<PAGE>
As filed with the Securities and Exchange Commission on January 15, 1998
Registration Nos. 333-1073 and 811-07537
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X /
Pre-Effective Amendment No. ______ / /
Post-Effective Amendment No. 3 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 6 /X /
(Check appropriate box or boxes)
ROYCE CAPITAL FUND
------------------------------------------------
(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
The Royce Fund
1414 Avenue of the Americas, New York, New York 10019
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Royce Capital Fund has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Its 24f-2 Notice for its most recent fiscal year was filed on
February 26, 1997.
Total number of pages:
-----
Index to Exhibits is located on page:
-----
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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............. *
<PAGE>
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
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 FUND
- ------------------------------------------------------------------------
ROYCE PREMIER PORTFOLIO
ROYCE TOTAL RETURN PORTFOLIO
- ------------------------------------------------------------------------
PROSPECTUS -- January 15, 1998
- ------------------------------------------------------------------------
Royce Premier Portfolio and Royce Total Return
Portfolio (the "Funds") are series of Royce
Capital Fund (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 January 15, 1998 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 7
Financial Highlights 3 Management of the Trust 8
Investment Performance 4 General Information 9
Investment Objectives 5 Dividends, Distributions and Taxes 10
Investment Policies 5 Net Asset Value Per Share 11
Investment Risks 6 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.
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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 Royce &
Associates, Inc. ("Royce"), 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
Premier Total Return
Portfolio Portfolio
--------- ---------
Management Fees
(after waivers). . . . . . . .00% .00%
12b-1 Fees . . . . . . . . . . . None None
Other Expenses
(after reimbursement). . . . . . 1.35% 1.35%
----- -----
Total Operating Expenses (after
waivers and reimbursement). . 1.35% 1.35%
----- -----
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% and total operating expenses would be 2.99%
for each of the Funds without the waivers of
management fees and reimbursement of Fund expenses
by Royce. Royce has voluntarily committed to
waive its fees and reimburse Fund expenses through
December 31, 1998 to the extent necessary to
maintain total operating expenses of each Fund at
or below 1.35%.
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 5 Years 10 Years
--------------------------------
Royce Premier Portfolio $14 $43 $74 $162
Royce Total Return Portfolio $14 $43 $74 $162
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.
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FINANCIAL HIGHLIGHTS
The following financial highlights are part of Royce Premier Portfolio's
financial statements and, except for the period ended June 30, 1997, have
been audited by Coopers & Lybrand L.L.P., independent accountants. The Funds'
financial statements and attached schedule of investments are included in the
Funds' Semi-Annual Report for the period ended June 30, 1997 and its Annual
Report to Shareholders and are incorporated by reference into the Statement of
Additional Information and this Prospectus. Further information about the
Funds' performance is contained elsewhere in this Prospectus and in the Funds'
Annual and Semi-Annual Reports to Shareholders, which may be obtained without
charge by calling Investor Information.
Royce Premier
-------------
Period ended Period ended
June 30, 1997 December 31, 1996(b)
------------- --------------------
(unaudited)
NET ASSET VALUE, BEGINNING OF PERIOD $5.05 $5.00
-----
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income (loss) (0.03) 0.00
Net realized and unrealized
gain (loss) on investments 0.57 .05
---- ---
Total from Investment Operations 0.54 .05
---- ---
LESS DISTRIBUTIONS
- ------------------
Dividends paid from
net investment income (0.00) (0.00)
Distributions paid
from capital gains (0.00) (0.00)
------ ------
Total Distributions (0.00) (0.00)
------ ------
$5.59 $5.05
===== =====
NET ASSET VALUE, END OF PERIOD 1.0%
====
TOTAL RETURN 10.7%
=====
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period $279,718 $252,419
Ratio of Expenses to
Average Net Assets(a) 1.99%* 1.99%*
Ratio of Net Investment Income
(Loss) to Average Net Assets(a) (1.06%) (1.99%)*
Portfolio Turnover Rate 37% 0%
Average Commission Rate Paid $0.0649 $0.0667
___________________________
(a) Expense ratios and net investment income are shown after fee
waivers and expense reimbursements by the investment adviser. For
the periods ended June 30, 1997 and December 31, 1996, the expense
ratios for Royce Premier Portfolio before waivers and expense
reimbursements would have been 7.73% and 22.02%, respectively.
(b) From inception of the Fund on December 27, 1996.
* Annualized.
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INVESTMENT
PERFORMANCE
Total return is the
change in value over a given time period,
assuming reinvestment
of any dividends and
capital gains
distributions
From time to time, the Funds may communicate figures reflecting total
return over various time periods. "Total return" is the rate of return
on an amount invested in a Fund from the beginning to the end of the
stated period. "Average annual total return" is the annual compounded
percentage change in the value of an amount invested in a Fund from the
beginning until the end of the stated period. Total returns, which
assume the reinvestment of all net investment income dividends and
capital gains distributions, are historical measures of past
performance and are not intended to indicate future performance.
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 has only recently begun to publicly offer its
securities and Royce Total Return Fund does not yet have its own
performance record, 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
Royce 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
<PAGE>
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.
The average annual total returns for the corresponding Royce retail funds
for the periods ended June 30, 1997 were:
One Three Five Since Inception
Year Year Year Inception Date
---- ---- ---- --------- --------
Royce Premier Fund 26.0% 18.2% 17.4% 16.1% December 31, 1991
Royce Total Return Fund 33.8% 23.7% -- 19.6% December 15, 1993
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 Royce as having
superior financial characteristics and/or
unusually attractive business prospects.
ROYCE TOTAL RETURN PORTFOLIO'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.
These investment objectives are fundamental and
may not be changed without the approval of a
majority of the Fund's outstanding voting shares.
INVESTMENT Royce will use a "value" method in managing the
POLICIES Funds' assets. In its selection process, Royce
puts primary emphasis on various internal returns
The Funds invest indicative of profitability, balance sheet
on a quality, cash flows and the relationships that
"value" basis these factors have to the current price of a given
security.
The Funds invest
primarily in
small companies Royce's value method is based on its belief that
the securities of certain small companies may sell
at a discount from its estimate of such companies'
"private worth". Royce 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, Royce 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 capital
appreciation (realized and unrealized) and current
income, Royce Total Return Portfolio will normally
invest at least 65% of its assets in common stocks
and convertible securities. At least 90% of these
securities will be income-producing, and at least
65% will be issued by companies with stock market
capitalizations under $1 billion 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 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.
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-cap companies. Such
risks 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, Royce's
investment method requires a long-term investment
horizon, and the Funds should not be used to play
short-term swings in the market.
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
<PAGE>
securities, it may be more susceptible to any
single corporate, economic, political or
regulatory occurrence than a more widely
diversified fund.
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
in the 1940 Act. These limitations are set forth
The Funds have in the Statement of Additional Information and
adopted provide, among other things, that no Fund will:
certain fundamental
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
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
<PAGE>
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 Each of the Funds may also invest no more than 5%
debt securities 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 Each Fund may invest up to 5% of its total assets
and options 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. Royce Premier's turnover rate for
the six months ended June 30, 1997 was 37%.
State insurance The Funds are sold to the Insurance Companies in
restrictions connection with Variable Contracts, and will seek
to be available under Variable Contracts sold in
a number of jurisdictions. Certain states have
regulations or guidelines concerning
concentration of investments and other investment
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
Royce &
Associates, Inc.
is responsible
for the
management of the
Funds' portfolios
The Trust's business and affairs are managed under the direction of its Board of
Trustees. Royce & Associates, Inc. ("Royce"), formerly named Quest Advisory
Corp., the Fund's investment adviser, is responsible for the management of the
Fund's portfolios, subject to the authority of the Board of Trustees. Royce,
which was organized in 1967, is also the investment adviser to The Royce Fund
and to other investment and non-investment company accounts. Charles M. Royce,
Royce's President, Chief Investment Officer and
<PAGE>
sole voting shareholder since 1972, is primarily responsible for managing the
Fund's portfolios. He is assisted by Royce's investment staff, including W.
Whitney George, Portfolio Manager and Managing Director, and by Jack E.
Fockler, Jr., Managing Director.
As compensation for its services to the Funds, Royce is entitled
to receive annual advisory fees of 1% of the average net assets
of each of the Funds. These fees are payable monthly from the
assets of the Funds involved.
Royce 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
Royce. Royce 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, Royce 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 Royce will not increase the fees paid
by the Funds or their shareholders.
GENERAL Royce Capital Fund (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
<PAGE>
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 Royce 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.
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
<PAGE>
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 59-1/2.
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
PER SHARE
Net asset value
per share (NAV) is
determined each day
the New York Stock
Exchange is open
Fund shares are purchased and redeemed at the net asset value per share
next determined after an order is received by the Funds' transfer agent or
an authorized service agent or sub-agent. Net asset value per share is
determined by dividing the total value of the Fund's investments and other
assets, less any liabilities, by the number of 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 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 The Trust will provide Insurance Companies and
GUIDE 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
<PAGE>
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.
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 FUND
1414 Avenue of the Americas
New York, NY 10019 ROYCE CAPITAL FUND
1-800-221-4268
Investment Adviser
Royce & Associates, Inc.
1414 Avenue of the Americas Royce Premier
New York, NY 10019 Portfolio
Royce Total Return
Transfer Agent Portfolio
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 Prospectus
and Asst. Secretary January 15, 1998
John E. Denneen, Secretary
=========================
<PAGE>
PROFILE
ROYCE PREMIER PORTFOLIO
(a series of Royce Capital Fund)
1414 Avenue of the Americas
New York, NY 10019
January 5, 1998
THIS PROFILE SUMMARIZES KEY INFORMATION ABOUT ROYCE PREMIER PORTFOLIO THAT IS
CONTAINED IN THE FUND'S PROSPECTUS. IF YOU WOULD LIKE MORE INFORMATION BEFORE
YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING PROSPECTUS. ADDITIONAL
INFORMATION ABOUT THE FUND'S INVESTMENTS IS AVAILABLE IN THE FUND'S ANNUAL AND
SEMI-ANNUAL REPORTS TO SHAREHOLDERS. YOU MAY OBTAIN THESE REPORTS AT NO COST BY
CALLING 1-800-221-4268.
1. WHAT ARE THE FUND'S GOALS?
Royce Premier Portfolio primarily seeks long-term growth and secondarily current
income.
2. WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a limited number of common stocks and convertible securities
of small-cap companies that the investment adviser believes are undervalued and
have superior financial characteristics and/or unusually attractive business
prospects.
- At least 80% of the Fund's assets are normally invested in common
stocks and convertible preferred stocks and convertible bonds.
- At least 65% of these securities will be issued by companies with
stock market capitalizations under $1 billion at the time of
investment and/or will be income-producing.
- In the selection process, primary emphasis is put on companies
with market capitalizations between $300 million and $1 billion 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, are also used in selecting investments.
3. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
The value of your investment may decline because the prices of the Fund's
investments in common stocks and/or convertible securities may decline over
short or even extended periods. The Fund invests in a relatively limited number
of securities of small-cap companies which may not be well-known, may not have
significant institutional ownership and may have cyclical, static or only
moderate growth prospects. These types of securities may be more volatile and
trade less than stocks of larger companies. The investment adviser's emphasis
on risk management may cause the Fund's performance to vary from that of market
indices.
<PAGE>
4. IS THE FUND APPROPRIATE FOR YOU?
You may wish to consider this Fund if you are primarily seeking long-term growth
and:
- - plan to hold your investment for several years,
- - can tolerate fluctuations in share price,
- - have or plan to have other investments for the benefit of diversification,
and
- - understand the risks of stock market investing.
5. WHAT ARE THE FUND'S EXPENSES AND FEES?
The Fund has no sales charge or fee for initial purchases, reinvestment of
distributions or redemptions. Sales charges for the Variable Contracts are
described in the relevant Separate Account prospectus.
Fund operating expenses are paid out of the Fund's assets and are not charged
directly to the shareholder. For 1997, operating expenses for the Fund were as
follows:
Investment advisory fees (after waiver) 0.00%
12b-1 fees None
Other expenses (after reimbursement) 1.35%
-----
1.35%
=====
Example:
Assuming a 5% annual return and redemption at the end of each period, the total
expenses relating to a $1,000 investment would be:
1 Year 3 Year 5 Year 10 Year
------ ------ ------ -------
$14 $43 $74 $162
6. HOW HAS THE FUND PERFORMED?
This chart shows how the Fund has performed since it commenced operations on
December 27, 1996. You should be aware that all performance is historical,
assumes reinvestment of all distributions and is no guarantee of future results.
Total return and principal value will fluctuate.
[BAR GRAPH]
Total Return:
- ------------
1997 17.08%
Period from Dec. 27 to Dec 31, 1996 1.00%
Average Annual Total Return:
- ---------------------------
One Year 17.08%
Since Inception 18.05%
7. WHO MANAGES THE FUND?
<PAGE>
Royce & Associates, Inc., the Fund's investment adviser, is responsible for the
management of the Fund's assets, subject to the authority of the Board of
Trustees. Royce is also the investment adviser to The Royce Fund and to other
investment and non-investment company accounts. Charles M. Royce, Royce's
President, Chief Investment Officer and sole voting shareholder since 1972, is
primarily responsible for managing the Fund's portfolio. He is assisted by
Royce's investment staff, including W. Whitney George, Portfolio Manager and
Managing Director, and by Jack E. Fockler, Jr., Managing Director.
8. HOW CAN SHARES BE PURCHASED?
Individuals may not place orders to purchase shares of the Fund directly, but
only through the separate accounts of Insurance Companies or through qualified
Retirement Plans. You should refer to the applicable Separate Account
Prospectus for information on how to purchase or surrender a contract, make
partial withdrawals of contract values, allocate contract values to the Fund or
change existing allocations among investment alternatives, including the Fund.
9. HOW CAN SHARES BE SOLD?
As with purchases, an individual may not place orders to sell shares directly.
A Separate Account may redeem all or any portion of the shares that it holds at
any time at the next computed net asset value per share.
10. WHEN AND HOW DOES THE FUND PAY DISTRIBUTIONS?
The Fund pays dividends from its net investment income and distributes its net
realized capital gains annually in December. Dividends and distributions will
be automatically reinvested in additional shares of the Fund. Distributions by
the Fund will be taxable, if at all, to the participating Insurance Companies,
and not to Variable Contract or Policy owners. The tax treatment on
distributions made to an Insurance Company will depend on the Insurance
Company's tax status.
11. OTHER SERVICES.
Shares of the Fund are offered by Royce Capital Fund - 1-800-221-4268. Please
read the Prospectus carefully before investing.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
<PAGE>
PROFILE
ROYCE TOTAL RETURN PORTFOLIO
(a series of Royce Capital Fund)
1414 Avenue of the Americas
New York, NY 10019
January 5, 1998
THIS PROFILE SUMMARIZES KEY INFORMATION ABOUT ROYCE TOTAL RETURN
PORTFOLIO THAT IS CONTAINED IN THE FUND'S PROSPECTUS. IF YOU
WOULD LIKE MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE
FUND'S ACCOMPANYING PROSPECTUS. ADDITIONAL INFORMATION ABOUT THE
FUND'S INVESTMENTS IS AVAILABLE IN THE FUND'S ANNUAL AND SEMI-
ANNUAL REPORTS TO SHAREHOLDERS. YOU MAY OBTAIN THESE REPORTS AT
NO COST BY CALLING 1-800-221-4268.
1. WHAT ARE THE FUND'S GOALS?
Royce Total Return Portfolio seeks both long-term growth of
capital and current income.
2. WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified portfolio of dividend-paying
common stocks selected on a value basis.
- At least 65% of the Fund's assets are normally
invested in common stocks and convertible securities.
- At least 90% of these securities will be income-
producing, and at least 65% will be issued by companies
with stock market capitalizations under $1 billion at
the time of investment.
3. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
The value of your investment may decline because the prices of
the Fund's investments in common stocks and/or convertible
securities may decline over short or even extended periods. The
Fund invests in securities of small-cap companies which may not
be well-known, may not have significant institutional ownership
and may have cyclical, static or only moderate growth prospects.
These types of securities may be more volatile and trade less
than stocks of larger companies. The investment adviser's
emphasis on risk management may cause the Fund's performance to
vary from that of market indices.
<PAGE>
4. IS THE FUND APPROPRIATE FOR YOU?
You may wish to consider this Fund if you are primarily seeking
long-term growth and:
- - plan to hold your investment for several years,
- - can tolerate fluctuations in share price,
- - have or plan to have other investments for the benefit of
diversification, and
- - understand the risks of stock market investing.
5. WHAT ARE THE FUND'S EXPENSES AND FEES?
The Fund has no sales charge or fee for initial purchases,
reinvestment of distributions or redemptions. Sales charges for
the Variable Contracts are described in the relevant Separate
Account prospectus.
Fund operating expenses are paid out of the Fund's assets and are
not charged directly to the shareholder. Operating expenses for
the Fund are estimated as follows:
Investment advisory fees (after waiver) 0.00%
12b-1 fees None
Other expenses (after reimbursement) 1.35%
-----
1.35%
=====
Example:
Assuming a 5% annual return and redemption at the end of each
period, the total expenses relating to a $1,000 investment would
be: 1 Year 3 Year 5 Year 10 Year
------ ------ ------ -------
$14 $43 $74 $162
6. HOW HAS THE FUND PERFORMED?
As a newly created mutual fund, the Fund has no past performance.
7. WHO MANAGES THE FUND?
Royce & Associates, Inc., the Fund's investment adviser, is
responsible for the management of the Fund's assets, subject to
the authority of the Board of Trustees. Royce is also the
investment adviser to The Royce Fund and to other investment and
non-investment company accounts. Charles M. Royce, Royce's
President, Chief Investment Officer and sole voting shareholder
since 1972, is primarily responsible for managing the Fund's
portfolio. He is assisted by Royce's investment staff, including
W. Whitney George, Portfolio Manager and Managing Director, and
by Jack E. Fockler, Jr., Managing Director.
8. HOW CAN SHARES BE PURCHASED?
Individuals may not place orders to purchase shares of the Fund
directly, but only through the separate accounts of Insurance
Companies or through qualified Retirement Plans. You should
<PAGE>
refer to the applicable Separate Account Prospectus for
information on how to purchase or surrender a contract, make
partial withdrawals of contract values, allocate contract values
to the Fund or change existing allocations among investment
alternatives, including the Fund.
9. HOW CAN SHARES BE SOLD?
As with purchases, an individual may not place orders to sell
shares directly. A Separate Account may redeem all or any
portion of the shares that it holds at any time at the next
computed net asset value per share.
10. WHEN AND HOW DOES THE FUND PAY DISTRIBUTIONS?
The Fund pays dividends from its net investment income and
distributes its net realized capital gains annually in December.
Dividends and distributions will be automatically reinvested in
additional shares of the Fund. Distributions by the Fund will be
taxable, if at all, to the participating Insurance Companies, and
not to Variable Contract or Policy owners. The tax treatment on
distributions made to an Insurance Company will depend on the
Insurance Company's tax status.
11. OTHER SERVICES.
Shares of the Fund are offered by Royce Capital Fund - 1-800-221-
4268. Please read the Prospectus carefully before investing.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE
INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
<PAGE>
ROYCE CAPITAL FUND
STATEMENT OF ADDITIONAL INFORMATION
ROYCE CAPITAL FUND (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 Prospectuses each of which is dated
June 30, 1997, except for the joint prospectus offering Royce Premier Portfolio
and Royce Total Return Portfolio dated January 15, 1998. To obtain an
additional copy of the Prospectus, please call Investor Information at
1-800-221-4268 or contact your Insurance Company.
INVESTMENT ADVISER
Royce & Associates, Inc. ("Royce")
TRANSFER AGENT CUSTODIAN
State Street Bank and Trust Company State Street Bank and Trust Company
c/o National Financial Data Services
January 15, 1998
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND LIMITATIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 3
MANAGEMENT OF THE TRUST 8
PRINCIPAL HOLDERS OF SHARES 11
INVESTMENT ADVISORY SERVICES 11
CUSTODIAN 12
INDEPENDENT ACCOUNTANTS 12
PORTFOLIO TRANSACTIONS 13
CODE OF ETHICS AND RELATED MATTERS 14
PRICING OF SHARES BEING OFFERED 14
REDEMPTIONS IN KIND 15
TAXATION 15
DESCRIPTION OF THE TRUST 17
PERFORMANCE DATA 18
FINANCIAL STATEMENTS 24
<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, unless such securities are
issued by money market funds registered under the Investment
Company Act of 1940, 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 Royce 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
<PAGE>
changes in a company's corporate structure or business 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. Royce 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 Royce 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 Royce's
judgment, the consideration to be earned from such loans would justify the risk.
Royce 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
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
<PAGE>
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, Royce'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, Royce 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.
Royce'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 assets in advance of payment, may
<PAGE>
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 Royce 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>
* * *
Royce 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 Age Held Principal Occupations During
- --------------------- with the Past 5 Years
Trust ----------------------------
--------
Trustee, President, Managing Director
Charles M. Royce* President (since April 1997),
(58) and Secretary, Treasurer, sole
1414 Avenue of the Treasurer director and sole voting
Americas shareholder of Royce &
New York, NY 10019 Associates, Inc. ("Royce"),
formerly named Quest
Advisory Corp, the Trust's
investment adviser; Trustee,
President and Treasurer of
The Royce Fund ("TRF") and
its predecessor, an open-end
diversified management
investment company of which
Royce is the principal
investment adviser;
Director, President and
Treasurer of Royce Value
Trust, Inc. ("RVT"), Royce
Micro-Cap Trust, Inc.
("OTCM") (since September
1993) and Royce Global
Trust, Inc. ("RGT") (since
October 1996) closed-end
management investment
companies of which Royce is
the investment adviser (TRF,
RVT, OTCM and RGT
collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Royce Fund Services, Inc.
("RFS), formerly named Quest
Distributors, Inc., the
distributor of TRF's shares;
and managing general partner
of Royce Management Company
("RMC"), formerly named
Quest Management Company, a
registered investment
adviser, and its
predecessor.
<PAGE>
Position
Name, Address and Age Held Principal Occupations During
- --------------------- with the Past 5 Years
Trust ----------------------------
--------
Richard M. Galkin Trustee Private investor and
(59) president of Richard M.
5284 Boca Marina Galkin Associates, Inc.,
Circle South tele-communications
Boca Raton, FL 33487 consultants.
Trustee President of The Center for
Stephen L. Isaacs Health and Social Policy
(58) since September 1996;
65 Harmon Avenue President of Stephen L.
Pelham, NY 10803 Isaacs Associates,
Consultants; and Director of
Columbia University
Development Law and Policy
Program and Professor at
Columbia University until
August 1996.
David L. Meister (57) Trustee Consultant to the
111 Marquez Place communications industry
Pacific Palisades, CA since January 1993;
90272 Executive Officer of Digital
Planet Inc. from April 1991
to December 1992.
W. Whitney George* Trustee and Managing Director (since
(39) Vice April 1997) and Vice
1414 Avenue of the President President (since August
Americas 1993) of Royce, having been
New York, NY 10019 employed by Royce since
October 1991; Vice President
of RGT (since October 1996)
and of the other Royce Funds
(since April 1995); and
general partner of RMC and
its predecessor since
January 1992.
Vice Director of Operations of
John D. Diederich President TRF and RVT (since April
(46) 1993) and of OTCM (since
1414 Avenue of the September 1993); Vice
Americas President and Director
New York, NY 10019 (since April 1997 and June
1997, respectively) of RVT
and OTCM; Vice President of
RGT (since October 1996);
President of RFS since
November 1995; and President
of Fund/Plan Services, Inc.
from January 1988 to
December 1992.
<PAGE>
Position
Name, Address and Age Held Principal Occupations During
- --------------------- with the Past 5 Years
Trust ----------------------------
--------
Vice Managing Director (since
Jack E. Fockler, Jr.* President April 1997) and Vice
(39) President (since August
1414 Avenue of the 1993) of Royce, having been
Americas employed by Royce since
New York, NY 10019 October 1989; Vice President
of RGT (since October 1996)
and of the other Royce Funds
(since April 1995); Vice
President of RFS (since
November 1995); and general
partner of RMC and its
predecessor (since July
1993).
Daniel A. O'Byrne* Vice Vice President of Royce
(35) President (since May 1994), having
1414 Avenue of the and been employed by Royce since
Americas Assistant October 1986; and Vice
New York, NY 10019 Secretary President of RGT (since
October 1996) and of the
other Royce Funds (since
July 1994).
John E. Denneen* (30) Secretary Associate General Counsel
1414 Avenue of the and Chief Compliance Officer
Americas of Royce (since May 1996);
New York, NY 10019 Secretary of RGT (since
October 1996) and of the
other Royce Funds (since
June 1996); and Associate of
Seward & Kissel from
September 1992 to May 1996.
________________________________
*An "interested person" under Section 2(a)(19) of the 1940 Act.
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, 1996, 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:
<PAGE>
Aggregate Compensation Total Compensation
Name from Trust from The Royce Funds
- ---- ---------------------- --------------------
Richard M. Galkin $- 0 - $60,500
Stephen L. Isaacs - 0 - 60,500
David L. Meister - 0 - 60,500
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 1, 1997, Royce & Associates, Inc. Money Purchase Pension Plan
owned of record 120,000 shares of the Trust, consisting of 50,000 shares of
Royce Premier Portfolio, 20,000 shares of Royce Total Return Portfolio and
50,000 shares of Royce Micro-Cap Portfolio, representing 57% of the Trust's then
outstanding shares. All of these shares were beneficially owned by Charles M.
Royce. IL Annuity and Insurance Company, 2960 North Meridian Street, P.O. Box
71499, Indianapolis, IN, owned of record 90,397 shares of Royce Micro-Cap
Portfolio representing 43% of the Trust's then outstanding shares.
INVESTMENT ADVISORY SERVICES
SERVICES PROVIDED BY ROYCE
As compensation for its services under its Investment Advisory Agreement with
the Trust, Royce 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 1.25%
Under the Investment Advisory Agreement, Royce (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.
<PAGE>
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 Royce's other accounts are
managed by Charles M. Royce, Royce's Chief Investment Officer. He is assisted
by Royce's investment staff, including W. Whitney George, Portfolio Manager and
Managing Director, and by Jack E. Fockler, Jr., Managing Director. In the event
of any significant change in Royce'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.
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 &
<PAGE>
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
Royce 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 Royce 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,
Royce generally considers the brokerage and research services which the broker
has provided to it, including any research relating to the security involved in
the transaction and/or to other securities. Such services may include general
economic research, market and statistical information, industry and technical
research, strategy and company research, and may be written or oral. Royce
determines the overall reasonableness of brokerage commissions paid, after
considering the amount another broker might have charged for effecting the
transaction and the value placed by Royce upon the brokerage and/or research
services provided by such broker, viewed in terms of either that particular
transaction or Royce's overall responsibilities with respect to its accounts.
Royce is authorized, under Section 28(e) of the Securities Exchange Act of
1934 and under its Investment Advisory Agreement with the 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 Royce in servicing all of its
accounts and those of RMC, and not all of such services may be used by Royce in
connection with the Trust or any one of its Funds.
Consistent with achieving the best price and execution, Royce 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 RFS.
Even though investment decisions for each Fund are made independently from
those for the other Funds and the other accounts managed by Royce and RMC,
securities of the same issuer are frequently purchased, held or sold by more
than one Royce/RMC account because the same security may be suitable for all of
them. When the same security is being purchased or sold for more than one
Royce/RMC account on the same trading day, Royce seeks to average the
transactions as to price and allocate them as to amount in a manner believed to
be equitable to each. Such purchases and sales of the same security are
generally effected pursuant to Royce/RMC's Trade Allocation Guidelines and
Procedures. Under such Guidelines and Procedures, unallocated orders are placed
with and executed by broker-dealers during the trading day. The securities
purchased or sold in such transactions are then allocated to one or more of
Royce's and RMC's accounts at or shortly following the close of trading, using
the average net price obtained. Such
<PAGE>
allocations are done based on a number of judgmental factors that Royce and RMC
believe should result in fair and equitable treatment to those of 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
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS and RMC ("Royce-
related persons") and interested trustees/directors, officers and employees of
The Royce Funds are prohibited from personal trading in any security which is
then being purchased or sold or considered for purchase or sale by a Royce Fund
or any other Royce or RMC account. Such persons are permitted to engage in
other personal securities transactions if (i) the securities involved are United
States Government debt securities, municipal debt securities, money market
instruments, shares of affiliated or non-affiliated registered open-end
investment companies or shares acquired from an issuer in a rights offering or
under an automatic dividend reinvestment plan or employer-sponsored automatic
payroll deduction cash purchase plan or (ii) they first obtain permission to
trade from Royce's Compliance Officer and an executive officer of Royce. The
Code contains standards for the granting of such permission, and it is expected
that permission to trade will be granted only in a limited number of instances.
Royce's and RMC's clients include several private investment companies in
which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr.
and/or W. Whitney George may be deemed to beneficially own) a share of up to 15%
of the company's realized and unrealized net capital gains from securities
transactions, but less than 5% of the company's equity interests. The Code of
Ethics does not restrict transactions effected by Royce or RMC for such private
investment company accounts. Transactions for such private investment company
accounts are subject to Royce's and RMC's allocation policies and procedures.
See "Portfolio Transactions".
As of December 1, 1997, Royce-related persons, interested
trustees/directors, officers and employees of The Royce Funds and members of
their immediate families beneficially owned shares of The Royce Funds having a
total value of approximately $33 million, and Royce's and RMC's equity interests
in such private investment companies totalled approximately $3.3 million.
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, Martin Luther King
<PAGE>
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
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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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.
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, 1996, the weighted mean market value of a
company in this Index was approximately $780 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.
<PAGE>
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 December 31, 1996,
the average included 221 capital appreciation funds, 758 growth funds, 186 mid-
cap funds, 443 small company growth funds, 583 growth and income funds, 180
equity income funds and 56 S&P 500 index objective funds. Capital appreciation,
growth and small company growth funds usually invest principally in common
stocks, with long-term mid-cap 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. S&P 500 index objective funds
seek to replicate the performance of the S&P 500.
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.
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
<PAGE>
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 2,880 stocks, with a median market capitalization of about $120
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.
Royce 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 December 31, 1996, the average risk score
for the 1,833 equity funds rated by Morningstar with a three-year history was
1.00; the average risk score for the 242 small company funds rated by
Morningstar with a three-year history was 1.29; and the average risk score for
the 91 equity income funds rated by Morningstar with a three-year history was
0.71.
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
<PAGE>
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.
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
<PAGE>
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.
JENSON'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>
FINANCIAL STATEMENTS
The financial statements and schedules of investments for the Micro-Cap
Portfolio and Premier Portfolio of the Trust for the year ended December 31,
1996, with Report of Independent Accountants, and the financial statements and
schedules of investments for Royce Premier Portfolio for the six months ended
June 30, 1997 are included in the Trust's filing with the Securities and
Exchange Commission pursuant to Rule 30b2-1 under the Investment Company Act of
1940, as amended, and such financial statements and schedules of investments are
incorporated herein by reference.
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial statements included in Prospectus (Part A):
Financial Highlights or Selected Per Share Data and
Ratios of Royce Premier and Micro-Cap Portfolios for the period
from December 27, 1996 through December 31, 1996 (audited) and
for the six-months ended June 30, 1997 (unaudited).
The following audited financial statements and schedules of
investments of the Registrant are included in the Registrant's Annual
Report to Shareholders for the fiscal period ended December 31, 1996,
and Semi-Annual Report to Shareholders for the six months ended June
30, 1997, each filed with the Securities and Exchange Commission under
Section 30(b)(1) of the Investment Company Act of 1940, and have been
incorporated by reference into the Statement of Additional Information
(Part B):
Schedules of Investments of Royce Premier and Micro-Cap
Portfolios at December 31, 1996;
Statements of Assets and Liabilities of Royce Premier
and Micro-Cap Portfolios at December 31, 1996;
Statements of Operations of Royce Premier and Micro-Cap
Portfolios for the period ended December 31, 1996;
Financial Highlights for Royce Premier and Micro-Cap
Portfolios for the period ended December 31, 1996; and
Notes to Statement of Assets and Liabilities -- Report
of Independent Accountants dated December 31, 1996.
Schedules of Investments of Royce Premier Portfolio at June
30, 1997 (unaudited);
Statements of Assets and Liabilities of Royce Premier
Portfolio at June 30, 1997 (unaudited);
Statements of Operations of Royce Premier Portfolio for
the six months ended June 30, 1997 (unaudited);
Financial Highlights for Royce Premier Portfolio for
the six months ended June 30, 1997 (unaudited); and
<PAGE>
Notes to Statement of Assets and Liabilities -- six
months ended June 30, 1997 (unaudited).
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, 2 and 3 and Post-Effective Amendment Nos. 1 and 2(No. 333-1073) and are
incorporated by reference herein.
(11) Consent of the Registrant's independent public
accountants.
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 1, 1997, the number of record holders of shares of
each Fund of the Registrant was as follows:
Title of Fund Number of Record Holders
------------- ------------------------
Royce Premier Portfolio 1
Royce Total Return Portfolio 1
Royce Micro-Cap Portfolio 2
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
<PAGE>
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.
(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
<PAGE>
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 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 Royce & Associates, Inc. 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
<PAGE>
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 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."
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 Royce & Associates, Inc. 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:
<PAGE>
Royce Capital Fund
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 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 certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, and State
of New York, on the 14th day of January, 1998.
The Registrant represents that this Post-Effective Amendment is filed
solely for one or more of the purposes set forth in paragraph (b)(1) of Rule 485
under the Securities Act of 1933 and that no material event requiring disclosure
in the prospectus, other than on listed in paragraph (b)(1) of such Rule or one
for which the Commission has approved a filing under paragraph (b)(1)(ix) of the
Rule, has occurred since the latest of the following three dates: (i) the
effective date of the Registrant's Registration Statement; (ii) the effective
date of the Registrant's most recent Post-Effective Amendment to its
Registration Statement which included a prospectus; or (iii) the filing date of
a post-effective amendment filed under paragraph (a) of Rule 485 which has not
become effective.
ROYCE CAPITAL FUND
By: S/CHARLES M. ROYCE
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post-Effective 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 and January 14,
Charles M. Royce Trustee 1998
(Principal Executive,
Accounting
and Financial Officer)
S/RICHARD M. GALKIN Trustee January 14,
Richard M. Galkin 1998
S/W. WHITNEY GEORGE Trustee January 14,
W. Whitney George 1998
S/STEPHEN L. ISAACS Trustee January 14,
Stephen L. Isaacs 1998
S/DAVID L. MEISTER Trustee January 14,
David L. Meister 1998
NOTICE
A copy of the Declaration of Trust of Royce Capital Fund is on file with
the Secretary of State of the State of Delaware, 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.
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of Royce Capital Fund and Shareholder of Royce Premier
Portfolio:
We consent to the reference to our Firm under the caption "Financial Highlights"
in Post-Effective Amendment No. 3 to the Registration Statement of Royce Capital
Fund on Form N-1A (File No. 333-1073) under the Securities Act of 1933 and
Amendment No. 6 under the Investment Company Act of 1940 (File No. 811-07537).
We further consent to the reference to our Firm under the headings "General
Information" in the Prospectus and "Independent Accountants" in the Statement of
Additional Information.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 12, 1998
