ROYCE CAPITAL FUND
- ------------------------------------------------------------------------------
ROYCE MICRO-CAP PORTFOLIO
ROYCE PREMIER PORTFOLIO
ROYCE TOTAL RETURN PORTFOLIO
- ------------------------------------------------------------------------------
PROSPECTUS -- April 15, 1998
- ------------------------------------------------------------------------------
Royce Micro-Cap Portfolio, 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
PROSPECTUS
This Prospectus sets forth concisely
the 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 of
Additional Information is dated
April 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 9
Investment Performance 4 General Information 10
Investment Objectives 5 Dividends, Distributions and
Investment Policies 5 Taxes 11
Investment Risks 6 Net Asset Value Per Share 12
Shareholder Guide 12
- ------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- ------------------------------------------------------------------------------
FUND EXPENSES Transaction expenses are charges paid when
shares of the Funds are purchased or sold.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases or
Reinvested Dividends None
Deferred Sales Load on Redemptions None
Each Fund pays its own operating expenses,
including the investment management fee to
Royce & Associates, Inc. ("Royce"), the
investment adviser to the Funds. Expenses are
factored into a Fund's net asset value daily.
The following expenses for Royce Micro-Cap
Portfolio and Royce Premier Portfolio are
based on amounts incurred in 1997, and are
estimated for Royce Total Return Portfolio's
first year of operation.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
------------------------------
Royce Royce Royce
Premier Total Return Micro-Cap
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Management Fees
(after waivers) .00% .00% .00%
12b-1 Fees None None None
Other Expenses
(after reimbursement) 1.35% 1.35% 1.35%
----- ----- -----
Total Operating Expenses (after
waivers and reimbursement) 1.35% 1.35% 1.35%
----- ----- -----
</TABLE>
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 have been 1.25% and
1.00% and total operating expenses would have
been 7.32% and 8.87% for Royce Micro-Cap
Portfolio and Royce Premier Portfolio,
respectively, for 1997 without the waiver of
management fees and reimbursement of Fund
expenses by Royce. Management fees for Royce
Total Return Portfolio would be 1.00% and
total operating expenses would be 2.99%
without the waiver 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.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------
<S> <C> <C> <C> <C>
Royce Micro-Cap Portfolio $14 $43 $74 $162
Royce Premier Portfolio $14 $43 $74 $162
Royce Total Return Portfolio $14 $43 $74 $162
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE
<PAGE>
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.
- ------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS
The following financial
highlights are part of the
financial statements and have
been audited by Coopers & Lybrand
L.L.P., independent accountants.
The Funds' financial statements
and attached schedules of
investments are included in the
Funds' Annual Report to
Shareholders for the year ended
December 31, 1997 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 Reports to
Shareholders, which may be
obtained without charge by
calling Investor Information.
<TABLE>
<CAPTION>
Royce Micro-Cap Portfolio Royce Premier Portfolio
------------------------- ------------------------
Period ended Period ended Period ended Period ended
------------ ------------ ------------ ------------
December 31, 1997 December 31, December 31, 1997 December 31,
----------------- ------------ ----------------- ------------
1996(b) 1996(b)
------- -------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $5.01 $5.00 $5.05 $5.00
----- ----- ----- -----
Income from Investment Operations
- ---------------------------------
Net investment income (loss) (0.02) 0.00 (0.01) 0.00
New realized and unrealized
gain (loss) on investments 1.08 0.01 0.87 0.05
----- ----- ----- -----
Total from Investment Operations 1.06 0.01 0.86 0.05
----- ----- ----- -----
Less Distributions
- ------------------
Dividends paid from net
net investment income (0.00) (0.00) (0.00) (0.00)
Distributions paid from
capital gains (0.27) (0.00) (0.54) (0.00)
----- ----- ----- -----
Total Distributions (0.27) (0.00) (0.54) (0.00)
----- ----- ----- -----
Net Asset Value, End of Period $5.80 $5.01 $5.37 $5.05
===== ===== ===== =====
Total Return 21.2% 0.2% 17.1% 1.0%
===== ===== ===== =====
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period $1,064,382 $250,462 $295,623 $252,419
Ratio of Expenses to
Average Net Assets (a) 1.35% 1.99% 1.35% 1.99%
Ratio of Net Investment
Income (Loss) to Average
Net Assets (a) (0.96%) (1.99%) (0.18%) (1.99%)
Portfolio Turnover Rate 1.32% 0% 79% 0%
Average Commission Rate Paid $0.0496 $0.0499 $0.0606 $0.0667
</TABLE>
(a) Expense ratios and net investment income are shown
after fee waivers and expense reimbursements by the investment adviser.
For the periods ended December 31, 1997 and 1996, the expense ratios for
Royce Micro-Cap Portfolio and Royce Premier Portfolio before waivers and
expense reimbursements would have been 7.32% and 22.49%, and 8.87% and
22.02%, respectively.
(b) From inception of the Fund on December 27, 1996.
* Annualized.
<PAGE>
- ------------------------------------------------------------------------------
INVESTMENT From time to time, the Funds may communicate
PERFORMANCE figures reflecting total return over various
time periods. "Total return" is the rate of
Total return is return on an amount invested in a Fund from
the the beginning to the end of the stated period.
change in value "Average annual total return" is the annual
over compounded percentage change in the value of
a given time an amount invested in a Fund from the
period, beginning until the end of the stated period.
assuming Total returns, which assume the reinvestment
reinvestment of all net investment income dividends and
of any dividends capital gains distributions, are historical
and measures of past performance and are not
capital gains intended to indicate future performance.
distributions
Total returns quoted for the Funds include the
effect of deducting each Fund's operating
expenses, but do 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.
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 of the Royce retail fund
presented below reflect the deduction of the
historical fees and expenses paid by the Royce
retail funds, and not those to be paid by
these Funds. The figures also do not reflect
the deduction of charges or expenses
attributable to Variable Contracts. As
discussed above, investors should refer to the
applicable Variable Contract disclosure
documents for information on such charges and
expenses. Additionally, although it is
anticipated that each Fund and its
corresponding retail fund will hold similar
securities selections, their investment
results are expected to differ. In
particular, differences in asset size and in
cash flow resulting from purchases and
redemptions of Fund shares may result in
different security selections, differences in
the relative weightings of securities or
differences in the price paid for particular
portfolio holdings.
<PAGE>
The average annual total returns for Royce
Micro-Cap and Royce Premier Portfolios for the
periods ended December 31, 1997 were:
One Since Inception
Year Inception Date
---- --------- ---------
Royce Micro-Cap Portfolio 21.2% 21.2% 12/27/96
Royce Premier Portfolio 17.1% 18.0% 12/27/96
The average annual total returns for the
corresponding Royce retail funds for the
periods ended December 31, 1997 were:
<TABLE>
<CAPTION>
One Three Five Since Inception
Year Year Year Inception Date
---- ---- ---- --------- --------
<S> <C> <C> <C> <C> <C>
Royce Micro-Cap Fund 24.7% 19.7% 17.1% 19.0% 12/31/91
Royce Premier Fund 18.4% 18.1% 15.2% 15.3% 12/31/91
Royce Total Return Fund 23.7% 25.3% -- 19.7% 12/15/93
</TABLE>
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. There can be no assurance
that any of the Funds will achieve their
objectives.
ROYCE MICRO-CAP PORTFOLIO seeks long-term
capital appreciation, primarily through
investments in common stocks and convertible
securities of small and micro-cap companies.
Production of income is incidental to this
objective.
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 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
POLICIES the Funds' assets. In its selection process,
Royce puts primary emphasis on various
internal returns indicative of profitability,
balance sheet quality, cash flows and the
relationships that these factors have to the
current price of a given security.
<PAGE>
The Funds invest on a
"value" basis
Royce's value method is based on its belief
The Funds invest that the securities of certain small companies
primarily in may sell at a discount from its estimate of
small and micro- such companies' "private worth". Royce will
cap attempt to identify and invest in these
companies 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.
ROYCE MICRO-CAP PORTFOLIO
At least 80% of the assets of Royce Micro-Cap
Portfolio will normally be invested in common
stocks and securities convertible into common
stocks of small and micro-cap companies, with
at least 65% of the the Fund's assets normally
issued by companies with stock market
capitalizations under $300 million at the time
of investment. The remainder of the Fund's
assets may be invested in the securities of
companies with higher stock market
capitalizations and non-convertible preferred
stocks and debt securities.
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
The Funds are market risk, that is, the possibility that
subject common stock prices will decline over short
or even extended periods. The Funds will
invest substantial portions of their assets
in
<PAGE>
to certain
investment
risks
securities of small-cap companies. Such
companies may not be well-known to the
investing public, may not have significant
institutional ownership and may have
cyclical, static or only moderate growth
prospects. In addition, the securities of
such companies may be more volatile in price,
have wider spreads between their bid and ask prices
and have significantly lower trading volumes than
larger capitalization stocks. Accordingly,
Royce's investment method requires a long-
term investment horizon, and the Funds should
not be used by market timers.
Because the Funds invest primarily in small
and/or micro-capitalization securities, they
may not be able to purchase or sell more than
a limited number of shares of a portfolio
security at then quoted market prices, and
may require a considerable period of time to
acquire or dispose of a position in the
security. This risk will increase to the
extent other Royce-managed accounts or other
investors are also seeking to purchase or
sell a portfolio security held by one of the
Funds. See "Net Asset Value Per Share".
In addition, Royce Micro-Cap and Total Return
Portfolios may invest in micro-cap
securities that are followed by relatively
few securities analysts, with the result that
there tends to be less publicly available
information concerning the securities. The
securities of these companies may have
limited trading volumes and be subject to
more abrupt or erratic market movements than
the securities of larger, more established
companies or the market averages in general,
and Royce may be required to deal with only a
few market-makers when purchasing and selling
these securities. Companies in which Royce
Micro-Cap and Total Return Portfolios are
likely to invest also may have limited
product lines, markets or financial
resources, may lack management depth and may
be more vulnerable to adverse business or
market developments. Thus, these Funds may
involve considerably more risk than mutual
funds investing in the more liquid equity
securities of larger companies.
Although Royce Premier Portfolio is
diversified within the meaning of the
Investment Company Act of 1940 (the "1940
Act"), it will normally be invested in a
limited number of securities. This Fund's
relatively limited portfolio may involve more
risk than investing in other Royce Funds or
in a broadly diversified portfolio of common
stocks of large and well-known companies. To
the extent that the Fund invests in a limited
number of securities, it may be more
susceptible to any single corporate,
economic, political or regulatory occurrence
than a more widely diversified fund.
INVESTMENT Each of the Funds has adopted certain
LIMITATIONS fundamental 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
The Funds have limitations are set forth in the Statement of
adopted Additional Information and provide, among
certain other things, that no Fund will:
<PAGE>
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
Practices: equity 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 securities income 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 Each of the Funds may invest up to 10% of its
securities assets in debt and/or equity securities of
foreign issuers. Foreign investments involve
certain risks, such as political or economic
instability of the issuer or of the country of
issue, fluctuating exchange rates and the
possibility of imposition of exchange
controls. These securities may also be
subject to greater fluctuations in price than
the securities of U.S. corporations, and there
may be less publicly available information
about their operations. Foreign companies may
not be subject to accounting standards or
governmental supervision comparable to U.S.
companies, and foreign markets may be less
liquid or more volatile than U.S. markets and
may offer less protection to investors such as
the Funds.
Lower-rated Each of the Funds may also invest no more
debt securities than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities,
which are below investment
<PAGE>
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
and options assets in warrants, rights and options.
Portfolio Although the Funds generally will seek to
turnover 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
most 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. Portfolio turnover rates for
Royce Micro-Cap and Royce Premier Portfolio
for 1997 were 132% and 79%, respectively.
State insurance The Funds are sold to the Insurance Companies
restrictions in 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's business and affairs are managed
THE TRUST under the direction of its Board of
Trustees. Royce & Associates, Inc.
Royce & ("Royce"), the Fund's investment adviser, is
Associates, Inc. responsible for the management of the Funds'
is responsible for portfolios, subject to the authority of the
the Board of Trustees. Royce, which was
management of the organized in 1967, is also the investment
Funds' portfolios 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 Funds'
portfolios. He is assisted by Royce's
investment staff, including W. Whitney
George, Senior Portfolio Manager and Managing
Director, Boniface A. Zaino, Senior Portfolio
Manager and Managing Director, Charles R. Dreifus,
Senior Portfolio Manager and Principal, 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 1.25% of the average net
assets of Royce Micro-Cap Portfolio and 1%
of the average net assets of each of Royce
Premier and Total Return Portfolios. These
fees are payable monthly from the assets of
the Funds involved. Royce will select the
brokers who will execute the purchases
<PAGE>
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
INFORMATION Delaware business trust registered with the
Securities and Exchange Commission as a
diversified, open-end management investment
company. The Trustees have the authority to
issue an unlimited number of shares of
beneficial interest, without shareholder
approval, and these shares may be divided
into an unlimited number of series.
Shareholders are entitled to one vote per
share. Shares vote by individual series on
all matters, except that shares are voted in
the aggregate and not by individual series
when required by the 1940 Act and that if
the Trustees determine that a matter affects
only one series, then only shareholders of
that series are entitled to vote on that
matter.
Pursuant to current interpretations of the
1940 Act, the Insurance Companies will
solicit voting instructions from Variable
Contract owners with respect to any matters
that are presented to a vote of shareholders
and will vote all shares held by the
separate accounts in proportion to the
voting instructions received. The exercise
of voting rights on shares held by
Retirement Plans will be governed by the
terms of such plans. Some Retirement Plans
may pass-through voting to plan
participants, while shares held by other
Retirement Plans may be voted by the
trustees of the Retirement Plan or by a
named fiduciary or an investment manager.
Retirement Plan participants should consult
their plan documents for information.
Each Fund sells its shares only to certain
qualified retirement plans and to variable
annuity and variable life insurance separate
accounts of insurance companies that are
unaffiliated with 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
<PAGE>
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.
Year 2000 Many computer software systems in use today
cannot properly process date-related
information from and after January 1, 2000.
Should any of the computer systems employed
by the Funds or any of their major service
providers fail to process this type of
information properly, that could have a
negative impact on the Funds' operations and
the services provided to the Funds'
shareholders. The Royce Funds and Royce
are reviewing all of their own computer
systems with the goal of modifying or
replacing such systems to the extent
necessary to prepare for the Year 2000. In
addition, Royce has been advised by the
Funds' major service providers that they are
also in the process of reviewing their
systems with the same goal. As of the date
of this Prospectus, the Funds and Royce have
no reason to believe that these goals will
not be achieved.
- ------------------------------------------------------------------------------
DIVIDENDS, Each of the Funds will pay dividends from its
DISTRIBUTIONS net investment income (if any) and distribute
AND TAXES its net 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
<PAGE>
result, it is anticipated that any net
investment income dividends or capital gains
distributions from a Fund will be exempt from
current taxation if left to accumulate within
a Variable Contract. Dividends and
distributions made by the Funds to the
Retirement Plans are not taxable to the
Retirement Plans or to the participants
thereunder. The Funds will be managed
without regard to tax ramifications.
Withdrawals from such Contracts may be
subject to ordinary income tax plus a 10%
penalty tax if made before age 59-1/2.
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 Fund shares are purchased and redeemed at the
PER SHARE net asset value per share next determined after
an order is received by the Funds' transfer
Net asset value agent or an authorized service agent or sub-
per agent. Net asset value per share is determined
share (NAV) is by dividing the total value of the Fund's
determined each investments and other assets, less any
day liabilities, by the number of outstanding
the New York Stock shares of the Fund. Net asset value per share
Exchange is open 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 are sold on a continuous
Redeeming Shares basis to separate accounts of Insurance
of the Funds Companies 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 Owners of Variable Contracts and Retirement
Communications 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
1-800-221-4268
ROYCE CAPITAL FUND
INVESTMENT ADVISER ------------------
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
TRANSFER AGENT ROYCE MICRO-CAP PORTFOLIO
State Street Bank and Trust Company
c/o NFDS ROYCE PREMIER PORTFOLIO
P.O. Box 419012
Kansas City, MO 64141-6012 ROYCE TOTAL RETURN
1-800-841-1180 PORTFOLIO
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 PROSPECTUS
W. Whitney George, Vice President APRIL 15, 1998
Daniel A. O'Byrne, Vice President
and Asst. Secretary
John E. Denneen, Secretary
<PAGE>
ROYCE CAPITAL FUND
- ------------------------------------------------------------------------------
ROYCE MICRO-CAP PORTFOLIO
- ------------------------------------------------------------------------------
PROSPECTUS -- April 15, 1998
- ------------------------------------------------------------------------------
Royce Micro-Cap Portfolio (the "Fund") is a
series of Royce Capital Fund (the "Trust").
Shares of the Fund 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").
The Trust is currently offering shares of three
series. This Prospectus relates to Royce Micro-
Cap Portfolio only.
- ------------------------------------------------------------------------------
ABOUT THIS This Prospectus sets forth concisely the
PROSPECTUS information that you should know about the Fund
before you invest. It should be retained for
future reference. A "Statement of Additional
Information" containing further information about
the Fund and the Trust has been filed with the
Securities and Exchange Commission. The
Statement of Additional Information is dated
April 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 6
Financial Highlights 3 Management of the Trust 8
Investment Performance 4 General Information 8
Investment Objective 5 Dividends, Distributions and Taxes 10
Investment Policies 5 Net Asset Value Per Share 10
Investment Risks 5 Shareholder Guide 11
- ------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- ------------------------------------------------------------------------------
FUND EXPENSES Transaction expenses are charges paid when shares
of the Fund are purchased or sold.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases or
Reinvested Dividends None
Deferred Sales Load on Redemptions None
The Fund pays its own operating expenses,
including the investment management fee to Royce
& Associates, Inc. ("Royce"), the investment
adviser to the Fund. Expenses are factored into
the Fund's net asset value daily.
Annual Fund Operating Expenses
------------------------------
Management Fees
(after waivers) .00%
12b-1 Fees None
Other Expenses
(after reimbursement) 1.35%
Total Operating Expenses
(after waivers and reimbursement) 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 Fund. Management fees would have
been 1.25% and total operating expenses would
have been 7.32% for 1997 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
the 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
------ ------- ------- --------
$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.
<PAGE>
- ------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial
highlights are part of the Fund's
financial statements and have
been audited by Coopers & Lybrand
L.L.P., independent accountants.
The Fund's financial statements
and Coopers & Lybrand L.L.P.'s
reports on them are included in
the Fund's Annual Report to
Shareholders and are incorporated
by reference into the Statement
of Additional Information and
this Prospectus. Further
information about the Fund's
performance is contained
elsewhere in this Prospectus and
in the Fund's Annual Report to
Shareholders for 1997, which may
be obtained without charge by
calling Investor Information.
Year Ended Period Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Net Asset Value, Beginning of Period $5.01 $5.00
Income from Investment Operations
- ---------------------------------
Net investment income (loss) (0.02) 0.00
Net realized and unrealized gain (loss)
on investments 1.08 0.01
---- ----
Total from Investment Operations 1.06 0.01
---- ----
Less Distributions
- ------------------
Dividends paid from net investment
income (0.00) (0.00)
Distributions paid from capital gains (0.27) (0.00)
---- ----
Total Distributions (0.27) (0.00)
---- ----
Net Asset Value, End of Period $5.80 $5.01
===== =====
Total Return 21.2% 0.2%
Ratios/Supplemental Data
Net Assets, End of Year $1,064,382 $250,462
Ratio of Expenses to
Average Net Assets(a) 1.35% 1.99%*
Ratio of Net Investment Income (Loss)
to Average Net Assets(a) (0.96%) (1.99%)*
Portfolio Turnover Rate 132% 0%
Average Commission Rate Paid $0.0496 $0.0499
(a) Expense ratios and net investment income are shown after fee waivers
and expense reimbursements by the investment adviser. For the periods
ended December 31, 1997 and 1996, the expense ratios before waivers and
expense reimbursements would have been 7.32% and 22.49%, respectively.
(b) From inception of the Fund on December 27, 1996.
* Annualized.
<PAGE>
- ------------------------------------------------------------------------------
INVESTMENT From time to time, the Fund may communicate
PERFORMANCE figures reflecting total return over various time
periods. "Total return" is the rate of return on
Total return is an amount invested in the Fund from the beginning
the to the end of the stated period. "Average annual
change in value total return" is the annual compounded percentage
over change in the value of an amount invested in the
a given time Fund from the beginning until the end of the
period, stated period. Total returns, which assume the
assuming reinvestment of all net investment income
reinvestment dividends and capital gains distributions, are
of any dividends historical measures of past performance and are
and not intended to indicate future performance.
capital gains
distributions Total returns quoted for the Fund include the
effect of deducting the Fund's operating expenses,
but will not include charges and expenses
attributable to a particular Variable Contract or
Retirement Plan. Because shares of the Fund 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 the Fund's
performance has the effect of increasing the
performance quoted. These charges and expenses
should be considered when comparing the Fund's
performance to other investment vehicles.
The Fund has the same investment objectives and
follows substantially the same investment policies
as a corresponding Royce retail fund. The Royce
retail fund has the same investment adviser as the
corresponding Fund offered in this Prospectus.
Set forth below is total return information for
the Fund and for the Royce retail fund
corresponding to the Fund, calculated as described
above. Such information has been obtained from
Royce and updates the information set forth in the
current prospectus of the fund. Investors should
not consider this performance data as an
indication of the future performance of the Fund
offered in this Prospectus. The performance
figures presented below for the Royce retail fund
reflect the deduction of the historical fees and
expenses paid by that fund, and not those paid by
this Fund. 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 the Fund and its corresponding
retail fund will hold similar securities
selections, their investment results are expected
to differ. In particular, differences in asset
size and in cash flow resulting from purchases and
redemptions of Fund shares may result in different
security selections, differences in the relative
weightings of securities or differences in the
price paid for particular portfolio holdings.
<PAGE>
The average annual total returns for the Fund for
the periods ended December 31, 1997 were:
One Since Inception
Year Inception Date
---- --------- ---------
Royce Micro-Cap Portfolio 21.2% 21.2% 12/27/96
The average annual total returns for the
corresponding Royce retail fund for the periods
ended December 31, 1997 were:
One Three Five Since Inception
Year Year Year Inception Date
---- ---- ---- --------- --------
Royce Micro-Cap Fund 24.7% 19.7% 17.1% 19.0% 12/31/91
The above total returns reflect partial waivers of
management fees. Without such waivers, the
average annual total returns would have been
lower.
- ------------------------------------------------------------------------------
INVESTMENT ROYCE MICRO-CAP PORTFOLIO seeks long-term capital
OBJECTIVE appreciation, primarily through investments in
common stocks and convertible securities of
small and micro-cap companies. Production of
income is incidental to this objective. There
can be no assurance that the Fund will achieve
its objective.
This investment objective is 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 Fund's assets. In its selection process, Royce
puts primary emphasis on various internal returns
indicative of profitability, balance sheet
quality, cash flows and the relationships that
The Fund invests these factors have to the current price of a
on a given security.
"value" basis
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
The Fund invests to identify and invest in these securities for
primarily in micro- the Fund, with the expectation that this "value
cap discount" will narrow over time and thus provide
companies capital appreciation for the Fund.
At least 80% of the assets of Royce Micro-Cap
Portfolio will normally be invested in common
stocks and securities convertible into common
stocks of small and micro-cap companies, with at
least 65% of the Fund's assets normally issued by
companies with stock market capitalizations under
$300 million at the time of investment. The
remainder of the Fund's assets may be invested in
the securities of companies with higher stock
market capitalizations and non-convertible
preferred stocks and debt securities.
- ------------------------------------------------------------------------------
INVESTMENT As a mutual fund investing primarily in common
RISKS stocks and/or securities convertible into common
stocks, the Fund is subject to market risk--that
is, the possibility that common stock prices will
decline over short or even extended periods.
Because the Fund focuses on the less liquid
securities of small and micro-capitalization
companies, it may involve considerably more risk
than a
<PAGE>
The Fund is mutual fund investing in the more liquid common
subject to stocks and convertible securities of larger
certain capitalization companies. The Fund's companies
investment may have static, cyclical or only moderate growth
risks prospects and/or limited product lines, markets
and financial resources. They may also lack
management depth and be more vulnerable to
adverse business developments. In addition,
these companies may not be well known to the
investment community and may be followed by
relatively few securities analysts, so that there
will tend to be less publicly available
information about them, and their securities may
not be widely held or attract significant
institutional ownership. Finally, the securities
of the Fund's companies may have limited trading
volumes, wide spreads between their bid and ask
prices, prices that are subject to more abrupt or
erratic market movements than the securities of
larger capitalization companies or the market
averages in general and, in the case of
securities traded in the over-the-counter market,
only a few market makers. Accordingly, Royce's
investment method requires it to have a long-term
investment outlook for the securities in which it
invests. The Fund should not be used by market
timers.
Because the Fund invests primarily in micro-
capitalization securities, it may not be able to
purchase or sell more than a limited number of
shares of a portfolio security at then quoted
market prices, and may require a considerable
period of time to acquire or dispose of a
position in the security. This risk will
increase to the extent other Royce-managed
accounts or other investors are also seeking to
purchase or sell a portfolio security held by the
Fund. See "Net Asset Value Per Share".
- ------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain fundamental
LIMITATIONS limitations, designed to reduce its exposure to
specific situations, which may not be changed
without the approval of a majority of its
outstanding voting shares, as that term is defined
The Fund has in the 1940 Act. These limitations are set forth
adopted certain in the Statement of Additional Information and
fundamental provide, among other things, that the Fund will
limitations not:
(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
Fund may follow a number of additional investment
practices.
Short-term fixed The Fund 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.
<PAGE>
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
the Fund implement a temporary investment policy,
its investment objectives may not be achieved.
Securities lending The Fund may lend up to 25% of its assets to
qualified institutional investors for the purpose
of realizing additional income. Loans of
securities of the 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 The Fund may invest up to 10% of its assets in
debt and/or equity securities of foreign issuers.
Foreign investments involve certain risks, such as
political or economic instability of the issuer or
of the country of issue, fluctuating exchange
rates and the possibility of imposition of
exchange controls. These securities may also be
subject to greater fluctuations in price than the
securities of U.S. corporations, and there may be
less publicly available information about their
operations. Foreign companies may not be subject
to accounting standards or governmental
supervision comparable to U.S. companies, and
foreign markets may be less liquid or more
volatile than U.S. markets and may offer less
protection to investors such as the Fund.
Lower-rated The Fund may also invest no more than 5% of its
debt securities net assets in lower-rated (high-risk) non-
convertible debt securities, which are below
investment grade. The Fund does 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 The Fund may invest up to 5% of its total assets
and options in warrants, rights and options.
Portfolio turnover The Fund's portfolio turnover rate for 1997 was
132%. Rates which exceed 100% are higher than
those of most other funds. A 100% turnover rate
occurs, for example, if all of the Fund's
portfolio securities are replaced in one year.
High portfolio activity increases the Fund's
transaction costs, including brokerage
commissions.
State insurance The Fund is 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
<PAGE>
applied to the Fund, the Fund may be limited in
its ability to engage in certain techniques and
to manage its portfolio with the flexibility
provided herein. In order to permit the Fund to
be available under Variable Contracts sold in
certain states, the Trust may make commitments
for the Fund that are more restrictive than the
investment policies and limitations described
above and in the Statement of Additional
Information. If the Trust determines that such a
commitment is no longer in the Fund's best
interests, the commitment may be revoked by
terminating the availability of the Fund to
Variable Contract owners residing in such states.
- ------------------------------------------------------------------------------
MANAGEMENT OF The Trust's business and affairs are managed
THE TRUST under the direction of its Board of Trustees.
Royce & Associates, Inc. ("Royce"), formerly
Royce & Associates, named Quest Advisory Corp., the Fund's investment
Inc. adviser, is responsible for the management of the
is responsible for Fund's portfolio, subject to the authority of the
the Board of Trustees. Royce, which was organized in
management of the 1967, is also the investment adviser to The Royce
Fund's portfolio 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, Senior Portfolio Manager
and Managing Director, Boniface A. Zaino, Senior
Portfolio Manager and Managing Director,
Charles R. Dreifus, Senior Portfolio Manager and
Principal, and by Jack E. Fockler, Jr., Managing
Director.
As compensation for its services to the Fund,
Royce is entitled to receive annual advisory fees
of 1.25% of the average net assets of the Fund.
These fees are payable monthly from the assets of
the Fund.
Royce will select the brokers who will execute
the purchases and sales of the Fund's 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 Fund or
that provide services relating to the Fund 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 Fund;
transmitting, on behalf of the Fund, proxy
statements, shareholder reports, updated
prospectuses and other communications regarding
the Fund; 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 Fund
or its 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
<PAGE>
management investment company. The Trustees have
the authority to issue an unlimited number of
shares of beneficial interest, without
shareholder approval, and these shares may be
divided into an unlimited number of series.
Shareholders are entitled to one vote per share.
Shares vote by individual series on all matters,
except that shares are voted in the aggregate and
not by individual series when required by the
1940 Act and that if the Trustees determine that
a matter affects only one series, then only
shareholders of that series are entitled to vote
on that matter.
Pursuant to current interpretations of the 1940
Act, the Insurance Companies will solicit voting
instructions from Variable Contract owners with
respect to any matters that are presented to a
vote of shareholders and will vote all shares
held by the separate accounts in proportion to
the voting instructions received. The exercise
of voting rights on shares held by Retirement
Plans will be governed by the terms of such
plans. Some Retirement Plans may pass-through
voting to plan participants, while shares held by
other Retirement Plans may be voted by the
trustees of the Retirement Plan or by a named
fiduciary or an investment manager. Retirement
Plan participants should consult their plan
documents for information.
The 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 Fund
currently does not foresee any disadvantages to
policyowners arising out of the fact that the
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 the Fund and to substitute shares
of another fund. As a result, the Fund may be
forced to sell securities at disadvantageous
prices. In addition, the Trustees may refuse to
sell shares of the Fund to any separate account
or qualified plan or may suspend or terminate the
offering of shares of the 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 Fund is State Street Bank
and Trust Company. State Street, through its
agent National Financial Data Services ("NFDS"),
also serves as the Fund's transfer agent.
Coopers & Lybrand L.L.P. serves as independent
accountants for the Fund.
Year 2000 Many computer software systems in use today
cannot properly process date-related information
from and after January 1, 2000. Should any of
the computer systems employed by the Funds or any
of their major service providers fail to process
this type of information properly, that could
have a negative impact on the Funds' operations
and the services provided to the Funds'
shareholders. The Royce Funds and Royce are
reviewing all of their
<PAGE>
own computer systems with the goal of modifying
or replacing such systems to the extent necessary
to prepare for the Year 2000. In addition, Royce
has been advised by the Funds' major service
providers that they are also in the process of
reviewing their systems with the same goal. As
of the date of this Prospectus, the Funds and
Royce have no reason to believe that these goals
will not be achieved.
- ------------------------------------------------------------------------------
DIVIDENDS, The Fund 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 Fund.
The 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, the 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 Fund may be purchased through
Variable Contracts. As a result, it is
anticipated that any net investment income
dividends or capital gains distributions from the
Fund will be exempt from current taxation if left
to accumulate within a Variable Contract.
Dividends and distributions made by the Fund to
the Retirement Plans are not taxable to the
Retirement Plans or to the participants
thereunder. The Fund 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 Fund
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 Fund and its shareholders; see the
Statement of Additional Information for
additional discussion.
- ------------------------------------------------------------------------------
NET ASSET VALUE Fund shares are purchased and redeemed at the net
PER SHARE asset value per share next determined after an
order is received by the Fund's transfer agent or
Net asset value per an authorized service agent or sub-agent. Net
share (NAV) is asset value per share is determined by dividing
determined each day the total value of the Fund's investments and
the New York Stock other assets, less any liabilities, by the number
Exchange is open of outstanding shares of the Fund. Net asset
value per share is calculated at the close of
regular trading on the New York Stock
<PAGE>
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 GUIDE The Trust will provide Insurance Companies and
Retirement Plans with information Monday through
Friday, except holidays, from 9:00 a.m. to 5:00
p.m. (Eastern time). For information, prices,
literature or to obtain information regarding the
availability of Fund shares or how Fund shares
are redeemed, call the Trust at 1-800-221-4268.
Purchasing and Shares of the Fund will be sold on a continuous
Redeeming Shares basis to separate accounts of Insurance Companies
or to Retirement Plans. Stock certificates will
not be issued; share activity will be recorded in
book entry form only. Investors may not purchase
or redeem shares of the 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 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
funds, change existing allocations among
investment alternatives, including the Fund, 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 Fund.
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,
the 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 the 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
<PAGE>
and Exchange Commission.
Shareholder Owners of Variable Contracts and Retirement Plans
Communications and their administrators will receive annual and
semi-annual reports, including the financial
statements of the Fund that they have authorized
for investment. Each report will also show the
investments owned by the Fund and the market values
thereof, as well as other information about the
Fund and its operations. The Trust's fiscal year
ends December 31.
<PAGE>
ROYCE CAPITAL FUND
ROYCE CAPITAL FUND ------------------
- ------------------
1414 Avenue of the Americas
New York, NY 10019 0
1-800-221-4268
INVESTMENT ADVISER ROYCE
Royce & Associates, Inc. MICRO-CAP
1414 Avenue of the Americas PORTFOLIO
New York, NY 10019
TRANSFER AGENT
State Street Bank and Trust Company
c/o NFDS
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
CUSTODIAN
State Street Bank and Trust Company PROSPECTUS
P.O. Box 1713 APRIL 15, 1998
Boston, MA 02105
OFFICERS
Charles M. Royce, President and
Treasurer
John D. Diederich, Vice President
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President
and Asst. Secretary
John E. Denneen, Secretary
