As filed with the Securities and Exchange Commission on December 10, 1996
1940 Act File No. 811-07537
1933 Act File No. 333-1073
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X /
Pre-Effective Amendment No. 3 /X /
Post-Effective Amendment No. / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/
Amendment No. 3 / X /
(Check appropriate box or boxes)
ROYCE CAPITAL TRUST
(Exact name of Registrant as specified in charter)
1414 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212)
355-7311
Charles M. Royce, President
Royce Capital Trust
1414 Avenue of the Americas, New York, New York 10019
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as
practicable after this Registration Statement becomes effective
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 Commission, acting
pursuant to said Section 8(a), may determine.
Total number of pages:
Index to Exhibits is located on page:
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 of Regulation C)
Item of Form N-1A CAPTION or Location in
Prospectus
Part A
I. Cover Page....................................... Cover Page
II. Synopsis.......................................... FUND EXPENSES
III. Condensed Financial Information... *
IV. General Description of Registrant.. INVESTMENT OBJECTIVES,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT LIMITATIONS,
GENERAL INFORMATION
V. Management of the Fund................ MANAGEMENT OF THE TRUST,
GENERAL INFORMATION
V.A. Management's Discussion of
Fund Performance......................... *
VI. Capital Stock and Other Securities. GENERAL INFORMATION,
DIVIDENDS, DISTRIBUTIONS AND
TAXES,
SHAREHOLDER GUIDE
VII. Purchase of Securities Being
Offered....................................... NET ASSET VALUE
PER SHARE,
SHAREHOLDER GUIDE
VIII. Redemption or Repurchase............. SHAREHOLDER GUIDE
IX. Pending Legal Proceedings............. *
CAPTION or Location in Statement
Item of Form N-1A of Additional Information
Part B
X. Cover Page....................................... Cover Page
XI. Table of Contents............................ TABLE OF CONTENTS
<PAGE>
CAPTION or Location in Statement
Item of Form N-1A of Additional Information
Part B
XII. General Information and History.... *
XIII. Investment Objectives and Policies. INVESTMENT POLICIES AND
LIMITATIONS,
RISK FACTORS AND SPECIAL
CONSIDERATIONS
XIV. Management of the Fund................ MANAGEMENT OF THE TRUST
XV. Control Persons and Principal
Holders of Securities.................... MANAGEMENT OF THE TRUST,
PRINCIPAL HOLDERS OF SHARES
XVI. Investment Advisory and Other
Services.....................................MANAGEMENT OF THE TRUST,
INVESTMENT ADVISORY SERVICES,
CUSTODIAN,
INDEPENDENT ACCOUNTANTS
XVII. Brokerage Allocation and Other
Practices...................................PORTFOLIO TRANSACTIONS
XVIII. Capital Stock and Other Securities. DESCRIPTION OF THE TRUST
XIX.Purchase, Redemption and Pricing
of Securities Being Offered.......... PRICING OF SHARES BEING OFFERED,
REDEMPTIONS IN KIND
XX. Tax Status........................................ TAXATION
XXI. Underwriters..................................... *
XXII. Calculation of Performance Data.... PERFORMANCE DATA
XXIII. Financial Statements........................ FINANCIAL STATEMENTS
* Not applicable.
<PAGE>
Royce Capital Trust
Royce Premier Portfolio
Royce Total Return Portfolio
Royce Micro-Cap Portfolio
PROSPECTUS -- , 1997
Royce Premier Portfolio, Royce Total Return
Portfolio and Royce Micro-Cap Portfolio (the
"Funds") are series of Royce Capital Trust (the
"Trust"). Shares of the Funds are offered to life
insurance companies ("Insurance Companies") for
allocation to certain separate accounts established
for the purpose of funding qualified and non-
qualified variable annuity contracts and variable
life insurance contracts ("Variable Contracts"),
and may also be offered directly to certain pension
plans and retirement plans and accounts permitting
accumulation of assets on a tax-deferred basis
("Retirement Plans"). Certain Funds may not be
available in connection with a particular Variable
Contract, and certain Variable Contracts may limit
allocations among the Funds. See the accompanying
Variable Contract disclosure documents for any
restrictions on purchases or allocations.
ABOUT THIS This Prospectus sets forth concisely the
PROSPECTUS information that you should know about a Fund
before you invest. It should be retained for
future reference. A "Statement of Additional
Information" containing further information about
the Funds and the Trust has been filed with the
Securities and Exchange Commission. The Statement
is dated , 1997 and has been incorporated by
reference into this Prospectus. A copy may be
obtained without charge by writing to the Trust, by
calling Investor Information at 1 (800) 221-4268 or
by writing or calling your Insurance Company.
TABLE OF CONTENTS
Page Page
Fund Expenses 2 Investment Limitations 6
Investment Performance 3 Management of the Trust 8
Investment Objectives 4 General Information 9
Investment Policies 4 Dividends, Distributions and Taxes 10
Investment Risks 5 Net Asset Value Per Share 10
Shareholder Guide 11
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES Transaction expenses are charges paid when shares
of the Funds are purchased or sold.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases or
Reinvested Dividends None
Deferred Sales Load on Redemptions None
Each Fund pays its own operating expenses,
including the investment management fee to Quest
Advisory Corp. ("Quest"), the investment adviser to
the Funds. Expenses are factored into a Fund's net
asset value daily. The following expenses are
estimates for the first year of operation.
Annual Fund Operating Expenses
Royce Royce Royce
Premier Total ReturnMicro-Cap
Portfolio Portfolio Portfolio
Management Fees
(after waivers) .00% .00% .00%
12b-1 Fees None None None
Other Expenses 1.99% 1.99% 1.99%
Total Operating Expenses
(after waivers) 1.99% 1.99% 1.99%
The purpose of the above table is to assist you in
understanding the various costs and expenses that
you would bear directly or indirectly as an
investor in the Funds. Management fees would be
1.00%, 1.00% and 1.50% and total operating expenses
would be 2.99%, 2.99% and 3.49% for each of the
Funds without the waivers of management fees by
Quest. Quest has voluntarily committed to waive
its fees through December 31, 1997 to the extent
necessary to maintain total operating expenses of
each Fund at or below 1.99%.
The following examples illustrate the expenses that
you would incur on a $1,000 investment over various
periods, assuming a 5% annual rate of return and
redemption at the end of each period.
1 Year 3 Years
Royce Premier Portfolio $20 $62
Royce Total Return Portfolio 20 62
Royce Micro-Cap Portfolio 20 62
These examples should not be considered
representations of past or future expenses or
performance. Actual expenses may be higher or
lower than those shown.
Additional expenses are incurred under the Variable
Contracts and the Retirement Plans. These expenses
are not described in this Prospectus. Variable
Contract owners and Retirement Plan participants
should consult the Variable Contract disclosure
documents or Retirement Plan information regarding
these expenses.
<PAGE>
INVESTMENT From time to time, the Funds may communicate
PERFORMANCE figures reflecting total return over various time
periods. "Total return" is the rate of return on
Total return is the an amount invested in a Fund from the beginning to
change in value the end of the stated period. "Average annual
over total return" is the annual compounded percentage
a given time change in the value of an amount invested in a Fund
period, from the beginning until the end of the stated
assuming period. Total returns, which assume the
reinvestment reinvestment of all net investment income dividends
of any dividends and capital gains distributions, are historical
and measures of past performance and are not intended
capital gains to indicate future performance.
distributions
Total returns quoted for the Funds include the
effect of deducting each Fund's operating expenses,
but will not include charges and expenses
attributable to a particular Variable Contract or
Retirement Plan. Because shares of the Funds may
be purchased only through a Variable Contract or an
eligible Retirement Plan, an individual owning a
Variable Contract or participating in a Retirement
Plan should carefully review the Variable Contract
disclosure documents or Retirement Plan information
for information on relevant charges and expenses.
Excluding these charges and expenses from
quotations of each Fund's performance has the
effect of increasing the performance quoted. These
charges and expenses should be considered when
comparing a Fund's performance to other investment
vehicles.
Although the Trust is newly-organized and the Funds
do not yet have their own performance records, each
Fund has the same investment objectives and follows
substantially the same investment policies as a
corresponding Royce retail fund. The Royce retail
funds have the same investment adviser as the
corresponding Funds offered in this Prospectus.
Set forth in the table below is total return
information for each of the Royce retail funds
corresponding to the Funds offered in this
Prospectus, calculated as described above. Such
information has been obtained from Quest and
updates the information set forth in the current
prospectus of each fund. Investors should not
consider this performance data as an indication of
the future performance of the Funds offered in this
Prospectus. The performance figures below reflect
the deduction of the historical fees and expenses
paid by the Royce retail funds, and not those to be
paid by these Funds. The figures also do not
reflect the deduction of charges or expenses
attributable to Variable Contracts. As discussed
above, investors should refer to the applicable
Variable Contract disclosure documents for
information on such charges and expenses.
Additionally, although it is anticipated that each
Fund and its corresponding retail fund will hold
similar securities selections, their investment
results are expected to differ. In particular,
differences in asset size and in cash flow
resulting from purchases and redemptions of Fund
shares may result in different security selections,
differences in the relative weightings of
securities or differences in the price paid for
particular portfolio holdings.
<PAGE>
The average annual total returns for the
corresponding Royce retail funds for the
periods ended September 30, 1996 were:
One Three Five Since Inception
Year Year Year Inception Date
Royce Premier Fund 9.9% 12.6% -- 13.8% December 31, 1991
Royce Total
Return Fund 19.4% -- -- 17.0% December 15, 1993
Royce Micro-Cap
Fund 7.4% 11.4% -- 17.1% December 31, 1991
The above total returns reflect partial
waivers of management fees. Without
such waivers, the average annual
total returns would have been lower.
INVESTMENT Each Fund has different investment objectives
OBJECTIVES and/or its own method of achieving its objectives
and is designed to meet different investment needs.
Since certain risks are inherent in owning any
security, there can be no assurance that any of the
Funds will achieve their objectives.
Royce Premier Portfolio's investment objectives are
primarily long-term growth and secondarily current
income. It seeks to achieve these objectives
through investments in a limited portfolio of
common stocks and convertible securities of
companies viewed by Quest as having superior
financial characteristics and/or unusually
attractive business prospects.
Royce Total Return Fund's investment objective is
an equal focus on both long-term growth of capital
and current income. It seeks to achieve this
objective through investments in a broadly
diversified portfolio of dividend-paying common
stocks of companies selected on a value basis.
Royce Micro-Cap Portfolio seeks long-term capital
appreciation, primarily through investments in
common stocks and convertible securities of small
and micro-cap companies. Production of income is
incidental to this objective.
These investment objectives are fundamental and may
not be changed without the approval of a majority
of the Fund's outstanding voting shares.
INVESTMENT Quest will use a "value" method in managing the
POLICIES Funds' assets. In its selection process, Quest
puts primary emphasis on various internal returns
The Funds invest on indicative of profitability, balance sheet quality,
a cash flows and the relationships that these factors
"value" basis have to the current price of a given security.
The Funds invest Quest's value method is based on its belief that
primarily in small the securities of certain small companies may sell
companies at a discount from its estimate of such companies'
"private worth". Quest will attempt to identify
and invest in these securities for each of the
Funds, with the expectation that this "value
discount" will narrow over time and thus provide
capital appreciation for the Funds.
<PAGE>
Royce Premier Portfolio Normally, Royce Premier
Portfolio will invest at least 80% of its assets
in a limited number of common stocks, convertible
preferred stocks and convertible bonds. At least
65% of these securities will be income-producing
and/or issued by companies with stock market
capitalizations under $1 billion at the time of
investment. The remainder of its assets may be
invested in securities of companies with higher
stock market capitalizations, non-dividend-paying
common stocks and non-convertible preferred
stocks and debt securities. In its selection
process for the Fund, Quest will put primary
emphasis on companies which have unusually
strong returns on assets, cash flows and balance
sheets or unusual business strengths and/or
prospects. Other characteristics, such as a
company's growth potential and valuation
considerations, will also be used in selecting
investments for the Fund.
Royce Total Return Portfolio In accordance with
its dual objective of seeking both capital
appreciation (realized and unrealized) and
current income, Royce Total Return Portfolio will
normally invest at least 80% of its assets in
common stocks. At least 90% of these securities
will be dividend-paying, and at least 65% of
these securities will be issued by companies with
stock market capitalizations under $1,000,000,000
at the time of investment. The remainder of the
Fund's assets may be invested in securities with
higher stock market capitalizations,
non-dividend-paying common stocks and convertible
and non- convertible securities. While most of
the Fund's securities will be income-producing,
the composite yield of the Fund will vary and may
be either higher or lower than the composite
yield of the stocks in the Standard & Poor's 500
Index.
Royce Micro-Cap Portfolio At least 80% of the
assets of Royce Micro-Cap Portfolio will normally
be invested in common stocks and securities
convertible into common stocks of small and
micro-sized companies, and at least 65% of these
securities will be issued by companies with stock
market capitalizations under $300 million at the
time of investment. The remainder of the Fund's
assets may be invested in the securities of
companies with higher stock market
capitalizations and non-convertible preferred
stocks and debt securities.
INVESTMENT As mutual funds investing primarily in common
RISKS stocks and/or securities convertible into common
stocks, the Funds are subject to market risk, that
The Funds are is, the possibility that common stock prices will
subject decline over short or even extended periods. The
to certain Funds will invest substantial portions of their
investment assets in securities of small and\or micro-cap
risks companies. Such companies may not be well-known to
the investing public, may not have significant
institutional ownership and may have cyclical,
static or only moderate growth prospects. In
addition, the securities of such companies may be
more volatile in price and have lower trading
volumes than the larger capitalization stocks
included in the Standard & Poor's 500 Index.
Accordingly, Quest's investment method requires a
long-term investment horizon, and the Funds should
not be used to play short-term swings in the
market.
<PAGE>
Although Royce Premier Portfolio is diversified
within the meaning of the Investment Company Act
of 1940 (the "1940 Act"), it will normally be
invested in a limited number of securities. This
Fund's relatively limited portfolio may involve
more risk than investing in other Royce Funds or
in a broadly diversified portfolio of common
stocks of large and well-known companies. To the
extent that the Fund invests in a limited number
of securities, it may be more susceptible to any
single corporate, economic, political or
regulatory occurrence than a more widely
diversified fund.
In addition, Royce Micro-Cap Portfolio may invest
in many micro-cap and/or low-priced securities
that are followed by relatively few securities
analysts, with the result that there tends to be
less publicly available information concerning
the securities. The securities of these companies
may have limited trading volumes and be subject
to more abrupt or erratic market movements than
the securities of larger, more established
companies or the market averages in general, and
Quest may be required to deal with only a few
market-makers when purchasing and selling these
securities. Companies in which Royce Micro-Cap
Portfolio is likely to invest also may have
limited product lines, markets or financial
resources, may lack management depth and may be
more vulnerable to adverse business or market
developments. Thus, the Fund may involve
considerably more risk than a mutual fund
investing in the more liquid equity securities of
larger companies traded on the New York or
American Stock Exchanges.
INVESTMENT Each of the Funds has adopted certain fundamental
LIMITATIONS limitations, designed to reduce its exposure to
specific situations, which may not be changed
without the approval of a majority of its
outstanding voting shares, as that term is defined
The Funds have in the 1940 Act. These limitations are set forth
adopted certain in the Statement of Additional Information and
fundamental provide, among other things, that no Fund will:
limitations
(a) as to 75% of its assets, invest more than 5%
of its assets in the securities of any one issuer,
excluding obligations of the U.S. Government;
(b) invest more than 25% of its assets in any
one industry; or
(c) invest in companies for the purpose of
exercising control of management.
Other Investment In addition to investing primarily in the equity
Practices: and fixed income securities described above, the
Funds may follow a number of additional investment
practices.
Short-term fixed The Funds may invest in short-term fixed income
income securities securities for temporary defensive purposes, to
invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities consist of United States Treasury bills,
domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements
collateralized by U.S. Government securities. In a
repurchase agreement, a bank sells a security to
<PAGE>
the Fund at one price and agrees to repurchase it
at the Fund's cost plus interest within a specified
period of seven or fewer days. In these
transactions, which are, in effect, secured loans
by the Fund, the securities purchased by the Fund
will have a value equal to or in excess of the
value of the repurchase agreement and will be held
by the Fund's custodian bank until repurchased.
Should a Fund implement a temporary investment
policy, its investment objectives may not be
achieved.
Securities lending Each of the Funds may lend up to 25% of its
assets to qualified institutional investors for
the purpose of realizing additional income.
Loans of securities of a Fund will be
collateralized by cash or securities issued or
guaranteed by the United States 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.
Foreign securities
Each of the Funds may invest up to 10%
of its assets in debt and/or equity
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
Funds.
Lower-rated
debt securities
Each of the Funds may also invest no more
than 5% of its net assets in lower- rated
(high-risk) non-convertible debt securities,
which are below investment grade. The
Funds do not expect to invest in
non-convertible debt securities that are
rated lower than Caa by Moody's Investors
Service, Inc. or CCC by Standard & Poor's
Corp. or, if unrated, determined to be of
comparable quality.
Warrants, rights
and options
Each Fund may invest up to 5% of its total
assets in warrants, rights and options.
Portfolio turnover
Although the Funds generally will seek to
invest for the long term, they retain the
right to sell securities regardless of how
long they have been held. Portfolio turnover
rates for the Funds may exceed 100%. Rates
which exceed 100% are higher than those
of other funds. A 100% turnover rate
occurs, for example, if all of a Fund's
portfolio securities are replaced in one
year. High portfolio activity
increases the Fund's transaction costs,
including brokerage commissions.
State insurance
restrictions
The Funds are sold to the Insurance Companies in
connection with Variable Contracts, and will seek
to be available under Variable Contracts sold in
a number of jurisdictions. Certain states have
<PAGE>
techniques. If applied to the Funds, the Funds
may be limited in their ability to engage in
certain techniques and to manage their portfolios
with the flexibility provided herein. In order to
permit a Fund to be available under Variable
Contracts sold in certain states, the Trust may
make commitments for the Fund that are more
restrictive than the investment policies and
limitations described above and in the Statement
of Additional Information. If the Trust
determines that such a commitment is no longer in
the Fund's best interests, the commitment may be
revoked by terminating the availability of the
Fund to Variable Contract owners residing in such
states.
MANAGEMENT OF The Trust's business and affairs are managed under
THE TRUST the direction of its Board of Trustees. Quest, the
Funds' investment adviser, is responsible for the
Quest Advisory management of the Funds' portfolios, subject to the
Corp. authority of the Board of Trustees. Quest, which
is responsible for was organized in 1967, is also the investment
the adviser to The Royce Fund and to other investment
management of the and non-investment company accounts. Charles M.
Funds' portfolios Royce, Quest's President, Chief Investment Officer
and sole voting shareholder since 1972, is
primarily responsible for supervising Quest's
investment management activities. Mr. Royce is
assisted by Jack E. Fockler, Jr. and W. Whitney
George, Vice Presidents of Quest, both of whom
participate in the investment management
activities, with their specific responsibilities
varying from time to time.
As compensation for its services to the Funds,
Quest is entitled to receive annual advisory fees
of 1% of the average net assets of Royce Premier
Portfolio and Royce Total Return Portfolio and 1.5%
of the average net assets of Royce Micro-Cap
Portfolio. These fees are payable monthly from the
assets of the Funds involved.
Quest will select the brokers who will execute the
purchases and sales of the Funds' portfolio
securities and may place orders with brokers who
provide brokerage and research services to Quest.
Quest is authorized, in recognition of the value of
brokerage and research services provided, to pay
commissions to a broker in excess of the amount
which another broker might have charged for the
same transaction.
From time to time, Quest may pay amounts to
Insurance Companies or other organizations that
provide administrative services for the Funds or
that provide services relating to the Funds to
owners of Variable Contracts and/or participants in
Retirement Plans. These services may include,
among other things: sub-accounting services;
answering inquiries regarding the Funds;
transmitting, on behalf of the Funds, proxy
statements, shareholder reports, updated
prospectuses and other communications regarding the
Funds; and such other related services as the
Trust, owners of Variable Contracts and/or
participants in Retirement Plans may request. The
amounts of any such payments will be determined by
the nature and extent of the services provided by
the Insurance Company or other organization.
Payment of such amounts by Quest will not increase
the fees paid by the Funds or their shareholders.
<PAGE>
GENERAL Royce Capital Trust (the "Trust") is a Delaware
INFORMATION business trust registered with the Securities and
Exchange Commission as a diversified, open-end
management investment company. The Trustees have
the authority to issue an unlimited number of
shares of beneficial interest, without shareholder
approval, and these shares may be divided into an
unlimited number of series. Shareholders are
entitled to one vote per share. Shares vote by
individual series on all matters, except that
shares are voted in the aggregate and not by
individual series when required by the 1940 Act and
that if the Trustees determine that a matter
affects only one series, then only shareholders of
that series are entitled to vote on that matter.
Pursuant to current interpretations of the 1940
Act, the Insurance Companies will solicit voting
instructions from Variable Contract owners with
respect to any matters that are presented to a vote
of shareholders and will vote all shares held by
the separate accounts in proportion to the voting
instructions received. The exercise of voting
rights on shares held by Retirement Plans will be
governed by the terms of such plans. Some
Retirement Plans may pass-through voting to plan
participants, while shares held by other Retirement
Plans may be voted by the trustees of the
Retirement Plan or by a named fiduciary or an
investment manager. Retirement Plan participants
should consult their plan documents for
information.
Each Fund sells its shares only to certain
qualified retirement plans and to variable annuity
and variable life insurance separate accounts of
insurance companies that are unaffiliated with
Quest and that may be unaffiliated with one
another. The Funds currently do not foresee any
disadvantages to policyowners arising out of the
fact that each Fund offers its shares to such
entities. Nevertheless, the Trustees intend to
monitor events in order to identify any
irreconcilable material conflicts that may arise
due to future differences in tax treatment or other
considerations and to determine what action, if
any, should be taken in response to such conflicts.
If a conflict occurs, the Trustees may require one
or more insurance company separate accounts or
plans to withdraw its investments in one or more of
the Funds and to substitute shares of another Fund.
As a result, a Fund may be forced to sell
securities at disadvantageous prices. In addition,
the Trustees may refuse to sell shares of any Fund
to any separate account or qualified plan or may
suspend or terminate the offering of shares of any
Fund if such action is required by law or
regulatory authority or is deemed by the Trust to
be in the best interests of the shareholders of the
Fund.
The custodian for the portfolio securities, cash
and other assets of the Funds is State Street Bank
and Trust Company. State Street, through its agent
National Financial Data Services ("NFDS"), also
serves as the Funds' transfer agent. Coopers &
Lybrand L.L.P. serves as independent accountants
for the Funds.
<PAGE>
DIVIDENDS, Each of the Funds will pay dividends from its net
DISTRIBUTIONS investment income (if any) and distribute its net
AND TAXES realized capital gains annually in December.
Dividends and distributions will be automatically
reinvested in additional shares of the Funds.
Each Fund intends to qualify and to remain
qualified for taxation as a "regulated investment
company" under the Internal Revenue Code, so that
it will not be subject to Federal income taxes to
the extent that its income is distributed to its
shareholders. In addition, each Fund intends to
qualify under the Internal Revenue Code with
respect to the diversification requirements related
to the tax-deferred status of insurance company
separate accounts. By meeting these and other
requirements, the participating Insurance
Companies, rather than the owners of the Variable
Contracts, should be subject to tax on
distributions received with respect to Fund shares.
The tax treatment on distributions made to an
Insurance Company will depend on the Insurance
Company's tax status.
Shares of the Funds may be purchased through
Variable Contracts. As a result, it is anticipated
that any net investment income dividends or capital
gains distributions from a Fund will be exempt from
current taxation if left to accumulate within a
Variable Contract. Dividends and distributions
made by the Funds to the Retirement Plans are not
taxable to the Retirement Plans or to the
participants thereunder. The Funds will be managed
without regard to tax ramifications. Withdrawals
from such Contracts may be subject to ordinary
income tax plus a 10% penalty tax if made before
age 59.5.
The tax status of your investment in the Funds
depends on the features of your Variable Contract
or Retirement Plan. For further information,
please refer to the prospectus or disclosure
documents of your Variable Contract or information
provided by your Retirement Plan. Prospective
investors are encouraged to consult their tax
advisers.
The above discussion is only a summary of some of
the important tax considerations generally
affecting the Funds and their shareholders; see the
Statement of Additional Information for additional
discussion.
NET ASSET VALUE Fund shares are purchased and redeemed at the net
PER SHARE asset value per share next determined after an
order is received by the Funds' transfer agent or
Net asset value per an authorized service agent or sub-agent. Net
share (NAV) is asset value per share is determined by dividing the
determined each day total value of the Fund's investments and other
the New York Stock assets, less any liabilities, by the number of
Exchange is open outstanding shares of the Fund. Net asset value
per share is calculated at the close of regular
trading on the New York Stock Exchange on each day
the Exchange is open for business.
In determining net asset value, securities listed
on an exchange or the Nasdaq National Market System
will be valued on the basis of the last reported
<PAGE>
sale price prior to the time the valuation is made
or, if no sale is reported for that day, at their
bid price for exchange-listed securities and at the
average of their bid and ask prices for Nasdaq
securities. Quotations will be taken from the
market where the security is primarily traded.
Other over-the counter securities for which market
quotations are readily available will be valued at
their bid price. Securities for which market
quotations are not readily available will be valued
at their fair value under procedures established
and supervised by the Board of Trustees. 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.
SHAREHOLDER GUIDE The Trust will provide Insurance Companies and
Retirement Plans with information Monday through
Friday, except holidays, from 9:00 a.m. to 5:00
p.m. (Eastern time). For information, prices,
literature or to obtain information regarding the
availability of Fund shares or how Fund shares are
redeemed, call the Trust at 1-800-221-4268.
Purchasing and Shares of the Funds will be sold on a continuous
Redeeming Shares basis to separate accounts of Insurance Companies
of the Funds or to Retirement Plans. Stock certificates will
not be issued; share activity will be recorded in
book entry form only. Investors may not purchase
or redeem shares of the Funds directly, but only
through the separate accounts of Insurance
Companies or through qualified Retirement Plans.
You should refer to the applicable Separate Account
Prospectus or your Plan documents for information
on how to purchase or surrender a contract, make
partial withdrawals of contract values, allocate
contract values to one or more of the Funds, change
existing allocations among investment alternatives,
including the Funds, or select specific Funds as
investment options in a Retirement Plan. No sales
charge is imposed upon the purchase or redemption
of shares of the Funds. Sales charges for the
Variable Contracts or Retirement Plans are
described in the relevant Separate Account
Prospectuses or plan documents.
If the Board of Trustees determines that it would
be detrimental to the best interest of the Fund's
remaining shareholders to make payment in cash, a
Fund may pay redemption proceeds in whole or in
part by a distribution in kind.
Fund shares are purchased or redeemed at the net
asset value per share next computed after receipt
of a purchase or redemption order by a Fund's
transfer agent or an authorized service agent or
sub-agent. Payment for redeemed shares will
generally be made within three business days
following the date of request for redemption.
However, payment may be postponed under unusual
circumstances, such as when normal trading is not
taking place on the New York Stock Exchange, an
emergency as defined by the Securities and Exchange
Commission exists or as permitted by the Securities
and Exchange Commission.
<PAGE>
Shareholder
Communications
Owners of Variable Contracts and
Retirement Plans and their
administrators will receive annual and
semi-annual reports, including the
financial statements of the Funds that they
have authorized for investment. Each report
will also show the investments
owned by each Fund and the market values
thereof, as well as other information about the
Funds and their operations. The Trust's
fiscal year ends December 31.
<PAGE>
Royce Capital Trust Royce Capital Trust
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
Investment Adviser Royce Premier Portfolio
Quest Advisory Corp.
1414 Avenue of the Americas Royce Total Return Portfolio
New York, NY 10019
Royce Micro-Cap Portfolio
Transfer Agent
State Street Bank and Trust Company
c/o NFDS
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
Officers
Charles M. Royce, President and
Treasurer
John D. Diederich, Vice President
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President
and Asst. Secretary
John E. Denneen, Secretary
Prospectus
, 1997
<PAGE>
ROYCE CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
ROYCE CAPITAL TRUST (the "Trust"), a Delaware business trust
organized in January 1996, is a professionally managed, open-end
registered investment company, which has three portfolios or
series ("Funds"). Each Fund has distinct investment objectives
and/or policies, and a shareholder's interest is limited to the
Fund in which the shareholder owns shares. The three Funds are:
Royce Premier Portfolio
Royce Total Return Portfolio
Royce Micro-Cap Portfolio
Shares of the Funds are offered to life insurance companies
("Insurance Companies") for allocation to certain separate
accounts established for the purpose of funding qualified and non-
qualified variable annuity contracts and variable life insurance
contracts ("Variable Contracts"), and may also be offered
directly to certain pension plans and retirement plans and
accounts permitting accumulation of assets on a tax-deferred
basis ("Retirement Plans").
This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Trust's
current Prospectus dated , 1997. To obtain an additional
copy of the Prospectus, please call Investor Information at 1-800-
221-4268 or contact your Insurance Company.
Investment Adviser
Quest Advisory Corp. ("Quest")
Transfer Agent Custodian
State Street Bank and Trust CompanyState Street Bank and Trust Company
c/o National Financial Data Services
, 1997
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND LIMITATIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 3
MANAGEMENT OF THE TRUST 8
PRINCIPAL HOLDERS OF SHARES 10
INVESTMENT ADVISORY SERVICES 10
CUSTODIAN 11
INDEPENDENT ACCOUNTANTS 12
PORTFOLIO TRANSACTIONS 12
CODE OF ETHICS AND RELATED MATTERS 13
PRICING OF SHARES BEING OFFERED 14
REDEMPTIONS IN KIND 14
TAXATION 14
DESCRIPTION OF THE TRUST 16
PERFORMANCE DATA 18
FINANCIAL STATEMENTS 23
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement
those set forth in the Funds' Prospectus. Unless otherwise
noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any
security or other asset or sets forth a policy regarding quality
standards, the percentage limitation or standard will be
determined immediately after giving effect to the Fund's
acquisition of the security or other asset. Accordingly, any
subsequent change in values, net assets or other circumstances
will not be considered in determining whether the investment
complies with the Fund's investment policies and limitations.
A Fund's fundamental investment policies cannot be changed
without the approval of a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940
(the "1940 Act")) of the Fund. Except for the fundamental
investment restrictions set forth below, the investment policies
and limitations described in this Statement of Additional
Information are operating policies and may be changed by the
Board of Trustees without shareholder approval. However,
shareholders will be notified prior to a material change in an
operating policy affecting their Fund.
No Fund may, as a matter of fundamental policy:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except from banks as a temporary measure for
extraordinary or emergency purposes in an amount not exceeding
5% of its assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its assets in the securities of
foreign issuers;
7. Invest in restricted securities or in repurchase agreements
which mature in more than seven days;
8. Invest more than 10% of its assets in securities without
readily-available market quotations (i.e., illiquid securities);
9. Invest, with respect to 75% of its assets, more than 5% of
its assets in the securities of any one issuer (except U.S.
Government securities);
10. Invest more than 25% of its assets in any one industry;
<PAGE>
11. Acquire more than 10% of the outstanding voting securities
of any one issuer;
12. 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;
13. Purchase or sell commodities or commodity contracts;
14.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 Funds may loan up to 25%
of their respective assets to qualified brokers, dealers or
institutions for their use relating to short sales or other
securities transactions (provided that such loans are fully
collateralized at all times);
15. Invest in companies for the purpose of exercising control of
management; or
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees
or investment adviser, as principal for their own accounts.
No Fund may, as a matter of operating policy:
1. Invest more than 5% of its net assets in
lower-rated (high-risk) non-convertible debt
securities;
2. Enter into repurchase agreements with
any party other than the custodian of its assets;
or
3. Invest more than 5% of its total assets in
warrants, rights and options.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Funds' Rights as Stockholders
As noted above, no Fund may invest in a company for the
purpose of exercising control of management. However, a Fund may
exercise its rights as a stockholder and communicate its views on
important matters of policy to management, the board of directors
and/or stockholders if Quest or the Board of Trustees determine
that such matters could have a significant effect on the value of
the Fund's investment in the company. The activities that a Fund
may engage in, either individually or in conjunction with others,
may include, among others, supporting or opposing proposed
changes in a company's corporate structure or business
<PAGE>
activities; seeking changes in a company's board of directors or
management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of a company or a portion of
its assets; or supporting or opposing third party takeover
attempts. This area of corporate activity is increasingly prone
to litigation, and it is possible that a Fund could be involved
in lawsuits related to such activities. Quest will monitor such
activities with a view to mitigating, to the extent possible, the
risk of litigation against the Funds and the risk of actual
liability if a Fund is involved in litigation. However, no
guarantee can be made that litigation against a Fund will not be
undertaken or liabilities incurred.
A Fund may, at its expense or in conjunction with others,
pursue litigation or otherwise exercise its rights as a security
holder to seek to protect the interests of security holders if
Quest and the Trust's Board of Trustees determine this to be in
the best interests of a Fund's shareholders.
Securities Lending
The Funds may lend up to 25% of their respective assets to
brokers, dealers and other financial institutions. Securities
lending allows a Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since
there may be delays in the recovery of loaned securities or even
a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to parties that participate
in a Global Securities Lending Program monitored by the Funds'
custodian and who are deemed by it to be of good standing.
Furthermore, such loans will be made only if, in Quest's
judgment, the consideration to be earned from such loans would
justify the risk.
Quest understands that it is the current view of the staff
of the Securities and Exchange Commission that a Fund may engage
in such loan transactions only under the following conditions:
(i) the Fund must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (ii) the borrower must increase the collateral whenever
the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (iii) after
giving notice, the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest or other distributions on the securities
loaned and to any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and
(vi) the Fund must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Lower-Rated (High-Risk) Debt Securities
Each Fund may invest up to 5% of its net assets in lower-
rated (high-risk) non-convertible debt securities. They may be
rated from Ba to Ca by Moody's Investors Service, Inc. or from BB
to D by Standard & Poor's Corporation or may be unrated. These
securities have poor protection with respect to the payment of
interest and repayment of principal and may be in default as to
the payment of principal or interest. These securities are often
considered to be
<PAGE>
speculative and involve greater risk of loss or price changes due
to changes in the issuer's capacity to pay. The market prices of
lower-rated (high-risk) debt securities may fluctuate more than
those of higher-rated debt securities and may decline
significantly in periods of general economic difficulty, which
may follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt
securities has been in existence for many years and has weathered
previous economic downturns, the 1980s brought a dramatic
increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of
the high-yield/high-risk bond market, especially during periods
of economic recession. In fact, from 1989 to 1991, the
percentage of lower-rated (high-risk) debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated (high-risk) debt securities may
be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which the
former are sold. If market quotations cease to be readily
available for a lower-rated (high-risk) debt security in which a
Fund has invested, the security will then be valued in accordance
with procedures established by the Board of Trustees. Judgment
plays a greater role in valuing lower-rated (high-risk) debt
securities than is the case for securities for which more
external sources for quotations and last sale information are
available. Adverse publicity and changing investor perceptions
may affect a Fund's ability to dispose of lower-rated (high-risk)
debt securities.
Since the risk of default is higher for lower-rated (high-
risk) debt securities, Quest's research and credit analysis may
play an important part in managing securities of this type for
the Funds. In considering such investments for the Funds, Quest
will attempt to identify those issuers of lower-rated (high-risk)
debt securities whose financial condition is adequate to meet
future obligations, has improved or is expected to improve in the
future. Quest's analysis may focus on relative values based on
such factors as interest or dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of
the issuer.
Foreign Investments
Each Fund may invest up to 10% of its assets in the
securities of foreign issuers. Foreign investments can involve
significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed to
foreign currencies and of dividends and interest from such
securities can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets
can be highly volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to
obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than
U.S. markets. Foreign issuers, brokers and securities markets
may be subject to less government supervision. Foreign security
trading practices, including those involving the release of
<PAGE>
assets in advance of payment, may involve increased risks in the
event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and
economic risks. Foreign investments may be affected by actions
of foreign governments adverse to the interests of U.S.
investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on
U.S. investment or on the ability to repatriate assets or convert
currency into U.S. dollars or other government intervention.
There may be a greater possibility of default by foreign
governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local
political, economic or social instability, military action or
unrest or adverse diplomatic developments. There is no assurance
that Quest will be able to anticipate these potential events or
counter their effects.
The considerations noted above are generally intensified for
investments in developing countries. Developing countries may
have relatively unstable governments, economies based on
only a few industries and securities markets that trade a small
number of securities.
American Depositary Receipts ("ADRs") are certificates held
in trust by a bank or similar financial institution evidencing
ownership of securities of a foreign-based issuer. Designed for
use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying foreign securities in their national
markets and currencies.
ADR facilities may be established as either unsponsored or
sponsored. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them
relating to the rights and obligations of ADR holders and the
practices of market participants. A depository may establish an
unsponsored facility without participation by (or even
necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depository requests a letter
of non-objection from such issuer prior to the establishment of
the facility. Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depository usually charges fees
upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-
cash distributions and the performance of other services. The
depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities.
Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the
deposited securities enters into a deposit agreement with the
depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR
holders. With sponsored facilities, the issuer of the deposited
securities generally will bear some of the costs relating to the
facility (such as deposit and withdrawal fees). Under the terms
of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions and to
provide shareholder communications and other information to the
ADR holders at the request of the issuer of the deposited
securities.
<PAGE>
Repurchase Agreements
In a repurchase agreement, a Fund in effect makes a loan by
purchasing a security and simultaneously committing to resell
that security to the seller at an agreed upon price on an agreed
upon date within a number of days (usually not more than seven)
from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the
agreed upon resale price and marked to market daily) of the
underlying security.
The Funds may engage in repurchase agreements with respect
to any U.S. Government security. While it does not presently
appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to a Fund
in connection with bankruptcy proceedings), it is the policy of
the Trust to enter into repurchase agreements only with its
custodian, State Street Bank and Trust Company, and having a term
of seven days or less.
Warrants, Rights and Options
The Funds may invest up to 5% of their assets in warrants,
rights and options. A warrant, right or call option entitles the
holder to purchase a given security within a specified period for
a specified price and does not represent an ownership interest.
A put option gives the holder the right to sell a particular
security at a specified price during the term of the option.
These securities have no voting rights, pay no dividends and have
no liquidation rights. In addition, their market prices do not
necessarily move parallel to the market prices of the underlying
securities.
The sale of warrants, rights or options held for more than
one year generally results in a long-term capital gain or loss to
the Fund, and the sale of warrants, rights or options held for
one year or less generally results in a short term capital gain
or loss. The holding period for securities acquired upon
exercise of a warrant, right or call option, however, generally
begins on the day after the date of exercise, regardless of how
long the warrant, right or option was held. The securities
underlying warrants, rights and options could include shares of
common stock of a single company or securities market indices
representing shares of the common stocks of a group of companies,
such as the Standard & Poor's SmallCap 600 Stock Price Index, an
unmanaged market-weighted index.
Investing in warrants, rights and call options on a given
security allow the Fund to hold an interest in that security
without having to commit assets equal to the market price of the
underlying security and, in the case of securities market
indices, to participate in a market without having to purchase
all of the securities comprising the index. Put options, whether
on shares of common stock of a single company or on a securities
market index, would permit the Fund to protect the value of a
portfolio security against a decline in its market price and/or
to benefit from an anticipated decline in the market price of a
given security or of a market. Thus, investing in warrants,
rights and options permits the Fund to incur additional risk
and/or to hedge against risk.
* * *
<PAGE>
Quest believes that Royce Micro-Cap Portfolio is suitable
for investment only by persons who can invest without concern for
income, and that such Fund and Royce Premier Portfolio are
suitable for those who are in a financial position to assume
above-average investment risks in search for long-term capital
appreciation.
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to
each Trustee and officer of the Trust:
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
Charles M. Royce* Trustee, President, Secretary, Treasurer,
(57) President sole director and sole voting
1414 Avenue of and shareholder of Quest Advisory
the Treasurer Corp. ("Quest"), the Trust's
Americas investment adviser; Trustee,
New York, NY President and Treasurer of The
10019 Royce Fund ("TRF"), an open-end
diversified management
investment company of which
Quest is the principal
investment adviser; Director,
President and Treasurer of Royce
Value Trust, Inc. ("RVT"), and
of Royce Micro-Cap Trust, Inc.
("OTCM") and Royce Global Trust,
Inc. ("RGT") since September
1993 and October 1996,
respectively, each a closed-end
management investment company of
which Quest is the investment
adviser (TRF, RVT, OTCM and RGT
collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Quest Distributors, Inc.
("QDI"), the distributor of
TRF's shares; and managing
general partner of Quest
Management Company ("QMC"), a
registered investment adviser,
and its predecessor.
Richard M. Galkin Trustee Private investor and president
(58) of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Circle South consultants.
Boca Raton, FL
33487
Stephen L. Isaacs Trustee President of The Center for
(57) Health and Social Policy since
60 Haven Street, September 1996; President of
Fl. B-2 Stephen L. Isaacs Associates,
New York, NY Consultants; and Director of
10032 Columbia University Development
Law and Policy Program and
Professor at Columbia University
until August 1996.
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
David L. Meister Trustee Consultant to the communications
(56) industry since January 1993;
111 Marquez Place Executive officer of Digital
Pacific Planet Inc. from April 1991 to
Palisades, CA December 1992.
90272
W. Whitney Trustee Vice President (since August
George* (38) and Vice 1993) and senior analyst of
1414 Avenue of President Quest, having been employed by
the Quest since October 1991; Vice
Americas President of The Royce Funds
New York, NY (other than RGT) since April
10019 1995 and of RGT since October
1996; and general partner of QMC
and its predecessor since
January 1992.
John D. Diederich Vice Director of Operations of TRF
(45) President and RVT since April 1993 and of
1414 Avenue of OTCM since September 1993; Vice
the President of RGT since October
Americas 1996; President of QDI since
New York, NY November 1995; and President of
10019 Fund/Plan Services, Inc. from
January 1988 to December 1992.
Jack E. Fockler, Vice Vice President (since August
Jr.* (38) President 1993) and senior associate of
1414 Avenue of Quest, having been employed by
the Quest since October 1989; Vice
Americas President of The Royce Funds
New York, NY (other than RGT) since April
10019 1995 and of RGT since October
1996; Vice President of QDI
since November 1995; and general
partner of QMC since July 1993.
Daniel A. Vice Vice President of Quest since
O'Byrne* (34) President May 1994, having been employed
1414 Avenue of and by Quest since October 1986; and
the Assistant Vice President of The Royce
Americas Secretary Funds (other than RGT) since
New York, NY July 1994 and of RGT since
10019 October 1996.
John E. Denneen* Secretary Associate General Counsel and
(29) Chief Compliance Officer of
1414 Avenue of Quest since May 1996; Secretary
the of The Royce Funds (other than
Americas RGT) since June 1996 and of RGT
New York, NY since October 1996; and
10019 Associate of Seward & Kissel
from September 1992 to May 1996.
________________________________
*An "interested person" under Section 2(a)(19) of the 1940
Act.
<PAGE>
All of the Trust's Trustees except W. Whitney George are
also trustees of TRF and directors of RVT, OTCM and RGT.
The Board of Trustees has an Audit Committee, comprised of
Richard M. Galkin, Stephen L. Isaacs and David L. Meister. The
Audit Committee is responsible for the selection and nomination
of independent auditors for the Funds and for conducting post-
audit reviews of their financial conditions with such auditors.
For the year ended December 31, 1995, the following Trustees
received compensation from the Trust and the other funds in the
group of registered investment companies comprising The Royce
Funds for services as a trustee/director on such funds' Boards:
Aggregate Compensation Total Compensation
Name from Trust from The Royce Funds
Richard M. Galkin $- 0 - $60,000
Stephen L. Isaacs - 0 - 60,000
David L. Meister - 0 - 60,000
Each of the non-affiliated Trustees will receive a fee of $500
per year for serving on the Trust's Board of Trustees.
PRINCIPAL HOLDERS OF SHARES
As of December 10, 1996, Quest Advisory Corp. Money Purchase
Pension Plan owned of record 60,000 shares of the Trust,
consisting of 20,000 shares of Royce Premier Portfolio, 20,000
shares of Royce Total Return Portfolio and 20,000 shares of Royce
Micro-Cap Portfolio, representing 100% of the Trust's and each
Portfolio's then outstanding shares. All of these shares were
beneficially owned by Charles M. Royce.
INVESTMENT ADVISORY SERVICES
Services Provided by Quest
As compensation for its services under its Investment Advisory
Agreement with the Trust, Quest is entitled to receive the
following fees:
Fund Percentage Per Annum of Fund's Average
Net Assets
Royce Premier Portfolio 1.00%
Royce Total Return Portfolio 1.00%
Royce Micro-Cap Portfolio 1.50%
<PAGE>
Under the Investment Advisory Agreement, Quest (i)
determines the composition of each Fund's portfolio, the nature
and timing of the changes in it and the manner of implementing
such changes, subject to any directions it may receive from the
Trust's Board of Trustees; (ii) provides each Fund with
investment advisory, research and related services for the
investment of its funds; (iii) furnishes, without expense to the
Trust, the services of such of its executive officers and full-
time employees as may be duly elected executive officers or
Trustees of the Trust; and (iv) pays any additional expenses
incurred by the Trust in connection with promoting the sale of
its shares and all expenses incurred in performing its investment
advisory duties under the Investment Advisory Agreement.
The Trust pays all administrative and other costs and
expenses attributable to its operations and transactions,
including, without limitation, transfer agent and custodian fees;
legal, administrative and clerical services; rent for its office
space and facilities; auditing; preparation, printing and
distribution of its prospectuses to existing shareholders, proxy
statements, shareholders reports and notices; supplies and
postage; Federal and state registration fees; Federal, state and
local taxes; non-affiliated Trustees' fees; and brokerage
commissions.
Portfolio Management
The Funds' portfolios and the portfolios of Quest's other
accounts are managed by Quest's senior investment staff,
including Charles M. Royce, Quest's Chief Investment Officer, who
is primarily responsible for supervising its investment
management activities. Mr. Royce is assisted by Jack E. Fockler,
Jr. and W. Whitney George, Vice Presidents of Quest, each of whom
participate in such activities, with their specific
responsibilities varying from time to time. In the event of any
significant change in Quest's senior investment staff, the
members of the Trust's Board of Trustees who are not interested
persons of the Trust will consider what action, if any, should be
taken in connection with the Trust's management arrangements.
Certain information concerning Messrs. Royce, Fockler and
George is set forth above under "MANAGEMENT OF THE TRUST".
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the
custodian for the securities, cash and other assets of each Fund
and the transfer agent and dividend disbursing agent for the
shares of each Fund, but it does not participate in any Fund's
investment decisions. The Trust has authorized State Street to
deposit certain domestic and foreign portfolio securities in
several central depository systems and to use foreign sub-
custodians for certain foreign portfolio securities, as allowed
by Federal law. State Street's main office is at 225 Franklin
Street, Boston, Massachusetts 02107. All mutual fund transfer,
dividend disbursing and shareholder service activities are
performed by State Street's agent, National Financial Data
Services, at 1004 Baltimore, Kansas City, Missouri 64105.
<PAGE>
State Street is responsible for the calculation of each
Fund's daily net asset value per share and for the maintenance of
its portfolio and general accounting records and also provides
certain shareholder services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office
Square, Boston, Massachusetts, 02109, are the independent
accountants of the Trust. The balance sheets of the Funds
included in the Statement of Additional Information have been
examined by Coopers & Lybrand L.L.P., as set forth in their
report with respect thereto and are included in reliance upon
such report and upon the authority of such firm as experts in
accounting and auditing.
PORTFOLIO TRANSACTIONS
Quest is responsible for selecting the brokers who effect
the purchases and sales of each Fund's portfolio securities. No
broker is selected to effect a securities transaction for a Fund
unless such broker is believed by Quest to be capable of
obtaining the best price and execution for the security involved
in the transaction. In addition to considering a broker's
execution capability, Quest generally considers the brokerage and
research services which the broker has provided to it, including
any research relating to the security involved in the transaction
and/or to other securities. Such services may include general
economic research, market and statistical information, industry
and technical research, strategy and company research, and may be
written or oral. Quest 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 Quest upon the brokerage and/or research services
provided by such broker, viewed in terms of either that
particular transaction or Quest's overall responsibilities with
respect to its accounts.
Quest is authorized, under Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreement
with the Trust, to pay a brokerage 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 a Fund effects securities transactions may be used by Quest
in servicing all of its accounts and those of QMC, and not all of
such services may be used by Quest in connection with the Trust
or any one of its Funds.
Consistent with achieving the best price and execution,
Quest may also consider sales by a broker-dealer of Variable
Contracts that permit allocation of contract value to one or more
of the Funds as a factor in the selection of broker-dealers to
execute portfolio transactions for the Funds. In no event will a
Fund's brokerage business be placed with QDI.
<PAGE>
Even though investment decisions for each Fund are made
independently from those for the other Funds and the other
accounts managed by Quest and QMC, securities of the same issuer
are frequently purchased, held or sold by more than one Quest/QMC
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 Quest/QMC account on the same trading day, Quest 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 Quest/QMC'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 Quest's and
QMC'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 Quest and QMC
believe should result in fair and equitable treatment to those of
their accounts for which the securities may be deemed suitable.
In some cases, this procedure may adversely affect the price paid
or received by a Fund or the size of the position obtainable for
a Fund.
CODE OF ETHICS AND RELATED MATTERS
Quest, QDI, QMC and The Royce Funds have adopted a Code of
Ethics under which directors, officers, employees and partners of
Quest, QDI and QMC ("Quest-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 Quest or QMC 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 Quest's
Compliance Officer and an executive officer of Quest. 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.
Quest's and QMC's clients include several private investment
companies in which Quest or QMC 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
Quest or QMC for such private investment company accounts.
Transactions for such private investment company accounts are
subject to Quest's and QMC's allocation policies and procedures.
See "Portfolio Transactions".
As of September 30, 1996, Quest-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 $ 21.2
million, and Quest's and QMC's equity interests in such private
investment companies totalled approximately $3.4 million.
<PAGE>
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is
based on the Fund's current net asset value per share. See "Net
Asset Value Per Share" in the Funds' Prospectus.
As set forth under "Net Asset Value Per Share", the Funds'
custodian determines the net asset value per share of each Fund
at the close of regular trading on the New York Stock Exchange on
each day that the Exchange is open. The Exchange is open on all
weekdays which are not holidays. Thus, it is closed on Saturdays
and Sundays and on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which
would, in the judgment of the Board of Trustees or management,
make it undesirable for a Fund to pay for all redemptions in
cash. In such cases, payment may be made in portfolio securities
or other property of the Fund. However, the Trust has obligated
itself under the 1940 Act to redeem for cash all shares presented
for redemption by any one shareholder up to $250,000 (or 1% of
the Fund's net assets if that is less) in any 90-day period.
Securities delivered in payment of redemptions would be valued at
the same value assigned to them in computing the net asset value
per share for purposes of such redemption. Shareholders
receiving such securities would incur brokerage costs when these
securities are sold.
TAXATION
Shares of the Funds are offered to separate accounts of
Insurance Companies that fund Variable Contracts and may be
offered to certain Retirement Plans, which are pension plans and
retirement arrangements and accounts permitting the accumulation
of funds on a tax-deferred basis. See the disclosure documents
for the Variable Contracts or the plan documents for the
Retirement Plans for a discussion of the special taxation of
insurance companies with respect to the separate accounts and the
Variable Contracts, and the holders thereof, or the special
taxation of Retirement Plans and the participants therein.
Each Fund intends to qualify and to remain qualified each
year for the tax treatment applicable to a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). To so qualify, a Fund must comply with
certain requirements of the Code relating to, among other things,
the source of its income and the diversification of its assets.
As a regulated investment company, a Fund will not be
subject to Federal income tax on net investment income and
capital gains (short- and long-term), if any, that it distributes
to its shareholders if at least 90% of its net investment income
and net short-term capital gains for the taxable year are
<PAGE>
distributed, but will be subject to tax at regular corporate
rates on any income or gains that are not distributed. In
general, dividends will be treated as paid when actually
distributed, except that dividends declared in October, November
or December and made payable to shareholders of record in such a
month will be treated as having been paid by the Fund (and
received by shareholders) on December 31, provided the dividend
is paid in the following January. Each Fund intends to satisfy
the distribution requirements in each taxable year.
The Funds will not be subject to the 4% Federal excise tax
imposed on registered investment companies that do not distribute
substantially all of their income and gains each calendar year
because such tax does not apply to a registered investment
company whose only shareholders are segregated asset accounts of
life insurance companies held in connection with variable annuity
and/or variable life insurance policies or Retirement Plans.
Each Fund will maintain accounts and calculate income by
reference to the U.S. dollar for U.S. Federal income tax
purposes. Investments calculated by reference to foreign
currencies will not necessarily correspond to a Fund's
distributable income and capital gains for U.S. Federal income
tax purposes as a result of fluctuations in foreign currency
exchange rates. Furthermore, if any exchange control regulations
were to apply to a Fund's investments in foreign securities, such
regulations could restrict that Fund's ability to repatriate
investment income or the proceeds of sales of securities, which
may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirements.
Income earned or received by a Fund from investments in
foreign securities may be subject to foreign withholding taxes
unless a withholding exemption is provided under an applicable
treaty. Any such taxes would reduce that Fund's cash available
for distribution to shareholders.
If a Fund invests in stock of a so-called passive foreign
investment company ("PFIC"), such Fund may be subject to Federal
income tax on a portion of any "excess distribution" with respect
to, or gain from the disposition of, such stock. The tax would
be determined by allocating such distribution or gain ratably to
each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable
year in which the excess distribution or disposition occurs would
be taxed to the Fund at the highest marginal income tax rate in
effect for such years, and the tax would be further increased by
an interest charge. The amount allocated to the taxable year of
the distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as a
dividend to shareholders. In lieu of being taxable in the manner
described above, such Fund may be able to elect to include
annually in income its pro rata share of the ordinary earnings
and net capital gain (whether or not distributed) of the PFIC.
In order to make this election, the Fund would be required to
obtain annual information from the PFICs in which it invests,
which in many cases may be difficult to obtain. Alternatively,
if eligible, the Fund may be able to elect to mark to market its
PFIC stock, resulting in the stock being treated as sold at fair
market value on the last business day of each taxable year. Any
resulting gain would be reported as ordinary income, and any
resulting loss would not be recognized.
Investments of a Fund in securities issued at a discount or
providing for deferred interest payments or payments of interest
in kind (which investment are subject to special tax rules under
<PAGE>
the Code) will affect the amount, timing and character of
distributions to shareholders. For example, a Fund which
acquires securities issued at a discount will be required to
accrue as ordinary income each year a portion of the discount
(even though the Fund may not have received cash interest
payments equal to the amount included in income) and to
distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid
income taxes. In order to generate sufficient cash to make
distributions necessary to satisfy the 90% distribution
requirement and to avoid income taxes, the Fund may have to
dispose of securities that it would otherwise have continued to
hold.
Each Fund must and the Funds intend to comply with Section
817(h) of the Code and the regulations issued thereunder, which
impose certain diversification requirements on the segregated
asset accounts investing in the Funds. These requirements, which
are in addition to the diversification requirements applicable to
the Funds under the 1940 Act and under the regulated investment
company provisions of the Code, may limit the types and amounts
of securities in which the Funds may invest. Failure to meet the
requirements of Section 817(h) could result in current taxation
of the holder of the Variable Contract on the income of the
Variable Contract.
The foregoing is only a general summary of some of the
important Federal income tax considerations generally affecting
the Funds and their shareholders. No attempt is made to present
a complete explanation of the Federal tax treatment of the Funds'
activities, and this discussion and the discussion in the
prospectuses and/or statements of additional information for
Variable Contracts are not intended as a substitute for careful
tax planning. Accordingly, potential investors are urged to
consult their own tax advisers for more detailed information and
for information regarding any state, local or foreign taxes
applicable to the Variable Contracts and the holders thereof.
DESCRIPTION OF THE TRUST
Trust Organization
The Trust was established as a Delaware business trust,
effective January 11, 1996. A copy of the Trust's Certificate of
Trust is on file with the Secretary of State of Delaware, and a
copy of its Trust Instrument, its principal governing document,
is available for inspection by shareholders at the Trust's office
in New York, New York.
The Trust has an unlimited authorized number of shares of
beneficial interest, which may be divided into an unlimited
number of series and/or classes without shareholder approval.
(The Trust presently has three series, each of which has only one
class of shares.) These shares are entitled to one vote per
share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. Shares vote by
individual series, except as otherwise required by the 1940 Act
or when the Trustees determine that the matter affects
shareholders of more than one series.
There will normally be no meeting of shareholders for the
purpose of electing Trustees unless and until such time as less
than a majority of the current five Trustees remain in office, at
which time the Trustees then in office will call a shareholders
meeting for the election of trustees. In addition, Trustees may
<PAGE>
be removed from office by written consents signed by the holders
of 66 2/3% of the outstanding shares of the Trust and filed with
the Trust's custodian or by a vote of the holders of 66 2/3% of
the outstanding shares of the Trust at a meeting duly called for
the purpose, which meeting will be held upon the written request
of the holders of at least 10% of the Trust's outstanding shares.
Upon the written request by 10 or more shareholders of the Trust,
who have been shareholders for at least 6 months and who hold
shares constituting at least 1% of the Trust's outstanding
shares, stating that such shareholders wish to communicate with
the Trust's other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider the removal
of a Trustee, the Trust is required to provide a lists of its
shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders). Except as provided
above the Trustees may continue to hold office and appoint their
successors.
Shares are freely transferable, are entitled to
distributions as declared by the Trustees and, in liquidation of
the Trust, are entitled to receive the net assets of their
series. Shareholders have no preemptive rights. The Trust's
fiscal year ends on December 31.
The separate accounts of Insurance Companies and the
trustees of qualified plans invested in the Funds, rather than
individual contract owners or plan participants, are the
shareholders of the Funds. However, each Insurance Company or
qualified plan will vote such shares as required by law and
interpretations thereof, as amended or changed from time to time.
Under current law, an Insurance Company is required to request
voting instructions from its contract owners and must vote Fund
shares held by each of its separate accounts in proportion to the
voting instructions received. Additional information about voting
procedures is contained in the applicable separate account
prospectuses.
Shareholder Liability
Generally, Trust shareholders will not be personally liable
for the obligations of the Trust under Delaware law. The
Delaware Business Trust Act provides that a shareholder of a
Delaware business trust is entitled to the same limited liability
extended to stockholders of private corporations for profit
organized under the Delaware General Corporation Law. No similar
statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the
extent that the Trust or a shareholder of the Trust is subject to
the jurisdiction of courts in those states, the courts may not
apply Delaware law and may thereby subject the Trust's
shareholders to liability. To guard against this possibility,
the Trust Instrument (i) requires that every written obligation
of the Trust contain a statement that such obligation may be
enforced only against the Trust's assets (however, the omission
of this disclaimer will not operate to create personal liability
for any shareholder); and (ii) provides for indemnification out
of a Fund's property of any Fund shareholder held personally
liable for the Fund's obligations. Thus, the risk of a Fund
shareholder incurring financial loss beyond its investment
because of shareholder liability is limited to circumstances in
which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the
Fund itself would be unable to meet its obligations. In light of
Delaware law, the nature of the Trust's business and the nature
of its assets, management believes that the risk of personal
liability to a shareholder is extremely remote.
<PAGE>
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All
performance information supplied for the Funds will be historical
and is not intended to indicate future returns. Each Fund's
share price and total returns fluctuate in response to market
conditions and other factors, and the value of a Fund's shares
when redeemed may be more or less than their original cost. The
Funds' performance figures do not reflect expenses of the
separate accounts of Insurance Companies, expenses imposed under
the Variable Contracts or expenses imposed by the Retirement
Plans.
Total Return Calculations
Total returns quoted will reflect all aspects of a Fund's
return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's net asset value
per share (NAV) over a stated period. Average annual total
returns are calculated by determining the growth or decline in
value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the
rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years
would produce an average annual total return of 7.18%, which is
the steady annual rate of return that would equal 100% growth on
a compounded basis in ten years. While average annual total
returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance
is not constant over time, but changes from year to year, and
that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, a Fund's
unaveraged or cumulative total returns, reflecting the simple
change in value of an investment over a stated period, may be
quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments or a
series of redemptions, over any time period. Total returns may
be broken down into their components of income and capital
(including capital gains and changes in share prices) in order to
illustrate the relationship of these factors and their
contributions to total return. Total returns and other
performance information may be quoted numerically or in a table,
graph or similar illustration.
Comparative Results
The Funds total returns may be compared to the records of
various indices of securities prices over the same periods,
including the Standard & Poor's 500 Composite Stock Price Index
(S&P 500) the Standard & Poor's SmallCap 600 Stock Price Index
(S&P 600) and the Russell 2000 Index (Russell 2000).
The S&P 500 is an unmanaged index of common stocks
frequently used as a general measure of stock market performance.
The Index's performance figures reflect changes of market prices
and quarterly reinvestment of all distributions.
<PAGE>
The S&P 600 is an unmanaged market-weighted index consisting
of 600 domestic stocks chosen for market size, liquidity and
industry group representation. As of December 31, 1995, the
weighted mean market value of a company in this Index was
approximately $640 million.
The Russell 2000, prepared by the Frank Russell Company,
tracks the return of the common stocks of the 2,000 smallest out
of the 3,000 largest publicly-traded U.S.-domiciled companies by
market capitalization. The Russell 2000 tracks the return on
these stocks based on price appreciation or depreciation and
includes dividends.
The Funds have the ability to invest in securities not
included in these indices, and their investment portfolios may or
may not be similar in composition to the indices. Figures for
the indices are based on the prices of unmanaged groups of
stocks, and unlike the Funds, their returns do not include the
effect of paying brokerage commissions and the other costs and
expenses of investing in a mutual fund.
The Funds' performances may be compared in advertisements to
the performance of other mutual funds in general or to the
performance of particular types of mutual funds, especially those
with similar investment objectives. Such comparisons may be
expressed as mutual fund rankings prepared by Lipper Analytical
Services, Inc. ("Lipper"), an independent service that monitors
the performance of registered investment companies.
Money market funds and municipal funds are not included in
the Lipper survey. The Lipper performance analysis ranks funds
on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees
payable by shareholders into consideration and is prepared
without regard to tax consequences.
The Lipper General Equity Funds Average can be used to show
how the Funds' performances compare to a broad-based set of
equity funds. The Lipper General Equity Funds Average is an
average of the total returns of all equity funds (excluding
international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of
June 30, 1996, the average included 220 capital appreciation
funds, 705 growth funds, 161 mid-cap funds, 414 small company
growth funds, 553 growth and income funds and 162 equity income
funds. Capital appreciation, growth and small company growth
funds usually invest principally in common stocks, with long-term
growth as a primary goal. Growth and income and equity income
funds tend to be more conservative in nature and usually invest
in a combination of common stocks, bonds, preferred stocks and
other income-producing securities. Growth and income and equity
income funds generally seek to provide their shareholders with
current income as well as growth of capital, unlike growth funds
which may not produce income.
Ibbotson Associates (Ibbotson) provides historical returns
of the capital markets in the United States. The Funds'
performance may be compared to the long-term performance of the
U.S. capital markets in order to demonstrate general long-term
risk versus reward investment scenarios. Performance comparisons
could also include the value of a hypothetical investment in
common stocks, long-term bonds or U.S. Treasury securities.
Ibbotson calculates total returns in the same manner as the
Funds.
<PAGE>
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-
term government bonds, long-term government bonds, U.S. Treasury
bills and the U.S. rate of inflation. These capital markets are
based on the returns of several different indices. For common
stocks, the S&P 500 is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund
Advisors (DFA) Small Company Fund. This fund is a market-value-
weighted index of the ninth and tenth deciles of the New York
Stock Exchange (NYSE), plus stocks listed on the American Stock
Exchange (AMEX) and over-the-counter (OTC) with the same or less
capitalization as the upper bound of the NYSE ninth decile. As
of August 31, 1996, DFA contained approximately 2,700 stocks,
with a median market capitalization of about $114 million.
U.S. Treasury bonds are securities backed by the credit and
taxing power of the U.S. government and, therefore, present
virtually no risk of default. Although such government
securities fluctuate in price, they are highly liquid and may be
purchased and sold with relatively small transaction costs
(direct purchase of U.S. Treasury securities can be made with no
transaction costs). Returns on intermediate-term government
bonds are based on a one-bond portfolio constructed each year,
containing a bond that is the shortest non-callable bond
available with a maturity of not less than five years. This bond
is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond that meets several
criteria, including having a term of approximately 20 years. The
bond is held for the calendar year and returns are recorded.
Returns on U.S. Treasury bills are based on a one-bill portfolio
constructed each month, containing the shortest term bill having
not less than one month to maturity. The total return on the
bill is the month-end price divided by the previous month-end
price, minus one. Data up to 1976 is from the U.S. Government
Bond file at the University of Chicago's Center for Research in
Security Prices; The Wall Street Journal is the source
thereafter. Inflation rates are based on the Consumer Price
Index.
Quest may, from time to time, compare the performance of
common stocks, especially small capitalization stocks, to the
performance of other forms of investment over periods of time.
From time to time, in reports and promotional literature,
the Funds' performances also may be compared to other mutual
funds tracked by financial or business publications and
periodicals, such as The BARDS Report, KIPLINGER's, INDIVIDUAL
INVESTOR, MONEY, FORBES, BUSINESS WEEK, BARRON's, FINANCIAL
TIMES, FORTUNE, MUTUAL FUNDS MAGAZINE and THE WALL STREET
JOURNAL. In addition, financial or business publications and
periodicals, as they relate to fund management, investment
philosophy and investment techniques, may be quoted.
Morningstar, Inc.'s proprietary risk ratings may be quoted
in advertising materials. For the three years ended August 31,
1996, the average risk score for the 1,666 equity funds rated by
Morningstar with a three-year history was 1.00; the average risk
score for the 204 small company funds rated by Morningstar with a
three-year history was 1.11; and the average risk score for the
82 equity income funds rated by Morningstar with a three-year
history was 0.64.
<PAGE>
The Funds' performances may also be compared to those of
other compilations or indices.
Advertising for the Funds may contain examples of the
effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit
or guard against loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
Risk Measurements
Quantitative measures of "total risk," which quantify the
total variability of a portfolio's returns around or below its
average return, may be used in advertisements and in
communications with current and prospective shareholders. These
measures include standard deviation of total return and the
Morningstar risk statistic. Such communications may also include
market risk measures, such as beta, and risk-adjusted measures of
performance, such as the Sharpe Ratio, Treynor Ratio, Jensen's
Alpha and Morningstar's star rating system.
Standard Deviation. The risk associated with a fund or
portfolio can be viewed as the volatility of its returns,
measured by the standard deviation of those returns. For
example, a fund's historical risk could be measured by computing
the standard deviation of its monthly total returns over some
prior period, such as three years. The larger the standard
deviation of monthly returns, the more volatile - i.e., spread
out around the fund's average monthly total return, the fund's
monthly total returns have been over the prior period. Standard
deviation of total return can be calculated for funds having
different objectives, ranging from equity funds to fixed income
funds, and can be measured over different time frames. The
standard deviation figures presented would be annualized
statistics based on the trailing 36 monthly returns.
Approximately 68% of the time, the annual total return of a fund
will differ from its mean annual total return by no more than
plus or minus the standard deviation figure. 95% of the time, a
fund's annual total return will be within a range of plus or
minus 2x the standard deviation from its mean annual total
return.
Beta. Beta measures the sensitivity of a security's or
portfolio's returns to the market's returns. It measures the
relationship between a fund's excess return (over 3-month T-
bills) and the excess return of the benchmark index (S&P 500 for
domestic equity funds). The market's beta is by definition equal
to 1. Portfolios with betas greater than 1 are more volatile than
the market, and portfolios with betas less than 1 are less
volatile than the market. For example, if a portfolio has a beta
of 2, a 10% market excess return would be expected to result in a
20% portfolio excess return, and a 10% market loss would be
expected to result in a 20% portfolio loss (excluding the effects
of any firm-specific risk that has not been eliminated through
diversification).
Morningstar Risk. The Morningstar proprietary risk
statistic evaluates a fund's downside volatility relative to that
of other funds in its class based on the under-performances of
the fund relative to the riskless T-bill return. It then
compares this statistic to those of other funds in the same broad
investment class.
<PAGE>
Sharpe Ratio. Also known as the Reward-to-Variability
Ratio, this is the ratio of a fund's average return in excess of
the risk-free rate of return ("average excess return") to the
standard deviation of the fund's excess returns. It measures the
returns earned in excess of those that could have been earned on
a riskless investment per unit of total risk assumed.
Treynor Ratio. Also known as the Reward-to-Volatility
Ratio, this is the ratio of a fund's average excess return to the
fund's beta. It measures the returns earned in excess of those
that could have been earned on a riskless investment per unit of
market risk assumed. Unlike the Sharpe Ratio, the Treynor Ratio
uses market risk (beta), rather than total risk (standard
deviation), as the measure of risk.
Jensen's Alpha. This is the difference between a fund's
actual returns and those that could have been earned on a
benchmark portfolio with the same amount of risk - i.e., the same
beta, as the portfolio. Jensen's Alpha measures the ability of
active management to increase returns above those that are purely
a reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund
rating service that rates mutual funds on the basis of risk-
adjusted performance. Ratings may change monthly. Funds with at
least three years of performance history are assigned ratings
from one star (lowest) to five stars (highest). Morningstar
ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are
adjusted for fees and sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars and the bottom
10% receive one star.
None of these quantitative risk measures taken alone can be
used for a complete analysis and, when taken individually, can be
misleading at times. However, when considered in some
combination and with the total returns of a fund, they can
provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will
change over time and are not necessarily predictive of future
performance or risk.
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements included in Prospectus (Part A):
None
The following financial statements were filed with
Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement (No. 333-1073) and are
incorporated by reference into the Statement of
Additional Information (Part B):
Statement of Assets and Liabilities of
Royce Premier and Micro-Cap Portfolios at July 26,
1996; and
Notes to Statement of Assets and
Liabilities -- Report of Independent Accountants
dated July 26, 1996.
Financial statements, schedules and historical
information other than those listed above have been
omitted since they are either inapplicable or are not
required.
(b) Exhibits:
The exhibits required by Items (1) through (9),(a),
(b), (10) and (12) through (16), to the extent applicable to the
Registrant, have been filed with the Registrant's initial
Registration Statement and Pre-Effective Amendments Nos. 1 and 2
(No. 333-1073) and are incorporated by reference herein.
(5) Form of Investment Advisory Agreement
between Registrant and Quest Advisory Corp.
(11) Consent of the Registrant's independent
public accountants.
(13) Subscription Agreement for the initial
purchase of shares of Royce Total Return
Portfolio.
Item 25. Persons Controlled by or Under Common Control With
Registrant
There are no persons directly or indirectly controlled
by or under common control with the Registrant.
Item 26. Number of Holders of Securities
As of December 10, 1996, the number of record holders
of shares of each Fund of the Registrant was as follows:
<PAGE>
Title of Fund Number of Record Holders
Royce Premier Portfolio 1
Royce Total Return Portfolio 1
Royce Micro-Cap Portfolio 1
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant
provides as follows:
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons
contracting with or having any claim against the Trust or a
particular Series shall look only to the assets of the Trust or
such Series for payment under such contract or claim; and neither
the Trustees nor any of the Trust's officers, employees or
agents, whether past, present or future, shall be personally
liable therefor. Every written instrument or obligation on
behalf of the Trust or any Series shall contain a statement to
the foregoing effect, but the absence of such statement shall not
operate to make any Trustee or officer of the Trust liable
thereunder. None of the Trustees or officers of the Trust shall
be responsible or liable for any act or omission or for neglect
or wrongdoing by him or by any agent, employee, investment
adviser or independent contractor of the Trust, but nothing
contained in this Trust Instrument or in the Delaware Act shall
protect any Trustee or officer of the Trust against liability to
the Trust or to Shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 2. Indemnification. (a) Subject to the exceptions
and limitations contained in subsection (b) below:
(i) every person who is, or has been, a Trustee
or an officer, employee or agent of the Trust ("Covered
Person") shall be indemnified by the Trust or the
appropriate Series to the fullest extent permitted by
law against liability and against all expenses
reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of
his being or having been a Covered Person and against
amounts paid or incurred by him in the settlement
thereof;
(ii) as used herein, the words "claim," "action,"
"suit," or "proceeding" shall apply to all claims,
actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened, and
the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other
liabilities.
<PAGE>
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall, in respect of the matter involved,
have been adjudicated by a court or body before which
the proceeding was brought to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office; or
(ii) in the event of a settlement, unless there
has been a determination that such Covered Person did
not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved
in the conduct of his office, (A) by the court or other
body approving the settlement, (B) by at least a
majority of those Trustees who are neither Interested
Persons of the Trust nor are parties to the matter
based upon a review of readily available facts (as
opposed to a full trial-type inquiry) or (C) by written
opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full
trial-type inquiry).
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights
to which any Covered Person may now or hereafter be entitled and
shall inure to the benefit of the heirs, executors and
administrators of a Covered Person.
(d) To the maximum extent permitted by applicable law,
expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character
described in subsection (a) of this Section may be paid by the
Trust or applicable Series from time to time prior to final
disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over
by him to the Trust or applicable Series if it is ultimately
determined that he is not entitled to indemnification under this
Section; provided, however, that either (i) such Covered Person
shall have provided appropriate security for such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments, or (iii) either a majority of a quorum of the
Trustees who are neither Interested Persons of the Trust nor
parties to the matter, or independent legal counsel in a written
opinion shall have determined, based upon a review of readily
available facts (as opposed to a full trial-type inquiry) that
there is reason to believe that such Covered Person will not be
disqualified from indemnification under this Section.
(e) Any repeal or modification of this Article IX by the
Shareholders of the Trust, or adoption or modification of any
other provision of the Trust Instrument or By-laws inconsistent
with this Article, shall be prospective only, to the extent that
such repeal or modification would, if applied retrospectively,
adversely affect any limitation on the liability of any Covered
Person or indemnification available to any Covered Person with
respect to any act or omission which occurred prior to such
repeal, modification or adoption.
Section 3. Indemnification of Shareholders. If any
Shareholder or former Shareholder of the Trust or of any Series
shall be held personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or
omissions or for some other reason, the Shareholder or former
Shareholder (or his heirs, executors, administrators or other
legal representatives or, in the case of any entity, its general
successor) shall be entitled out of the assets of the Trust or
<PAGE>
belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such
liability. The Trust, for itself or on behalf of the affected
Series, shall, upon request by such Shareholder, assume the
defense of any claim made against such Shareholder for any act or
obligation of the Trust or the Series and satisfy any judgment
thereon from the assets of the Trust or the Series."
(b) Paragraph 8 of the Investment Advisory Agreement
by and between the Registrant and Quest Advisory Corp. provides
as follows:
"8. Protection of the Adviser. The Adviser
shall not be liable to the Fund or to any portfolio
series thereof for any action taken or omitted to be
taken by the Adviser in connection with the performance
of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the
Fund or such series, and the Fund or each portfolio
series thereof involved, as the case may be, shall
indemnify the Adviser and hold it harmless from and
against all damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts
reasonably paid in settlement) incurred by the Adviser
in or by reason of any pending, threatened or completed
action, suit, investigation or other proceeding
(including an action or suit by or in the right of the
Fund or any portfolio series thereof or its security
holders) arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be
taken by the Adviser in connection with the performance
of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the
Fund or such series. Notwithstanding the preceding
sentence of this Paragraph 8 to the contrary, nothing
contained herein shall protect or be deemed to protect
the Adviser against or entitle or be deemed to entitle
the Adviser to indemnification in respect of, any
liability to the Fund or to any portfolio series
thereof or its security holders to which the Adviser
would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the per
formance of its duties or by reason of its reckless
disregard of its duties and obligations under this
Agreement.
Determinations of whether and the extent to
which the Adviser is entitled to indemnification
hereunder shall be made by reasonable and fair means,
including (a) a final decision on the merits by a court
or other body before whom the action, suit or other pro
ceeding was brought that the Adviser was not liable by
reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties, or (b)
in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that
the Adviser was not liable by reason of such misconduct
by (i) the vote of a majority of a quorum of the
Trustees of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of
the Investment Company Act of 1940) nor parties to the
action, suit or other proceeding, or (ii) an
independent legal counsel in a written opinion."
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Reference is made to the filings on Schedule D to the
Application on Form ADV, as amended, of Quest Advisory Corp. for
Registration as Investment Adviser under the Investment Advisers
Act of 1940.
Item 29. Principal Underwriters
Inapplicable. The Registrant does not have any
principal underwriters.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be
maintained by the Registrant pursuant to the Investment Company
Act of 1940, are maintained at the following locations:
Royce Capital Trust
1414 Avenue of the Americas
10th Floor
New York, New York 10019
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Item 31. Management Services
State Street Bank and Trust Company, a Massachusetts
trust company ("State Street"), will provide certain
management-related services to the Registrant pursuant to a
Custodian Contract between the Registrant and State Street.
Under such Custodian Contract, State Street, among other things,
will contract with the Registrant to keep books of accounts and
render such statements as agreed to in the then current
mutually-executed Fee Schedule or copies thereof from time to
time as requested by the Registrant, and will assist generally in
the preparation of reports to holders of shares of the
Registrant, to the Securities and Exchange Commission and to
others, in the auditing of accounts and in other ministerial
matters of like nature as agreed to between the Registrant and
State Street. All of these services will be rendered pursuant to
instructions received by State Street from the Registrant in the
ordinary course of business.
Item 32. Undertakings
The Registrant hereby undertakes to file a Post-
Effective Amendment for Royce Premier, Royce Total Return and
Royce Micro-Cap Portfolios, using financial statements which need
not be certified, within four to six months from the effective
date of this registration statement.
<PAGE>
The Registrant hereby undertakes to call a special
meeting of its shareholders upon the written request of
shareholders owning at least 10% of the outstanding shares of the
Registrant for the purpose of voting upon the question of the
removal of a trustee or trustees and, upon the written request of
10 or more shareholders of the Registrant who have been such for
at least 6 months and who own at least 1% of the outstanding
shares of the Registrant, to provide a list of shareholders or to
disseminate appropriate materials at the expense of the
requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant has duly
caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the
City of New York and State of New York on the 10th day of
December, 1996.
ROYCE CAPITAL TRUST
By: /s/ Charles M. Royce
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
/s/ Charles M. Royce President, Treasurer 12/10/96
Charles M. Royce and Trustee
(Principal Executive,
Financial and Accounting
Officer)
/s/ Richard M. Galkin Trustee 12/10/96
Richard M. Galkin
/s/ W. Whitney George Trustee 12/10/96
W. Whitney George
/s/ Stephen L. Isaacs Trustee 12/10/96
Stephen L. Isaacs
/s/ David L. Meister Trustee 12/10/96
David L. Meister
---------------------------
NOTICE
A copy of the Trust Instrument of Royce Capital Trust is
available for inspection at the office of the Registrant, and
notice is hereby given that this instrument is executed on behalf
of the Registrant by an officer of the Registrant as an officer
and not individually and that the obligations of or arising out
of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets
and property of the Registrant.
<PAGE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
ROYCE CAPITAL TRUST
AND
QUEST ADVISORY CORP.
Agreement made this ____ day of _____________ 1996, by and
between ROYCE CAPITAL TRUST, a Delaware business trust (the
"Fund"), and QUEST ADVISORY CORP., a New York corporation (the
"Adviser").
The Fund and the Adviser hereby agree as follows in respect
of Royce Premier Portfolio, Royce Total Return Portfolio and
Royce Micro-Cap Portfolio, each a series of the Fund (the
"Series"):
1. Duties of the Adviser. The Adviser shall, during the
term and subject to the provisions of this Agreement, (a)
determine the composition of the portfolio of the Series, the
nature and timing of the changes therein and the manner of
implementing such changes, and (b) provide the Series with such
investment advisory, research and related services as the Series
may, from time to time, reasonably require for the investment of
its funds. The Adviser shall perform such duties in accordance
with the applicable provisions of the Fund's Trust Instrument, By-
laws and current prospectus and any directions it may receive
from the Fund's Trustees. The Adviser shall also comply with its
covenants and agreements contained in the Adviser's and the
Fund's application to the Securities and Exchange Commission for
an exemptive order regarding the use of the Fund's shares as a
funding medium for insurance company variable contracts.
2. Expenses Payable by the Series. Except as otherwise
provided in Paragraphs 1 and 3 hereof, the Fund shall be responsi
ble for effecting sales and redemptions of the Series' shares,
for determining the net asset value thereof and for all of the
Series' other operations and shall cause the Series to pay all
administrative and other costs and expenses attributable to its
operations and transactions, including, without limitation,
transfer agent and custodian fees; legal, administrative and
clerical services; rent for its office space and facilities;
auditing; preparation, printing and distribution of its
prospectuses to existing shareholders, proxy statements, share
holders reports and notices; supplies and postage; Federal and
state registration fees; Federal, state and local taxes; non-
affiliated Trustees' fees; and brokerage commissions.
<PAGE>
3. Expenses Payable by the Adviser. The Adviser shall
furnish, without expense to the Fund or to the Series, the
services of those of its executive officers and full-time
employees who may be duly elected executive officers or Trustees
of the Fund, subject to their individual consent to serve and to
any limitations imposed by law, and shall pay all the salaries
and expenses of such persons. For purposes of this Agreement,
only a president, a treasurer or a vice-president in charge of a
principal business function shall be deemed to be an executive
officer. The Adviser shall also pay all expenses which it may
incur in performing its duties under Paragraph 1 hereof and shall
reimburse the Fund for any space leased by the Fund and occupied
by the Adviser. In the event the Fund shall qualify shares of
the Series for sale in any jurisdiction, the applicable statutes
or regulations of which expressly limit the amount of the Series'
total annual expenses, the Adviser agrees to reduce its annual
investment advisory fee for the Series, to the extent that such
total annual expenses (other than brokerage commissions and other
capital items, interest, taxes, distribution fees, extraordinary
items and other excludable items, charges, costs and expenses)
exceed the limitations imposed on the Series by the most
stringent regulations of any such jurisdiction.
4. Compensation of the Adviser. The Fund agrees to cause
the Series to pay to the Adviser, and the Adviser agrees to
accept as compensation for the services provided by the Adviser
hereunder, fees equal to 1.00% per annum of the average net
assets of Royce Premier Portfolio and Royce Total Return
Portfolio, and a fee equal to 1.50% per annum of the average net
assets of Royce Micro-Cap Portfolio, at the close of business on
each day that the value of their respective net assets is
computed during the year. However, the Fund and the Adviser may
agree in writing to temporarily or permanently reduce such fees.
Such compensation shall be accrued on the Series' books at the
close of business on each day that the value of their net assets
is computed during each year and shall be payable to the Adviser
monthly, on the last day of each month, and adjusted as of year-
end if required.
5. Excess Brokerage Commissions. The Adviser is hereby
authorized, to the fullest extent now or hereafter permitted by
law, to cause the Series to pay a member of a national securities
exchange, broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission
another member of such exchange, broker or dealer would have
charged for effecting that transaction, if the Adviser determines
in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and/or research services
provided by such member, broker or dealer, viewed in terms of
either that particular transaction or its overall
responsibilities with respect to all of its accounts.
6. Limitations on the Employment of the Adviser. The
services of the Adviser to the Series shall not be deemed
exclusive, and the Adviser may engage in any other business or
render similar or different services to others so long as its
services to the Series hereunder are not impaired thereby, and
nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Adviser to engage in any
other business or to devote his or her time and attention in part
<PAGE>
to any other business, whether of a similar or dissimilar nature.
So long as this Agreement or any extension, renewal or amendment
remains in effect, the Adviser shall be the only investment
adviser for the Series, subject to the Adviser's right to enter
into sub-advisory agreements. The Adviser assumes no
responsibility under this Agreement other than to render the
services called for hereunder, and shall not be responsible for
any action of or directed by the Fund's Trustees, or any
committee thereof, unless such action has been caused by the
Adviser's gross negligence, willful malfeasance, bad faith or
reckless disregard of its obligations and duties under this
Agreement.
7. Responsibility of Dual Directors, Officers and/or
Employees. If any person who is a director, officer or employee
of the Adviser is or becomes a Trustee, officer and/or employee
of the Fund and acts as such in any business of the Fund pursuant
to this Agreement, then such director, officer and/or employee of
the Adviser shall be deemed to be acting in such capacity solely
for the Fund, and not as a director, officer or employee of the
Adviser or under the control or direction of the Adviser,
although paid by the Adviser.
8. Protection of the Adviser. The Adviser shall not be
liable to the Fund or to any portfolio series thereof for any
action taken or omitted to be taken by the Adviser in connection
with the performance of any of its duties or obligations under
this Agreement or otherwise as an investment adviser of the Fund
or such series, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the Adviser and
hold it harmless from and against all damages, liabilities, costs
and expenses (including reasonable attorneys' fees and amounts
reasonably paid in settlement) incurred by the Adviser in or by
reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by
or in the right of the Fund or any portfolio series thereof or
its security holders) arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be taken by the
Adviser in connection with the performance of any of its duties
or obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the
preceding sentence of this Paragraph 8 to the contrary, nothing
contained herein shall protect or be deemed to protect the
Adviser against or entitle or be deemed to entitle the Adviser to
indemnification in respect of, any liability to the Fund or to
any portfolio series thereof or its security holders to which the
Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of its reckless disregard of its duties
and obligations under this Agreement.
Determinations of whether and the extent to which the
Adviser is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or
other proceeding was brought that the Adviser was not liable by
reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties, or (b) in the absence of such a
decision, a reasonable determination, based upon a review of the
facts, that the Adviser was not liable by reason of such
misconduct by (i) the vote of a majority of a quorum of the
Trustees of the Fund who are neither "interested persons" of the
<PAGE>
Fund (as defined in Section 2(a)(19) of the Investment Company
Act of 1940) nor parties to the action, suit or other proceeding,
or (ii) an independent legal counsel in a written opinion.
9. Effectiveness, Duration and Termination of Agreement.
This Agreement shall become effective immediately as to a Series
upon approval by a majority of the outstanding voting securities
of the Series. This Agreement shall remain in effect until April
30, 1998, and thereafter shall continue automatically for
successive annual periods, provided that such continuance is
specifically approved at least annually by (a) the vote of the
Fund's Trustees, including a majority of such Trustees who are
not parties to this Agreement or "interested persons" (as such
term is defined in Section 2(a)(19) of the Investment Company Act
of 1940) of any such party, cast in person at a meeting called
for the purpose of voting on such approval, or (b) the vote of a
majority of the outstanding voting securities of the Series and
the vote of the Fund's Trustees, including a majority of such
Trustees who are not parties to this Agreement or "interested
persons" (as so defined) of any such party. This Agreement may be
terminated at any time as to a Series, without the payment of any
penalty, on 60 days' written notice by the vote of a majority of
the outstanding voting securities of the Series, or by the vote
of a majority of the Fund's Trustees or by the Adviser, and will
automatically terminate in the event of its "assignment" (as such
term is defined for purposes of Section 15(a)(4) of the
Investment Company Act of 1940); provided, however, that the
provisions of Paragraph 8 of this Agreement shall remain in full
force and effect, and the Adviser shall remain entitled to the
benefits thereof, notwithstanding any such termination. The
Adviser or Charles M. Royce may, upon termination of this
Agreement, require the Fund to refrain from using the name
"Royce" in any form or combination in its name or in its
business, and the Fund shall, as soon as practicable following
its receipt of any such request from the Adviser or Charles M.
Royce, so refrain from using such name.
Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed, postage prepaid, to the other
party at its principal office.
10. Shareholder Liability. Notice is hereby given that
this Agreement is entered into on the Fund's behalf by an officer
of the Fund in his capacity as an officer and not individually,
and that the obligations of or arising out of this Agreement are
not binding upon any of the Fund's Trustees, officers, employees,
agents or shareholders individually, but are binding only upon
the assets and property of the Series.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed the day and year first above
written.
ROYCE CAPITAL TRUST
By:_______________________________
__________________, President
QUEST ADVISORY CORP.
By:_______________________________
__________________, President
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholder of Royce Capital
Trust:
We consent to the reference to our Firm in Pre-Effective
Amendment No. 3 to the Registration Statement of Royce Total
Return Portfolio of Royce Capital Trust on Form N-1A (File
No. 333-1073) under the Securities Act of 1933 and (File No.
811-07537) under the Investment Company Act of 1940. We
further consent to the reference to our Firm under the
heading "Experts" in the Statement of Additional
Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 9, 1996
<PAGE>
ROYCE CAPITAL TRUST
1414 Avenue of the Americas
New York, New York 10019
September 20, 1996
Mr. Charles M. Royce
Quest Advisory Corp.
Money Purchase Plan
1414 Avenue of the Americas
New York, New York 10019
Dear Mr. Royce:
Royce Capital Trust (the "Trust") hereby accepts your offer
to purchase 20,000 shares of beneficial interest of the Royce
Total Return Portfolio, a series of the Trust, at $5.00 per
share, for an aggregate purchase price of $100,000.00, subject to
the understanding that you have no present intention of redeeming
or selling the shares so acquired.
Sincerely,
ROYCE CAPITAL TRUST
By: /s/ Charles M. Royce
__________________________
Charles M. Royce
President
Agreed:
I, Charles M. Royce, hereby agree to purchase the shares of
beneficial interest of the Trust covered under the above letter
agreement with monies currently held in my Quest Advisory Corp.
Money Purchase Pension Plan account. I acknowledge that I have
no present intention of redeeming or selling any of the 20,000
shares of the Trust covered by such letter agreement.
/s/ Charles M. Royce
__________________________
Charles M. Royce
Trustee, Quest Money Purchase
Pension Plan
<PAGE>
December 10, 1996
Ms. Jacquelyn J. Rivas
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Royce Capital Trust
File Nos. 811-07537 and 333-1073
Dear Ms. Rivas:
Enclosed herewith for filing under the Securities Act
of 1933, as amended, and the Investment Company Act of 1940,
as amended, is Pre-Effective Amendment No. 3 on Form N-1A
for Royce Capital Trust ("the Fund"). The most significant
difference between this filing and Pre-Effective Amendment
No. 2 filed with the Securities and Exchange Commission on
July 31, 1996, is the addition of Royce Total Return
Portfolio and the deletion of Royce Equity Income Portfolio,
as a series of the Fund. In addition, in light of Nicholas-
Appelgate Mutual Funds (publicly available August 6, 1996)
and Bramwell Growth Fund (publicly available August 7,
1996), the Fund no longer intends to limit the use in its
Prospectus of the total return information for the "Royce
retail funds" which correspond to the three series of the
Fund, to the Fund's first year of operations. This is a
change to the representation made in my July 29, 1996 letter
to you which pre-dated the above mentioned no-action letters
becoming publicly available.
We hereby request that the effective date of the Fund's
Registration be accelerated to December 17, 1996 or as soon
as practicable thereafter. Please direct any communications
relating to this filing to the undersigned at telephone no.
(212) 508-4578 or facismile no. (212) 832-8921.
Very truly yours,
/s/ John E. Denneen
John E. Denneen
Secretary
JED/fm
Enclosures
