<PAGE>
<PAGE>
PROSPECTUS
1,600,000 SHARES
ROYCE MICRO-CAP TRUST, INC.
7.75% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------
The 7.75% 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 7.75% 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)
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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'.
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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 $0.7875 $24.2125
Total(3)................................................... $40,000,000 $1,260,000 $38,740,000
</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 July 2, 1997.
------------------
SMITH BARNEY INC. PAINEWEBBER INCORPORATED
June 27, 1997
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(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 27, 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>
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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 7.75% Cumulative Preferred
Stock, par value $.001 per share, liquidation preference $25.00 per
share (the 'Cumulative Preferred Stock'), at a purchase price of
$25 per share.
</TABLE>
3
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<TABLE>
<S> <C>
Dividends................................. Dividends on the Cumulative Preferred Stock, at the annual rate of
7.75% 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 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
</TABLE>
4
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<TABLE>
<S> <C>
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 share plus accumulated and unpaid dividends (whether or
</TABLE>
5
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<PAGE>
<TABLE>
<S> <C>
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
(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 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 of its net
assets, it may be required to redeem Cumulative
</TABLE>
6
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<PAGE>
<TABLE>
<S> <C>
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
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<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')(1). 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 rate 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>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
----------------------------
<S> <C>
PERCENTAGE OF CUMULATIVE
PREFERRED STOCK
DIVIDEND COMPOSED OF* 7.75%
---------------------------
<CAPTION>
ORDINARY IS EQUIVALENT TO AN ORDINARY
L/T CAPITAL GAINS INCOME INCOME YIELD OF
- ----------------- -------- ----------------------------
<S> <C> <C>
85.0% 15.0% 9.02%
75.0% 25.0% 8.87%
50.0% 50.0% 8.49%
25.0% 75.0% 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
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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 indicated dividend rate for taxpayers in the indicated tax brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
----------------------------
<S> <C>
7.75%
<CAPTION>
1997 FEDERAL IS EQUIVALENT TO AN ORDINARY
TAX BRACKET`D' INCOME YIELD OF
- ------------------------------ ----------------------------
<S> <C>
39.6%......................... 9.02%
36.0%......................... 8.57%
31.0%......................... 8.04%
28.0% or lower................ 7.75%
</TABLE>
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`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 7.75%, 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 9.89%; for the 36.0%
bracket, the Ordinary Income equivalent yield would be 9.40%; for the 31.0%
bracket, the Ordinary Income equivalent yield would be 8.80%; for the 28.0%
bracket, the Ordinary Income equivalent yield would be 8.48%. No assurance can
be given, however, that such legislation will be enacted.
9
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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>
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* 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
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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 7.75% 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>
<C> <S>
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
<PAGE>
<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
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
18
<PAGE>
<PAGE>
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 7.75% 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
<PAGE>
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Value of Fund assets less liabilities not
constituting senior securities $152,453,022
------------------------------------------------------------ ------------
Senior securities representing indebtedness plus liquidation = $40,000,000 = 381%
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').
20
<PAGE>
<PAGE>
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
<PAGE>
<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
<PAGE>
<PAGE>
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 AMEX or on another exchange registered with the Commission as a
national securities exchange and (iv) at the time of termination of compliance
with the Rating Agency Guidelines, the cumulative cash dividend rate payable on
the Cumulative Preferred Stock is increased by .375% per annum.
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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<PAGE>
<PAGE>
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 or, if the
Fund has not previously terminated compliance with the Rating Agency Guidelines,
adversely affect the then current rating on the Cumulative Preferred Stock by
Moody's.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem their
shares of the Fund. The Fund may, however, repurchase shares of the Cumulative
Preferred Stock when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and regulations
thereunder.
BOOK-ENTRY
Shares of Cumulative Preferred Stock will initially be held in the name of
Cede & Co. ('Cede'), as nominee for The Depositary Trust Company ('DTC'). The
Fund will treat Cede as the holder of record of the Cumulative Preferred Stock
for all purposes. In accordance with the procedures of DTC, however, purchasers
of Cumulative Preferred Stock will be deemed the beneficial owners of shares
purchased for purposes of dividends, voting and liquidation rights. Purchasers
of Cumulative Preferred Stock may obtain registered certificates by contacting
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 Code.
If it so qualifies, the Fund (but not its stockholders) will not be subject to
Federal income tax on the part of its net investment income (i.e., its
investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gains (i.e., the excess of the Fund's net realized long-term capital gains over
its net realized short-term capital losses), if any, that it distributes to its
stockholders in each taxable year, provided that it distributes at least 90% of
its net investment income for such taxable year to them. The Fund intends to
distribute substantially all of such income.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund from its net investment income (such dividends
referred to hereafter as 'ordinary income dividends') are taxable to
stockholders as ordinary income. Distributions made from net capital gains
(including gains or losses from certain transactions in warrants, rights and
options) and properly designated by the Fund ('capital gain dividends') are
taxable to stockholders as long-term capital gains, regardless of the length of
time the stockholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the stockholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
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adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Capital gain dividends may be taxed at a lower rate than ordinary income
dividends for certain non-corporate taxpayers. 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 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.
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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 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.
27
<PAGE>
<PAGE>
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 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. ..................................................... 800,000
PaineWebber Incorporated............................................... 800,000
---------
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 $0.50
per share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.30 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 $0.7875 per share is
equal to 3.15% of the initial offering price. Investors must pay for any shares
of Cumulative Preferred Stock purchased on or before July 2, 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'.
The Fund has agreed that it will not sell, contract to sell, or otherwise
dispose of any senior securities of the Fund, or grant any options or warrants
to purchase senior securities of the Fund, for a period of 60 days after the
date of this Prospectus, without the prior written consent of Smith Barney Inc.
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 27, 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 7.75% 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.
7.75% CUMULATIVE PREFERRED STOCK
------------
PROSPECTUS
JUNE 27, 1997
------------
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
_____________________________ _____________________________
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
1,600,000 SHARES
ROYCE MICRO-CAP TRUST, INC.
7.75% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
The 7.75% 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 27, 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 27, 1997
<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 6.4%
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 6.4%
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
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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 $169,000,
respectively.
One or both 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
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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.
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STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as ......`D'
