As filed with the Securities and Exchange Commission on April 17, 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. 4 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 7 /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:
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 of Regulation C)
Item of Form N-1A CAPTION or Location in Prospectus
Part A
I. Cover Page.........................Cover Page
II. Synopsis......................... FUND EXPENSES
III. Condensed Financial Information... *
IV. General Description of Registrant.. INVESTMENT OBJECTIVES,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT LIMITATIONS,
GENERAL INFORMATION
V. Management of the Fund........... MANAGEMENT OF THE TRUST,
GENERAL INFORMATION
V.A. Management's Discussion of
Fund Performance................ *
VI. Capital Stock and Other Securities. GENERAL INFORMATION,
DIVIDENDS, DISTRIBUTIONS AND
TAXES,
SHAREHOLDER GUIDE
VII. Purchase of Securities Being
Offered...........................NET ASSET VALUE PER SHARE,
SHAREHOLDER GUIDE
VIII. Redemption or Repurchase............. SHAREHOLDER GUIDE
IX. Pending Legal Proceedings............. *
<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 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-sized companies, and
at least 65% of these securities will be
issued by companies with stock market
capitalizations under $300 million at the time
of investment. The remainder of the Fund's
assets may be invested in the securities of
companies with higher stock market
capitalizations and non-convertible preferred
stocks and debt securities.
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 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 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 traded on the
New York or American Stock Exchanges.
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-sized companies, and at
least 65% of these securities will be issued by
companies with stock market capitalizations under
$300 million at the time of investment. The
remainder of the Fund's assets may be invested in
the securities of companies with higher stock
market capitalizations and non-convertible
preferred stocks and debt securities.
- ------------------------------------------------------------------------------
INVESTMENT As 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
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
<PAGE>
ROYCE CAPITAL FUND
- ------------------------------------------------------------------------------
ROYCE PREMIER PORTFOLIO
ROYCE TOTAL RETURN PORTFOLIO
- ------------------------------------------------------------------------------
PROSPECTUS -- April 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
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 Taxes 11
Investment Policies 5 Net Asset Value Per Share 12
Investment Risks 6 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 Premier Portfolio are based on amounts
incurred in 1997, and are estimated for Royce Total
Return Portfolio's 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 for Royce
Premier Portfolio would have been 1.00% and total
operating expenses would have been 8.87% 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 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.
<PAGE>
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 The following financial
HIGHLIGHTS highlights are part of Royce
Premier Portfolio's financial
statements and 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'
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.
Royce Premier
-------------
Period ended Period ended
December 31, 1997 December 31, 1996(b)
----------------- --------------------
Net Asset Value,
Beginning of Period $5.05 $5.00
Income from Investment Operations
- ---------------------------------
Net investment income (loss) (0.01) 0.00
Net realized and
unrealized gain (loss)
on investments 0.87 0.05
------ ------
Total from Investment Operations 0.86 0.05
------ ------
Less Distributions
- ------------------
Dividends paid from
net investment income (0.00) (0.00)
Distributions paid
from capital gains (0.54) (0.00)
------ ------
Total Distributions (0.54) (0.00)
------ ------
Net Asset Value, End of Period $5.37 $5.05
===== ====
Total Return 17.1% 1.0%
===== ====
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period $295,623 $252,419
Ratio of Expenses
to Average Net Assets (a) 1.35% 1.99%*
Ratio of Net Investment Income
(Loss) to Average Net Assets (a) (0.18%) (1.99%)*
Portfolio Turnover Rate 79% 0%
Average Commission Rate Paid $0.0606 $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 December 31, 1997 and 1996, the expense ratios for
Royce Premier Portfolio before waivers and expense reimbursements would
have been 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
Total return is the periods. "Total return" is the rate of return on
change in value an amount invested in a Fund from the beginning to
over the end of the stated period. "Average annual
a given time total return" is the annual compounded percentage
period, change in the value of an amount invested in a Fund
assuming from the beginning until the end of the stated
reinvestment period. Total returns, which assume the
of any dividends reinvestment of all net investment income dividends
and and capital gains distributions, are historical
capital gains measures of past performance and are not intended
distributions to indicate future performance.
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 Premier
Portfolio for the periods ended December 31, 1997
were:
One Since Inception
Year Inception Date
---- --------- ---------
Royce Premier Portfolio 17.1% 18.0% 12/27/96
The average annual total returns for the
corresponding Royce retail fund for the periods
ended December 31, 1997 were:
</TABLE>
<TABLE>
<CAPTION>
One Three Five Since Inception
Year Year Year Inception Date
---- ----- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
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.
<PAGE>
- ------------------------------------------------------------------------------
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 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 the
POLICIES Funds' assets. In its selection process, Royce
puts primary emphasis on various internal returns
The Funds invest on indicative of profitability, balance sheet quality,
a cash flows and the relationships that these factors
"value" basis have to the current price of a given security.
The Funds invest Royce's value method is based on its belief that
primarily in the securities of certain small companies may sell
small companies 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, have wider spreads between their bid and
ask prices and have significantly 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 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
<PAGE>
of the Funds. See "Net Asset Value Per Share".
In addition, Royce Total Return Portfolio 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 Total Return Portfolio is likely to invest
also may have limited product lines, markets or
financial resources, may lack management depth and
may be more vulnerable to adverse business or
market developments. Thus, the Fund may involve
considerably more risk than a mutual fund
investing in the more liquid equity securities of
larger companies traded on the New York or
American Stock Exchanges.
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 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
<PAGE>
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 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
debt securities 5% of its net assets in lower-rated (high-risk) non-
convertible debt securities, which are below
investment grade. The Funds do not expect to
invest in non-convertible debt securities that are
rated lower than Caa by Moody's Investors Service,
Inc. or CCC by Standard & Poor's Corp. or, if
unrated, determined to be of comparable quality.
Warrants, rights 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 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.
Royce Premier's turnover rate for 1997 was 79%.
<PAGE>
The Funds are sold to the Insurance Companies in
connection with Variable Contracts, and will seek
to be available under Variable Contracts sold in a
number of jurisdictions. Certain states have
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"), the Fund's
Royce & Associates, investment adviser, is responsible for the
Inc. management of the Fund's portfolios, subject to the
is responsible for authority of the Board of Trustees. Royce, which
the was organized in 1967, is also the investment
management of the adviser to The Royce Fund and to other investment
Funds' portfolios 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
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% 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.
<PAGE>
- ------------------------------------------------------------------------------
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 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.
<PAGE>
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 net
DISTRIBUTIONS investment income (if any) and distribute its net
AND TAXES realized capital gains annually in December.
Dividends and distributions will be automatically
reinvested in additional shares of the Funds.
Each Fund intends to qualify and to remain
qualified for taxation as a "regulated investment
company" under the Internal Revenue Code, so that
it will not be subject to Federal income taxes to
the extent that its income is distributed to its
shareholders. In addition, each Fund intends to
qualify under the Internal Revenue Code with
respect to the diversification requirements related
to the tax-deferred status of insurance company
separate accounts. By meeting these and other
requirements, the participating Insurance
Companies, rather than the owners of the Variable
Contracts, should be subject to tax on
distributions received with respect to Fund shares.
The tax treatment on distributions made to an
Insurance Company will depend on the Insurance
Company's tax status.
Shares of the Funds may be purchased through
Variable Contracts. As a result, it is anticipated
that any net investment income dividends or capital
gains distributions from a Fund will be exempt from
current taxation if left to accumulate within a
Variable Contract. Dividends and distributions
made by the Funds to the Retirement Plans are not
taxable to the Retirement Plans or to the
participants thereunder. The Funds will be managed
without regard to tax ramifications. Withdrawals
from such Contracts may be subject to ordinary
income tax plus a 10% penalty tax if made before
age 59-1/2.
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.
<PAGE>
- ------------------------------------------------------------------------------
NET ASSET VALUE Fund shares are purchased and redeemed at the net
PER SHARE asset value per share next determined after an
order is received by the Funds' transfer agent or
an authorized service agent or sub-agent. Net
asset value per share is determined by dividing the
Net asset value per total value of the Fund's investments and other
share (NAV) is assets, less any liabilities, by the number of
determined each day outstanding shares of the Fund. Net asset value
the New York Stock per share is calculated at the close of regular
Exchange is open 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 Companies
of the Funds or to Retirement Plans. Stock certificates will
not be issued; share activity will be recorded in
book entry form only. Investors may not purchase
or redeem shares of the Funds directly, but only
through the separate accounts of Insurance
Companies or through qualified Retirement Plans.
You should refer to the applicable Separate Account
Prospectus or your Plan documents for information
on how to purchase or surrender a contract, make
partial withdrawals of contract values, allocate
contract values to one or more of the Funds, change
existing allocations among investment alternatives,
including the Funds, or select specific Funds as
investment options in a Retirement Plan. No sales
charge is imposed upon the purchase or redemption
of shares of the Funds. Sales charges for the
Variable Contracts or Retirement Plans are
described in the relevant Separate Account
Prospectuses or plan documents.
If the Board of Trustees determines that it would
be detrimental to the best interest of the Fund's
remaining shareholders to make payment in cash, a
Fund may pay redemption proceeds in whole or in
part by a distribution in kind.
<PAGE>
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 Plans
Communications 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. ROYCE PREMIER PORTFOLIO
1414 Avenue of the Americas
New York, NY 10019 ROYCE TOTAL RETURN PORTFOLIO
TRANSFER AGENT
State Street Bank and Trust Company
c/o NFDS
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
OFFICERS
Charles M. Royce, President and Treasurer
John D. Diederich, Vice President
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President PROSPECTUS
Daniel A. O'Byrne, Vice President APRIL 15, 1998
and Asst. Secretary
John E. Denneen, Secretary
<PAGE>
PROFILE
ROYCE PREMIER PORTFOLIO
(a series of Royce Capital Fund)
1414 Avenue of the Americas
New York, NY 10019
April 15, 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
<PAGE>
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.
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.
Total Return:
- -------------
1997 17.1%
Period from Dec. 27 to Dec 31, 1996 1.0%
Average Annual Total Return through March 31, 1998:
- --------------------------------------------------
One Year 28.9%
Since Inception 25.3%
<PAGE>
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, 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.
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
April 15, 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, 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.
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
April 15, 1998. Please retain this document for future reference. The audited
financial statements and schedules of investments included in the Annual Reports
to Shareholders of Royce Premier Portfolio and Royce Micro-Cap Portfolio for the
fiscal year ended December 31, 1997 are incorporated herein by reference. To
obtain an additional copy of the Prospectus or Annual Report, 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
April 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 13
PORTFOLIO TRANSACTIONS 13
CODE OF ETHICS AND RELATED MATTERS 14
PRICING OF SHARES BEING OFFERED 15
REDEMPTIONS IN KIND 15
TAXATION 15
DESCRIPTION OF THE TRUST 17
PERFORMANCE DATA 19
<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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
Portfolio Turnover
For the year ended December 31, 1997 and the period from December 27, 1996
(commencement of operations) through December 31, 1996, Royce Premier and Micro-
Cap Portfolios' turnover rates were 79% and 0%, and 132% and 0%, respectively.
Each Fund's portfolio turnover rate for its start-up period in 1996 was zero
because the Fund was then investing its initial cash and did not sell any
portfolio securities during this period.
* * *
<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
- --------------------- -------- ----------------------------
Charles M. Royce* Trustee, President, Managing Director
(58) President (since April 1997),
1414 Avenue of the and Secretary, Treasurer, sole
Americas Treasurer director and sole voting
New York, NY 10019 shareholder of Royce &
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.
Stephen L. Isaacs Trustee President of The Center for
(58) Health and Social Policy
65 Harmon Avenue since September 1996;
Pelham, NY 10803 President of Stephen L.
Isaacs Associates,
Consultants; and Director of
Columbia University
Development Law and Policy
Program and Professor at
Columbia University until
August 1996.
David L. Meister (58) Trustee Consultant to the
111 Marquez Place communications industry.
Pacific Palisades, CA
90272
John D. Diederich Trustee and Director of Administration
(46) Vice of TRF and RVT (since April
1414 Avenue of the President 1993) and of OTCM (since
Americas September 1993); Vice
New York, NY 10019 President and Director
(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
- --------------------- -------- ----------------------------
Jack E. Fockler, Jr.* Vice Managing Director (since
(39) President April 1997) and Vice
1414 Avenue of the President (since August
Americas 1993) of Royce, having been
New York, NY 10019 employed by Royce since
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
(36) 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* (31) 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 prior to May
1996.
________________________________
*An "interested person" under Section 2(a)(19) of the 1940 Act.
All of the Trust's Trustees are also directors of RVT and OTCM and all,
except John D. Diederich, are also trustees of TRF and directors of 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, 1997, 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 $500 $65,000
Stephen L. Isaacs 500 65,000
David L. Meister 500 65,000
Each of the non-affiliated Trustees will receive a fee of $500 per year for
serving on the Trust's Board of Trustees.
PRINCIPAL HOLDERS OF SHARES
As of March 31, 1998, Royce & Associates, Inc. Money Purchase Pension Plan
owned of record 75,998 shares of the Trust, consisting of 55,056 shares of
Royce Premier Portfolio, 20,000 shares of Royce Total Return Portfolio and
20,942 shares of Royce Micro-Cap Portfolio, representing 21.2% 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 282,356 shares of Royce Micro-Cap
Portfolio representing 78.8% 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.
For the period from December 27, 1996 (commencement of operations) to
December 31, 1996 and for the year ended December 31, 1997 Royce received
advisory fees from the Funds (net of any amounts waived by Royce) and waived
advisory fees payable to it, as follows:
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce Premier Portfolio
- -----------------------
1996 $0 $ 34
1997 $0 $2,783
Royce Micro-Cap Portfolio
- -------------------------
1996 $0 $ 51
1997 $0 $4,746
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.
<PAGE>
State Street is responsible for the calculation of each Fund's daily net
asset value per share and for the maintenance of its portfolio and general
accounting records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office Square, Boston,
Massachusetts, 02109, are the independent accountants of the Trust.
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. Best price and execution is comprised of several factors,
including the liquidity of the security, the commission charged, the promptness
and reliability of execution, priority accorded the order and other factors
affecting the overall benefit obtained. 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. Brokers that provide both research and execution
services are generally paid higher commissions than those paid to brokers who do
not provide such research and execution services.
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
<PAGE>
may be suitable for all of them. When the same security is being purchased or
sold for more than one Royce/RMC account on the same trading day, Royce seeks to
average the transactions as to price and allocate them as to amount in a manner
believed to be equitable to each. Such purchases and sales of the same security
are generally effected pursuant to Royce/RMC's Trade Allocation Guidelines and
Procedures. Under such Guidelines and Procedures, unallocated orders are placed
with and executed by broker-dealers during the trading day. The securities
purchased or sold in such transactions are then allocated to one or more of
Royce's and RMC's accounts at or shortly following the close of trading, using
the average net price obtained. Such allocations are done based on a number of
judgmental factors that Royce and RMC believe should result in fair and
equitable treatment to those of 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.
During the two years ended December 31, 1996 and 1997, the Funds paid
brokerage commissions as follows:
Fund 1996* 1997
- ---- ----- ----
Royce Premier Portfolio $300 $1,000
Royce Micro-Cap Portfolio 489 3,257
______________
* For the period from December 27, 1996 (commencement of operations) to
December 31, 1996.
For the year ended December 31, 1997, the aggregate amount of brokerage
transactions of each Fund having a research component and the amount of
commissions paid by each Fund for such transactions were as follows:
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Royce Premier Portfolio $ 78,712 $210
Royce Micro-Cap Portfolio 114,593 491
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.
<PAGE>
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 February 28, 1998, 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 over $37 million, and Royce's and RMC's equity interests in such
private investment companies totalled approximately $3.1 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 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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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
the removal of a Trustee, the Trust is required to provide a lists of its
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as provided above the Trustees may continue to
hold office and appoint their successors.
Shares are freely transferable, are entitled to distributions as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive the
net assets of their series. Shareholders have no preemptive rights. The Trust's
fiscal year ends on December 31.
The separate accounts of Insurance Companies and the trustees of qualified
plans invested in the Funds, rather than individual contract owners or plan
participants, are the shareholders of the Funds. However, each Insurance Company
or qualified plan will vote such shares as required by law and interpretations
thereof, as amended or changed from time to time. Under current law, an
Insurance Company is required to request voting instructions from its contract
owners and must vote Fund shares held by each of its separate accounts in
proportion to the voting instructions received. Additional information about
voting procedures is contained in the applicable separate account prospectuses.
Shareholder Liability
Generally, Trust shareholders will not be personally liable for the
obligations of the Trust under Delaware law. The Delaware Business Trust Act
provides that a shareholder of a Delaware business trust is entitled to the same
limited liability extended to stockholders of private corporations for profit
organized under the Delaware General Corporation Law. No similar statutory or
other authority limiting business trust shareholder liability exists in many
other states. As a result, to the extent that the Trust or a shareholder of the
Trust is subject to the jurisdiction of courts in those states, the courts may
not apply Delaware law and may thereby subject the Trust's shareholders to
liability. To guard against this possibility, the Trust Instrument (i) requires
that every written obligation of the Trust contain a statement that such
obligation may be enforced only against the Trust's assets (however, the
omission of this disclaimer will not operate to create personal liability for
any shareholder); and (ii) provides for indemnification out of a Fund's property
of any Fund shareholder held personally liable for the Fund's obligations.
Thus, the risk of a Fund shareholder incurring financial loss beyond its
investment because of shareholder liability is limited to circumstances in
which: (i) a court refuses to apply Delaware law; (ii) no contractual limitation
of liability was in effect; and (iii) the Fund itself would be unable to meet
its obligations. In light of Delaware law, the nature of the Trust's business
and the nature of its assets, management believes that the risk of personal
liability to a shareholder is extremely remote.
<PAGE>
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds will be historical and is not intended to
indicate future returns. Each Fund's share price and total returns fluctuate in
response to market conditions and other factors, and the value of a Fund's
shares when redeemed may be more or less than their original cost. The Funds'
performance figures do not reflect expenses of the separate accounts of
Insurance Companies, expenses imposed under the Variable Contracts or expenses
imposed by the Retirement Plans.
Total Return Calculations
Total returns quoted will reflect all aspects of a Fund's return, including
the effect of reinvesting dividends and capital gain distributions and any
change in the Fund's net asset value per share (NAV) over a stated period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual total return of 7.18%, which is the steady
annual rate of return that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
In addition to average annual total returns, a Fund's unaveraged or
cumulative total returns, reflecting the simple change in value of an investment
over a stated period, may be quoted. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
prices) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns and other performance information
may be quoted numerically or in a table, graph or similar illustration.
Historical Fund Results
The following table shows each of Royce Premier and Micro-Cap Portfolios'
total returns for the periods indicated. Such total returns reflect all income
earned by each Fund, any appreciation or depreciation of the assets of such Fund
and all expenses incurred by such Fund for the stated periods. The table
compares the Funds' total returns to the records of the Russell 2000 Index
(Russell 2000) and Standard & Poor's 500 Composite Stock Price Index (S&P 500)
over the same periods. The comparison to the Russell 2000 shows how the Funds'
total returns compared to the record of a broad index of small capitalization
stocks. The S&P 500 comparison is provided to show how the Funds' total returns
compared to the record of a broad average of common stock prices over the same
period. The Funds have the ability to invest in securities not included in the
indices, and their investment
<PAGE>
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 other costs and expenses of investing in a mutual fund.
Period Ended
Fund December 31, 1997 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Premier Portfolio
- -----------------------
1 Year Total Return 17.1% 22.4% 33.4%
Average Annual Total Return 18.0% 23.3% 29.2%
since 12-27-96
(commencement of operations)
Royce Micro-Cap Portfolio
- -----------------------
1 Year Total Return 21.2% 22.4% 33.4%
Average Annual Total Return 21.2% 23.3% 29.2%
since 12-27-96
(commencement of operations)
During the applicable period ended December 31, 1997, a hypothetical
$10,000 investment in certain of the Funds would have grown as indicated below,
assuming all distributions were reinvested:
Fund/Commencement of Operations Hypothetical Investment at December 31, 1997
- ------------------------------- --------------------------------------------
Royce Premier Portfolio
(12-27-96) 11,826
Royce Micro-Cap Portfolio
(12-27-96) 12,147
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 included in variable insurance products
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. The Funds' rankings by Lipper for the one year period ended December
31, 1997 were:
Fund Lipper Ranking
---- --------------
Royce Premier Portfolio 39 out of 59 underlying small-cap funds
Royce Micro-Cap Portfolio 28 out of 59 underlying small-cap funds
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).
<PAGE>
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, 1997, the weighted mean market value of a
company in this Index was approximately $923.5 million.
The Russell 2000, prepared by the Frank Russell Company, tracks the return
of the common stocks of the 2,000 smallest out of the 3,000 largest publicly-
traded U.S.-domiciled companies by market capitalization. The Russell 2000
tracks the return on these stocks based on price appreciation or depreciation
and includes dividends.
The Funds have the ability to invest in securities not included in these
indices, and their investment portfolios may or may not be similar in
composition to the indices. Figures for the indices are based on the prices of
unmanaged groups of stocks, and unlike the Funds, their returns do not include
the effect of paying brokerage commissions and the other costs and expenses of
investing in a mutual fund.
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, 1997,
the average included 248 capital appreciation funds, 944 growth funds, 284 mid-
cap funds, 566 small company growth funds, 43 micro-cap funds, 710 growth and
income funds, 208 equity income funds and 85 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.
<PAGE>
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, U.S. Treasury bills and the U.S. rate of
inflation. These capital markets are based on the returns of several
different indices. For common stocks, the S&P 500 is used. For small
capitalization stocks, return is based on the return achieved by Dimensional
Fund Advisors (DFA) Small Company Fund. This fund is a market-value-weighted
index of the ninth and tenth deciles of the New York Stock Exchange (NYSE), plus
stocks listed on the American Stock Exchange (AMEX) and over-the-counter (OTC)
with the same or less capitalization as the upper bound of the NYSE ninth
decile. As of November 30, 1997, DFA contained approximately 2,881 stocks, with
a median market capitalization of about $142 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, 1997, the average risk score
for the 1,646 equity funds rated by Morningstar with a three-year history was
1.00; and the average risk score for the 324 small company funds rated by
Morningstar with a three-year history was 1.49.
The Funds' performances may also be compared to those of other compilations
or indices.
<PAGE>
Advertising for the Funds may contain examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can be
lower than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
Risk Measurements
Quantitative measures of "total risk," which quantify the total variability
of a portfolio's returns around or below its average return, may be used in
advertisements and in communications with current and prospective shareholders.
These measures include standard deviation of total return and the Morningstar
risk statistic. Such communications may also include market risk measures, such
as beta, and risk-adjusted measures of performance, such as the Sharpe Ratio,
Treynor Ratio, Jensen's Alpha and Morningstar's star rating system.
STANDARD DEVIATION. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation of
those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average monthly
total return, the fund's monthly total returns have been over the prior period.
Standard deviation of total return can be calculated for funds having different
objectives, ranging from equity funds to fixed income funds, and can be measured
over different time frames. The standard deviation figures presented would be
annualized statistics based on the trailing 36 monthly returns. Approximately
68% of the time, the annual total return of a fund will differ from its mean
annual total return by no more than plus or minus the standard deviation figure.
95% of the time, a fund's annual total return will be within a range of plus or
minus 2x the standard deviation from its mean annual total return.
RETURN PER UNIT OF RISK. This is a measure of a fund's risk adjusted
return and is calculated by dividing a fund's average annual total return by the
annualized standard deviation over a designated time period.
BETA. Beta measures the sensitivity of a security's or portfolio's returns
to the market's returns. It measures the relationship between a fund's excess
return (over 3-month T-bills) and the excess return of the benchmark index (S&P
500 for domestic equity funds). The market's beta is by definition equal to 1.
Portfolios with betas greater than 1 are more volatile than the market, and
portfolios with betas less than 1 are less volatile than the market. For
example, if a portfolio has a beta of 2, a 10% market excess return would be
expected to result in a 20% portfolio excess return, and a 10% market loss would
be expected to result in a 20% portfolio loss (excluding the effects of any
firm-specific risk that has not been eliminated through diversification).
MORNINGSTAR RISK. The Morningstar proprietary risk statistic evaluates a
fund's downside volatility relative to that of other funds in its class based on
the under-performances of the fund relative to the riskless T-bill return. It
then compares this statistic to those of other funds in the same broad
investment class.
<PAGE>
SHARPE RATIO. Also known as the Reward-to-Variability Ratio, this is the
ratio of a fund's average return in excess of the risk-free rate of return
("average excess return") to the standard deviation of the fund's excess
returns. It measures the returns earned in excess of those that could have been
earned on a riskless investment per unit of total risk assumed.
TREYNOR RATIO. Also known as the Reward-to-Volatility Ratio, this is the
ratio of a fund's average excess return to the fund's beta. It measures the
returns earned in excess of those that could have been earned on a riskless
investment per unit of market risk assumed. Unlike the Sharpe Ratio, the
Treynor Ratio uses market risk (beta), rather than total risk (standard
deviation), as the measure of risk.
JENSEN'S ALPHA. This is the difference between a fund's actual returns and
those that could have been earned on a benchmark portfolio with the same amount
of risk - i.e., the same beta, as the portfolio. Jensen's Alpha measures the
ability of active management to increase returns above those that are purely a
reward for bearing market risk.
MORNINGSTAR STAR RATINGS. Morningstar, Inc. is a mutual fund rating service
that rates mutual funds on the basis of risk-adjusted performance. Ratings may
change monthly. Funds with at least three years of performance history are
assigned ratings from one star (lowest) to five stars (highest). Morningstar
ratings are calculated from the funds' three-, five- and ten-year average annual
returns (when available). Funds' returns are adjusted for fees and sales loads.
Ten percent of the funds in an investment category receive five stars, 22.5%
receive four stars, 35% receive three stars, 22.5% receive two stars and the
bottom 10% receive one star.
None of these quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
<PAGE>
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS PROVIDED IN ITEM 22
------------------------------------------
This Schedule illustrates the growth of a $1,000 initial investment in the
Royce Micro-Cap Portfolio series of the Trust by applying the "Annual Total
Return" and the "Average Annual Total Return" percentages set forth in Item 22
of this Registration Statement to the following total return formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
0 $1,000 investment made at the beginning of the 1, 5 or 10
year or other periods at the end of the 1, 5 or 10 year or
other periods.
Royce Capital Fund - Royce Micro-Cap Portfolio
- ----------------------------------------------
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .2120)(1) = $1,212.00 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on August 1, 1994 through December
31, 1997:
$1,000 (1+ .2120)(1.0137) = $1,212.00 ERV
<PAGE>
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS PROVIDED IN ITEM 22
------------------------------------------
This Schedule illustrates the growth of a $1,000 initial investment in the
Royce Premier Portfolio series of the Trust by applying the "Annual Total
Return" and the "Average Annual Total Return" percentages set forth in Item 22
of this Registration Statement to the following total return formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 investment made at the beginning of the 1, 5 or 10
year or other periods at the end of the 1, 5 or 10 year or
other periods.
Royce Capital Fund - Royce Premier Portfolio
- --------------------------------------------
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .1710)(1) = $1,171.00 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on August 1, 1994 through December
31, 1997:
$1,000 (1+ 18.27)(1.0137) = $1,180.00 ERV
<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 year ended December 31, 1997 (audited).
The following audited financial statements and schedules of
investments of the Registrant are included in the Registrant's Annual
Reports to Shareholders for the fiscal period ended December 31, 1996,
and for the year ended December 31, 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, 1997;
Statements of Assets and Liabilities of Royce Premier
and Micro-Cap Portfolios at December 31, 1997;
Statement of Changes of Net Assets of Royce Premier and Micro-Cap
Portfolios for the year ended December 31, 1997 and for the
period ended December 31, 1996;
Statements of Operations of Royce Premier and Micro-Cap
Portfolios for the period ended December 31, 1997;
Financial Highlights for Royce Premier and Micro-Cap
Portfolios for the period ended December 31, 1996 and the year
ended December 31, 1997; and
Notes to Statement of Assets and Liabilities -- Report
of Independent Accountants dated February 10, 1997.
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
<PAGE>
Statement and Pre-Effective Amendments Nos. 1, 2 and 3 and Post-Effective
Amendment Nos. 1, 2 and 3 (No. 333-1073) and are incorporated by reference
herein.
(11) Consent of the Registrant's independent public
accountants.
(27) Financial Data Schedule.
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 March 31, 1998, 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
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.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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:
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
<PAGE>
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.
Registrant paid the following fees to State Street for services rendered
pursuant to the Custodian Contract, as amended, for the period from December 27,
1996 to December 31, 1996 and for the year ended December 31, 1997:
1996: $ 0
1997: $10,181
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 16th day of April, 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 4/16/98
Charles M. Royce and Trustee
(Principal Executive,
Accounting
and Financial Officer)
S/RICHARD M. GALKIN Trustee 4/16/98
Richard M. Galkin
S/W. WHITNEY GEORGE Trustee 4/16/98
W. Whitney George
S/STEPHEN L. ISAACS Trustee 4/16/98
Stephen L. Isaacs
S/DAVID L. MEISTER Trustee 4/16/98
David L. Meister
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 Micro-
Cap Portfolio, Royce Premier Portfolio and Royce Total Return Portfolio:
We consent to the reference to our Firm under the caption "Financial Highlights"
in Post-Effective Amendment No. 4 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. 7 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
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0001006387
<NAME> ROYCE CAPITAL FUND
<SERIES>
<NUMBER> 3
<NAME> MICRO-CAP FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 823152
<INVESTMENTS-AT-VALUE> 854967
<RECEIVABLES> 74214
<ASSETS-OTHER> 136100
<OTHER-ITEMS-ASSETS> 8318
<TOTAL-ASSETS> 1073599
<PAYABLE-FOR-SECURITIES> 4063
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5154
<TOTAL-LIABILITIES> 9217
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1030664
<SHARES-COMMON-STOCK> 183
<SHARES-COMMON-PRIOR> 50
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1720
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31815
<NET-ASSETS> 1064382
<DIVIDEND-INCOME> 1464
<INTEREST-INCOME> 29
<OTHER-INCOME> 0
<EXPENSES-NET> 5124
<NET-INVESTMENT-INCOME> (3631)
<REALIZED-GAINS-CURRENT> 47820
<APPREC-INCREASE-CURRENT> 31285
<NET-CHANGE-FROM-OPS> 75474
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 42470
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 740441
<NUMBER-OF-SHARES-REDEEMED> 1995
<SHARES-REINVESTED> 42470
<NET-CHANGE-IN-ASSETS> 813920
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4746
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 27782
<AVERAGE-NET-ASSETS> 379716
<PER-SHARE-NAV-BEGIN> 5.01
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 1.08
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .27
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.80
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0001006387
<NAME> ROYCE CAPITAL FUND
<SERIES>
<NUMBER> 1
<NAME> PREMIER FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 228966
<INVESTMENTS-AT-VALUE> 247344
<RECEIVABLES> 467
<ASSETS-OTHER> 44063
<OTHER-ITEMS-ASSETS> 8318
<TOTAL-ASSETS> 300192
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4569
<TOTAL-LIABILITIES> 4569
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 276917
<SHARES-COMMON-STOCK> 55
<SHARES-COMMON-PRIOR> 50
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 273
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18378
<NET-ASSETS> 295623
<DIVIDEND-INCOME> 3266
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 3754
<NET-INVESTMENT-INCOME> (488)
<REALIZED-GAINS-CURRENT> 27763
<APPREC-INCREASE-CURRENT> 15891
<NET-CHANGE-FROM-OPS> 43166
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 27004
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 27004
<NET-CHANGE-IN-ASSETS> 43204
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2783
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24685
<AVERAGE-NET-ASSETS> 278364
<PER-SHARE-NAV-BEGIN> 5.05
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> .87
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.37
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
