Fund and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Fund and the Adviser on the one hand (treated jointly
for this purpose as one person) and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Fund bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Fund and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Fund and the Adviser on the one hand
(treated jointly for this purpose as one person) or by the Underwriters on the
other hand and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
(e) The Fund, the Adviser and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (d)
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20
above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Shares set forth opposite their names
in Schedule I hereto (or such numbers of Shares increased as set forth in
Section 11 hereof) and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Fund and the Adviser set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Fund, the Adviser, their directors or officers,
or any person controlling the Fund or the Adviser, (ii) acceptance of any Shares
and payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter or any person controlling any Underwriter, or to
the Fund, the Adviser, their directors or officers, or any person controlling
the Fund or the Adviser, shall be entitled to the benefits of the indemnity,
contribution, and reimbursement agreements contained in this Section 8.
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21
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Shares hereunder are subject to
the following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933
Act Rules and Regulations shall have been timely made; no stop order suspending
the effectiveness of the Registration Statement or order pursuant to Section
8(e) of the 1940 Act shall have been issued and no proceeding for those purposes
shall have been instituted or, to the knowledge of the Fund, the Adviser or any
Underwriter, threatened by the Commission, and any request of the Commission for
additional information (to be included in the registration statement or the
prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change or any development involving a
prospective change in or affecting the condition (financial or other), business,
prospects, properties, net assets, or results of operations of the Fund or the
Adviser and its subsidiaries, taken as a whole, not contemplated by the
Prospectus, which in your opinion, as Representatives of the several
Underwriters, would materially, adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Fund or the Adviser
or any officer or director of the Fund or the Adviser which makes any statement
made in the Prospectus untrue or which, in the opinion of the Fund and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in your opinion, as Representatives of the several
Underwriters, materially adversely affect the market for the Shares.
(c) The Fund shall have furnished to you and to the Rating
Agency, a report showing compliance with the asset coverage requirements of the
1940 Act, a Basic Maintenance Report (as defined in the Articles Supplementary)
and a letter from Ernst & Young LLP regarding the accuracy of the calculations
made by the Fund in such reports, each dated the Closing Date and in form and
substance satisfactory to the Rating Agency and to you.
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22
(d) You shall have received on the Closing Date, opinions of
Brown and Wood LLP, counsel for the Fund, or, as to matters of Maryland law,
Venable, Baetjer and Howard LLP, Maryland counsel for the Fund, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland;
(ii) The Fund has corporate power and authority, under the
laws of the State of Maryland, to own, lease and operate its properties and
conduct its business as described in the Registration Statement and in the
Prospectus (and any amendment or supplement to either of them);
(iii) The Fund is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction or place where the nature
of its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net assets or results of operations of the Fund taken as a whole;
(iv) The authorized and outstanding capital stock of the Fund
is as set forth under the caption "Capitalization" in the Prospectus; and the
authorized capital stock of the Fund conforms in all material respects as to
legal matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(v) All the shares of capital stock of the Fund outstanding
prior to the issuance of the Shares have been duly authorized and validly
issued, and are fully paid and nonassessable;
(vi) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive, or to the best knowledge of such counsel after reasonable
inquiry, similar rights that entitle or will entitle any person to acquire any
Shares upon the issuance thereof by the Fund, and will conform to the
description thereof contained in the Prospectus under the caption "Description
of Cumulative Preferred Stock";
(vii) The form of certificates for the Shares conforms to the
requirements of the General Corporation Law of Maryland;
(viii) The Registration Statement and all post-effective
amendments, if any, have become effective under the 1933 Act and, to the best
knowledge of such counsel after
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23
reasonable inquiry, no stop order suspending the effectiveness of the
Registration Statement or order pursuant to Section 8(e) of the 1940 Act has
been issued and no proceedings for that purpose are pending before or
contemplated by the Commission; and any required filing of the Prospectus
pursuant to Rule 497 has been made in accordance with Rule 497;
(ix) The Fund has corporate power and authority to enter into
this Agreement and each of the Fund Agreements and to issue, sell and deliver
the Shares to the Underwriters as provided herein, and this Agreement and each
of the Fund Agreements have been duly authorized, executed and delivered by the
Fund and each is a valid, legal and binding agreement of the Fund, enforceable
against the Fund in accordance with its terms, except as enforcement of rights
to indemnity and contribution hereunder may be limited by Federal or state
securities laws or principles of public policy and subject to the qualification
that the enforceability of the Fund's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
(x) The Fund is not in violation of its articles of
incorporation, including the Articles Supplementary, or bylaws, or other
organizational documents, and to the best knowledge of such counsel after
reasonable inquiry, is not in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture, note or
other evidence of indebtedness, except as may be disclosed in the Prospectus;
(xi) No consent, approval, authorization or order of any court
or governmental authority or agency is required in connection with the
performance by the Fund of its obligations under this Agreement and the Fund
Agreements, except such as has been obtained under the 1933 Act, the 1934 Act,
the 1940 Act or the Advisers Act or such as may be required under state
securities laws; and the execution and delivery of this Agreement and the Fund
Agreements and the consummation of the transactions contemplated herein and
therein will not conflict with or constitute a breach of, or a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Fund pursuant to any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the Fund is a party or
by which it may be bound or to which any of the property or assets of the Fund
is subject, nor will such action result in any violation of the provisions of
the articles of incorporation, including the Articles Supplementary, or bylaws,
or other organizational documents of the Fund, or, to such counsel's best
knowledge after reasonable inquiry, any law or administrative regulation, or
administrative or court decree;
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24
(xii) The 1940 Act Notification, the Registration Statement,
the Prospectus and the Fund's Registration Statement on Form 8-A under the 1934
Act and any supplements or amendments thereto (except for the financial
statements and the notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements of the
1933 Act, the 1940 Act, the Rules and Regulations, the 1934 Act and the rules
and regulations promulgated thereunder;
(xiii) To the best knowledge of such counsel after reasonable
inquiry, (A) other than as described or contemplated in the Registration
Statement or Prospectus (or any supplement thereto), there are no legal or
governmental proceedings pending or threatened against the Fund, or to which the
Fund or any of its properties is subject, which are required to be described in
the Registration Statement or Prospectus (or any amendment or supplement to
either of them) and (B) there are no agreements, contracts, indentures, leases
or other instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to be
filed as an exhibit to the Registration Statement that are not described or
filed as required, as the case may be;
(xiv) To the best knowledge of such counsel after reasonable
inquiry, the Fund is not in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Fund or of any decree of any
court or governmental agency or body having jurisdiction over the Fund;
(xv) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or other
legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
(xvi) Each of the Fund Agreements and the Fund's and the
Adviser's obligations under each of this Agreement and the Fund Agreements
comply as to form in all material respects with all applicable provisions of the
1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the
Advisers Act Rules and Regulations;
(xvii) The Fund is duly registered with the Commission under
the 1940 Act as a closed-end diversified management investment company; the
provisions of the Fund's articles of incorporation, including the Articles
Supplementary, and bylaws comply as to form in all material respects with the
applicable provisions of the 1940 Act and the 1940 Act Rules and Regulations,
the provisions of the Fund's articles of incorporation, including the Articles
Supplementary, and bylaws and the investment policies and restrictions described
in the Registration Statement and the Prospectus under the captions
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25
"Investment Objective and Policies" and "Investment Restrictions" comply in all
material respects with the requirements of the 1940 Act, and all action has been
taken by the Fund as is required of the Fund by the 1933 Act and the 1940 Act
and the Rules and Regulations in connection with the issuance and sale of the
Shares to make the public offering and consummate the sale of the Shares as
contemplated by this Agreement;
(xviii) The Share's are duly authorized for listing, subject
to official notice of issuance, on the AMEX and the Fund's registration
statement on Form 8-A under the 1934 Act is effective;
(xix) The Fund has full corporate power and authority, and all
necessary governmental authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental regulatory
officials and bodies (except where the failure so to have any such
authorizations, approvals, orders, licenses, certificates, franchises or
permits, individually or in the aggregate, would not have a material adverse
effect on the business, properties, operations or financial condition of the
Fund), to own its properties and to conduct business as now being conducted, as
described in the Prospectus;
(xx) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, and
such counsel does not know of any commitment, plan or arrangement to issue, any
shares of capital stock of the Fund or any security convertible into or
exchangeable or exercisable for capital stock of the Fund;
(xxi) Except as described in the Prospectus, there is no
holder of any security of the Fund or any other person who has the right,
contractual or otherwise, to cause the Fund to sell or otherwise issue to them,
or to permit them to underwrite the sale of, the Shares or the right to have any
securities of the Fund included in the registration statement or the right, as a
result of the filing of the registration statement, to require registration
under the 1933 Act of any securities of the Fund;
(xxii) At all times since its inception, as required by
Subchapter M of the Code, the Fund has complied with the requirements to qualify
as a regulated investment company under the Code; and
(xxiii) In giving their opinion Brown & Wood LLP shall
additionally state that nothing has come to their attention that would lead them
to believe that the Registration Statement or any amendment or supplement
thereto, at the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto, as of the time it was first
provided to the Underwriters or as of the Closing
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26
Date, included an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except that such
counsel need not express any belief with respect to the financial statements and
other financial and statistical information included in the Registration
Statement and the Prospectus (and any amendment or supplement to either of the
foregoing).
In giving their opinion, Brown & Wood LLP (i) may state that
they express no opinion as to the laws of any jurisdiction other than the laws
of the State of New York and the Federal laws of the United States of America,
(ii) may rely as to matters involving the laws of the State of Maryland upon the
opinion of Venable, Baetjer and Howard LLP, and (iii) may rely, as to matters of
fact, upon the representations and warranties made by the Fund and the Adviser
herein and on certificates and written statements of officers and employees of
and accountants for the Fund and the Adviser and of public officials. Except as
otherwise specifically provided herein, when giving their opinions to their
"knowledge", Brown & Wood LLP have relied solely upon an inquiry of the
attorneys of that firm who have worked on matters for the Fund, on certificates
or written statements of officers of the Fund and, where appropriate, a review
of the Registration Statement, Prospectus, exhibits to the Registration
Statement, the Fund's articles of incorporation, including the Articles
Supplementary, bylaws and other organizational documents and a review of the
stock ledger books and minute books of the Fund and have made no other
investigation or inquiry.
(e) You shall have received on the Closing Date an opinion of
either (i) Howard J. Kashner, Esq., General Counsel for the Adviser or (ii) John
E. Denneen, Esq., Associate General Counsel for the Adviser, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, to
the effect that:
(i) The Adviser is a corporation duly incorporated and validly
existing in good standing under the laws of the State of New York with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Adviser and its subsidiaries, taken as a whole, or
on the ability of the Adviser to perform its obligations under this Agreement
and the Investment Advisory Agreement;
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27
(ii) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Investment Advisory Agreement for the Fund
as contemplated by the Prospectus (or any amendment or supplement thereto);
(iii) This Agreement and the Investment Advisory Agreement
each has been duly authorized, executed and delivered by the Adviser, and this
Agreement and the Investment Advisory Agreement each constitutes a valid and
binding obligation of the Adviser, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization or other
laws relating to or affecting creditors' rights generally and to general
equitable principles (except as to those provisions relating to indemnity or
contribution for liabilities arising under such agreement, as to which no
opinion need be expressed); and neither the execution and delivery of this
Agreement or the Investment Advisory Agreement nor the performance by the
Adviser of its obligations hereunder or thereunder will conflict with, or result
in a breach of, any of the terms and provisions of, or constitute, with or
without the giving of notice or the lapse of time or both, a default under, the
articles of incorporation, bylaws or other organizational documents of the
Adviser or any agreement or instrument to which the Adviser is a party or by
which the Adviser is bound, or any law, order, rule or regulation applicable to
the Adviser of any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its properties or
operations;
(iv) No consent, approval, authorization or other order of, or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency, or
official is required on the part of the Adviser for the execution, delivery and
performance by it of this Agreement and the Fund Agreements to which it is a
party or the consummation by it of the transactions contemplated hereby and
thereby;
(v) To the best knowledge of such counsel after reasonable
inquiry, there are no legal or governmental proceedings pending or threatened
against the Adviser or to which the Adviser or any of its properties is subject,
which are required to be described in the Registration Statement or the
Prospectus (or any amendment or supplement to either of them) but are not
described as required or which may reasonably be expected to involve a
prospective material adverse change on the ability of the Adviser to perform its
obligations under this Agreement and the Investment Advisory Agreement;
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28
(vi) The obligations of the Adviser under this Agreement and
the Investment Advisory Agreement comply in all material respects with all
applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the
Advisers Act and the Advisers Act Rules and Regulations.
(vii) The Adviser has full corporate power and authority, and
all necessary governmental authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental regulatory
officials and bodies (except where the failure so to have any such
authorizations, approvals, orders, licenses, certificates, franchises or
permits, individually or in the aggregate, would not have a material adverse
effect on the business, properties, operations or financial condition of the
Adviser and its subsidiaries, taken as a whole), to own its properties and to
conduct business as now being conducted, as described in the Prospectus, and to
perform its obligations under the Investment Advisory Agreement; and
(viii) Such counsel shall additionally state that nothing has
come to his attention that would lead him to believe that the description of the
Adviser in the Registration Statement and in the Prospectus (and in any
amendment or supplement to either of them) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
In giving his opinion, such counsel (i) may state that he
expresses no opinion as to the laws of any jurisdiction other than the laws of
the State of New York and the federal laws of the United States of America, and
(ii) may rely, as to matters of fact, upon the representations and warranties
made by the Fund and the Adviser herein and on certificates and written
statements of officers and employees of and accountants for the Fund and the
Adviser and of public officials.
(f) You shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, with
respect to such matters as the Underwriters may reasonably request.
(g) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Ernst & Young LLP, independent certified public accountants,
substantially in the forms heretofore approved by you.
(h) (i) No order suspending the effectiveness of the
registration statement or the Registration Statement or prohibiting or
suspending the use of the Prospectus (or any amendment or supplement thereto) or
any Prepricing Prospectus or any sales material shall have been issued and no
proceedings for such purpose or for the purpose of commencing an enforcement
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29
action against the Fund, the Adviser or, with respect to the transactions
contemplated by the Prospectus (or any amendment or supplement thereto) and this
Agreement, any Underwriter, may be pending before or, to the knowledge of the
Fund, the Adviser or any Underwriter or in the reasonable view of counsel to the
Underwriters, shall be threatened or contemplated by the Commission at or prior
to the Closing Date and that any request for additional information on the part
of the Commission (to be included in the Registration Statement, the Prospectus
or otherwise) be complied with to the satisfaction of the Representatives; (ii)
there shall not have been any change in the capital stock of the Fund nor any
material increase in the short-term or long-term debt of the Fund (other than in
the ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or supplement
thereto), any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the Fund
or the Adviser; (iv) the Fund shall not have any liabilities or obligations,
direct or contingent (whether or not in the ordinary course of business), that
are material to the Fund, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement to either of them);
and (v) all the representations and warranties of the Fund and the Adviser
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of each of
the Fund and the Adviser (or such other officers as are acceptable to you), to
the effect set forth in this Section 9(h) and in Section 9(i) hereof.
(i) That neither the Fund nor the Adviser shall have failed at
or prior to the Closing Date to have performed or complied with any of its
agreements herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
(j) The Fund shall have delivered and you shall have received
evidence satisfactory to you that the shares of Cumulative Preferred Stock are
rated at least 'aaa' by the Rating Agency as of the Closing Date, and there
shall not have been given any notice of any intended or potential downgrading,
or of any review for a potential downgrading, in the rating accorded to the
shares of Cumulative Preferred Stock by the Rating Agency.
(k) The Shares shall have been listed or approved for listing
upon notice of issuance on the American Stock Exchange.
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30
(l) The Fund and the Adviser shall have furnished or caused to
be furnished to you such further certificates and documents as you shall have
requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Fund
or the Adviser and delivered to you, as Representatives of the Underwriters, or
to counsel for the Underwriters, shall be deemed a representation and warranty
by the Fund or the Adviser to each Underwriter as to the statements made
therein.
10. Expenses. The Fund agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the printing (or reproduction) and delivery of this Agreement, any dealer
agreements, the preliminary blue sky memorandum and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the registration of the Shares under the Exchange Act and the
listing of the Shares on the American Stock Exchange; (vi) the registration or
qualification of the Shares for offer and sale under the state securities or
blue sky laws of the several states as provided in Section 5(g) hereof
(including the reasonable fees, expenses and disbursements of counsel for the
Underwriters relating to the preparation, printing or reproduction, and delivery
of the preliminary blue sky memorandum and such registration and qualification);
(vii) fees paid to the Rating Agency; (viii) the transportation and other
expenses incurred by or on behalf of Fund representatives in connection with
presentations to prospective purchasers of the Shares; and (ix) the fees and
expenses of the Fund's accountants and the fees and expenses of counsel
(including local and special counsel) for the Fund and of the transfer agent.
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31
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Fund, by
notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Fund.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Shares set forth
opposite its name in Schedule I hereto bears to the aggregate number of Shares
set forth opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which
such defaulting Underwriter or Underwriters are obligated, but fail or refuse,
to purchase. If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase on the Closing Date
and the aggregate number of Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Fund for the purchase of such Shares by one or more non-defaulting
Underwriters or other party or parties approved by you and the Fund are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Fund. In any such
case which does not result in termination of this Agreement, either you or the
Fund shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Fund,
purchases Shares which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.
<PAGE>
<PAGE>
32
Any notice under this Section 11 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject
to termination in your absolute discretion, without liability on the part of any
Underwriter to the Fund or the Adviser, by notice to the Fund or the Adviser, if
prior to the Closing Date (i) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, the effect of which on
the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Fund by telegram,
telecopy or telephone and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriters. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside cover page, and the statements in the first, third, and fifth
paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 6(b) and
8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5,
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Fund or the Adviser, at the
office of the Fund at 1414 Avenue of the Americas, New York, New York 10019,
Attention: Howard J. Kashner; or (ii) if to you, as Representatives of the
several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Fund, the Adviser, their directors and officers,
and the other controlling persons referred to in Section 8 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
<PAGE>
<PAGE>
33
15. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement among the Fund, the Adviser and the several Underwriters.
Very truly yours,
ROYCE MICRO-CAP TRUST, INC.
By:
----------------------------------
ROYCE & ASSOCIATES, INC.
By:
----------------------------------
Confirmed as of the date first above
mentioned on behalf of themselves and
the other several Underwriters named
in Schedule I hereto.
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
----------------------------------
Managing Director
<PAGE>
<PAGE>
SCHEDULE I
ROYCE MICRO-CAP TRUST, INC.
Number of
Underwriter Shares
----------- ----------
Smith Barney Inc................................
PaineWebber Incorporated .......................
---------
Total........................................... 1,600,000
=========
<PAGE>
<PAGE>
EXHIBIT 2(L)
Venable, Baetjier and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201-2978
Tel: (410) 244-7400, Fax: (410) 244-7742
June 20, 1997
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Re: Royce Micro-Cap Trust, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Royce Micro-Cap Trust, Inc., a
Maryland Corporation (the "Fund"), in connection with the issuance of
1,600,000 shares of its % Cumulative Preferred Stock, par value $.001 per
share (the "Cumulative Preferred Stock").
As special Maryland counsel for the Fund, we are familiar with its Charter
and Bylaws. We have examined the prospectus included in its Registration
Statement on Form N-2 for the Cumulative Preferred Stock (Securities Act
Registration No. 333-28615, Investment Company Act File No. 811-8030), (the
"Registration Statement"), substantially in the form in which it is to become
effective (the "Prospectus"). We are also familiar with the form of Articles
Supplementary relating to the Cumulative Preferred Stock (the "Articles
Supplementary") that have been filed as an exhibit to the Registration
Statement. We have further examined and relied upon a certificate of the
Maryland State Department of Assessments and Taxation ("SDAT") to the effect
that the Fund is duly incorporated and existing under the laws of the State of
Maryland and is in good standing and duly authorized to transact business in
the State of Maryland.
We have also examined and relied upon such corporate records of the Fund
and other documents and certificates with respect to factual matters as we have
deemed necessary to render the opinion expressed herein. We have assumed,
without independent verification, the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
with originals of all documents submitted to us as copies.
<PAGE>
<PAGE>
Brown & Wood, LLP
June 20, 1997
Page 2
Based on such examination, we are of the opinion and so advise you that
when Articles Supplementary have been filed with SDAT, and when the final terms
of the issuance of the Cumulative Preferred Stock have been authorized by
the Board of Directors pursuant to Section 2-203 of the Maryland General
Corporation Law, the Cumulative Preferred Stock to be offered for sale pursuant
to the Prospectus will have been duly authorized and, when thereafter sold,
issued and paid for as contemplated by the Prospectus, will have been validly
and legally issued and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock, but it does not extend to the securities or "Blue Sky"
laws of Maryland, to federal securities laws or to other laws.
You may rely upon our foregoing opinion in rendering your opinion to the
Fund that is to be filed as an exhibit to the Registration Statement. We consent
to the reference to us under the caption "Legal Matters" in the Prospectus and
to the filing of this opinion as an exhibit to the Registration Statement. We do
not thereby admit that we are "experts" within the meaning of the Securities Act
of 1933 and the rules and regulations thereunder. This opinion may not be relied
upon by any other person or for any other purpose without our prior written
consent.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
<PAGE>
<PAGE>
EXHIBIT 2(n)(1)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Experts" and "Financial Statements" and to the incorporation by
reference of our report dated February 25, 1997, in this Registration Statement
(Form N-2 No. 333-28615) of Royce Micro-Cap Trust, Inc.
ERNST & YOUNG LLP
New York, New York
June 19, 1997
<PAGE>
