-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B9jf87GtdwzHRSIhgwDRyrq96Pv6PQKvta/hJ2RBMI0bCMw/rwSea9EP+NGNdd09 oKiR3Co4Ve1r/hUCW7vFng== 0000950117-97-001070.txt : 19970623 0000950117-97-001070.hdr.sgml : 19970623 ACCESSION NUMBER: 0000950117-97-001070 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970620 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE OTC MICRO CAP FUND INC CENTRAL INDEX KEY: 0000912147 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133739778 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-28615 FILM NUMBER: 97627480 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-08030 FILM NUMBER: 97627481 BUSINESS ADDRESS: STREET 1: C/O MITCHELL HUTCHINS ASSET MANAGEMENT STREET 2: 1414 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127138392 MAIL ADDRESS: STREET 1: ROYCE OTC MICRO -CAP FUND INC STREET 2: 1285 AVE OF THE AMERICAS 16TH FLR CITY: NEW YORK STATE: NY ZIP: 10019 N-2/A 1 ROYCE MICRO-CAP TRUST, INC N-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997 SECURITIES ACT FILE NO. 333-28615 INVESTMENT COMPANY ACT FILE NO. 811-8030 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-2 [x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] POST-EFFECTIVE AMENDMENT NO. AND/OR [x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x] AMENDMENT NO. 5 (CHECK APPROPRIATE BOX OR BOXES) ------------------------ ROYCE MICRO-CAP TRUST, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) ------------------------ 1414 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (800) 221-4268 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ CHARLES M. ROYCE, PRESIDENT ROYCE MICRO-CAP TRUST, INC. 1414 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (NAME AND ADDRESS OF AGENT FOR SERVICE) ------------------------ COPIES TO: FRANK P. BRUNO, ESQ. HOWARD J. KASHNER, ESQ. GARY S. SCHPERO, ESQ. BROWN & WOOD LLP ROYCE MICRO-CAP TRUST, INC. SIMPSON THACHER & BARTLETT ONE WORLD TRADE CENTER 1414 AVENUE OF THE AMERICAS 425 LEXINGTON AVENUE NEW YORK, NEW YORK 10048-0557 NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017
------------------------ APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended (the 'Securities Act'), other than securities offered in connection with a dividend reinvestment plan, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
============================================================================================================================ AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED(1) PER SHARE(1) OFFERING PRICE(1) FEE(2) - ---------------------------------------------------------------------------------------------------------------------------- % Cumulative Preferred Stock 1,600,000 Shares $25.00 $40,000,000 $12,121.21 ============================================================================================================================
(1) Estimated solely for the purpose of calculating the filing fee. (2) Previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ________________________________________________________________________________ CROSS-REFERENCE SHEET
ITEM NUMBER IN FORM N-2 CAPTION IN PROSPECTUS - -------------------------------------------------------------------------- -------------------------------------- PART A -- INFORMATION REQUIRED IN A PROSPECTUS 1. Outside Front Cover................................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Page.............................. Inside Front and Outside Back Cover Page; Underwriting 3. Fee Table and Synopsis................................................ Not Applicable 4. Financial Highlights.................................................. Financial Highlights 5. Plan of Distribution.................................................. Outside Front Cover Page; Prospectus Summary; Underwriting 6. Selling Shareholders.................................................. Not Applicable 7. Use of Proceeds....................................................... Use of Proceeds; Investment Objective and Policies 8. General Description of the Registrant................................. Front Cover Page; Prospectus Summary; The Fund; Investment Objective and Policies 9. Management............................................................ Prospectus Summary; Investment Advisory and Other Services; Custodian, Transfer Agent and Dividend-Paying Agent 10. Capital Stock, Long-Term Debt, and Other Securities................... Front Cover Page; Prospectus Summary; Ordinary Income Equivalent Yield Tables; Capitalization; Investment Objective and Policies; Description of Cumulative Preferred Stock; Description of Capital Stock; Taxation 11. Defaults and Arrears on Senior Securities............................. Not Applicable 12. Legal Proceedings..................................................... Not Applicable 13. Table of Contents of the Statement of Additional Information......................................................... Table of Contents of Statement of Additional Information PART B -- INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 14. Cover Page............................................................ Front Cover Page 15. Table of Contents..................................................... Front Cover Page 16. General Information and History....................................... Not Applicable 17. Investment Objective and Policies..................................... Not Applicable 18. Management............................................................ Directors and Officers; Investment Advisory and Other Services 19. Control Persons and Principal Holders of Securities................... Principal Stockholders 20. Investment Advisory and Other Services................................ Investment Advisory and Other Services 21. Brokerage Allocation and Other Practices.............................. Brokerage Allocation and Other Practices 22. Tax Status............................................................ Not Applicable 23. Financial Statements.................................................. Financial Statements PART C -- OTHER INFORMATION Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement.
SUBJECT TO COMPLETION, DATED JUNE 20, 1997 PROSPECTUS 1,600,000 SHARES ROYCE MICRO-CAP TRUST, INC. % CUMULATIVE PREFERRED STOCK (LIQUIDATION PREFERENCE $25.00 PER SHARE) ------------------ The % Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Micro-Cap Trust, Inc. (the 'Fund') will be senior securities of the Fund. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. The Fund is a closed-end diversified management investment company. The Fund's investment objective is to seek long-term capital appreciation by investing primarily in equity securities of companies that, at the time of investment, have market capitalizations of $300 million or less. Royce & Associates, Inc. is the Fund's investment adviser. Dividends on the Cumulative Preferred Stock offered hereby, at the annual rate of % of the liquidation preference, are cumulative from the Date of Original Issue thereof and are payable quarterly on March 23, June 23, September 23 and December 23, commencing on September 23, 1997. During the Fund's most recent fiscal year, distributions paid by the Fund on its Common Stock consisted primarily of long-term capital gains, and under current market conditions the investment adviser expects that dividends paid on the Cumulative Preferred Stock similarly will consist primarily of long-term capital gains. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of long-term capital gains. It is a condition to its issuance that the Cumulative Preferred Stock be rated 'aaa' by Moody's Investors Service, Inc. ('Moody's'). In connection with the receipt of such rating, the composition of the Fund's portfolio must reflect guidelines established by Moody's, and the Fund will be required to maintain a certain discounted asset coverage with respect to the Cumulative Preferred Stock. The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund for cash at a price equal to $25 per share plus accumulated but unpaid dividends (whether or not earned or declared) (the 'Redemption Price') if the Fund fails to maintain a quarterly asset coverage of at least 225% or to maintain the discounted asset coverage required by Moody's. Commencing July 1, 2002 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock in whole or in part for cash at a price equal to the Redemption Price. Prior to July 1, 2002, the Cumulative Preferred Stock will be redeemable, at the option of the Fund, for cash at a price equal to the Redemption Price, only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption'. (Continued on next page) ------------------ APPLICATION HAS BEEN MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE AMERICAN STOCK EXCHANGE (THE 'AMEX'). TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE AMEX IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE 'UNDERWRITING'. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================================================================================== UNDERWRITING PRICE TO DISCOUNTS PROCEEDS PUBLIC(1) OR COMMISSIONS(2) TO FUND(3) - ------------------------------------------------------------------------------------------------------------------------ Per Share.................................................. $25.00 $ $ - ------------------------------------------------------------------------------------------------------------------------ Total(3)................................................... $40,000,000 $ $ ========================================================================================================================
(1) Plus accumulated dividends, if any, from the Date of Original Issue. (2) The Fund and the investment adviser have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (3) Before deducting offering expenses payable by the Fund, estimated at $240,000. ------------------ The shares of Cumulative Preferred Stock are being offered by the Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that delivery of the shares of Cumulative Preferred Stock will be made in book-entry form through the facilities of The Depository Trust Company on or about June , 1997. ------------------ SMITH BARNEY INC. PAINEWEBBER INCORPORATED June , 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. (continued from cover page) If the Fund voluntarily terminates compliance with the Moody's guidelines, the dividend rate payable on the Cumulative Preferred Stock will be increased and, among other things, the Fund will no longer be required to maintain the discounted asset coverage required by Moody's. See 'Investment Objective and Policies -- Rating Agency Guidelines' and 'Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines'. This Prospectus sets forth certain information an investor should know before investing and should be retained for future reference. A Statement of Additional Information dated June , 1997 has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The table of contents of the Statement of Additional Information appears on page 31 of this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing to the Fund at its address at 1414 Avenue of the Americas, New York 10019, or calling the Fund toll-free at (800) 221-4268. ------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING'. 2 PROSPECTUS SUMMARY The following information is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus and the Statement of Additional Information. Capitalized terms not defined in this Summary are defined in the Glossary that appears at the end of this Prospectus. The Fund; Investment Objective and Policies................................ Royce Micro-Cap Trust, Inc. (the 'Fund') has been engaged in business as a closed-end diversified management investment company since its initial offering in December 1993. The investment objective of the Fund is long-term capital appreciation, which it seeks by investing at least 65% of its assets in common stocks, convertible securities and warrants of companies that, at the time of investment, have market capitalizations of $300 million or less ('micro-cap companies'). No assurance can be given that the Fund's investment objective will be achieved. The Fund's average annual total returns on the net asset values of its Common Stock for the one year and three year periods ended May 31, 1997, and from inception on December 14, 1993 to May 31, 1997, were 9.4%, 17.0% and 14.9%, respectively. Total return figures are based on the Fund's historical performance, assume reinvestment of distributions and full primary participation in its 1994 rights offering, and are not intended to indicate future performance. See 'Investment Objective and Policies'. The Investment Adviser.................... Royce & Associates, Inc. ('Royce'), formerly known as Quest Advisory Corp., has served as the investment adviser to the Fund since its inception. Royce also serves as investment adviser to other management investment companies, with aggregate net assets of approximately $1.7 billion as of May 31, 1997, and manages other institutional accounts. As compensation for its services under the present Investment Advisory Agreement, Royce will receive a fee at a rate ranging from .5% up to 1.5% per annum of the Fund's average net assets for the applicable performance period, depending upon the investment performance of the Fund relative to the investment record of the Russell 2000 Index (the 'Russell 2000'), over rolling periods of up to 36 months. For a more detailed description of the method by which the advisory fee is determined, see 'Investment Advisory and Other Services -- Advisory Fee'. Charles M. Royce, Royce's President, Chief Investment Officer and sole voting shareholder, is primarily responsible for managing the Fund's portfolio. He is assisted by Royce's investment staff, including W. Whitney George, Portfolio Manager and Managing Director, and by Jack E. Fockler, Jr., Managing Director. See 'Investment Advisory and Other Services -- Portfolio Management' herein and 'Directors and Officers' in the Statement of Additional Information. The Offering.............................. The Fund is offering 1,600,000 shares of % Cumulative Preferred Stock, par value $.001 per share, liquidation
3 preference $25.00 per share (the 'Cumulative Preferred Stock'), at a purchase price of $25 per share. Dividends................................. Dividends on the Cumulative Preferred Stock, at the annual rate of % of the liquidation preference, are cumulative from the Date of Original Issue and are payable, when, as and if declared by the Board of Directors of the Fund out of funds legally available therefor, quarterly on March 23, June 23, September 23 and December 23, commencing on September 23, 1997, to holders of record on the preceding March 6, June 6, September 6 and December 6, respectively. See 'Description of Cumulative Preferred Stock -- Dividends'. Potential Tax Benefit to Certain Investors............................... The Fund is required to allocate income taxed as long-term capital gains, as well as other types of income, proportionately among holders of shares of Common Stock and shares of Cumulative Preferred Stock in accordance with the current position of the Internal Revenue Service (the 'IRS'). During the Fund's most recent fiscal year, distributions paid by the Fund on its Common Stock consisted primarily of income taxed as long-term capital gains, and under current market conditions Royce expects that dividends paid on the Cumulative Preferred Stock similarly will consist primarily of such income. Certain investors in the Cumulative Preferred Stock may realize a tax benefit to the extent that dividends paid by the Fund on those shares are composed of long-term capital gains. See 'Ordinary Income Equivalent Yield Tables'. Subject to statutory limitations, investors may also be entitled to offset the portion of their dividends on Cumulative Preferred Stock that consists of long-term capital gains with capital losses incurred by such investors. See 'Taxation'. No assurance can be given, however, as to what percentage, if any, of the dividends to be paid on the Cumulative Preferred Stock will consist of long-term capital gains. To the extent that dividends on the shares of Cumulative Preferred Stock are not paid from long-term capital gains, they will be paid from net investment income (which includes both ordinary income and short-term capital gains) and taxed as ordinary income or will represent a return of capital. Rating.................................... It is a condition to its issuance that the Cumulative Preferred Stock be issued with a rating of 'aaa' from Moody's Investors Service, Inc. ('Moody's'). The Articles Supplementary creating and fixing the rights and preferences of the Cumulative Preferred Stock (the 'Articles Supplementary') contain certain provisions which reflect guidelines established by Moody's (the 'Rating Agency Guidelines') in order to obtain such rating on the Cumulative Preferred Stock on the Date of Original Issue. Although it is the Fund's present intention to continue to comply with the Rating Agency Guidelines, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to do so. If the Fund voluntarily terminates compliance with the Rating Agency Guidelines, the dividend rate payable on the Cumulative
4 Preferred Stock will be increased by .375% per annum and, among other things, the Fund will no longer be required to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount. See 'Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines'. Asset Coverage............................ The Fund will be required to maintain, as of the last Business Day of March, June, September and December of each year, Asset Coverage of at least 225% with respect to the Cumulative Preferred Stock. This required Asset Coverage is greater than the 200% asset coverage required by Section 18 of the Investment Company Act of 1940, as amended (the '1940 Act'). If the Fund had issued and sold the Cumulative Preferred Stock offered hereby as of December 31, 1996 and May 31, 1997, the Asset Coverage would have been 381% and 399%, respectively. See 'Description of Cumulative Preferred Stock -- Asset Maintenance'. Also, pursuant to the Rating Agency Guidelines, the Fund will be required to maintain a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount. The discount factors and guidelines for determining the Portfolio Calculation have been established by Moody's in connection with the Fund's receipt of a rating on the Cumulative Preferred Stock on its Date of Original Issue of 'aaa' from Moody's. See 'Investment Objective and Policies -- Rating Agency Guidelines'. Voting Rights............................. At all times, holders of shares of Cumulative Preferred Stock and any other Preferred Stock will elect two members of the Fund's Board of Directors, and holders of Cumulative Preferred Stock, any other Preferred Stock and Common Stock, voting as a single class, will elect the remaining directors. However, upon a failure by the Fund to pay dividends on the Cumulative Preferred Stock and/or any other Preferred Stock in an amount equal to two full years' dividends, holders of Cumulative Preferred Stock, voting as a separate class with any other outstanding shares of Preferred Stock of the Fund, will have the right to elect the smallest number of directors that would constitute a majority of the directors until cumulative dividends have been paid or provided for. Holders of Cumulative Preferred Stock and any other Preferred Stock will vote separately as a class on certain other matters, as required under the Fund's Articles Supplementary, the 1940 Act and Maryland law. Except as otherwise indicated in this Prospectus and as otherwise required by applicable law, holders of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of Common Stock as a single class. See 'Description of Cumulative Preferred Stock -- Voting Rights'. Mandatory Redemption...................... The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund in the event that the Fund fails to maintain the quarterly Asset Coverage or to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount required by Moody's and does not cure such failure by the applicable cure date. Any such redemption will be made for cash at a price equal to $25 per
5 share plus accumulated and unpaid dividends (whether or not earned or declared) to the redemption date (the 'Redemption Price'). In the event that shares are redeemed due to a failure to maintain the quarterly Asset Coverage, the Fund may redeem a sufficient number of shares of Cumulative Preferred Stock in order that the asset coverage, as defined in the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption is up to 250%. In the event that shares are redeemed due to a failure to maintain a Portfolio Calculation at least equal to the Basic Maintenance Amount, the Fund may redeem a sufficient number of shares of Cumulative Preferred Stock in order that the Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock by up to 10%. See 'Description of Cumulative Preferred Stock -- Redemption -- Mandatory Redemption'. Optional Redemption....................... Commencing July 1, 2002 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock, in whole or in part, for cash at a price equal to the Redemption Price. Prior to July 1, 2002, the Cumulative Preferred Stock will be redeemable at the option of the Fund at the Redemption Price only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See 'Description of Cumulative Preferred Stock -- Redemption -- Optional Redemption'. Liquidation Preference.................... The liquidation preference of each share of Cumulative Preferred Stock is $25 plus an amount equal to accumulated and unpaid dividends (whether or not earned or declared) to the date of distribution. See 'Description of Cumulative Preferred Stock -- Liquidation Rights'. Use of Proceeds........................... The Fund will use the net proceeds from the offering of the Cumulative Preferred Stock to purchase additional portfolio securities in accordance with its investment objective and policies. See 'Use of Proceeds'. Listing................................... Prior to this offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the shares of Cumulative Preferred Stock on the American Stock Exchange. However, during an initial period, which is not expected to exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock may not be listed on such Exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period. Special Considerations and Risk Factors... The market price for the Cumulative Preferred Stock will be influenced by changes in interest rates, the perceived credit quality of the Cumulative Preferred Stock and other factors. As indicated above, the Cumulative Preferred Stock is subject to redemption under specified circumstances. To the extent that the Fund experiences a substantial decline in the value
6 of its net assets, it may be required to redeem Cumulative Preferred Stock to restore compliance with the applicable asset coverage requirements. See 'Description of Cumulative Preferred Stock -- Redemption'. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn while an investor holds shares, either as a result of the Fund's termination of compliance with the Rating Agency Guidelines or otherwise, and the credit rating does not eliminate or mitigate the risks of investing in the Cumulative Preferred Stock. A reduction or withdrawal of the credit rating may have an adverse effect on the market value of the Cumulative Preferred Stock. See 'Description of Cumulative Preferred Stock -- Termination of Rating Agency Guidelines'. Payments to the holders of Cumulative Preferred Stock of dividends or upon redemption or in liquidation will be subject to the prior payments of interest and repayment of principal then due on any outstanding indebtedness of the Fund. As of May 31, 1997, the Fund had no outstanding indebtedness and had not issued any Preferred Stock. See 'Investment Objective and Policies -- Senior Securities and Borrowing of Money'. All equity securities are subject to price volatility, the potential bankruptcy of the issuer, general movements in markets, overall economic conditions and perceptions of potential growth. The Fund primarily invests in micro-cap securities, for which these characteristics are particularly pronounced and which are more volatile in price and less liquid than the equity securities of larger-cap companies. See 'Investment Objective and Policies -- Investment Policies and Risk Factors'. Federal Income Tax Considerations......... The Fund has qualified, and intends to remain qualified, for Federal income tax purposes, as a regulated investment company. Qualification requires, among other things, compliance by the Fund with certain distribution requirements. Limitations on distributions if the Fund failed to satisfy the Asset Coverage or Portfolio Calculation requirements could jeopardize the Fund's ability to meet the distribution requirements. The Fund presently intends, however, to the extent possible, to purchase or redeem Cumulative Preferred Stock if necessary in order to maintain compliance with such requirements. See 'Taxation' for a more complete discussion of these and other Federal income tax considerations. Administrator............................. Mitchell Hutchins Asset Management Inc., an affiliate of PaineWebber Incorporated, serves as the Fund's administrator. See 'Investment Advisory and Other Services -- Administration Agreement' and 'Underwriting'. Custodian, Transfer and Dividend-Paying Agent and Registrar..................... State Street Bank and Trust Company ('State Street') serves as the Fund's custodian and, with respect to the Cumulative Preferred Stock, as transfer and dividend paying agent and registrar and as agent to provide notice of redemption and certain voting rights. See 'Custodian, Transfer and Dividend-Paying Agent and Registrar'.
7 ORDINARY INCOME EQUIVALENT YIELD TABLES For the fiscal year of the Fund ended December 31, 1996, distributions paid by the Fund on its Common Stock consisted of 85% long-term capital gains ('L/T Capital Gains') and 15% ordinary income/short-term capital gains ('Ordinary Income'). Individual investors in the Cumulative Preferred Stock who are in a Federal marginal income tax bracket higher than the current 28.0% maximum Federal tax rate on long-term capital gains would, under the current position of the IRS, realize a tax advantage on their investment to the extent that distributions by the Fund to its stockholders continue to be partially composed of the less highly taxed long-term capital gains. The following table shows examples of the pure Ordinary Income equivalent yield that would be generated by the indicated dividend rates on the Cumulative Preferred Stock, assuming distributions consisting of four different proportions of L/T Capital Gains and Ordinary Income for an investor in the 39.6% Federal marginal tax bracket and assuming no change in the current maximum Federal long-term capital gain tax rate for individuals of 28.0%.
PERCENTAGE OF CUMULATIVE PREFERRED A CUMULATIVE PREFERRED STOCK DIVIDEND COMPOSED OF* STOCK DIVIDEND RATE OF - ------------------------------ ------------------------ 7.50% 7.625% 7.75% ORDINARY IS EQUIVALENT TO AN L/T CAPITAL GAINS INCOME ORDINARY INCOME YIELD OF - ----------------- -------- ------------------------ 85.0% 15.0% 8.72% 8.87% 9.02% 75.0% 25.0% 8.58% 8.72% 8.87% 50.0% 50.0% 8.22% 8.36% 8.49% 25.0% 75.0% 7.86% 7.99% 8.12%
- ------------ 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 As illustrated in the table below, the yield advantage of the lower Federal long-term capital gain tax rate would be diminished for investors in tax brackets below the 39.6% rate assumed in the table above, and there would be no effect on the yield for an investor in a Federal marginal income tax bracket of 28.0% or lower. Assuming a Cumulative Preferred Stock dividend composed of 85% L/T Capital Gains and 15% Ordinary Income (representing the composition of distributions paid by the Fund for its most recent fiscal year), the following table shows the pure Ordinary Income equivalent yields that would be generated at the assumed dividend rates for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF ---------------------------------------------- 7.50% 7.625% 7.75% 1997 FEDERAL TAX BRACKET`D' IS EQUIVALENT TO AN ORDINARY INCOME YIELD OF - --------------------------------------------------------- ---------------------------------------------- 39.6%.................................................... 8.72% 8.87% 9.02% 36.0%.................................................... 8.30% 8.44% 8.57% 31.0%.................................................... 7.78% 7.91% 8.04% 28.0% or lower........................................... 7.50% 7.625% 7.75%
- ------------ `D' Annual taxable income levels corresponding to the 1997 Federal marginal tax brackets are as follows: 39.6% -- over $271,050 for both single and joint returns; 36.0% -- $124,651-$271,050 for single returns, $151,751-$271,050 for joint returns; 31.0% -- $59,751-$124,650 for single returns, $99,601-$151,750 for joint returns; and 28.0% -- $24,651-$59,750 for single returns, $41,201-$99,600 for joint returns. An investor's marginal tax rate may exceed the rates shown in the above table due to the reduction, or possible elimination, of the personal exemption deduction for high-income taxpayers and an overall limit on itemized deductions. Income also may be subject to certain state, local and foreign taxes. For investors who pay alternative minimum tax, equivalent yields may be lower than those shown above. The tax rates shown above do not apply to corporate taxpayers. ------------------------- The tax characteristics of the Fund are described more fully under 'Taxation'. The two preceding charts are for illustrative purposes only and cannot be taken as an indication of the composition of the Fund's future distributions. As of the date of this Prospectus, legislation has been proposed that would reduce the maximum Federal long-term capital gain tax rate for individuals from 28.0% to 20.0%. If such legislation were enacted, the Ordinary Income equivalent yields would be higher than those presented in the tables above. For example, a Cumulative Preferred Stock dividend at the annual rate of 7.625%, consisting of 85% L/T Capital Gains and 15% Ordinary Income paid to an individual in the 39.6%, bracket would be equivalent to an Ordinary Income yield of 9.73%; for the 36.0% bracket, the Ordinary Income equivalent yield would be 9.25%; for the 31.0% bracket, the Ordinary Income equivalent yield would be 8.66%; for the 28.0% bracket, the Ordinary Income equivalent yield would be 8.35%. No assurance can be given, however, that such legislation will be enacted. 9 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.
PERIOD FROM YEAR ENDED DECEMBER 31, DEC. 14, 1993* ------------------------------- TO 1996 1995 1994 DEC. 31, 1993 -------- -------- ------- -------------- 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 -- -- --
- ------------ * 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 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.
OUTSTANDING AS ADJUSTED ------------ ------------ Stockholders' equity: Preferred Stock, $.001 par value: No shares authorized, issued or outstanding; as adjusted, 5,000,000 shares of % Cumulative Preferred Stock authorized, and 1,600,000 of such shares issued and outstanding................................................ -- $ 40,000,000 ------------ ------------ ------------ ------------ Common Stock, $.001 par value: Authorized 150,000,000 shares; 12,153,511 shares issued and outstanding; as adjusted, 145,000,000 shares authorized.................. $ 12,154 $ 12,154 Additional paid-in capital................................................ 88,111,021 86,611,021(1) Dividends in excess of net investment income.............................. (152,608) (152,608) Accumulated net realized gain on investments.............................. 4,709,893 4,709,893 Net unrealized appreciation on investments................................ 21,272,562 21,272,562 ------------ ------------ Net assets applicable to outstanding Common Stock......................... $113,953,022 $112,453,022 ------------ ------------ ------------ ------------
- ------------ (1) After deducting underwriting discounts and estimated costs of this offering of $1,500,000. 11 PORTFOLIO COMPOSITION The following tables set forth certain information with respect to the Fund's investment portfolio as of December 31, 1996.
VALUE PERCENTAGE ------------ ---------- 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% ------------ ---------- ------------ ----------
SECTOR WEIGHTINGS IN COMMON STOCK PORTFOLIO
VALUE PERCENTAGE ------------ ---------- 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% ------------ ----- ------------ -----
OTHER INFORMATION REGARDING COMMON STOCK INVESTMENTS Number of issuers............................................................................ 183 Median market capitalization (total portfolio)............................................... $156 million
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 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 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 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 outstanding shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% or more of the relevant shares of capital stock of the Fund present or represented at a meeting of stockholders, at which the holders of more than 50% of the outstanding relevant shares of capital stock are present or represented, or (ii) more than 50% of the outstanding relevant shares of capital stock of the Fund). Except as indicated under 'Investment Restrictions' below, the Fund does not consider its other policies to be fundamental, and such policies may be changed by the Board of Directors without stockholder approval or prior notice to stockholders. INVESTMENT RESTRICTIONS The policies set forth below are fundamental policies of the Fund and may not be changed without the affirmative vote of the holders of a majority of the Fund's outstanding voting securities, as indicated above under ' -- Changes in Investment Objective and Policies'. The Fund may not: 1. 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.
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 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 maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and would be payable if the investment performance of the Fund exceeded the percentage change in the investment record of the Russell 2000 by 12 or more percentage points for the performance period, and the minimum monthly fee rate as adjusted for performance is 1/12 of .5% and would be payable if the percentage change in the investment record of the Russell 2000 exceeded the investment performance of the Fund by 12 or more percentage points for the performance period. In order to avoid the impact of short-term differences between the investment performance of the Fund and the record of the Russell 2000, Royce will not collect any accrued portion of the Basic Fee, as adjusted for performance, in excess of .5% until January 1998. The present Investment Advisory Agreement replaced a similar investment advisory agreement between the Fund and Royce, under which the Fund's investment performance was measured against the record of the Nasdaq Composite over a rolling period of up to 36 months. The present Investment Advisory Agreement provides that, for the 18 month period from January 1, 1997 to June 30, 1998, the monthly fee payable to Royce will be the lower of the fee calculated under such Agreement or the fee that would have been payable to Royce for the month involved under the prior agreement. Because the Basic Fee is computed based on the Fund's net assets and not of its total assets, Royce will not receive any fee in respect of those assets of the Fund equal to the aggregate unpaid principal amount of any indebtedness of the Fund. However, because preferred stock is a form of equity, Royce will receive a fee in respect of any assets of the Fund equal to the liquidation preference of and any potential redemption premium for any Preferred Stock that may be issued and sold by the Fund, including the Cumulative Preferred Stock. See 'Investment Advisory and Other Services' in the Statement of Additional Information. ADMINISTRATION AGREEMENT Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins' or the 'Administrator'), an affiliate of PaineWebber Incorporated, one of the Representatives of the Underwriters, with offices at 1285 Avenue of the Americas, New York, New York 10019, has acted as Administrator for the Fund and has performed certain administrative services for it since December 1993. As compensation for its services under the Administration Agreement, the Administrator receives a monthly fee at the annual rate of $50,000 plus 0.05% of the Fund's average daily net assets up to $125 million and 0.03% of the Fund's average daily net assets in excess of $125 million. DESCRIPTION OF CUMULATIVE PREFERRED STOCK The following is a brief description of the terms of the Cumulative Preferred Stock. This description does not purport to be complete and is qualified by reference to the Articles Supplementary, the form of which is filed as an exhibit to the Fund's Registration Statement. Certain of the capitalized terms used herein are defined in the Glossary that appears at the end of this Prospectus. GENERAL Under the Articles Supplementary, the Fund will be authorized to issue up to 5,000,000 shares of Cumulative Preferred Stock, 1,600,000 of which are being offered hereby. No fractional shares of Cumulative Preferred Stock will be issued. As of the date of this Prospectus, there were no shares of Cumulative Preferred Stock or any other Preferred Stock of the Fund issued or outstanding. The Board of Directors reserves the right to issue additional shares of Cumulative Preferred Stock or other Preferred Stock from time to time, subject to the restrictions in the Articles Supplementary and the 1940 Act. The shares of Cumulative Preferred Stock will, upon issuance, be fully paid and nonassessable and will have no preemptive, exchange or conversion rights. Any shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be classified as authorized but unissued Preferred Stock. The Board of Directors may by resolution classify or reclassify any authorized but unissued Preferred Stock from time to time by setting or changing the preferences, rights, voting powers, restrictions, limitations 18 or terms of redemption. The Fund will not issue any class of stock senior to the shares of Cumulative Preferred Stock. DIVIDENDS Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Fund out of funds legally available therefor, cumulative cash dividends, at the annual rate of % of the liquidation preference of $25 per share, payable quarterly on March 23, June 23, September 23 and December 23 (each, a 'Dividend Payment Date'), commencing on September 23, 1997, to the persons in whose names the shares of Cumulative Preferred Stock are registered at the close of business on the preceding March 6, June 6, September 6 and December 6, respectively. Dividends on the shares of Cumulative Preferred Stock will accumulate from the date on which such shares are originally issued (the 'Date of Original Issue'). No dividends will be declared or paid or set apart for payment on shares of Cumulative Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Date thereof. If full cumulative dividends are not paid on the Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred Stock will be paid pro rata to the holders of the shares of Cumulative Preferred Stock. Holders of Cumulative Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment that may be in arrears. For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of its Common Stock or any other junior stock (except by conversion into or exchange for stock of the Fund ranking junior to the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (i) immediately after such transaction, the Fund will have a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount and the Fund will maintain the Asset Coverage (see ' -- Asset Maintenance' and ' -- Redemption' below), (ii) full cumulative dividends on shares of Cumulative Preferred Stock due on or prior to the date of the transaction have been declared and paid (or sufficient Deposit Securities to cover such payment have been deposited with the Paying Agent) and (iii) the Fund has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision for mandatory redemption contained in the Articles Supplementary. ASSET MAINTENANCE The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Articles Supplementary. These requirements are summarized below. Asset Coverage. The Fund will be required under the Articles Supplementary to maintain as of the last Business Day of each March, June, September and December of each year, an 'asset coverage' (as defined by the 1940 Act) of at least 225% (or such higher percentage as may be required under the 1940 Act) with respect to all outstanding senior securities of the Fund which are stock, including the Cumulative Preferred Stock (the 'Asset Coverage'). This required Asset Coverage is higher than the 200% asset coverage required by the 1940 Act. If the Fund fails to maintain the Asset Coverage on such dates and such failure is not cured in 60 days, the Fund will be required under certain circumstances to redeem certain of the shares of Cumulative Preferred Stock. See ' -- Redemption' below. If the shares of Cumulative Preferred Stock offered hereby had been issued and sold on December 31, 1996, the Asset Coverage immediately following such issuance and sale (after giving 19 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: Value of Fund assets less liabilities not constituting senior securities $152,453,022 ------------------------------------------------------------ = ------------ = 381% Senior securities representing indebtedness plus liquidation $40,000,000 preference of the Cumulative Preferred Stock
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 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 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 voting rights of the holders of shares of Cumulative Preferred Stock and any other Preferred Stock as described above will cease, and the terms of office of all of the additional directors elected by the holders of shares of Cumulative Preferred Stock and any other Preferred Stock (but not of the directors with respect to whose election the holders of shares of Common Stock were entitled to vote or the two directors the holders of shares of Cumulative Preferred Stock and any other Preferred Stock have the right to elect in any event) will terminate automatically. So long as shares of the Cumulative Preferred Stock are outstanding, the Fund will not, without the affirmative vote of the holders of two-thirds of the shares of Cumulative Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of the Cumulative Preferred Stock. The Board of Directors, however, without stockholder approval, may amend, alter or repeal the Rating Agency Guidelines in the event the Fund receives confirmation from Moody's that any such amendment, alteration or repeal would not impair the rating then assigned to the Cumulative Preferred Stock. Furthermore, under certain circumstances, without the vote of stockholders, the Board of Directors of the Fund may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines. See ' -- Termination of Rating Agency Guidelines' below. The affirmative vote of a majority of the votes entitled to be cast by holders of outstanding shares of the Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be required to approve any plan of reorganization adversely affecting such shares or any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, changes in the Fund's investment objective or changes in the investment restrictions described as fundamental policies under 'Investment Objective and Policies'. The class vote of holders of shares of the Cumulative Preferred Stock and any other Preferred Stock described above in each case will be in addition to a separate vote of the requisite percentage of shares of Common Stock and Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class, necessary to authorize the action in question. See 'Description of Capital Stock -- Certain Voting Requirements'. The foregoing voting provisions will not apply to any shares of Cumulative Preferred Stock if, at or prior to the time when the act with respect to which such vote otherwise would be required will be effected, such shares will have been (i) redeemed or (ii) called for redemption and sufficient Deposit Securities provided to the Paying Agent to effect such redemption. TERMINATION OF RATING AGENCY GUIDELINES The Articles Supplementary provide that the Board of Directors may determine that it is not in the best interests of the Fund to continue to comply with the Rating Agency Guidelines, in which case the Fund will no longer be required to comply with such guidelines, provided that (i) the Fund has given the Paying Agent, Moody's and holders of the Cumulative Preferred Stock at least 20 calendar days written notice of such termination of compliance, (ii) the Fund is in compliance with the Rating Agency Guidelines at the time the notice required in clause (i) above is given and at the time of termination of compliance with the Rating Agency Guidelines, (iii) at the time the notice required in clause (i) above is given and at the time of termination of compliance with the Rating Agency Guidelines, the Cumulative Preferred Stock is listed on the American Stock Exchange or on another exchange registered with the Commission as a national securities exchange and (iv) at the time of termination of compliance with the Rating Agency Guidelines, the cumulative cash dividend rate payable on the Cumulative Preferred Stock is increased by .375% per annum. If the Fund terminates compliance with the Rating Agency Guidelines, Moody's may change its rating on the Cumulative Preferred Stock or withdraw its rating altogether, which may have an adverse effect on the market value of the Cumulative Preferred Stock. It is the Fund's present intention to continue to comply with the Rating Agency Guidelines. 23 LIMITATION ON ISSUANCE OF ADDITIONAL PREFERRED STOCK So long as any shares of Cumulative Preferred Stock are outstanding, the Articles Supplementary provide that the Fund may issue and sell up to 3,400,000 additional shares of the Cumulative Preferred Stock and/or shares of one of more other series of the Preferred Stock, provided that (i) immediately after giving effect to the issuance and sale of such additional Preferred Stock and to the Fund's receipt and application of the proceeds thereof, the Fund will maintain the Asset Coverage of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Fund then outstanding, and (ii) no such additional Preferred Stock will have any preference or priority over any other Preferred Stock of the Fund upon the distribution of the assets of the Fund or in respect of the payment of dividends. ABILITY TO MODIFY ARTICLES SUPPLEMENTARY The Articles Supplementary provide that, to the extent permitted by law, the Board of Directors may, without the vote of the holders of the Cumulative Preferred Stock or any other capital stock of the Fund, amend the provisions of the Articles Supplementary to resolve any inconsistency or ambiguity or remedy any formal defect so long as the amendment does not materially adversely affect any of the contract rights set forth in the Charter of holders of shares of the Cumulative Preferred Stock or any other capital stock of the Fund. REPURCHASE OF CUMULATIVE PREFERRED STOCK The Fund is a closed-end investment company and, as such, holders of Cumulative Preferred Stock do not, and will not, have the right to redeem their shares of the Fund. The Fund may, however, repurchase shares of the Cumulative Preferred Stock when it is deemed advisable by the Board of Directors in compliance with the requirements of the 1940 Act and the rules and regulations thereunder. BOOK-ENTRY Shares of Cumulative Preferred Stock will initially be held in the name of Cede & Co. ('Cede'), as nominee for The Depositary Trust Company ('DTC'). The Fund will treat Cede as the holder of record of the Cumulative Preferred Stock for all purposes. In accordance with the procedures of DTC, however, purchasers of Cumulative Preferred Stock will be deemed the beneficial owners of shares purchased for purposes of dividends, voting and liquidation rights. Purchasers of Cumulative Preferred Stock may obtain registered certificates by contacting State Street. DESCRIPTION OF CAPITAL STOCK CAPITAL STOCK Common Stock. The Fund is authorized to issue 150,000,000 shares of capital stock, par value $.001 per share, all of which shares were initially classified as Common Stock. Each share of Common Stock has equal voting, dividend, distribution and liquidation rights. The shares of Common Stock outstanding are fully paid and non-assessable. The shares of Common Stock are not redeemable and have no preemptive, exchange, conversion or cumulative voting rights. As a Nasdaq National Market System-listed company, the Fund is required to hold annual meetings of its stockholders. Preferred Stock. The Board of Directors is authorized to classify or reclassify any unissued shares of capital stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares. In this regard, the Board of Directors has reclassified 5,000,000 shares of unissued Common Stock as Cumulative Preferred Stock, of which 1,600,000 are offered hereby. The terms of the Cumulative Preferred Stock materially limit and/or qualify the rights of the holders of the Fund's Common Stock. See 'Description of Cumulative Preferred Stock'. 24 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.
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) - ------------------------------------------------------- ----------- ----------- --------------- Common Stock........................................... 145,000,000 -0- 12,153,511 Cumulative Preferred Stock............................. 5,000,000 -0- -0-
CERTAIN VOTING REQUIREMENTS Under the Fund's Charter, (i) any merger of the Fund into or with another entity, any consolidation of the Fund with another entity, any share exchange to which the Fund is a party or any sale, transfer or other disposition not in the ordinary course of its business of all or substantially all of the Fund's assets, (ii) any dissolution or other liquidation of the Fund, (iii) any conversion of the Fund from a closed-end fund to another type of investment company and (iv) any change in the nature of the Fund's business that would cause it to cease to be an investment company will have to be recommended by the Board, including a majority of the non-interested directors, and approved by the holders of at least 66 2/3% of the outstanding shares of the Fund's Common Stock and Preferred Stock, voting together as a single class. Such 66 2/3% vote, which will also be required to alter, amend or repeal the provision of the Fund's Charter containing these voting requirements, is the vote provided for certain of these matters by the Maryland General Corporation Law in the absence of the Charter providing for a greater or lesser percentage. Other of these matters would not require a vote under such law in the absence of such provisions in the Articles of Incorporation. The foregoing voting requirements could have the effect of limiting the ability of third parties to acquire control of the Fund. This could in turn have the effect of depriving stockholders of potential opportunities to sell their shares at above market prices. TAXATION The following Federal income tax discussion is based on the advice of Brown & Wood LLP, special counsel to the Fund. The discussion reflects applicable tax laws of the United States as of the date of this Prospectus, which tax laws are subject to being changed retroactively or prospectively. The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ('RICs') under Subchapter M of the Internal Revenue Code of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but not its stockholders) will not be subject to Federal income tax on the part of its net investment income (i.e., its investment company taxable income, as that term is defined in the Code, determined without regard to the deduction for dividends paid) and net capital gains (i.e., the excess of the Fund's net realized long-term capital gains over its net realized short-term capital losses), if any, that it distributes to its stockholders in each taxable year, provided that it distributes at least 90% of its net investment income for such taxable year to them. The Fund intends to distribute substantially all of such income. TAXATION OF STOCKHOLDERS Dividends paid by the Fund from its net investment income (such dividends referred to hereafter as 'ordinary income dividends') are taxable to stockholders as ordinary income. Distributions made from net capital gains (including gains or losses from certain transactions in warrants, rights and options) and properly designated by the Fund ('capital gain dividends') are taxable to stockholders as long-term capital gains, regardless of the length of time the stockholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less, however, will be treated as long-term capital loss to the extent of any capital gain dividends received by the stockholder. Distributions in excess of 25 the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Capital gain dividends may be taxed at a lower rate than ordinary income dividends for certain non-corporate taxpayers. As of the date of this Prospectus, legislation has been proposed that would provide for a reduction in the Federal long-term capital gain tax rate for individuals and corporations. No assurance can be given, however, that such legislation will be enacted. Stockholders may be entitled to offset their capital gain dividends with capital losses. There are a number of statutory provisions affecting when capital losses may be offset against capital gains, and limiting the use of losses from certain investments and activities. Accordingly, stockholders with capital losses are urged to consult their tax advisers. The Code provides that capital gain recognized on the termination of a position held as part of a 'conversion transaction' will be treated as ordinary income, to the extent it does not exceed the interest that would have accrued on the net investment in the conversion transaction at an interest rate prescribed by the Code. A 'conversion transaction,' for these purposes, is a transaction substantially all of the return from which is attributable to the time value of the net investment in the transaction, and which is marketed as producing capital gains, but having the characteristics of a loan. Although there are no regulations construing this provision, the conversion transaction rules would not apply to an investment in the Cumulative Preferred Stock because dividends paid with respect to the Cumulative Preferred Stock will not constitute gain which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction. Not later than 60 days after the close of its taxable year, the Fund will provide its stockholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. If the Fund pays a dividend in January which was declared in the previous October, November or December to stockholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its stockholders on December 31 of the year in which such dividend was declared. Ordinary income dividends (but not capital gain dividends) paid to stockholders who are non-resident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident stockholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some stockholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ('backup withholding'). A stockholder, however, may generally avoid becoming subject to this requirement by filing an appropriate form with the payor (i.e., the financial institution or brokerage firm where the stockholder maintains his or her account), certifying under penalties of perjury that such stockholder's taxpayer identification number is correct and that such stockholder (i) has never been notified by the IRS that he or she is subject to backup withholding, (ii) has been notified by the IRS that he or she is no longer subject to backup withholding, or (iii) is exempt from backup withholding. Corporate stockholders and certain other stockholders are exempt from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to a stockholder may be credited against such stockholder's Federal income tax liability. At the time of a stockholder's purchase, the market price of the Fund's Common Stock or Cumulative Preferred Stock may reflect undistributed net investment income or net capital gains. A subsequent distribution of these amounts by the Fund will be taxable to the stockholder even though the distribution economically is a return of part of the stockholder's investment. Investors should 26 carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution that would nevertheless be taxable to them. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares of the same class are acquired within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Designation of Capital Gain Dividends to Cumulative Preferred Stock. The IRS has taken the position in Revenue Ruling 89-81 that if a RIC has more than one class of shares, it may designate distributions made to each class in any year as consisting of no more than such class's proportionate share of particular types of income, such as long-term capital gains. A class's proportionate share of a particular type of income is determined according to the percentage of total dividends paid by the RIC during such year that was paid to such class. Consequently, the Fund will designate distributions made to the Common Stock and Cumulative Preferred Stock and any other Preferred Stock as consisting of particular types of income in accordance with the classes' proportionate shares of such income. Because of this rule, the Fund is required to allocate a portion of its net capital gains to holders of Common Stock and holders of Cumulative Preferred Stock. The amount of net capital gains and other types of income allocable among the Cumulative Preferred Stock and the Common Stock will depend upon the amount of such net capital gains and other income realized by the Fund and the total dividends paid by the Fund on shares of Common Stock and Cumulative Preferred Stock during a taxable year. In the opinion of Brown & Wood LLP, under current law, the manner in which the Fund intends to allocate net capital gains and other taxable income between shares of Common Stock and Cumulative Preferred Stock will be respected for Federal income tax purposes. However, there is currently no direct guidance from the IRS or other sources specifically addressing whether the Fund's method of allocation will be respected for Federal income tax purposes, and it is possible that the IRS could disagree with counsel's opinion and attempt to reallocate the Fund's net capital gains or other taxable income. Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS were to challenge in court the Fund's allocation of income and gain, the IRS would be unlikely to prevail. The opinion of Brown & Wood LLP, however, represents only its best legal judgment and is not binding on the IRS or the courts. TAXATION OF THE FUND Qualification as a RIC requires, among other things, that at least 90% of the Fund's gross income in each taxable year consist of certain types of income, including dividends, interest, gains from the disposition of stocks and securities, and other investment-type income, and that less than 30% of its gross income be derived from the sale of certain types of securities held for less than three months. In addition, the Fund's investments must meet certain diversification standards. The Code requires a RIC to pay a non-deductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its ordinary income and capital gains in a manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's ordinary income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. If the Fund does not meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fund will be required to suspend distributions to the holders of the Common Stock until the asset coverage is restored. See 'Description of Cumulative Preferred Stock -- Dividends'. Such a suspension of distributions might prevent the Fund from distributing 90% of its net investment income, as is required in order to avoid Fund-level taxation of such income, or might prevent it from distributing enough ordinary income and capital gains to avoid completely imposition of the excise tax. Upon any failure to meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in certain circumstances will be required to, partially redeem the shares of Cumulative Preferred Stock in order to maintain or restore the requisite asset coverage and 27 avoid the adverse consequences to the Fund and its stockholders of failing to qualify as a RIC. If asset coverage were restored, the Fund would again be able to pay dividends and might be able to avoid Fund-level taxation of its income. If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify to be taxed as a RIC in any year, it would be subject to tax in such year on all of its taxable income, whether or not the Fund made any distributions. To qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to Cumulative Preferred Stockholders and Common Stockholders as an ordinary income dividend, its earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the Fund to the IRS. In addition, if the Fund failed to qualify as a RIC for a period greater than one taxable year, then, except as provided in regulations to be promulgated, the Fund would be required to recognize and pay tax on any net built-in gains (the excess of aggregate gains, including items of income, over aggregate losses that would have been realized if the Fund had been liquidated) in order to qualify as a RIC in a subsequent year. The Fund may invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities ('high yield securities'). Some of these high yield securities may be purchased at a discount and may therefore cause the Fund to accrue income (and to be required to distribute such income) before amounts due under the obligations are paid. In addition, a portion of the interest payments on such high yield securities may be treated as dividends for Federal income tax purposes. If the Fund invests in stock of a so-called passive foreign investment company ('PFIC'), it may be subject to Federal income tax at ordinary rates and an additional charge in the nature of interest, on a portion of its distributions from the PFIC and on gain from the disposition of the shares of the PFIC, even if such distributions and gain are paid by the Fund as a dividend to its stockholders. In some cases, the Fund may be able to elect to include annually in income its pro rata share of the ordinary earnings and capital gains (whether or not distributed) of the PFIC. Alternatively, proposed legislation and regulations may permit the Fund to mark to market at the end of each taxable year its shares in PFICs; in this case, the Fund would recognize as ordinary income any increase in the value of such shares. Under either election, the Fund might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action, either prospectively or retroactively. Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax. OTHER TAXATION Distributions may also be subject to additional state, local and foreign taxes, depending on each stockholder's particular situation. Stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Cumulative Preferred Stock. CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT State Street, which is located at 225 Franklin Street, Boston, Massachusetts 02110, acts as custodian of the securities, cash and other assets of the Fund, as dividend-paying agent and as transfer agent and registrar for the Fund's Cumulative Preferred Stock. Stockholder inquiries should be directed to P.O. Box 8100, Boston, Massachusetts 02266-8100 (Tel. No. (800) 426-5523). 28 UNDERWRITING Upon the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof, each Underwriter named below, for whom Smith Barney Inc. and PaineWebber Incorporated are acting as the Representatives (the 'Representatives'), has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of shares of Cumulative Preferred Stock set forth opposite the name of such Underwriter:
NUMBER OF NAME SHARES - ----------------------------------------------------------------------- --------- Smith Barney Inc....................................................... PaineWebber Incorporated............................................... --------- Total............................................................. 1,600,000 --------- ---------
The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Cumulative Preferred Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Cumulative Preferred Stock offered hereby if any are taken. The Underwriters propose to offer part of the shares of Cumulative Preferred Stock offered hereby directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering of the shares of Cumulative Preferred Stock to the public, the public offering price and such concessions may be changed by the Underwriters. The underwriting discount of $ per share is equal to % of the initial offering price. Investors must pay for any shares of Cumulative Preferred Stock purchased on or before June , 1997. The Fund and Royce have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Underwriters have advised the Fund that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Cumulative Preferred Stock at a level above that which might otherwise prevail in the open market. A 'stabilizing bid' is a bid for or the purchase of the Cumulative Preferred Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Cumulative Preferred Stock. A 'syndicate covering transaction' is a bid for or purchase of the Cumulative Preferred Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A 'penalty bid' is an arrangement permitting the Underwriters to reclaim the selling concession otherwise accruing to an Underwriter or selling group member in connection with the offering if any of the Cumulative Preferred Stock originally sold by such Underwriter or selling group member is purchased in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or selling group member. The Underwriters have advised the Fund that such transactions may be effected on the AMEX or otherwise and, if commenced, may be discontinued at any time. The Underwriters have acted in the past and may continue to act from time to time, during and subsequent to the completion of the offering of Cumulative Preferred Stock hereunder, as a broker or dealer in connection with the execution of portfolio transactions for the Fund. See 'Brokerage Allocation and Other Practices' in the Statement of Additional Information. 29 Prior to the offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the Cumulative Preferred Stock on the AMEX. However, during an initial period, which is not expected to exceed 30 days from the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period. Mitchell Hutchins, an affiliate of PaineWebber Incorporated, is a party to and has an agreement with the Fund to provide various administrative services to the Fund. See 'Investment Advisory and Other Services -- Administration Agreement'. LEGAL MATTERS Certain matters concerning the legality under Maryland law of the Cumulative Preferred Stock will be passed on by Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Certain legal matters will be passed on by Brown & Wood LLP, New York, New York, special counsel to the Fund, and by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York, counsel to the Underwriters. Brown & Wood LLP and Simpson Thacher & Bartlett will each rely as to matters of Maryland law on the opinion of Venable, Baetjer and Howard, LLP. EXPERTS Ernst & Young LLP are the independent auditors of the Fund. The audited financial statements of the Fund and certain of the information appearing under the caption 'Financial Highlights' included in this Prospectus have been audited by Ernst & Young LLP and Coopers & Lybrand L.L.P. for the periods indicated in their reports with respect thereto, and are included in reliance upon such reports and upon the authority of such firms as experts in accounting and auditing. Ernst & Young LLP has an office at 787 Seventh Avenue, New York, New York 10019, and also performs tax and other professional services for the Fund. The address of Coopers & Lybrand L.L.P. is 1 Post Office Square, Boston, Massachusetts 02109. ADDITIONAL INFORMATION The Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith files reports and other information with the Commission. Reports, proxy statements and other information filed by the Fund with the Commission pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such material can be obtained from the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Fund, that file electronically with the Commission. This Prospectus constitutes part of a Registration Statement filed by the Fund with the Commission under the Securities Act of 1933, as amended, and the 1940 Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the Cumulative Preferred Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the Commission upon payment of the fee prescribed by its rules and regulations. 30 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION A Statement of Additional Information dated June , 1997, has been filed with the Commission and is incorporated by reference in this Prospectus. The Table of Contents of the Statement of Additional Information is as follows:
PAGE ---- 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
31 GLOSSARY 'Articles Supplementary' means the Fund's Articles Supplementary creating and fixing the rights of the Cumulative Preferred Stock. 'Asset Coverage' has the meaning set forth on page 19 of this Prospectus. 'Basic Maintenance Amount' means, as of any Valuation Date, the dollar amount equal to (i) the sum of (A) the product of the number of shares of Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the Liquidation Preference; (B) to the extent not included in (A), the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each outstanding share of Cumulative Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Basic Maintenance Amount is calculated on a date prior to the initial Dividend Payment Date with respect to the Cumulative Preferred Stock, then from the Date of Original Issue) through the Valuation Date plus all dividends to accumulate on the Cumulative Preferred Stock then outstanding during the 70 days following such Valuation Date; (C) the Fund's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Fund by the issuance of Common Stock will not be included as a liability) and such liabilities projected to become due and payable by the Fund during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date); (D) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Fund pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Discounted Value of any of the Fund's assets and/or (B) the face value of any of the Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or securities which mature prior to or on the date of redemption or repurchase of Cumulative Preferred Stock or payment of another liability and are either U.S. Government Obligations or securities which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, in both cases irrevocably held by the Fund's custodian bank in a segregated account or deposited by the Fund with the Paying Agent for the payment of the amounts needed to redeem or repurchase Cumulative Preferred Stock subject to redemption or repurchase or any of (i)(B) through (i)(D) and provided that in the event the Fund has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent for the payment of the repurchase price the Fund may deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to be repurchased from (i) above. 'Business Day' means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close. 'Charter' means the Articles of Incorporation, as amended and supplemented (including the Articles Supplementary), of the Fund on file in the Maryland State Department of Assessments and Taxation. 'Common Stock' means the Common Stock, par value $.001 per share, of the Fund. 'Cumulative Preferred Stock' means the % Cumulative Preferred Stock, par value $.001 per share, of the Fund. 'Date of Original Issue' has the meaning set forth on page 19 of this Prospectus. 'Deposit Securities' means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Fund has a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, each Deposit Security will be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Security but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made. 32 '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:
MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR - ----------------------------------------------------------------------- --------------------------- Moody's Short Term Money Market Instruments (other than U.S. Government Obligations set forth below) and other commercial paper: Demand or time deposits, certificates of deposit and bankers' acceptances includible in Moody's Short Term Money Market Instruments.......................................................... 1.00 Commercial paper rated P-1 by Moody's maturing in 30 days or less...... 1.00 Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270 days or less.................................................. 1.15 Commercial paper rated A-1+ by S&P maturing in 270 days or less........ 1.25 Repurchase obligations includible in Moody's Short Term Money Market Instruments if term is less than 30 days and counterparty is rated at least A2............................................................. 1.00 Other repurchase obligations........................................... Discount Factor applicable to underlying assets Common stocks.......................................................... 3.00 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
33
MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR - ----------------------------------------------------------------------- --------------------------- 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
34
MOODY'S TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR - ----------------------------------------------------------------------- --------------------------- Convertible corporate bonds with senior debt securities rated Aa issued by the following type of issuers: Utility...................................................... 1.80 Industrial................................................... 2.97 Financial.................................................... 2.92 Transportation............................................... 4.27 Convertible corporate bonds with senior debt securities rated A issued by the following type of issuers: Utility...................................................... 1.85 Industrial................................................... 3.02 Financial.................................................... 2.97 Transportation............................................... 4.32 Convertible corporate bonds with senior debt securities rated Baa issued by the following type of issuers: Utility...................................................... 2.01 Industrial................................................... 3.18 Financial.................................................... 3.13 Transportation............................................... 4.48 Convertible corporate bonds with senior debt securities rated Ba issued by the following type of issuers: Utility...................................................... 2.02 Industrial................................................... 3.19 Financial.................................................... 3.14 Transportation............................................... 4.49 Convertible corporate bonds with senior debt securities rated B1 or B2 issued by the following type of issuers: Utility...................................................... 2.12 Industrial................................................... 3.29 Financial.................................................... 3.24 Transportation............................................... 4.59
'Moody's Eligible Assets' means: (i) cash (including, for this purpose, receivables for investments sold to a counterparty whose senior debt securities are rated at least Baa3 by Moody's or a 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 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 ISSUER:
NON-UTILITY UTILITY MAXIMUM SINGLE MAXIMUM SINGLE MOODY'S RATING(1)(2) ISSUER(3)(4) ISSUER(3)(4) - -------------------------------------------------------------------- -------------- -------------- 'aaa', Aaa.......................................................... 100% 100% 'aa', Aa............................................................ 20% 20% 'a', A.............................................................. 10% 10% CS/CB, 'Baa', Baa(5)................................................ 6% 4% Ba.................................................................. 4% 4% B1/B2............................................................... 3% 3% B3 (Caa subordinate)................................................ 2% 2%
INDUSTRY AND STATE:
NON-UTILITY UTILITY UTILITY MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE MOODY'S RATING(1) INDUSTRY(3) SUB-INDUSTRY(3)(6) STATE(3) - ------------------------------------------------ -------------- ------------------- -------------- 'aaa', Aaa...................................... 100% 100% 100% 'aa', Aa........................................ 60% 60% 20% 'a', A.......................................... 40% 50% 10%(7) CS/CB, 'baa', Baa(5)............................ 20% 50% 7%(7) Ba.............................................. 12% 12% N/A B1/B2........................................... 8% 8% N/A B3 (Caa subordinate)............................ 5% 5% N/A
- ------------ (1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate bonds and convertible corporate bonds rated by S&P but not by Moody's. (2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets. (3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category. (4) Issuers subject to common ownership of 25% or more are considered as one name. (5) CS/CB refers to common stock and convertible corporate bonds, which are diversified independently from the rating level. (6) In the case of utility common stock, utility preferred stock, utility bonds and utility convertible bonds, the definition of industry refers to sub-industries (electric, 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 '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 _____________________________ _____________________________ 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
PAGE ---- Prospectus Summary......................................................................................................... 3 Ordinary Income Equivalent Yield Tables.................................................................................... 8 Financial Highlights....................................................................................................... 10 The Fund................................................................................................................... 11 Use of Proceeds............................................................................................................ 11 Capitalization............................................................................................................. 11 Portfolio Composition...................................................................................................... 12 Investment 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
1,600,000 SHARES ROYCE MICRO-CAP TRUST, INC. % CUMULATIVE PREFERRED STOCK ------------ PROSPECTUS JUNE , 1997 ------------ SMITH BARNEY INC. PAINEWEBBER INCORPORATED _____________________________ _____________________________ SUBJECT TO COMPLETION, DATED JUNE 20, 1997 STATEMENT OF ADDITIONAL INFORMATION 1,600,000 SHARES ROYCE MICRO-CAP TRUST, INC. % CUMULATIVE PREFERRED STOCK (LIQUIDATION PREFERENCE $25.00 PER SHARE) The % Cumulative Preferred Stock, liquidation preference $25.00 per share (the 'Cumulative Preferred Stock'), to be issued by Royce Micro-Cap Trust, Inc. (the 'Fund') will be senior securities of the Fund. The Fund will use the net proceeds of the offering to purchase additional portfolio securities in accordance with its investment objective and policies. The Fund is a closed-end diversified management investment company. The Fund's investment objective is long-term capital appreciation, which it seeks by investing at least 65% of its assets in common stocks, convertible securities and warrants of companies that, at the time of investment, have market capitalizations of $300 million or less. The Fund's address is 1414 Avenue of the Americas, New York, New York 10019, and its telephone number is (212) 355-7311. Royce & Associates, Inc. is its investment adviser. This Statement of Additional Information is not a prospectus, but should be read in conjunction with the Fund's Prospectus (dated June , 1997). Please retain this document for future reference. To obtain an additional copy of the Prospectus or the Fund's Annual Report to Stockholders for the year ended December 31, 1996, please call Investor Information at 1-800-221-4268. Defined terms used herein have the meanings assigned to them in the Prospectus. ------------------------ TABLE OF CONTENTS
PAGE ---- 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
Dated June , 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. 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:
TYPE AND PERCENTAGE OF NAME AND ADDRESS OWNERSHIP - ----------------------------------------------------------------- ------------------------- Charles M. Royce ................................................ 776,626 shares 6.6% 1414 Avenue of the Americas (Beneficial) New York, New York 10019 Depository Trust Company ........................................ 11,575,205 95.2% Cede & Co. (Record only) P.O. Box 20, Bowling Green Station New York, New York 10274
All directors and officers of the Fund as a group owned approximately 6.6% of the Fund's outstanding shares of Common Stock as of such date. DIRECTORS AND OFFICERS The following table sets forth certain information as to each director and officer of the Fund.
POSITION WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS NAME AND ADDRESS THE FUND DURING THE LAST FIVE YEARS - --------------------------------------- ----------------- --------------------------------------------------- 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.
B-2
POSITION WITH PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS NAME AND ADDRESS THE FUND DURING THE LAST FIVE YEARS - --------------------------------------- ----------------- --------------------------------------------------- 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.
- ------------ * 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 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.
AGGREGATE TOTAL COMPENSATION COMPENSATION FROM THE FUND AND DIRECTOR FROM THE FUND OTHER ROYCE FUNDS - --------------------------------------------------------------- ----------------- ------------------ Charles M. Royce............................................... $ 0 $ 0 Thomas R. Ebright.............................................. 0 0 Richard M. Galkin.............................................. 7,500 64,000 Stephen L. Isaacs.............................................. 7,500 64,000 David L. Meister............................................... 7,500 64,000
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 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.
DIFFERENCE BETWEEN PERFORMANCE OF FUND AND % CHANGE IN RUSSELL 2000 INDEX ADJUSTMENT TO 1% BASIC FEE FEE AS ADJUSTED - --------------------------------------------------------- -------------------------- --------------- +12 or more.............................................. +.5 % 1.5 % +11...................................................... +.45% 1.45% +10...................................................... +.4 % 1.4 % +9....................................................... +.35% 1.35% +8....................................................... +.3 % 1.3 % +7....................................................... +.25% 1.25% +6....................................................... +.2 % 1.2 % +5....................................................... +.15% 1.15% +4....................................................... +.1 % 1.1 % +3....................................................... +.05% 1.05% +/-2..................................................... 0 1 % - -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 %
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 Royce's services to the Fund are not deemed to be exclusive, and Royce or any of its affiliates may provide similar services to other investment companies and other clients or engage in other activities. The Investment Advisory Agreement will remain in effect until April 30, 1998 and may be continued in effect from year to year thereafter if such continuance is specifically approved at least annually by the Board of Directors or by the vote of a majority of the Fund's outstanding voting securities and, in either case, by a majority of the directors who are not parties to the Agreement or interested persons of any such party. The Investment Advisory Agreement will automatically terminate if it is assigned (as defined by the 1940 Act and the rules thereunder) and may be terminated without penalty by vote of a majority of the Fund's outstanding voting securities or by either party thereto on not less than 60 days' written notice. ADMINISTRATION AGREEMENT Mitchell Hutchins Asset Management Inc. (the 'Administrator') is a wholly-owned subsidiary of PaineWebber Incorporated. Under the Administration Agreement with the Fund (the 'Administration Agreement'), the Administrator is responsible for (i) preparing all reports required to be filed by the Fund with the Securities and Exchange Commission (the 'Commission') on Form N-SAR; (ii) providing to the Fund's independent accountants such information as is necessary for such accountants to prepare and file the Fund's Federal, state and local tax returns, and reviewing such returns after they are prepared; (iii) assisting in the preparation of financial information relating to the Fund for the Fund's periodic reports to stockholders; (iv) assisting in monitoring compliance of the Fund's operations with the 1940 Act and with its investment policies and limitations; (v) reviewing the calculation of the Fund's net asset value in accordance with the Fund's registration statement under the 1940 Act and the Securities Act of 1933, as amended (the '1933 Act'), by the Fund's accounting agent (which may or may not be the same party as the Fund's custodian or an affiliate of the Fund's custodian), and in monitoring the performance of such agent in making the Fund's net asset value available for public dissemination; (vi) assisting in establishing the accounting policies of the Fund; and (vii) assisting the Fund in determining the amount of dividends or other distributions available to be paid by the Fund to its stockholders. The Administration Agreement is terminable without penalty on 60 days' prior written notice by either party to the other. The Board reviews the Administrator's performance under the Administration Agreement semi-annually and will continue, modify or terminate the Agreement, based on what it determines to be in the best interests of the Fund's stockholders. During the fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid $119,427, $186,625 and $147,482, respectively, in fees to the Administrator for administration services. SERVICE CONTRACT WITH STATE STREET State Street Bank and Trust Company ('State Street'), the custodian of the Fund's assets, provides certain management-related services to the Fund. Such services include keeping books of accounts and rendering such financial and other statements as may be requested by the Fund from time to time, and generally assisting in the preparation of reports to the Fund's stockholders, to the Commission and others, in the auditing of accounts and in other ministerial matters of like nature, as agreed to between the Fund and State Street. During the fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid $59,957, $63,266 and $55,527, respectively, in fees to State Street for management-related and custodial services. BROKERAGE ALLOCATION AND OTHER PRACTICES Royce is responsible for selecting the brokers who effect the purchases and sales of the Fund's portfolio securities. No broker is selected to effect a securities transaction for the Fund unless such broker is believed by Royce to be capable of obtaining the best price for the security involved in the transaction. In addition to considering a broker's execution capability, Royce generally considers the brokerage and research services which the broker has provided to it, including any research relating to the security involved in the transaction and/or to other securities. Such services may include general B-6 economic research, market and statistical information, industry and technical research, strategy and company research and performance measurement, and may be written or oral. Royce determines the overall reasonableness of brokerage commissions paid, after considering the amount another broker might have charged for effecting the transaction and the value placed by Royce upon the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or Royce's overall responsibilities with respect to its accounts. Royce is authorized, under Section 28(e) of the Securities Exchange Act of 1934 and under its Investment Advisory Agreement with the Fund, to pay a broker a commission in excess of that which another broker might have charged for effecting the same transaction, in recognition of the value of brokerage and research services provided by the broker. Brokerage and research services furnished by brokers through whom the Fund effects securities transactions may be used by Royce in servicing all of its accounts and those of RMC, and not all of such services may be used by Royce in connection with the Fund. Even though investment decisions for the Fund are made independently from those for the other accounts managed by Royce and RMC, securities of the same issuer are frequently purchased, held or sold by more than one Royce/RMC account because the same security may be suitable for all of them. When the same security is being purchased or sold for more than one Royce/RMC account on the same trading day, Royce seeks to average the transactions as to price and allocate them as to amount in a manner believed to be equitable to each. Such purchases and sales of the same security are generally effected pursuant to Royce/RMC's Trade Allocation Guidelines and Procedures. Under such Guidelines and Procedures, unallocated orders are placed with and executed by broker-dealers during the trading day. The securities purchased or sold in such transactions are then allocated to one or more of Royce's and RMC's accounts at or shortly following the close of trading, using the average net price obtained. Such allocations are done based on a number of judgmental factors that Royce and RMC believe should result in fair and equitable treatment to those of its accounts for which the securities may be deemed suitable. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained for the Fund. During the year ended December 31, 1996, the Fund did not acquire any securities of any of its regular brokers (as defined in Rule 10b-1 under the 1940 Act) or of any of their parents. During each of the three years ended December 31, 1996, 1995 and 1994, the Fund paid brokerage commissions of $158,000, $122,000 and $83,000, respectively. One or more of the Underwriters have effected purchases and sales of the portfolio securities of the Fund and of other accounts managed by Royce and RMC and may be chosen to effect future transactions for the Fund and such other accounts. NET ASSET VALUE The Fund calculates the net asset value of its shares of Common Stock daily and makes that information available daily by telephone (800-221-4268) and weekly for publication. Currently, The Wall Street Journal, The New York Times and Barron's publish net asset values for closed-end investment companies weekly. Net asset value per share of Common Stock is determined at the close of regular trading on the New York Stock Exchange (currently 4:00 P.M., Eastern time) on each day on which the Exchange is open. The net asset value of the Fund's Common Stock is calculated by dividing the current value of the Fund's total assets less the sum of all of its liabilities and the aggregate liquidation preference of its outstanding shares of Preferred Stock, by the total number of shares of the Common Stock outstanding. In determining net asset value, securities listed on an exchange or on the National Association of Securities Dealers Automated Quotation System are valued on the basis of the last reported sale prior to the time the valuation is made or, if no sale is reported for such day, at their electronically-reported bid price for exchange-listed securities and at the average of their electronically-reported bid and asked prices for Nasdaq securities. Quotations are taken from the market where the security is primarily traded. Other over-the-counter securities for which market quotations are readily available are valued at their electronically-reported bid price or, if there is no such price, then at their representative bid B-7 price. Securities for which market quotations are not readily available are valued at their fair value under procedures established and supervised by the Fund's Board of Directors. Notwithstanding the above, bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. The offering costs of the Cumulative Preferred Stock (including the underwriting discount) will be charged to additional paid-in capital. FINANCIAL STATEMENTS The audited financial statements included in the Annual Report to the Fund's Stockholders for the fiscal year ended December 31, 1996, together with the report of Ernst & Young LLP thereon, are incorporated herein by reference. B-8 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS 1. Financial Statements Included in Part A: -- Selected Per Share Data and Ratios for the three years ended December 31, 1996 and the period December 14, 1993 (commencement of operations) to December 31, 1993. Incorporated by reference in Part B: -- Schedule of Investments at December 31, 1996* -- Statement of Assets and Liabilities at December 31, 1996* -- Statement of Operations for the year ended December 31, 1996* -- Statement of Changes in Net Assets for the years ended December 31, 1996 and 1995* -- Statement of Cash Flows for the year ended December 31, 1996* -- Selected Per Share Data and Ratios for the three years ended December 31, 1996 and the period December 14, 1993 (commencement of operations) to December 31, 1993* -- Notes to Financial Statements* -- Report of Independent Auditors*
- ------------ * Incorporated by reference to the Registrant's 1996 Annual Report to Stockholders, filed with the Securities and Exchange Commission (the 'Commission') for the year ended December 31, 1996, pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as amended. 2. Exhibits (a) (1) Articles of Amendment and Restatement to the Articles of Incorporation of the Registrant.(1) (2) Articles of Amendment to the Articles of Incorporation of the Registrant.(2) (3) Form of Articles Supplementary of the Registrant, to be filed with the Maryland State Department of Assessments and Taxation. (b) Amended and Restated By-laws of the Registrant.(4) (c) Not applicable. (d) (1) Form of specimen certificate for % Cumulative Preferred Stock.(3) (2) Portions of the Articles Supplementary of the Registrant defining the rights of holders of % Cumulative Preferred Stock.(5) (e) Amended and Restated Distribution Reinvestment and Cash Purchase Plan.(3) (f) Not applicable. (g) Form of Investment Advisory Agreement between the Registrant and Royce & Associates, Inc. ('Royce').(3) (h) (1) Form of Underwriting Agreement between the Fund and Royce and Smith Barney Inc. and PaineWebber Incorporated, as Representatives of the Underwriters. (2) Form of Smith Barney Inc. Agreement Among Underwriters.(3) (i) Not applicable. (j) Form of Custodian Contract.(1) (k) (1) Form of Registrar, Transfer Agency and Service Agreement.(1) (2) Form of Administration Agreement.(1) (3) Amendment to Administration Agreement.(3) (4) Form of Registrar, Transfer Agent and Paying Agency Agreement between the Registrant and State Street Bank and Trust Company.(3) (l) Opinion and Consent of Venable, Baetjer and Howard, LLP, Maryland counsel to the Registrant. (m) Not applicable. (n) (1) Consent of Ernst & Young LLP, independent auditors for the Registrant. (2) Consent of Coopers & Lybrand L.L.P., independent auditors.(3) (o) Not applicable.
C-1 (p) Not applicable. (q) Not applicable. (r) Financial Data Schedule.
- ------------ (1) Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2, filed with the Commission on December 14, 1993 (File No. 33-68950) (the 'Common Stock Registration Statement'). (2) Incorporated by reference to the Registrant's Semi-Annual Report on Form N-SAR'). filed with the Commission on September 14, 1995 (the 'September 1995 N-SAR') (3) Previously filed with the Registrant's Registration Statement on Form N-2, filed with the Commission on June 6, 1997 (File No. 333-28615) (the 'Preferred Stock Registration Statement'). (4) Incorporated by reference to the Registrant's Semi-Annual Report on Form N-SAR, filed with the Commission on February 27, 1997 (the 'February 1997 N-SAR'). (5) Reference is made to (i) Article IV, Article VI and Article VIII of the Registrant's Articles of Amendment and Restatement to the Articles of Incorporation, previously filed as Exhibit (a) to the Common Stock Registration Statement; (ii) Article I and Article IV of the Registrant's Amended and Restated By-Laws, previously filed as Exhibit (b) to the Common Stock Registration Statement; and (iii) Article II of the Registrant's Articles Supplementary, filed as Exhibit (a)(3). ITEM 25. MARKETING ARRANGEMENTS See Exhibit (h)(1) to this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement: Registration fees................................................................. $ 12,121 Listing fees...................................................................... 15,000 Printing expenses (other than stock certificates)................................. 50,000 Accounting fees and expenses...................................................... 4,000 Legal fees and expenses........................................................... 117,000 Rating Agency fees................................................................ 20,000 Miscellaneous..................................................................... 21,879 -------- Total................................................................... $240,000 -------- --------
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following information is given as of May 31, 1997:
NUMBER OF TITLE OF CLASS RECORD HOLDERS - ----------------------------------------------------------------------------- -------------- Common Stock ($.001 par value)............................................... 390 Preferred Stock ($.001 par value)............................................ 0
ITEM 29. INDEMNIFICATION Section 2-418 of the General Corporation Law of the State of Maryland, Article VII of the Registrant's Articles of Amendment and Restatement to the Articles of Incorporation, previously filed as Exhibit (a) to the Common Stock Registration Statement, Article V of the Registrant's Amended C-2 and Restated By-laws, previously filed as an Exhibit to the September 1995 N-SAR, the form of Investment Advisory Agreement, previously filed as an Exhibit to the February 1997 N-SAR and the form of Underwriting Agreement, filed as Exhibit(h)(1) to the Preferred Stock Registration Statement, each provide for indemnification. The Investment Advisory Agreement between the Registrant and Royce obligates the Registrant to indemnify Royce and hold it harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees) incurred by Royce in or by reason of any action, suit, investigation or other proceeding arising out of or otherwise based upon any action actually or allegedly taken or omitted to be taken by Royce in connection with the performance of any of its duties or obligations under the Agreement or otherwise as an investment adviser of the Registrant. Royce is not entitled to indemnification in respect of any liability to the Registrant or its security holders to which it would otherwise be subject by reason of its willful misfeasance, bad faith or reckless disregard. Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the 'Securities Act'), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent or such claim is to be paid under insurance policies, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant, its officers and directors, Royce and certain others are presently insured under a Directors and Officers/Errors and Omissions Liability Insurance Policy issued by ICI Mutual Insurance Company, which generally covers claims by the Registrant's stockholders and third persons based on or alleging negligent acts, misstatements or omissions by the insureds and the costs and expenses of defending those claims, up to a limit of $10,000,000, with a deductible amount of $150,000. Reference is made to Section 8 of the form of Underwriting Agreement, to be filed as Exhibit (h)(1) to the Preferred Stock Registration Statement, for provisions relating to indemnification of the Underwriters. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Reference is made to Schedules D and F to Royce's amended Form ADV (File No. 801-8268), which are incorporated herein by reference. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS Records are located at: 1. Royce Micro-Cap Trust, Inc., 10th Floor 1414 Avenue of the Americas New York, New York 10019 (Corporate records and records relating to the function of Royce as investment adviser) 2. State Street Bank and Trust Company P.O. Box 9061 Boston, Massachusetts 02205-8686 Attention: Royce Micro-Cap Trust, Inc. (Records relating to its functions as Custodian, Registrar and Transfer Agent and Dividend Paying Agent for the Registrant)
C-3 ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS 1. Not applicable. 2. Not applicable. 3. Not applicable. 4. Not applicable. 5. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the registration statement as of the time it was declared effective. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. 6. Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information constituting Part B of this registration statement.
C-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 20th day of June, 1997. ROYCE MICRO-CAP TRUST, INC. (Registrant) By: /s/ CHARLES M. ROYCE ................................... CHARLES M. ROYCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment has been signed below by the following persons in the capacities and on the dates indicated:
NAME TITLE DATE - ----------------------------------------- ---------------------------------------------- ------------------- /s/ CHARLES M. ROYCE Director, President and Treasurer (Principal June 20, 1997 ........................................ Executive, Financial and Accounting Officer) (CHARLES M. ROYCE) /s/ THOMAS R. EBRIGHT Director June 20, 1997 ........................................ (THOMAS R. EBRIGHT) /s/ RICHARD M. GALKIN Director June 20, 1997 ........................................ (RICHARD M. GALKIN) /s/ STEPHEN L. ISSACS Director June 20, 1997 ........................................ (STEPHEN L. ISSACS) /s/ DAVID L. MEISTER Director June 20, 1997 ........................................ (DAVID L. MEISTER)
C-5 STATEMENT OF DIFFERENCES ------------------------ The dagger symbol shall be expressed as .........................`D' EX-99.2A 2 EXHIBIT 2(A)(3) EXHIBIT 2(a)(3) ARTICLES SUPPLEMENTARY CREATING AND FIXING THE RIGHTS OF __% CUMULATIVE PREFERRED STOCK OF ROYCE MICRO-CAP TRUST, INC. ROYCE MICRO-CAP TRUST, INC., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article FOURTH of the Charter of the Corporation, the Board of Directors has reclassified 5,000,000 authorized and unissued shares of Common Stock of the Corporation, par value $.001 per share, as shares of preferred stock, par value $.001 per share, of the Corporation designated as the "___% Cumulative Preferred Stock" (the "Cumulative Preferred Stock") and has provided for the issuance of shares of such series. SECOND: The preferences, voting powers, rights, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares of the Cumulative Preferred Stock of the Corporation, as set by the Board of Directors, are as follows: ARTICLE I DEFINITIONS ----------- Unless the context or use indicates another or different meaning or intent, the following terms when used in these Articles Supplementary shall have the meanings set forth below, whether such terms are used in the singular or plural and regardless of their tense: "Accountant's Confirmation"* means a letter from an Independent Accountant delivered to Moody's with respect to certain Basic Maintenance Reports substantially to the effect that: (i) the Independent Accountant has read the Basic Maintenance Report for the current Quarterly Valuation Date and a randomly selected Basic Maintenance Report prepared by the Corporation during the quarter ending on such Quarterly Valuation Date (the "Reports"); (ii) with respect to the issue size compliance, issuer diversification and industry diversification calculations, such calculations and the resulting Market Value of Moody's Eligible Assets and Portfolio Calculation are numerically correct; (iii) with respect to the calculation of the Basic Maintenance Amount, such calculation has been compared with the definition of Basic Maintenance Amount in these Articles Supplementary and is calculated in accordance with such definition and the results of such calculation have been recalculated and are numerically correct; (iv) with respect to the excess or deficiency of the Portfolio Calculation when compared to the Basic Maintenance Amount calculated for Moody's, the results of the calculation set forth in the Reports have been recalculated and are numerically correct; (v) with respect to the Moody's and S&P ratings on corporate bonds, convertible corporate bonds and preferred stock, issuer name, issue size and coupon or dividend rate listed in the Reports, that information has been traced and agrees with the information listed in the applicable guides of the respective rating agencies (in the event such information does not agree or such information is not listed in the applicable guides of the respective rating agencies, the Independent Accountant will inquire of the rating agencies what such information is, and provide a listing in its letter of such differences, if any); (vi) with respect to the lower of two bid prices (or alternative permissible factors used in calculating the Market Value as provided by these Articles Supplementary) provided by the custodian of the Corporation's assets for purposes of valuing securities in the portfolio, the Independent Accountant has traced the price used in the Reports to the lower of the two bid prices listed in the report provided by such custodian and verified that such information agrees (in the event such information does not agree, the Independent Accountant will provide a listing in its letter of such differences); and (vii) with respect to the description of each security included in the Reports, the description of Moody's Eligible Assets has been compared to the definition of Moody's Eligible Assets contained in these Articles Supplementary, and the description as appearing in the Reports agrees with the definition of Moody's Eligible Assets as described in these Articles Supplementary. Each such letter may state: such Independent Accountant has made no independent verification of the accuracy of the description of the investment securities listed in the Reports or 2 the Market Value of those securities nor have they performed any procedures other than those specifically outlined above for the purposes of issuing such letter; unless otherwise stated in the letter, the procedures specified therein were limited to a comparison of numbers or a verification of specified computations applicable to numbers appearing in the Reports and the schedule(s) thereto; the foregoing procedures do not constitute an examination in accordance with generally accepted auditing standards and the Reports discussed in the letter do not extend to any of the Corporation's financial statements taken as a whole; such Independent Accountant does not express an opinion as to whether such procedures would enable such Independent Accountant to determine that the methods followed in the preparation of the Reports would correctly determine the Market Value or Discounted Value of the investment portfolio; accordingly, such Independent Accountant expresses no opinion as to the information set forth in the Reports or in the schedule(s) thereto and make no representation as to the sufficiency of the procedures performed for the purposes of these Articles Supplementary. Such letter shall also state that the Independent Accountant is a "independent accountant" with respect to the Corporation within the meaning of the Securities Act of 1933, as amended, and the related published rules and regulations thereunder. "Adviser" means Royce & Associates, Inc., a New York corporation. "Asset Coverage" means, asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 225%, or such higher percentage as may be required under the 1940 Act, with respect to all outstanding senior securities of the Corporation which are stock, including all outstanding shares of Cumulative Preferred Stock. "Asset Coverage Cure Date" means, with respect to the failure by the Corporation to maintain the Asset Coverage (as required by paragraph 5(a)(i) of Article II hereof) as of the last Business Day of each March, June, September and December of each year, 60 days following such Business Day. "Basic Maintenance Amount"* means, as of any Valuation Date, the dollar amount equal to (i) the sum of (A) the product of the number of shares of Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the Liquidation Preference; (B) to the extent not included in (A), the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each outstanding share of Cumulative Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Basic Maintenance Amount is calculated on a date prior to the 3 initial Dividend Payment Date with respect to the Cumulative Preferred Stock, then from the Date of Original Issue) through the Valuation Date plus all dividends to accumulate on the Cumulative Preferred Stock then outstanding during the 70 days following such Valuation Date; (C) the Corporation's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Corporation by the issuance of Common Stock shall not be included as a liability) and such liabilities projected to become due and payable by the Corporation during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date; (D) any current liabilities of the Corporation as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Corporation pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Discounted Value of any of the Corporation's assets and/or (B) the face value of any of the Corporation's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or securities which mature prior to or on the date of redemption or repurchase of Cumulative Preferred Stock or payment of another liability and are either U.S. Government Obligations or securities which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A- 1+, in both cases irrevocably held by the Corporation's custodian bank in a segregated account or deposited by the Corporation with the Paying Agent for the payment of the amounts needed to redeem or repurchase Cumulative Preferred Stock subject to redemption or repurchase or any of (i)(B) through (i)(D) and provided that in the event the Corporation has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent for the payment of the repurchase price the Corporation may deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to be repurchased from (i) above. "Basic Maintenance Amount Cure Date"* means 14 calendar days following a Valuation Date, such date being the last day upon which the Corporation's failure to comply with paragraph 5(a)(ii)(A) of Article II hereof could be cured. "Basic Maintenance Report"* means a report signed by the President, the Treasurer or any Vice President of the Corporation which sets forth, as of the related Valuation Date, the assets of the Corporation, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Basic Maintenance Amount. 4 "Board of Directors" means the Board of Directors of the Corporation. "Business Day" means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close. "Charter" means the Articles of Incorporation, as amended and supplemented (including these Articles Supplementary), of the Corporation on file in the State Department of Assessments and Taxation of Maryland. "Common Stock" means the Common Stock, par value $.001 per share, of the Corporation. "Corporation" shall mean Royce Micro-Cap Trust, Inc., a Maryland corporation. "Cumulative Preferred Stock" means the ___% Cumulative Preferred Stock, par value $.001 per share, of the Corporation. "Date of Original Issue" shall have the meaning set forth in paragraph 1(a) of Article II hereof. "Deposit Securities" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Corporation has a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, each Deposit Security shall be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Security but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made. "Discounted Value"* means, with respect to a Moody's Eligible Asset, the quotient of (A) in the case of non-convertible fixed income securities, the lower of the principal amount and the Market Value thereof or (B) in the case of any other Moody's Eligible Asset, the Market Value thereof, divided by the applicable Moody's Discount Factor. "Dividend Payment Date" with respect to the Cumulative Preferred Stock, means any date on which dividends are payable thereon pursuant to the provisions of paragraph 1(a) of Article II hereof. "Dividend Period" shall have the meaning set forth in paragraph 1(a) of Article II hereof. "Independent Accountant"* means a nationally recognized accountant, or firm of accountants, that is with respect to the 5 Corporation an independent public accountant or firm of independent public accountants under the Securities Act of 1933, as amended. "Liquidation Preference" shall have the meaning set forth in paragraph 2(a) of Article II hereof. "Market Value"* means the amount determined by State Street Bank and Trust Company (so long as prices are provided to it by Telekurs N.A., Inc. or another pricing service approved by Moody's in writing), or, if Moody's agrees in writing, the then bank custodian of the Corporation's assets or such other party approved by Moody's in writing, with respect to specific Moody's Eligible Assets of the Corporation, as follows: Securities listed on an exchange or on the Nasdaq System shall be valued on the basis of the last reported sale on the Valuation Date or, if no sale is reported for such Valuation Date, then at their electronically-reported bid price for such day for exchange-listed securities and at the average of their electronically-reported bid and asked prices for such Valuation Date for Nasdaq System securities. Quotations shall be taken from the market where the security is primarily traded. Bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. Notwithstanding the foregoing, "Market Value" may, at the option of the Corporation, mean the amount determined with respect to specific Moody's Eligible Assets of the Corporation in the manner set forth below: (a) as to any corporate bond or convertible corporate bond which is a Moody's Eligible Asset, (i) the product of (A) the unpaid principal balance of such bond as of the Valuation Date and (B)(1) if the bond is traded on a national securities exchange or quoted on the NASDAQ System, the last sales price reported on the Valuation Date or (2) if there was no reported sales price on the Valuation Date or if the bond is not traded on a national securities exchange or quoted on the NASDAQ System, the lower of two bid prices for such bond provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, plus (ii) accrued interest on such bond or, if two bid prices cannot be 6 obtained, such Moody's Eligible Asset shall have a Market Value of zero; (b) as to any common or preferred stock which is a Moody's Eligible Asset, (i) if the stock is traded on a national securities exchange or quoted on the NASDAQ System, the last sales price reported on the Valuation Date or (ii) if there was no reported sales price on the Valuation Date, the lower of two bid prices for such stock provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such Moody's Eligible Asset shall have a Market Value of zero; (c) the product of (i) as to U.S. Government Obligations, Short Term Money Market Instruments (other than demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements) and commercial paper, the face amount or aggregate principal amount of such U.S. Government Obligations or Short Term Money Market Instruments, as the case may be, and (ii) the lower of the bid prices for the same kind of securities or instruments, as the case may be, having, as nearly as practicable, comparable interest rates and maturities provided by two recognized securities dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such Moody's Eligible Asset will have a Market Value of zero; (d) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements included in Short Term Money Market Instruments, the face value thereof. "Moody's" means Moody's Investors Service, Inc., or its successor. 7 "Moody's Discount Factor"* means, with respect to a Moody's Eligible Asset specified below, the following applicable number: Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------ ---------------- Moody's Short Term Money Market Instruments (other than U.S. Government Obligations set forth below) and other commercial paper: Demand or time deposits, certificates of deposit and bankers' acceptances includible in Moody's Short Term Money Market Instruments............................ 1.00 Commercial paper rated P-1 by Moody's maturing in 30 days or less.............................. 1.00 Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270 days or less............................................. 1.15 Commercial paper rated A-1+ by S&P maturing in 270 days or less............................. 1.25 Repurchase obligations includible in Moody's Short Term Money Market Instruments if term is less than 30 days and counterparty is rated at least A2........................ 1.00 Other repurchase obligations.................................. Discount Factor applicable to underlying assets Common stocks................................................. 3.00 8 Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------ ---------------- Preferred stocks: Auction rate preferred stocks............................. 3.50 Other preferred stocks issued by issuers in the financial and industrial industries........................................... 2.35 Other preferred stocks issued by issuers in the utilities industry............................ 1.60 U.S. Government Obligations (other than U.S. Treasury Securities Strips set forth below) with remaining terms to maturity of: 1 year or less............................................ 1.08 2 years or less........................................... 1.15 3 years or less........................................... 1.20 4 years or less........................................... 1.26 5 years or less........................................... 1.31 7 years of less........................................... 1.40 10 years or less.......................................... 1.48 15 years or less.......................................... 1.54 20 years or less.......................................... 1.61 30 years or less.......................................... 1.63 U.S. Treasury Securities Strips with remaining terms to maturity of: 1 year or less............................................ 1.08 2 years or less........................................... 1.16 3 years or less........................................... 1.23 4 years or less........................................... 1.30 5 years or less........................................... 1.37 7 years or less........................................... 1.51 10 years or less.......................................... 1.69 15 years or less.......................................... 1.99 20 years or less.......................................... 2.28 30 years or less.......................................... 2.56 9 Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------ ---------------- Corporate bonds: Corporate bonds rated Aaa with remaining terms to maturity of: 1 year or less............................................ 1.14 2 years or less........................................... 1.21 3 years or less........................................... 1.26 4 years or less........................................... 1.32 5 years or less........................................... 1.38 7 years or less........................................... 1.47 10 years or less.......................................... 1.55 15 years or less.......................................... 1.62 20 years or less.......................................... 1.69 30 years or less.......................................... 1.71 Corporate bonds rated Aa with remaining terms to maturity of: 1 year or less............................................ 1.19 2 years or less........................................... 1.26 3 years or less........................................... 1.32 4 years or less........................................... 1.38 5 years or less........................................... 1.44 7 years or less........................................... 1.54 10 years or less.......................................... 1.63 15 years or less.......................................... 1.69 20 years or less.......................................... 1.77 30 years or less.......................................... 1.79 Corporate bonds rated A with remaining terms to maturity of: 1 year or less............................................ 1.24 2 years or less........................................... 1.32 3 years or less........................................... 1.38 4 years or less........................................... 1.45 5 years or less........................................... 1.51 7 years or less........................................... 1.61 10 years or less.......................................... 1.70 15 years or less.......................................... 1.77 20 years or less.......................................... 1.85 30 years or less.......................................... 1.87 10 Moody's Type of Moody's Eligible Asset: Discount Factor: - ------------------------------ ---------------- Convertible corporate bonds with senior debt securities rated Aa issued by the following type of issuers: Utility.................................................. 1.80 Industrial............................................... 2.97 Financial................................................ 2.92 Transportation........................................... 4.27 Convertible corporate bonds with senior debt securities rated A issued by the following type of issuers: Utility.................................................. 1.85 Industrial............................................... 3.02 Financial................................................ 2.97 Transportation........................................... 4.32 Convertible corporate bonds with senior debt securities rated Baa issued by the following type of issuers: Utility.................................................. 2.01 Industrial............................................... 3.18 Financial................................................ 3.13 Transportation........................................... 4.48 Convertible corporate bonds with senior debt securities rated Ba issued by the following type of issuers: Utility.................................................. 2.02 Industrial............................................... 3.19 Financial................................................ 3.14 Transportation........................................... 4.49 Convertible corporate bonds with senior debt securities rated B1 or B2 issued by the following type of issuers: Utility.................................................. 2.12 Industrial............................................... 3.29 Financial................................................ 3.24 Transportation........................................... 4.59 "Moody's Eligible Assets"* means: (i) cash (including, for this purpose, receivables for investments sold to a counterparty whose senior debt securities are rated at least Baa3 by Moody's or a 11 counterparty approved by Moody's and payable within five Business Days following such Valuation Date and dividends and interest receivable within 70 days on investments); (ii) Short-Term Money Market Instruments; (iii) commercial paper that is not includible as a Short-Term Money Market Instrument having on the Valuation Date a rating from Moody's of at least P-1 and maturing within 270 days; (iv) preferred stocks (A) which either (1) are issued by issuers whose senior debt securities are rated at least Baa1 by Moody's or (2) are rated at least "baa3" by Moody's (or in the event an issuer's senior debt securities or preferred stock is not rated by Moody's, which either (1) are issued by an issuer whose senior debt securities are rated at least A by S&P or (2) are rated at least A by S&P and for this purpose have been assigned a Moody's equivalent rating of at least "baa3"), (B) of issuers which have (or, in the case of issuers which are special purpose corporations, whose parent companies have) common stock listed on the New York Stock Exchange or the American Stock Exchange, (C) which have a minimum issue size (when taken together with other of the issuer's issues of similar tenor) of $50,000,000, (D) which have paid cash dividends consistently during the preceding three-year period (or, in the case of new issues without a dividend history, are rated at least "a1" by Moody's or, if not rated by Moody's, are rated at least AA by S&P), (E) which pay cumulative cash dividends in U.S. dollars, (F) which are not convertible into any other class of stock and do not have warrants attached, (G) which are not issued by issuers in the transportation industry and (H) in the case of auction rate preferred stocks, which are rated at least "aa" by Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved in writing by Moody's and have never had a failed auction; provided, however, that for this purpose the aggregate Market Value of the Company's holdings of any issue of preferred stock shall not be less than $500,000 nor more than $5,000,000; (v) common stocks (A) which are traded on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market, (B) which, if cash dividend paying, pay cash dividends in U.S. dollars, and (C) which are not privately placed; provided, however, that (1) common stock which, while a Moody's Eligible Asset owned by the Corporation, ceases paying any regular cash dividend will no longer be considered a Moody's Eligible Asset until 71 days after the date of the announcement of such cessation, unless the issuer of the common stock has senior debt securities 12 rated at least A3 by Moody's and (2) the aggregate Market Value of the Corporation's holdings of the common stock of any issuer shall not exceed 4% in the case of utility common stock and 6% in the case of non-utility common stock of the number of outstanding shares times the Market Value of such common stock; (vi) U.S. Government Obligations; (vii) corporate bonds (A) which are not privately placed, rated at least B3 (Caa subordinate) by Moody's (or, in the event the bond is not rated by Moody's, the bond is rated at least BB- by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), with such rating confirmed on each Valuation Date, (B) which have a minimum issue size of at least (x) $100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3, (C) which are U.S. dollar denominated and pay interest in cash in U.S. dollars, (D) which are not convertible or exchangeable into equity of the issuing corporation and have a maturity of not more than 30 years, (E) for which, if rated below Baa3, the aggregate Market Value of the Company's holdings do not exceed 10% of the aggregate Market Value of any individual issue of corporate bonds calculated at the time of original issuance, (F) the cash flow from which must be controlled by an indenture trustee and (G) which are not issued in connection with a reorganization under any bankruptcy law; (viii) convertible corporate bonds (A) which are issued by issuers whose senior debt securities are rated at least B2 by Moody's (or, in the event an issuer's senior debt securities are not rated by Moody's, which are issued by issuers whose senior debt securities are rated at least BB by S&P and which for this purpose is assigned a Moody's equivalent rating of one full rating category lower), (B) which are convertible into common stocks which are traded on the New York Stock Exchange or the American Stock Exchange or are quoted on the NASDAQ National Market System and (C) which, if cash dividend paying, pay cash dividends in U.S. dollars; provided, however, that once convertible corporate bonds have been converted into common stock, the common stock issued upon conversion must satisfy the criteria set forth in clause (v) above and other relevant criteria set forth in this definition in order to be a Moody's Eligible Asset; provided, however, that the Corporation's investment in preferred stock, common stock, corporate bonds and convertible corporate bonds described above must be within the following diversification requirements (utilizing Moody's Industry and Sub- 13 industry Categories) in order to be included in Moody's Eligible Assets: Issuer: - ------ Non-Utility Utility Maximum Moody's Rating Maximum Single Issuer Single Issuer (1)(2) (3)(4) (3)(4) ------ ------ ------ "aaa", Aaa 100% 100% "aa", Aa 20% 20% "a", A 10% 10% CS/CB, "Baa", Baa(5) 6% 4% Ba 4% 4% B1/B2 3% 3% B3 (Caa subordinate) 2% 2% Industry and State: - ------------------ Utility Non-Utility Utility Maximum Maximum Single Maximum Single Single Moody's Rating(1) Industry(3) Sub-Industry(3)(6) State(3) - ----------------- ----------- ------------------ -------- "aaa", Aaa 100% 100% 100% "aa", Aa 60% 60% 20% "a", A 40% 50% 10%(7) CS/CB, "baa", Baa(5) 20% 50% 7%(7) Ba 12% 12% N/A B1/B2 8% 8% N/A B3 (Caa subordinate) 5% 5% N/A - ---------------------------- (1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate bonds and convertible corporate bonds rated by S&P but not by Moody's. (2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets. (3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category. (4) Issuers subject to common ownership of 25% or more are considered as one name. (5) CS/CB refers to common stock and convertible corporate bonds, which are diversified independently from the rating level. (6) In the case of utility common stock, utility preferred stock, utility bonds and utility convertible bonds, the definition of industry refers to sub-industries (electric, 14 water, hydro power, gas, diversified). Investments in other sub-industries are eligible only to the extent that the combined sum represents a percentage position of the Moody's Eligible Assets less than or equal to the percentage limits in the diversification tables above. (7) Such percentage shall be 15% in the case of utilities regulated by California, New York and Texas. ; and provided, further, that the Corporation's investments in auction rate preferred stocks described in clause (iv) above shall be included in Moody's Eligible Assets only to the extent that the aggregate Market Value of such stocks does not exceed 10% of the aggregate Market Value of all of the Corporation's investments meeting the criteria set forth in clauses (i) through (viii) above less the aggregate Market Value of those investments excluded from Moody's Eligible Assets pursuant to the immediately preceding proviso; and (ix) no assets which are subject to any lien or irrevocably deposited by the Corporation for the payment of amounts needed to meet the obligations described in clauses (i)(A) through (i)(E) of the definition of "Basic Maintenance Amount" may be includible in Moody's Eligible Assets. "Moody's Industry and Sub-Industry Categories"* means as set forth below: Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting, Engineering, Construction, Hardware, Forest Products (building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land Development 15 Chemicals, Plastics and Rubber: Chemicals (non- agriculture), Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers, Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass Personal and Non Durable Consumer Products (Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies Diversified/Conglomerate Manufacturing Diversified/Conglomerate Service Diversified Natural Resources, Precious Metals and Minerals: Fabricating Distribution Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste Disposal Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology Finance: Investment Brokerage, Leasing, Syndication, Securities Farming and Agriculture: Livestock, Grains, Produce; Agricultural Chemicals, Agricultural Equipment, Fertilizers Grocery: Grocery Stores, Convenience Food Stores Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges Hotels, Motels, Inns and Gaming Insurance: Life, Property and Casualty, Broker, Agent, Surety Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy Manufacturing, 16 Motion Picture Production Theaters, Motion Picture Distribution Machinery (Non-Agriculture, Non-Construction, Non- Electronic): Industrial, Machine Tools, Steam Generators Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling Personal, Food and Miscellaneous Services Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes Personal Transportation: Air, Bus, Rail, Car Rental Utilities: Electric, Water, Hydro Power, Gas, Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra- national agencies "1940 Act" means the Investment Company Act of 1940, as amended. "Notice of Redemption" has the meaning set forth in paragraph 3(c)(i) of Article II hereof. "Officers' Certificate" means a certificate signed by any two of the President, a Vice President, the Treasurer or the 17 Secretary of the Corporation or by any one of the foregoing and an Assistant Treasurer or Assistant Secretary of the Corporation. "Paying Agent" means State Street Bank and Trust Company and its successors or any other paying agent appointed by the Corporation. "Portfolio Calculation"* means the aggregate Discounted Value of all Moody's Eligible Assets. "Preferred Stock" means the preferred stock, par value $.001 per share, of the Corporation, and includes the Cumulative Preferred Stock. "Quarterly Valuation Date"* means the last Valuation Date in March, June, September and December of each year, commencing September 26, 1997. "Redemption Price" has the meaning set forth in paragraph 3(a) of Article II hereof. "Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation (or, in the case of an instrument specified by clauses (i) and (ii) below, on the Valuation Date), the remaining terms to maturity thereof are not in excess of 90 days: (i) U.S. Government Obligations; (ii) commercial paper that is rated at the time of purchase or acquisition and the Valuation Date at least P-1 by Moody's and is issued by an issuer (or guaranteed or supported by a person or entity other than the issuer) whose long-term unsecured debt obligations are rated at least Aa by Moody's; (iii) demand or time deposits in, or certificates of deposit of, or banker's acceptances issued by (A) a depository institution or trust company incorporated under the laws of the United States of America or any state thereof or the District of Columbia or (B) a United States branch office or agency of a foreign depository institution (provided that such branch office or agency is subject to banking regulation under the laws of the United States, any state thereof or the District of Columbia) if, in each case, the commercial paper, if any, and the long-term unsecured debt obligations (other than such obligations the ratings of which are based on the credit of a person or entity other than such depository institution or trust company) of such depository institution or trust company at the time of purchase or acquisition and the Valuation Date, have (1) 18 credit ratings from Moody's of at least P-1 in the case of commercial paper and (2) credit ratings from Moody's of at least Aa in the case of long-term unsecured debt obligations; provided, however, that in the case of any such investment that matures in no more than one Business Day from the date of purchase or other acquisition by the Corporation, all of the foregoing requirements shall be applicable except that the required long-term unsecured debt credit rating of such depository institution or trust company from Moody's shall be at least A2; and provided, further, however, that the foregoing credit rating requirements shall be deemed to be met with respect to a depository institution or trust company if (1) such depository institution or trust company is the principal depository institution in a holding company system, (2) the commercial paper, if any, of such depository institution or trust company is not rated below P-1 by Moody's and (3) the holding company shall meet all of the foregoing credit rating requirements (including the preceding proviso in the case of investments that mature in no more than one Business Day from the date of purchase or other acquisition by the Corporation); (iv) repurchase obligations with respect to any U.S. Government Obligation entered into with a depository institution, trust company or securities dealer (acting as principal) which is rated (A) at least Aa3 if the maturity is three months or less, (B) at least A1 if the maturity is two months or less and (C) at least A2 if the maturity is one month or less; and (v) Eurodollar demand or time deposits in, or certificates of deposit of, the head office or the London branch office of a depository institution or trust company meeting the credit rating requirements of commercial paper and long-term unsecured debt obligations specified in clause (iii) above, provided that the interest receivable by the Corporation shall be payable in U.S. dollars and shall not be subject to any withholding or similar taxes. "S&P" means Standard & Poor's Ratings Services or its successors. "U.S. Government Obligations" means direct non-callable obligations of the United States, provided that such direct obligations are entitled to the full faith and credit of the United States and that any such obligations, other than United States Treasury Bills and U.S. Treasury Securities Strips, provide for the periodic payment of interest and the full payment of principal at maturity. 19 "Valuation Date"* means every Friday or, if such day is not a Business Day, the immediately preceding Business Day. "Voting Period" shall have the meaning set forth in paragraph 4(b) of Article II hereof. Those of the foregoing definitions which are marked with an asterisk have been adopted by the Board of Directors of the Corporation in order to obtain a "aaa" rating from Moody's on the shares of Cumulative Preferred Stock on their Date of Original Issue; and the Board of Directors of the Corporation shall have the authority, without stockholder approval, to amend, alter or repeal from time to time the foregoing definitions and the restrictions and guidelines set forth thereunder if Moody's advises the Corporation in writing that such amendment, alteration or repeal will not adversely affect their then current rating on the Cumulative Preferred Stock. Furthermore, if the Board of Directors determines not to continue to comply with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof as provided in paragraph 7 of Article II hereof, then such definitions marked with an asterisk, unless the context otherwise requires, shall have no meaning for these Articles Supplementary. 20 ARTICLE II CUMULATIVE PREFERRED STOCK -------------------------- 1. Dividends. (a) Holders of shares of Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cumulative cash dividends at the annual rate of % per share (computed on the basis of a 360-day year consisting of twelve 30-day months) of the initial Liquidation Preference of $25.00 per share on the Cumulative Preferred Stock and no more, payable quarterly on March 23, June 23, September 23 and December 23 in each year (each, a "Dividend Payment Date"), commencing September 23, 1997 (or, if any such day is not a Business Day, then on the next succeeding Business Day), to holders of record of Cumulative Preferred Stock as they appear on the stock register of the Corporation at the close of business on the preceding March 6, June 6, September 6 and December 6 (or, if any such day is not a Business Day, then on the next succeeding Business Day), as the case may be, in preference to dividends on shares of Common Stock and any other capital stock of the Corporation ranking junior to the Cumulative Preferred Stock in payment of dividends. Dividends on shares of Cumulative Preferred Stock shall accumulate from the date on which the first such shares of Cumulative Preferred Stock are originally issued ("Date of Original Issue"). Each period beginning on and including a Dividend Payment Date (or the Date of Original Issue, in the case of the first dividend period after issuance of any such shares) and ending on but excluding the next succeeding Dividend Payment Date is referred to herein as a "Dividend Period." Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors. (b)(i) No dividends shall be declared or paid or set apart for payment on any shares of Cumulative Preferred Stock for any Dividend Period or part thereof unless full cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Date therefor. If full cumulative dividends are not declared and paid on the shares of Cumulative Preferred Stock, any dividends on the shares of Cumulative Preferred Stock shall be declared and paid pro rata on all outstanding shares of Cumulative Preferred Stock. No holders of shares of Cumulative Preferred Stock shall be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in this paragraph 1(b)(i) on shares of Cumulative Preferred Stock. No interest or 21 sum of money in lieu of interest shall be payable in respect of any dividend payments on any shares of Cumulative Preferred Stock that may be in arrears. (ii) For so long as shares of Cumulative Preferred Stock are outstanding, the Corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation (except by conversion into or exchange for stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (A) immediately thereafter, the Corporation shall have a Portfolio Calculation at least equal to the Basic Maintenance Amount and the Corporation shall maintain the Asset Coverage, (B) full cumulative dividends on all shares of Cumulative Preferred Stock due on or prior to the date of the transaction have been declared and paid (or shall have been declared and sufficient funds for the payment thereof deposited with the Paying Agent) and (C) the Corporation has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision contained herein for mandatory redemption. (iii) Any dividend payment made on the shares of Cumulative Preferred Stock shall first be credited against the dividends accumulated with respect to the earliest Dividend Period for which dividends have not been paid. (c) Not later than the Business Day next preceding each Dividend Payment Date, the Corporation shall deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to pay the dividends that are payable on such Dividend Payment Date, which Deposit Securities shall mature on or prior to such Dividend Payment Date. The Corporation may direct the Paying Agent with respect to the investment of any such Deposit Securities, provided that such investment consists exclusively of Deposit Securities and provided further that the proceeds of any such investment will be available at the opening of business on such Dividend Payment Date. (d) The Board of Directors may declare an additional dividend on the Cumulative Preferred Stock each year in order to permit the Corporation to distribute its income in accordance 22 with Section 855 (or any successor provision) of the Internal Revenue Code of 1986, as amended (the "Code"), and the other rules and regulations under Subchapter M of the Code. Any such additional dividend shall be payable to holders of the Cumulative Preferred Stock on the next Dividend Payment Date, shall be part of a regular quarterly dividend for the year of declaration payable to holders of record pursuant to paragraph 1(a) hereof and shall not result in any increase in the amount of cash dividends payable for such year pursuant to paragraph 1(a) hereof. 2. Liquidation Rights. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of shares of Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, after claims of creditors but before any distribution or payment shall be made in respect of the Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25.00 per share plus an amount equal to all unpaid dividends thereon accumulated to and including the date fixed for such distribution or payment (whether or not earned or declared by the Corporation, but excluding interest thereon) (the "Liquidation Preference"), and such holders shall be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up. (b) If, upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the assets of the Corporation available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock, and any other outstanding class or series of Preferred Stock of the Corporation ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, shall be insufficient to permit the payment in full to such holders of Cumulative Preferred Stock of the Liquidation Preference and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets shall be distributed among the holders of shares of Cumulative Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference has been paid in full to the holders of shares of Cumulative Preferred Stock, no dividends or distributions shall be made to holders of the Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to liquidation. 23 3. Redemption. Shares of the Cumulative Preferred Stock shall be redeemed or redeemable by the Corporation as provided below: (a) Mandatory Redemptions. If the Corporation is required to redeem any shares of Cumulative Preferred Stock pursuant to paragraphs 5(b) or 5(c) of Article II hereof, then the Corporation shall, to the extent permitted by the 1940 Act, Maryland law and any agreement in respect of indebtedness of the Corporation to which it may be a party or by which it may be bound, by the close of business on such Asset Coverage Cure Date or Basic Maintenance Amount Cure Date (herein collectively referred to as a "Cure Date"), as the case may be, fix a redemption date and proceed to redeem shares as set forth in paragraph 3(c) hereof. On such redemption date, the Corporation shall redeem, out of funds legally available therefor, the number of shares of Cumulative Preferred Stock equal to the minimum number of shares the redemption of which, if such redemption had occurred immediately prior to the opening of business on such Cure Date, would have resulted in the Asset Coverage having been satisfied or the Corporation having a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, as the case may be, immediately prior to the opening of business on such Cure Date or, if the Asset Coverage or a Portfolio Calculation equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at a price equal to $25.00 per share plus accumulated but unpaid dividends thereon (whether or not earned or declared by the Corporation) through the date of redemption (the "Redemption Price"). In the event that shares of Cumulative Preferred Stock are redeemed pursuant to paragraph 5(b) of Article II hereof, the Corporation may, but shall not be required to, redeem a sufficient number of shares of Cumulative Preferred Stock pursuant to this paragraph 3(a) in order that the "asset coverage" of a class of senior security which is stock, as defined in Section 18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption is up to 250%. 24 (b) Optional Redemptions. Prior to July 1, 2002, the Corporation may, at its option, redeem shares of Cumulative Preferred Stock at the Redemption Price per share only if and to the extent that any such redemption is necessary, in the judgment of the Corporation, to maintain the Corporation's status as a regulated investment company under Subchapter M of the Code. Commencing July 1, 2002 and at any time and from time to time thereafter, the Corporation may, at its option, to the extent permitted by the 1940 Act, Maryland law and any agreement in respect of indebtedness of the Corporation to which it may be a party or by which it may be bound, redeem the Cumulative Preferred Stock in whole or in part at the Redemption Price per share. (c) Procedures for Redemption. (i) If the Corporation shall determine or be required to redeem shares of Cumulative Preferred Stock pursuant to this paragraph 3, it shall mail a written notice of redemption ("Notice of Redemption") with respect to such redemption by first class mail, postage prepaid, to each holder of the shares to be redeemed at such holder's address as the same appears on the stock books of the Corporation on the record date in respect of such redemption established by the Board of Directors. Each such Notice of Redemption shall state: (A) the redemption date, which shall be not fewer than 30 days nor more than 45 days after the date of such notice; (B) the number of shares of Cumulative Preferred Stock to be redeemed; (C) the CUSIP number(s) of such shares; (D) the Redemption Price; (E) the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the Notice of Redemption shall so state) are to be surrendered for payment in respect of such redemption; (F) that dividends on the shares to be redeemed will cease to accumulate on such redemption date; and (G) the provisions of this paragraph 3 under which such redemption is made. If fewer than all shares of Cumulative Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder also shall specify the number of shares to be redeemed from such holder. No defect in the Notice of Redemption or the mailing thereof shall affect the validity of the redemption proceedings, except as required by applicable law. (ii) If the Corporation shall give a Notice of Redemption, then by the close of business on the Business Day preceding the redemption date specified in the Notice of Redemption the Corporation shall (A) deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock to be redeemed, which Deposit Securities shall mature on or prior to such redemption date, and (B) give the Paying Agent irrevocable 25 instructions and authority to pay the Redemption Price to the holders of the shares of Cumulative Preferred Stock called for redemption on the redemption date. The Corporation may direct the Paying Agent with respect to the investment of any Deposit Securities so deposited, provided that the proceeds of any such investment will be available at the opening of business on such redemption date. Upon the date of such deposit (unless the Corporation shall default in making payment of the Redemption Price), all rights of the holders of the shares of Cumulative Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Redemption Price thereof, and such shares shall no longer be deemed outstanding for any purpose. The Corporation shall be entitled to receive, promptly after the date fixed for redemption, any cash in excess of the aggregate Redemption Price of the shares of Cumulative Preferred Stock called for redemption on such date and any remaining Deposit Securities. Any assets so deposited that are unclaimed at the end of two years from such redemption date shall, to the extent permitted by law, be repaid to the Corporation, after which the holders of the shares of Cumulative Preferred Stock so called for redemption shall look only to the Corporation for payment thereof. The Corporation shall be entitled to receive, from time to time after the date fixed for redemption, any interest on the Deposit Securities so deposited. (iii) On or after the redemption date, each holder of shares of Cumulative Preferred Stock that are subject to redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in the Notice of Redemption and shall then be entitled to receive the cash Redemption Price, without interest. (iv) In the case of any redemption of less than all of the shares of Cumulative Preferred Stock pursuant to these Articles Supplementary, such redemption shall be made pro rata from each holder of shares of Cumulative Preferred Stock in accordance with the respective number of shares held by each such holder on the record date for such redemption. (v) Notwithstanding the other provisions of this paragraph 3, the Corporation shall not redeem shares of Cumulative Preferred Stock unless all accumulated and unpaid dividends on all outstanding shares of Cumulative Preferred Stock for all applicable past Dividend Periods (whether or not earned or declared by the Corporation) shall have been or are contemporaneously paid or declared and Deposit Securities for the payment of such dividends shall have been deposited with the Paying Agent as set forth in paragraph 1(c) of Article II hereof. (vi) If the Corporation shall not have funds legally available for the redemption of, or is otherwise unable to 26 redeem, all the shares of the Cumulative Preferred Stock to be redeemed on any redemption date, the Corporation shall redeem on such redemption date the number of shares of Cumulative Preferred Stock as it shall have legally available funds, or is otherwise able, to redeem ratably from each holder whose shares are to be redeemed, and the remainder of the shares of the Cumulative Preferred Stock required to be redeemed shall be redeemed on the earliest practicable date on which the Corporation shall have funds legally available for the redemption of, or is otherwise able to redeem, such shares. 4. Voting Rights. (a) General. Except as otherwise provided by law or as specified in the Charter or By-Laws, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation, and the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, and of shares of Common Stock shall vote together as a single class; provided that, at any meeting of the stockholders of the Corporation held for the election of directors, the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, shall be entitled, as a class, to the exclusion of the holders of all other securities and classes of capital stock of the Corporation, to elect two directors of the Corporation. Subject to paragraph 4(b) of Article II hereof, the holders of outstanding shares of capital stock of the Corporation, including the holders of outstanding shares of Preferred Stock (including the Cumulative Preferred Stock), voting as a single class, shall elect the balance of the directors. Notwithstanding the foregoing, and except as otherwise required by the 1940 Act, (i) the holders of outstanding shares of Cumulative Preferred Stock shall be entitled as a class, to the exclusion of the holders of all other securities, including other Preferred Stock and classes of capital stock of the Corporation, to vote on matters affecting the Cumulative Preferred Stock that do not adversely affect other securities, including other Preferred Stock and classes of capital stock, and (ii) holders of other outstanding shares of Preferred Stock shall be entitled, as a class to the exclusion of the holders of Cumulative Preferred Stock, to vote on matters affecting such other Preferred Stock that do not adversely affect the holders of the Cumulative Preferred Stock. (b) Right to Elect Majority of Board of Directors. During any period in which any one or more of the conditions described below shall exist (such period being referred to herein as a "Voting Period"), the number of directors constituting the Board of Directors shall be automatically increased by the 27 smallest number that, when added to the two directors elected exclusively by the holders of shares of Preferred Stock, would constitute a majority of the Board of Directors as so increased by such smallest number; and the holders of shares of Preferred Stock shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), to elect such smallest number of additional directors, together with the two directors that such holders are in any event entitled to elect. A Voting Period shall commence: (i) if at any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the outstanding shares of Cumulative Preferred Stock equal to at least two full years' dividends shall be due and unpaid and sufficient Deposit Securities shall not have been deposited with the Paying Agent for the payment of such accumulated dividends; or (ii) if at any time holders of any other shares of Preferred Stock are entitled to elect a majority of the directors of the Corporation under the 1940 Act. Upon the termination of a Voting Period, the voting rights described in this paragraph 4(b) shall cease, subject always, however, to the reverting of such voting rights in the holders of Preferred Stock upon the further occurrence of any of the events described in this paragraph 4(b). (c) Right to Vote with Respect to Certain Other Matters. So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of two-thirds of the shares of Cumulative Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of Cumulative Preferred Stock. The Corporation shall notify Moody's ten Business Days prior to any such vote described above. Unless a higher percentage is provided for under the Charter, the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock, including Cumulative Preferred Stock, voting together as a single class, will be required to approve any plan of reorganization adversely affecting such shares or any action requiring a vote of security holders under Section 13(a) of the 1940 Act. For purposes of the preceding sentence, the phrase "vote of the holders of a majority of the outstanding shares of Preferred Stock" shall have the meaning set forth in the 1940 Act. The class vote of holders of shares of Preferred 28 Stock, including Cumulative Preferred Stock, described above will be in addition to a separate vote of the requisite percentage of shares of Common Stock and shares of Preferred Stock, including Cumulative Preferred Stock, voting together as a single class, necessary to authorize the action in question. An increase in the number of authorized shares of Preferred Stock pursuant to the Charter or the issuance of additional shares of any series of Preferred Stock (including Cumulative Preferred Stock) pursuant to the Charter shall not in and of itself be considered to adversely affect the contract rights of the holders of Cumulative Preferred Stock. (d) Voting Procedures. (i) As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described in paragraph 4(b) above, the Corporation shall call a special meeting of such holders and instruct the Paying Agent to mail a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more than 20 days after the date of mailing of such notice. If the Corporation fails to send such notice to the Paying Agent or if the Corporation does not call such a special meeting, it may be called by any such holder on like notice. The record date for determining the holders entitled to notice of and to vote at such special meeting shall be the close of business on the fifth Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting held during a Voting Period, such holders of Preferred Stock, voting together as a class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), shall be entitled to elect the number of directors prescribed in paragraph 4(b) above. At any such meeting or adjournment thereof in the absence of a quorum, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting without notice, other than by an announcement at the meeting, to a date not more than 120 days after the original record date. (ii) For purposes of determining any rights of the holders of Cumulative Preferred Stock to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these Articles Supplementary, by the other provisions of the Charter, by statute or otherwise, a share of Cumulative Preferred Stock which is not outstanding shall not be counted. (iii) The terms of office of all persons who are directors of the Corporation at the time of a special meeting of holders of Preferred Stock, including Cumulative Preferred Stock, to elect directors shall continue, notwithstanding the election at such meeting by such holders of the number of directors that they are entitled to elect, and the persons so elected by such holders, together with the two incumbent directors elected by the holders 29 of Preferred Stock, including Cumulative Preferred Stock, and the remaining incumbent directors elected by the holders of the Common Stock and Preferred Stock, shall constitute the duly elected directors of the Corporation. (iv) Simultaneously with the expiration of a Voting Period, the terms of office of the additional directors elected by the holders of Preferred Stock, including Cumulative Preferred Stock, pursuant to paragraph 4(b) above shall terminate, the remaining directors shall constitute the directors of the Corporation and the voting rights of such holders of Preferred Stock, including Cumulative Preferred Stock, to elect additional directors pursuant to paragraph 4(b) above shall cease, subject to the provisions of the last sentence of paragraph 4(b). (e) Exclusive Remedy. Unless otherwise required by law, the holders of shares of Cumulative Preferred Stock shall not have any rights or preferences other than those specifically set forth herein. The holders of shares of Cumulative Preferred Stock shall have no preemptive rights or rights to cumulative voting. In the event that the Corporation fails to pay any dividends on the shares of Cumulative Preferred Stock, the exclusive remedy of the holders shall be the right to vote for directors pursuant to the provisions of this paragraph 4. (f) Notification to Moody's. In the event a vote of holders of Cumulative Preferred Stock is required pursuant to the provisions of Section 13(a) of the 1940 Act, as long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall, not later than ten Business Days prior to the date on which such vote is to be taken, notify Moody's that such vote is to be taken and the nature of the action with respect to which such vote is to be taken and, not later than ten Business Days after the date on which such vote is taken, notify Moody's of the result of such vote. 5. Coverage Tests. (a) Determination of Compliance. For so long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall make the following determinations: (i) Asset Coverage. The Corporation shall maintain, as of the last Business Day of each March, June, September and December of each year in which any shares of Cumulative Preferred Stock are outstanding, the Asset Coverage. 30 (ii) Basic Maintenance Amount Requirement. (A) For so long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall maintain, on each Valuation Date, a Portfolio Calculation at least equal to the Basic Maintenance Amount, each as of such Valuation Date. Upon any failure to maintain the required Portfolio Calculation, the Corporation shall use its best efforts to reattain a Portfolio Calculation at least equal to the Basic Maintenance Amount on or prior to the Basic Maintenance Amount Cure Date, by altering the composition of its portfolio or otherwise. (B) The Corporation shall prepare a Basic Maintenance Report relating to each Valuation Date. On or before 5:00 P.M., New York City time, on the third Business Day after the first Valuation Date following the Date of Original Issue of the Cumulative Preferred Stock and after each (A) Quarterly Valuation Date, (B) Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above, (C) Basic Maintenance Amount Cure Date following a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above and (D) Valuation Date and any immediately succeeding Business Day on which the Portfolio Calculation exceeds the Basic Maintenance Amount by 5% or less, the Corporation shall complete and deliver to Moody's a Basic Maintenance Report, which will be deemed to have been delivered to Moody's if Moody's receives a copy or telecopy, telex or other electronic transcription setting forth at least the Portfolio Calculation and the Basic Maintenance Amount each as of the relevant Valuation Date and on the same day the Corporation mails to Moody's for delivery on the next Business Day the full Basic Maintenance Report. The Corporation also shall provide Moody's with a Basic Maintenance Report relating to any other Valuation Date on Moody's specific request. A failure by the Corporation to deliver a Basic Maintenance Report under this paragraph 5(a)(ii)(B) shall be deemed to be delivery of a Basic Maintenance Report indicating a Portfolio Calculation less than the Basic Maintenance Amount, as of the relevant Valuation Date. (C) Within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to a Quarterly Valuation Date, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report and any other Basic Maintenance Report, randomly selected by the Independent Accountants, that was prepared by the Corporation during the quarter ending on such Quarterly Valuation Date. Also, within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) and any Basic Maintenance Amount Cure Date, the 31 Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report. If any Accountant's Confirmation delivered pursuant to this paragraph 5(a)(ii)(C) shows that an error was made in the Basic Maintenance Report for such Quarterly Valuation Date, or shows that a lower Portfolio Calculation was determined by the Independent Accountants, the calculation or determination made by such Independent Accountants shall be final and conclusive and shall be binding on the Corporation, and the Corporation shall accordingly amend the Basic Maintenance Report and deliver the amended Basic Maintenance Report to Moody's promptly following Moody's receipt of such Accountant's Confirmation. (D) In the event the Portfolio Calculation shown in any Basic Maintenance Report prepared pursuant to paragraph 5(a)(ii)(B) above is less than the applicable Basic Maintenance Amount, the Corporation shall have until the Basic Maintenance Amount Cure Date to achieve a Portfolio Calculation at least equal to the Basic Maintenance Amount, and upon such achievement (and not later than such Basic Maintenance Amount Cure Date) the Corporation shall inform Moody's of such achievement in writing by delivery of a revised Basic Maintenance Report showing a Portfolio Calculation at least equal to the Basic Maintenance Amount as of the date of such revised Basic Maintenance Report, together with an Officers' Certificate to such effect. (E) On or before 5:00 P.M., New York City time, on the first Business Day after shares of Common Stock are repurchased by the Corporation, the Corporation shall complete and deliver to Moody's a Basic Maintenance Report as of the close of business on such date that Common Stock is repurchased. A Basic Maintenance Report delivered as provided in paragraph 5(a)(ii)(B) above also shall be deemed to have been delivered pursuant to this paragraph 5(a)(ii)(E). (b) Failure to Meet Asset Coverage. If the Asset Coverage is not satisfied as provided in paragraph 5(a)(i) hereof and such failure is not cured as of the related Asset Coverage Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock to enable it to meet the requirements of paragraph 5(a)(i) above, and, at the Corporation's discretion, such additional number of shares of Cumulative Preferred Stock in order that the "asset coverage" of a class of senior security which is stock, as defined in Section 18(h) of the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock is up to 250%, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of 32 the shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof. (c) Failure to Maintain a Portfolio Calculation At Least Equal to the Basic Maintenance Amount. If a Portfolio Calculation for Moody's at least equal to the Basic Maintenance Amount is not maintained as provided in paragraph 5(a)(ii)(A) above and such failure is not cured by the related Basic Maintenance Amount Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock to enable it to meet the requirements of paragraph 5(a)(ii)(A) above, and, at the Corporation's discretion, such additional number of shares of Cumulative Preferred Stock in order that the Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock by up to 10%, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof. (d) Status of Shares Called for Redemption. For purposes of determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied, (i) no share of the Cumulative Preferred Stock shall be deemed to be outstanding for purposes of any computation if, prior to or concurrently with such determination, sufficient Deposit Securities to pay the full Redemption Price for such share shall have been deposited in trust with the Paying Agent and the requisite Notice of Redemption shall have been given, and (ii) such Deposit Securities deposited with the Paying Agent shall not be included in determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied. 6. Certain Other Restrictions. (a) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation will not, and will cause the Adviser not to, (i) knowingly and willfully purchase or sell a portfolio security for the specific purpose of causing, and with the actual knowledge that the effect of such purchase or sale will be to cause, the Portfolio Calculation as of the date of the purchase or sale to be less than the Basic Maintenance Amount as of such date, (ii) in the event that, as of the immediately preceding Valuation Date, the Portfolio Calculation exceeded the Basic Maintenance Amount by 5% or less, alter the composition of the Corporation's portfolio securities in a manner reasonably expected to reduce the Portfolio Calculation, unless the 33 Corporation shall have confirmed that, after giving effect to such alteration, the Portfolio Calculation exceeded the Basic Maintenance Amount or (iii) declare or pay any dividend or other distribution on any shares of Common Stock or repurchase any shares of Common Stock, unless the Corporation shall have confirmed that, after giving effect to such declaration, other distribution or repurchase, the Corporation continues to satisfy the requirements of paragraph 5(a)(ii)(A) of Article II hereof. (b) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall not (a) acquire or otherwise invest in (i) future contracts or (ii) options on futures contracts, (b) engage in reverse repurchase agreements, (c) engage in short sales, (d) overdraw any bank account, (e) write options on portfolio securities other than call options on securities held in the Corporation's portfolio or that the Corporation has an immediate right to acquire through conversion or exchange of securities held in its portfolio, or (f) borrow money, except for the purpose of clearing and/or settling transactions in portfolio securities (which borrowings shall under any circumstances be limited to the lesser of $10,000,000 and an amount equal to 5% of the Market Value of the Corporation's assets at the time of such borrowings and which borrowings shall be repaid within 60 days and not be extended or renewed), unless in any such case, the Corporation shall have received written confirmation from Moody's that such investment activity will not adversely affect Moody's then current rating of the Cumulative Preferred Stock. Furthermore, for so long as the Cumulative Preferred Stock is rated by Moody's, unless the Corporation shall have received the written confirmation from Moody's referred to in the preceding sentence, the Corporation may engage in the lending of its portfolio securities only in an amount of up to 5% of the Corporation's total assets, provided that the Corporation receives cash collateral for such loaned securities which is maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities and, if invested, is invested only in money market mutual funds meeting the requirements of Rule 2a-7 under the 1940 Act that maintain a constant $1.00 per share net asset value. In determining the Portfolio Calculation, the Corporation shall use the Moody's Discount Factor applicable to the loaned securities rather than the Moody's Discount Factor applicable to the collateral. (c) For so long as the Cumulative Preferred Stock is rated by Moody's, the Corporation shall not consolidate the Corporation with, merge the Corporation into, sell or otherwise transfer all or substantially all of the Corporation's assets to another entity or adopt a plan of liquidation of the Corporation, in each case without providing prior written notification to Moody's. 7. Termination of Rating Agency Provisions. 34 (a) The Board of Directors may determine that it is not in the best interests of the Corporation to continue to comply with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, in which case the Corporation will no longer be required to comply with any of the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, provided that (i) the Corporation has given the Paying Agent, Moody's and holders of the Cumulative Preferred Stock at least 20 calendar days written notice of such termination of compliance, (ii) the Corporation is in compliance with the provisions of paragraphs 5(a)(i), 5(a)(ii), 5(c) and 6 of Article II hereof at the time the notice required in clause (i) hereof is given and at the time of the termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, (iii) at the time the notice required in clause (i) hereof is given and at the time of termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's the Cumulative Preferred Stock is listed on the American Stock Exchange or on another exchange registered with the Securities and Exchange Commission as a national securities exchange and (iv) at the time of termination of compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's, the cumulative cash dividend rate payable on a share of the Cumulative Preferred Stock pursuant to paragraph 1(a) of Article II hereof shall be increased by .375% per annum. (b) On the date that the notice is given in paragraph 7(a) above and on the date that compliance with the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's is terminated, the Corporation shall provide the Paying Agent and Moody's with an Officers' Certificate as to the compliance with the provisions of paragraph 7(a) hereof, and the provisions of paragraphs 5(a)(ii), 5(c) and 6 of Article II hereof with respect to Moody's shall terminate on such later date and thereafter have no force or effect. 8. Limitation on Issuance of Additional Preferred Stock. So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation may issue and sell additional shares of Cumulative Preferred Stock authorized hereby and/or shares of one or more other series of Preferred Stock constituting a series of a class of senior securities of the Corporation representing stock under Section 18 of the 1940 Act in addition to the shares of Cumulative Preferred Stock, provided that (i) immediately after giving effect to the issuance and sale of such additional Preferred Stock and to the Corporation's receipt and application of the proceeds thereof, the Corporation will maintain the Asset Coverage of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Corporation then outstanding, and (ii) no such additional Preferred Stock shall have any preference 35 or priority over any other Preferred Stock of the Corporation upon the distribution of the assets of the Corporation or in respect of the payment of dividends. ARTICLE III ABILITY OF BOARD OF DIRECTORS TO MODIFY THE ARTICLES SUPPLEMENTARY To the extent permitted by law, the Board of Directors, without the vote of the holders of the Cumulative Preferred Stock or any other capital stock of the Corporation, may amend the provisions of these Articles Supplementary to resolve any inconsistency or ambiguity or remedy any formal defect so long as the amendment does not materially adversely affect any of the contract rights of holders of shares of the Cumulative Preferred Stock or any other capital stock of the Corporation. 36 IN WITNESS WHEREOF, ROYCE MICRO-CAP TRUST, INC. has caused these presents to be signed in its name and on its behalf by a duly authorized officer, and its corporate seal to be hereunto affixed and attested by its Secretary, and the said officers of the Corporation further acknowledge said instrument to be the corporate act of the Corporation, and state that to the best of their knowledge, information and belief the matters and facts herein set forth with respect to approval are true in all material respects, all on June _________, 1997. ROYCE MICRO-CAP TRUST, INC. By ------------------------- Name: Title: Attest: - --------------------------- John E. Denneen Secretary EX-99.2H 3 EXHIBIT 2(H)(I) 1,600,000 Shares ROYCE MICRO-CAP TRUST, INC. _% Cumulative Preferred Stock Liquidation Preference $25 Per Share UNDERWRITING AGREEMENT June __, 1997 SMITH BARNEY INC. PAINEWEBBER INCORPORATED As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: Royce Micro-Cap Trust, Inc., a Maryland corporation (the "Fund"), proposes, upon the terms and conditions set forth herein, to issue and sell an aggregate of 1,600,000 shares (the "Shares") of its _% cumulative preferred stock, liquidation preference $25 per share, $.001 par value per share (the "Cumulative Preferred Stock"), to the several Underwriters named in Schedule I hereto. The Cumulative Preferred Stock will be authorized by, and subject to the terms and conditions of, the Articles Supplementary to be adopted in connection with the issuance of the Cumulative Preferred Stock (the "Articles Supplementary"). The Fund and its investment adviser, Royce & Associates, Inc., a New York corporation (the "Adviser"), wish to confirm as follows their agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. The Fund has entered into an investment advisory agreement dated as of December 31, 1996 with the Adviser, an administration agreement dated as of December 14, 1993 and amended as of March 1, 1996 with Mitchell Hutchins Asset Management Inc., a Delaware corporation, a custodian contract dated as of December 14, 1993 with State Street Bank and Trust Company, a Massachusetts corporation, a registrar, transfer agency and service agreement dated as of December 14, 1993 with State Street Bank and Trust Company with respect to the Fund's Common Stock and a registrar, transfer agency and paying agency agreement dated as of June __, 1997 with State Street Bank and Trust Company with respect to the Cumulative Preferred Stock. Such agreements are hereinafter referred to as the "Investment 2 Advisory Agreement", the "Administration Agreement", the "Custodian Contract", the "Transfer Agency Agreement" and the "Paying Agency Agreement", respectively. Collectively, the Investment Advisory Agreement, the Administration Agreement, the Custodian Contract, the Transfer Agency Agreement and the Paying Agency Agreement are hereinafter referred to as the "Fund Agreements". This Underwriting Agreement is hereinafter referred to as the "Agreement". 1. Registration Statement and Prospectus. The Fund has prepared in conformity with the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations of the Securities and Exchange Commission (the "Commission") promulgated under the 1933 Act (the "1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and, together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a registration statement on Form N-2 (File No. 333-_____) under the 1933 Act and the 1940 Act (the "registration statement"), including a prospectus relating to the Shares, and has filed the registration statement and prospectus in accordance with the 1933 Act and 1940 Act. The Fund also has filed a notification of registration of the Fund as an investment company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective under the 1933 Act or, if the registration statement became effective under the 1933 Act prior to the execution of this Agreement, as amended or supplemented at the time it became effective, prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed under the 1933 Act and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If the Fund has filed an abbreviated registration statement to register an additional amount of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall include such Rule 462 Registrations Statement. The term "Prospectus" as used in this Agreement means the prospectus and statement of additional information in the forms included in the Registration Statement or, if the prospectus and statement of additional information included in the Registration Statement omit information in reliance on Rule 430A under the 1933 Act Rules and Regulations and such information is included in a prospectus and statement of additional information filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term "Prospectus" as used in this Agreement means the prospectus and statement of additional information in the forms included in the Registration Statement as supplemented by the addition of the information contained in the prospectus filed 3 with the Commission pursuant to Rule 497(h). The term "Prepricing Prospectus" as used in this Agreement means the prospectus and statement of additional information subject to completion in the forms included in the registration statement at the time of filing of amendment No. 1 to the registration statement with the Commission on [June __, 1997] and as such prospectus and statement of additional information shall have been amended from time to time prior to the date of the Prospectus, together with any other prospectus and statement of additional information relating to the Fund other than the Prospectus approved in writing by or directly or indirectly prepared by the Fund or the Adviser. It being understood that the definition of Prepricing Prospectus above shall not include any Prepricing Prospectus prepared by any Underwriter unless approved in writing by the Fund or Adviser. The terms "Registration Statement", "Prospectus" and "Prepricing Prospectus" shall also include any financial statements incorporated by reference therein. The Fund has furnished the Representatives with copies of such registration statement, each amendment to such registration statement filed with the Commission and each Prepricing Prospectus. 2. Agreements to Sell and Purchase. The Fund hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Fund and the Adviser herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase price of $[ ] per Share, the number of Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Shares increased as set forth in Section 11 hereof). 3. Terms of Public Offering. The Fund and the Adviser have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Shares shall be made at the office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 10:00 A.M., New York City time, on June __, 1997 (the "Closing Date"). The place of closing for the Shares and the Closing Date may be varied by agreement between you and the Fund. Certificates for the Shares shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date. Such certificates shall be made 4 available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date. The certificates evidencing the Shares shall be delivered to you on the Closing Date against payment of the purchase price therefor in immediately available funds. 5. Agreements of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, agree with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective under the 1933 Act before the offering of the Shares may commence, the Fund will endeavor to cause the Registration Statement or such post-effective amendment to become effective under the 1933 Act as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing when the Registration Statement or such post-effective amendment has become effective. (b) The Fund will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request made by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus (or any amendment or supplement to any of the foregoing) or for additional information, (ii) of the issuance by the Commission, the National Association of Securities Dealers, Inc. (the "NASD"), any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official of any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purposes, (iii) of receipt by the Fund, the Adviser, any affiliate of the Fund or the Adviser or any representative or attorney of the Fund or the Adviser of any other material communication from the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official relating to the Fund (if such communication relating to the Fund is received by such person within three years after the date of this Agreement), the Registration Statement, the 1940 Act Notification, the Prospectus, any Prepricing Prospectus, any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing), this Agreement or any of the Fund Agreements and (iv) within the period of time referred to in paragraph (f) below, of any material adverse change in the condition (financial 5 or other), business, prospects, properties, net assets or results of operations of the Fund or the Adviser or of the happening of any event which makes any statement of a material fact made in the Registration Statement, the Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) untrue or which requires the making of any additions to or changes in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales materials (as hereinafter defined) (or any amendment or supplement to any of the foregoing) in order to state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or of the necessity to amend or supplement the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as herein defined) (or any amendment or supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law or order of any court or regulatory body. If at any time the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regularity or administrative agency or any official shall issue any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) or suspending the qualification of the Shares for offering or sale in any jurisdiction, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Fund will furnish to you, without charge, three signed copies of the registration statement and the 1940 Act Notification as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request. (d) The Fund will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus, or any sales material (as hereinafter defined) of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. 6 (e) Prior to the execution and delivery of this Agreement, the Fund has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Fund consents to the use, in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, the Fund will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Fund consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Fund or in the opinion of counsel for the Underwriters is required to be set forth in the Registration Statement or the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Registration Statement or the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other federal law, rule or regulation, or any state securities or blue sky disclosure laws, rules or regulations, the Fund will forthwith prepare and, subject to the provisions of paragraph (d) above, promptly file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers, without charge, a reasonable number of copies thereof. In the event that the Fund and you, as Representatives of the several Underwriters, agree that the Registration Statement or the Prospectus should be amended or supplemented, the Fund, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Fund will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the state securities or blue sky laws of such jurisdictions as you may designate and will file 7 such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Fund be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Fund will make generally available to its security holders an earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and Regulations. (i) During the period of five years hereafter, the Fund will furnish to you (i) as soon as available, a copy of each report of the Fund mailed to stockholders or filed with the Commission or furnished to the American Stock Exchange (the "AMEX") other than reports on Form N-SAR, and (ii) from time to time such other information concerning the Fund as you may request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 11 hereof or by notice given by you terminating this Agreement pursuant to Section 11 or Section 12 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Fund or the Adviser to comply with the terms or fulfill any of the conditions of this Agreement, the Fund and the Adviser, jointly and severally, agree to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Fund will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus and in such a manner as to comply with the investment objective, policies and restrictions of the Fund as described in the Prospectus. (l) The Fund will timely file the requisite copies of the Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations, whichever is applicable or, if applicable, will timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Fund will not sell, contract to sell, or otherwise dispose of any 8 senior securities of the Fund, or grant any options or warrants to purchase senior securities of the Fund, for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (n) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, neither the Fund nor the Adviser has taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares. (o) The Fund will use its best efforts to cause the Cumulative Preferred Stock, prior to the Closing Date, to be assigned a rating of 'aaa' by Moody's Investors Service, Inc. (the "Rating Agency"). (p) The Fund and the Adviser will use their best efforts to perform all of the agreements required of them and discharge all conditions to closing as set forth in this Agreement. 6. Representations and Warranties of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, represent and warrant to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied when so filed in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 497 of the 1933 Act Rules and Regulations and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission, complied or will comply in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in 9 writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of Common Stock of the Fund have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them); and the capital stock of the Fund conforms to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them). (d) The Fund is a corporation duly organized and validly existing in good standing under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund; and the Fund has no subsidiaries. (e) There are no legal or governmental proceedings pending or, to the knowledge of the Fund, threatened, against the Fund, or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations. (f) The Fund is not in violation of its articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or governmental agency, body or official having jurisdiction over the Fund, or in default in any material respect in the performance of any obligation, agreement or condition contained 10 in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound. (g) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement or any of the Fund Agreements by the Fund, nor the consummation by the Fund of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may have been obtained prior to the date hereof and such as may be required for compliance with the state securities or blue sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents, of the Fund or (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Fund or any of its properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets is subject. The Fund is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency. (h) The accountants, Ernst & Young LLP, who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement to either of them) are independent public accountants as required by the 1933 Act, the 1940 Act and the Rules and Regulations. (i) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), present fairly the financial position, results of operations and changes in financial position of the Fund on the basis stated or incorporated by reference in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included 11 in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Fund. (j) The execution and delivery of, and the performance by the Fund of its obligations under, this Agreement and the Fund Agreements have been duly and validly authorized by the Fund, and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (k) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Fund has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Fund, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Fund, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund taken as a whole, whether or not arising in the ordinary course of business. (l) The Fund has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act or the Rules and Regulations. (m) The Fund has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment or supplement thereto), subject to such qualifications as may be set forth in the Prospectus; the Fund has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any amendment or supplement thereto); and, except as described in the Prospectus (and any amendment or supplement thereto), none of 12 such permits contains any restriction that is materially burdensome to the Fund. (n) The Fund maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization and with the applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets and to maintain compliance with the books and records requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (o) To the Fund's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (p) The Fund has filed all tax returns required to be filed, which returns are complete and correct, and the Fund is not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (q) No holder of any security of the Fund has any right to require registration of shares of common stock, Cumulative Preferred Stock or any other security of the Fund because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. (r) The Fund, subject to the registration statement having been declared effective and the filing of the Prospectus under Rule 497 under the Rules and Regulations, has taken all required action under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares as contemplated by this Agreement. (s) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license. (t) The Fund is registered under the 1940 Act as a closed-end diversified management investment company and the 1940 Act Notification has been duly filed with the Commission and, at 13 the time of filing thereof and any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund is, and at all times through the completion of the transactions contemplated hereby, will be, in compliance in all material respects with the terms and conditions of the 1933 Act and the 1940 Act. No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of the Commission promulgated under the Advisers Act (the "Advisers Act Rules and Regulations"). (u) Except as stated in this Agreement and in the Prospectus (and any amendment or supplement thereto), the Fund has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund. (v) The Fund has filed in a timely manner each document or report required to be filed by it pursuant to the 1934 Act and the rules and regulations of the Commission promulgated thereunder (the "1934 Act Rules and Regulations"); each such document or report at the time it was filed conformed to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and none of such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (w) All advertising, sales literature or other promotional material (including "prospectus wrappers," "broker kits," "road show slides" and "road show scripts") authorized in writing by or prepared by the Fund or the Adviser for use in connection with the offering and sale of the Shares (collectively, "sales material") complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD and no such sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (x) Each of the Fund Agreements and the Fund's and the Adviser's obligations under this Agreement and each of the Fund Agreements comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations. 14 (y) The Shares have been, or prior to the Closing Date will be, assigned a rating of 'aaa' by the Rating Agency. (z) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code. (aa) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), no director of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of any Underwriter. (ab) The Shares have been duly approved for listing upon notice of issuance on the AMEX. 7. Representations and Warranties of the Adviser. The Adviser represents and warrants to each Underwriter as follows: (a) The Adviser is a corporation duly organized and validly existing in good standing under the laws of the State of New York, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement. (b) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto). There does not exist any proceeding or any facts or circumstances the existence of which could lead to any proceeding which might adversely affect the registration of the Adviser with the Commission. (c) There are no legal or governmental proceedings pending or, to the knowledge of the Adviser, threatened against the Adviser, or to which the Adviser or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or that may 15 reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement. (d) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, nor the consummation by the Adviser of the transactions contemplated hereby or thereby (A) requires the Adviser to obtain any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official or conflicts or will conflict with or constitutes or will constitute a breach of or a default under, the certificate of incorporation or bylaws, or other organizational documents, of the Adviser or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any agreement, indenture, lease or other instrument to which the Adviser is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Adviser or any of its properties or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Adviser is subject. The Adviser is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency. (e) The execution and delivery of, and the performance by the Adviser of its obligations under, this Agreement and the Investment Advisory Agreement have been duly and validly authorized by the Adviser, and this Agreement and the Investment Advisory Agreement have been duly executed and delivered by the Adviser and each constitutes the valid and legally binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (f) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus (or any amendment or supplement thereto) and under this Agreement and the Investment Advisory Agreement. (g) The description of the Adviser in the Registration Statement and the Prospectus (and any amendment or supplement thereto) complied and comply in all material respects with the provisions the 1933 Act, the 1940 Act, the Advisers Act, the 16 Rules and Regulations and the Advisers Act Rules and Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (h) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Adviser has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Adviser and its subsidiaries, taken as a whole, and there has not been any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, or which, in each case, could have a material adverse effect on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement. (i) The Adviser has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment thereto); the Adviser has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Adviser under any such permit; and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Adviser. (j) Except as stated in this Agreement and in the Prospectus (and in any amendment or supplement thereto), the Adviser has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Adviser is not aware of any such action taken or to be taken by any affiliates of the Adviser. (k) Charles M. Royce is the validly appointed President and Chief Investment Officer of the Adviser and is the sole voting shareholder of the Adviser. W. Whitney George is the portfolio manager of the Fund; Messrs. Royce and George have not given notice nor made known an intention to give notice of termination of their employment and the Adviser knows of no 17 reason why they should be unable to continue to serve the Adviser in their current capacities. 8. Indemnification and Contribution. (a) The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all losses, claims, damages, liabilities and expenses, joint and several (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Fund by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the 1933 Act and the 1933 Act Rules and Regulations, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Fund has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Fund or the Adviser may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Fund or the Adviser, such Underwriter or such controlling person shall promptly notify the Fund or the Adviser, and the Fund or the Adviser shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Fund or the Adviser has agreed in writing to pay such fees and expenses, (ii) 18 the Fund and the Adviser have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Fund or the Adviser and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Fund or the Adviser by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Fund and the Adviser shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Fund and the Adviser shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The Fund and the Adviser shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Fund and the Adviser agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Adviser, their directors, any officers who sign the Registration Statement, and any person who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same extent as the foregoing indemnity from the Fund and the Adviser to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Fund or the Adviser, any of their directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Fund and the Adviser by paragraph (b) above (except that if the Fund or the Adviser shall have assumed the defense thereof such 19 Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Fund and the Adviser, their directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Fund bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Fund, the Adviser and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) 20 above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to the respective numbers of Shares set forth opposite their names in Schedule I hereto (or such numbers of Shares increased as set forth in Section 11 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Fund and the Adviser set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Fund, the Adviser, their directors or officers, or any person controlling the Fund or the Adviser, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Fund, the Adviser, their directors or officers, or any person controlling the Fund or the Adviser, shall be entitled to the benefits of the indemnity, contribution, and reimbursement agreements contained in this Section 8. 21 9. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or order pursuant to Section 8(e) of the 1940 Act shall have been issued and no proceeding for those purposes shall have been instituted or, to the knowledge of the Fund, the Adviser or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change or any development involving a prospective change in or affecting the condition (financial or other), business, prospects, properties, net assets, or results of operations of the Fund or the Adviser and its subsidiaries, taken as a whole, not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Fund or the Adviser or any officer or director of the Fund or the Adviser which makes any statement made in the Prospectus untrue or which, in the opinion of the Fund and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) The Fund shall have furnished to you and to the Rating Agency, a report showing compliance with the asset coverage requirements of the 1940 Act, a Basic Maintenance Report (as defined in the Articles Supplementary) and a letter from Ernst & Young LLP regarding the accuracy of the calculations made by the Fund in such reports, each dated the Closing Date and in form and substance satisfactory to the Rating Agency and to you. 22 (d) You shall have received on the Closing Date, opinions of Brown and Wood LLP, counsel for the Fund, or, as to matters of Maryland law, Venable, Baetjer and Howard LLP, Maryland counsel for the Fund, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Fund has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland; (ii) The Fund has corporate power and authority, under the laws of the State of Maryland, to own, lease and operate its properties and conduct its business as described in the Registration Statement and in the Prospectus (and any amendment or supplement to either of them); (iii) The Fund is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Fund taken as a whole; (iv) The authorized and outstanding capital stock of the Fund is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Fund conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (v) All the shares of capital stock of the Fund outstanding prior to the issuance of the Shares have been duly authorized and validly issued, and are fully paid and nonassessable; (vi) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive, or to the best knowledge of such counsel after reasonable inquiry, similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Fund, and will conform to the description thereof contained in the Prospectus under the caption "Description of Cumulative Preferred Stock"; (vii) The form of certificates for the Shares conforms to the requirements of the General Corporation Law of Maryland; (viii) The Registration Statement and all post-effective amendments, if any, have become effective under the 1933 Act and, to the best knowledge of such counsel after 23 reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement or order pursuant to Section 8(e) of the 1940 Act has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 497 has been made in accordance with Rule 497; (ix) The Fund has corporate power and authority to enter into this Agreement and each of the Fund Agreements and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement and each of the Fund Agreements have been duly authorized, executed and delivered by the Fund and each is a valid, legal and binding agreement of the Fund, enforceable against the Fund in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Fund's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles; (x) The Fund is not in violation of its articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents, and to the best knowledge of such counsel after reasonable inquiry, is not in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus; (xi) No consent, approval, authorization or order of any court or governmental authority or agency is required in connection with the performance by the Fund of its obligations under this Agreement and the Fund Agreements, except such as has been obtained under the 1933 Act, the 1934 Act, the 1940 Act or the Advisers Act or such as may be required under state securities laws; and the execution and delivery of this Agreement and the Fund Agreements and the consummation of the transactions contemplated herein and therein will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents of the Fund, or, to such counsel's best knowledge after reasonable inquiry, any law or administrative regulation, or administrative or court decree; 24 (xii) The 1940 Act Notification, the Registration Statement, the Prospectus and the Fund's Registration Statement on Form 8-A under the 1934 Act and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the 1933 Act, the 1940 Act, the Rules and Regulations, the 1934 Act and the rules and regulations promulgated thereunder; (xiii) To the best knowledge of such counsel after reasonable inquiry, (A) other than as described or contemplated in the Registration Statement or Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Fund, or to which the Fund or any of its properties is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement to either of them) and (B) there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; (xiv) To the best knowledge of such counsel after reasonable inquiry, the Fund is not in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of any court or governmental agency or body having jurisdiction over the Fund; (xv) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; (xvi) Each of the Fund Agreements and the Fund's and the Adviser's obligations under each of this Agreement and the Fund Agreements comply as to form in all material respects with all applicable provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations; (xvii) The Fund is duly registered with the Commission under the 1940 Act as a closed-end diversified management investment company; the provisions of the Fund's articles of incorporation, including the Articles Supplementary, and bylaws comply as to form in all material respects with the applicable provisions of the 1940 Act and the 1940 Act Rules and Regulations, the provisions of the Fund's articles of incorporation, including the Articles Supplementary, and bylaws and the investment policies and restrictions described in the Registration Statement and the Prospectus under the captions 25 "Investment Objective and Policies" and "Investment Restrictions" comply in all material respects with the requirements of the 1940 Act, and all action has been taken by the Fund as is required of the Fund by the 1933 Act and the 1940 Act and the Rules and Regulations in connection with the issuance and sale of the Shares to make the public offering and consummate the sale of the Shares as contemplated by this Agreement; (xviii) The Share's are duly authorized for listing, subject to official notice of issuance, on the AMEX and the Fund's registration statement on Form 8-A under the 1934 Act is effective; (xix) The Fund has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Fund), to own its properties and to conduct business as now being conducted, as described in the Prospectus; (xx) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Fund or any security convertible into or exchangeable or exercisable for capital stock of the Fund; (xxi) Except as described in the Prospectus, there is no holder of any security of the Fund or any other person who has the right, contractual or otherwise, to cause the Fund to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any securities of the Fund included in the registration statement or the right, as a result of the filing of the registration statement, to require registration under the 1933 Act of any securities of the Fund; (xxii) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code; and (xxiii) In giving their opinion Brown & Wood LLP shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement or any amendment or supplement thereto, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of the time it was first provided to the Underwriters or as of the Closing 26 Date, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that such counsel need not express any belief with respect to the financial statements and other financial and statistical information included in the Registration Statement and the Prospectus (and any amendment or supplement to either of the foregoing). In giving their opinion, Brown & Wood LLP (i) may state that they express no opinion as to the laws of any jurisdiction other than the laws of the State of New York and the Federal laws of the United States of America, (ii) may rely as to matters involving the laws of the State of Maryland upon the opinion of Venable, Baetjer and Howard LLP, and (iii) may rely, as to matters of fact, upon the representations and warranties made by the Fund and the Adviser herein and on certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials. Except as otherwise specifically provided herein, when giving their opinions to their "knowledge", Brown & Wood LLP have relied solely upon an inquiry of the attorneys of that firm who have worked on matters for the Fund, on certificates or written statements of officers of the Fund and, where appropriate, a review of the Registration Statement, Prospectus, exhibits to the Registration Statement, the Fund's articles of incorporation, including the Articles Supplementary, bylaws and other organizational documents and a review of the stock ledger books and minute books of the Fund and have made no other investigation or inquiry. (e) You shall have received on the Closing Date an opinion of either (i) Howard J. Kashner, Esq., General Counsel for the Adviser or (ii) John E. Denneen, Esq., Associate General Counsel for the Adviser, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Adviser is a corporation duly incorporated and validly existing in good standing under the laws of the State of New York with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement; 27 (ii) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto); (iii) This Agreement and the Investment Advisory Agreement each has been duly authorized, executed and delivered by the Adviser, and this Agreement and the Investment Advisory Agreement each constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights generally and to general equitable principles (except as to those provisions relating to indemnity or contribution for liabilities arising under such agreement, as to which no opinion need be expressed); and neither the execution and delivery of this Agreement or the Investment Advisory Agreement nor the performance by the Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of, any of the terms and provisions of, or constitute, with or without the giving of notice or the lapse of time or both, a default under, the articles of incorporation, bylaws or other organizational documents of the Adviser or any agreement or instrument to which the Adviser is a party or by which the Adviser is bound, or any law, order, rule or regulation applicable to the Adviser of any jurisdiction, court, Federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its properties or operations; (iv) No consent, approval, authorization or other order of, or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Adviser for the execution, delivery and performance by it of this Agreement and the Fund Agreements to which it is a party or the consummation by it of the transactions contemplated hereby and thereby; (v) To the best knowledge of such counsel after reasonable inquiry, there are no legal or governmental proceedings pending or threatened against the Adviser or to which the Adviser or any of its properties is subject, which are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or which may reasonably be expected to involve a prospective material adverse change on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement; 28 (vi) The obligations of the Adviser under this Agreement and the Investment Advisory Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations. (vii) The Adviser has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Adviser and its subsidiaries, taken as a whole), to own its properties and to conduct business as now being conducted, as described in the Prospectus, and to perform its obligations under the Investment Advisory Agreement; and (viii) Such counsel shall additionally state that nothing has come to his attention that would lead him to believe that the description of the Adviser in the Registration Statement and in the Prospectus (and in any amendment or supplement to either of them) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. In giving his opinion, such counsel (i) may state that he expresses no opinion as to the laws of any jurisdiction other than the laws of the State of New York and the federal laws of the United States of America, and (ii) may rely, as to matters of fact, upon the representations and warranties made by the Fund and the Adviser herein and on certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials. (f) You shall have received on the Closing Date an opinion of Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to such matters as the Underwriters may reasonably request. (g) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (h) (i) No order suspending the effectiveness of the registration statement or the Registration Statement or prohibiting or suspending the use of the Prospectus (or any amendment or supplement thereto) or any Prepricing Prospectus or any sales material shall have been issued and no proceedings for such purpose or for the purpose of commencing an enforcement 29 action against the Fund, the Adviser or, with respect to the transactions contemplated by the Prospectus (or any amendment or supplement thereto) and this Agreement, any Underwriter, may be pending before or, to the knowledge of the Fund, the Adviser or any Underwriter or in the reasonable view of counsel to the Underwriters, shall be threatened or contemplated by the Commission at or prior to the Closing Date and that any request for additional information on the part of the Commission (to be included in the Registration Statement, the Prospectus or otherwise) be complied with to the satisfaction of the Representatives; (ii) there shall not have been any change in the capital stock of the Fund nor any material increase in the short-term or long-term debt of the Fund (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund or the Adviser; (iv) the Fund shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Fund, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement to either of them); and (v) all the representations and warranties of the Fund and the Adviser contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of each of the Fund and the Adviser (or such other officers as are acceptable to you), to the effect set forth in this Section 9(h) and in Section 9(i) hereof. (i) That neither the Fund nor the Adviser shall have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (j) The Fund shall have delivered and you shall have received evidence satisfactory to you that the shares of Cumulative Preferred Stock are rated at least 'aaa' by the Rating Agency as of the Closing Date, and there shall not have been given any notice of any intended or potential downgrading, or of any review for a potential downgrading, in the rating accorded to the shares of Cumulative Preferred Stock by the Rating Agency. (k) The Shares shall have been listed or approved for listing upon notice of issuance on the American Stock Exchange. 30 (l) The Fund and the Adviser shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Fund or the Adviser and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Fund or the Adviser to each Underwriter as to the statements made therein. 10. Expenses. The Fund agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act Notification, the Prospectus and each amendment or supplement to any of them (including, without limitation, the filing fees prescribed by the 1933 Act, the 1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Prepricing Prospectus, the Prospectus, any sales material and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, any dealer agreements, the preliminary blue sky memorandum and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the registration of the Shares under the Exchange Act and the listing of the Shares on the American Stock Exchange; (vi) the registration or qualification of the Shares for offer and sale under the state securities or blue sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary blue sky memorandum and such registration and qualification); (vii) fees paid to the Rating Agency; (viii) the transportation and other expenses incurred by or on behalf of Fund representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Fund's accountants and the fees and expenses of counsel (including local and special counsel) for the Fund and of the transfer agent. 31 11. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Fund, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Fund. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Fund for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Fund are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Fund. In any such case which does not result in termination of this Agreement, either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Fund, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. 32 Any notice under this Section 11 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 12. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Fund or the Adviser, by notice to the Fund or the Adviser, if prior to the Closing Date (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Fund by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 13. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first, third, and fifth paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 8 hereof. 14. Miscellaneous. Except as otherwise provided in Sections 5, 11 and 12 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Fund or the Adviser, at the office of the Fund at 1414 Avenue of the Americas, New York, New York 10019, Attention: Howard J. Kashner; or (ii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Fund, the Adviser, their directors and officers, and the other controlling persons referred to in Section 8 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 33 15. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. Please confirm that the foregoing correctly sets forth the agreement among the Fund, the Adviser and the several Underwriters. Very truly yours, ROYCE MICRO-CAP TRUST, INC. By: ---------------------------------- ROYCE & ASSOCIATES, INC. By: ---------------------------------- Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. SMITH BARNEY INC. PAINEWEBBER INCORPORATED As Representatives of the Several Underwriters By: SMITH BARNEY INC. By: ---------------------------------- Managing Director SCHEDULE I ROYCE MICRO-CAP TRUST, INC. Number of Underwriter Shares ----------- ---------- Smith Barney Inc................................ PaineWebber Incorporated ....................... --------- Total........................................... 1,600,000 ========= EX-99.2L 4 EXHIBIT 2(L) EXHIBIT 2(L) Venable, Baetjier and Howard, LLP 1800 Mercantile Bank & Trust Building Two Hopkins Plaza Baltimore, Maryland 21201-2978 Tel: (410) 244-7400, Fax: (410) 244-7742 June 20, 1997 Brown & Wood LLP One World Trade Center New York, New York 10048-0557 Re: Royce Micro-Cap Trust, Inc. Ladies and Gentlemen: We have acted as special Maryland counsel to Royce Micro-Cap Trust, Inc., a Maryland Corporation (the "Fund"), in connection with the issuance of 1,600,000 shares of its % Cumulative Preferred Stock, par value $.001 per share (the "Cumulative Preferred Stock"). As special Maryland counsel for the Fund, we are familiar with its Charter and Bylaws. We have examined the prospectus included in its Registration Statement on Form N-2 for the Cumulative Preferred Stock (Securities Act Registration No. 333-28615, Investment Company Act File No. 811-8030), (the "Registration Statement"), substantially in the form in which it is to become effective (the "Prospectus"). We are also familiar with the form of Articles Supplementary relating to the Cumulative Preferred Stock (the "Articles Supplementary") that have been filed as an exhibit to the Registration Statement. We have further examined and relied upon a certificate of the Maryland State Department of Assessments and Taxation ("SDAT") to the effect that the Fund is duly incorporated and existing under the laws of the State of Maryland and is in good standing and duly authorized to transact business in the State of Maryland. We have also examined and relied upon such corporate records of the Fund and other documents and certificates with respect to factual matters as we have deemed necessary to render the opinion expressed herein. We have assumed, without independent verification, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with originals of all documents submitted to us as copies. Brown & Wood, LLP June 20, 1997 Page 2 Based on such examination, we are of the opinion and so advise you that when Articles Supplementary have been filed with SDAT, and when the final terms of the issuance of the Cumulative Preferred Stock have been authorized by the Board of Directors pursuant to Section 2-203 of the Maryland General Corporation Law, the Cumulative Preferred Stock to be offered for sale pursuant to the Prospectus will have been duly authorized and, when thereafter sold, issued and paid for as contemplated by the Prospectus, will have been validly and legally issued and will be fully paid and nonassessable. This letter expresses our opinion with respect to the Maryland General Corporation Law governing matters such as due organization and the authorization and issuance of stock, but it does not extend to the securities or "Blue Sky" laws of Maryland, to federal securities laws or to other laws. You may rely upon our foregoing opinion in rendering your opinion to the Fund that is to be filed as an exhibit to the Registration Statement. We consent to the reference to us under the caption "Legal Matters" in the Prospectus and to the filing of this opinion as an exhibit to the Registration Statement. We do not thereby admit that we are "experts" within the meaning of the Securities Act of 1933 and the rules and regulations thereunder. This opinion may not be relied upon by any other person or for any other purpose without our prior written consent. Very truly yours, /s/ Venable, Baetjer and Howard, LLP EX-99.2N 5 EXHIBIT 2(N)(1) EXHIBIT 2(n)(1) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights", "Experts" and "Financial Statements" and to the incorporation by reference of our report dated February 25, 1997, in this Registration Statement (Form N-2 No. 333-28615) of Royce Micro-Cap Trust, Inc. ERNST & YOUNG LLP New York, New York June 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----