As filed with the Securities and Exchange Commission on April 19, 2000
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. 7 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 10 /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)
(212) 355-7311
(Registrant's Telephone Number, including Area Code)
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.
Total number of pages:
Index to Exhibits is located on page:
<PAGE>
ROYCE CAPITAL FUND
Value Investing in Small Companies for More Than 25 Years
Royce Premier Portfolio
Royce Micro-Cap Portfolio
Prospectus
April 20, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities or determined that the
information in this prospectus is accurate or complete. It is a crime to
represent otherwise.
<PAGE>
Table of Contents
Page
Overview 1
Royce Premier Portfolio 2
Royce Micro-Cap Portfolio 5
Investing in Small- and Micro-Cap Stocks 10
General Shareholder Information 12
Management of the Funds 13
<PAGE>
Overview
- --------
"At Royce & Associates, Inc. ("Royce"), the Funds' investment adviser,
we attempt to invest in equity securities of small- and micro-cap companies
that are trading significantly below our estimate of their current worth.
We base this assessment on either what we believe a knowledgeable buyer might
pay to acquire the entire company, or what we think the value of the company
should be in the stock market. This analysis takes into consideration a
number of relevant factors, including the company's future growth prospects.
We select these securities using a risk-averse value approach, with the
expectation that their market prices should increase toward our estimate of
their current worth, resulting in capital appreciation for Fund investors.
Our Funds' ability to achieve their goals will depend largely on our
skill in selecting their portfolio companies using our risk-averse value
approach. It will also rest on the degree to which the markets eventually
recognize our assessment of the current worth of these companies."
Chuck Royce
The information on the following pages about each Fund's investment goals and
principal strategies and about the primary risks for Funda Fund's investors
is based on, and should be read in conjunction with, the information on pages
8 and 9 of this Prospectus, including the investment and risk characteristics
of small and micro-cap companies, the market for their securities and Royce's
risk-averse value approach to investing.
The performance information presented in this Prospectus is current to
December 31, 1999. For more recent information, you can contact Royce
Capital Fund through any of the methods listed on the back cover of this
Prospectus.
The Funds included in this Prospectus may be a suitable investment as part of
your overall investment plan if you want to include a fund or funds that
focus on small- and/or micro-cap companies.
The Funds offer their shares to life insurance companies that allocate the
shares to separate accounts they establish for the purpose of funding
variable annuity contracts and variable life insurance contracts. The Funds
may also offer their shares directly to certain retirement plans and
accounts. A Fund may not be available in connection with a particular
variable contract.
<PAGE>
Royce Premier Portfolio
- -----------------------
Investment Goals and Principal Strategies
Royce Premier Portfolio's primary investment goal is long-term growth of
capital and its secondary goal is current income. Royce invests the Fund's
assets primarily in a limited number of equity securities issued by small
companies with stock market capitalizations between $300 million and $1.5
billion. Royce generally looks to invest in companies that it considers
"premier" - those that have excellent business strengths and/or prospects for
growth, high internal rates of return and low leverage and are trading
significantly below its estimate of their current worth. At December 31,
1999, the Fund had 35 securities in its portfolio.
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of such "premier" companies. At least 65%
of these securities will be issued by companies with stock market
capitalizations of less than $1.5 billion at the time of investment and/or
will produce income for the Fund. Royce expects the Fund's portfolio to have
a median market cap below $1 billion. At December 31, 1999, the Fund had a
median market cap of $616 million.
Primary Risks for Fund Investors
As with any mutual fund that invests in common stocks, Royce Premier
Portfolio is subject to market risk - the possibility that common stock
prices will decline over short or extended periods of time. As a result, the
value of your investment in the Fund will fluctuate, and you could lose money
over short or even long periods of time.
The prices of small-cap securities are generally more volatile and their
markets are less liquid relative to larger-cap securities. Therefore,
involve more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited number of portfolio securities may also involve
more risk to investors than a more broadly diversified portfolio of small-cap
securities because it may be more susceptible to any single corporate,
economic, political, regulatory or market event.
<PAGE>
- -------------------------------------------------------------------------------
The following information provides some indication of the past rewards and
risks of investing in the Fund by showing the Fund'sits performance from year
to year since its inception on 12/27/96 and by showing how the Fund's average
annual total returns for various periods compare with those of the Russell
2000, the Fund's benchmark index. The Fund's total returns do not reflect
any deduction for charges or expenses of the variable contracts or retirement
plans investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
[BAR CHART]
CALENDAR YEAR RETURNS - in Percentages (%)
1997 (+17.09%)
1998 (+8.92%)
1999 (+8.22%)
[END BAR CHART]
[PULL QUOTE]
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.31% (quarter ended 06/30/99) and the lowest return for a
calendar quarter was -13.21% (quarter ended 9/30/98).
[END PULL QUOTE]
<TABLE>
<CAPTION>
Annualized Returns - in Percentages (%)
- ---------------------------------------
One-Year Three-Year From Inception (12/27/96) to 12/31/99
-------- ---------- -------------------------------------
<S> <C> <C> <C>
Royce Premier Portfolio 8.22 11.34 11.66
Russell 2000 21.26 13.08 13.39
</TABLE>
- -------------------------------------------------------------------------------
Fees and Expenses of the Fund
The following table presents the fees and expenses that you may pay if you
buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge None
Maximum sales charge (load) imposed on reinvested dividends None
Redemption fee None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management fees 1.00%
Distribution (12b-1) fees None
Other expenses 4.63
----
Total Annual Fund Operating Expenses 5.63
Fee waiver and expense reimbursement 3.28
----
Net Annual Fund Operating Expenses 1.35%
=====
Royce has contractually agreed to waive its fee and reimburse expenses to the
extent necessary to maintain the Fund's Net Annual Operating Expense ratio at
or below 1.35% through December 31, 2000 and 1.99% through December 31, 2009.
<PAGE>
Example:
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$137 $563 $1,014 $2,265
An investor will incur additional expenses under the variable contracts or
retirement plans investing in the Fund. These expenses are not described in
this Prospectus and variable contract owners and retirement plan participants
should consult the disclosure documents or plan information regarding these
expenses.
- -------------------------------------------------------------------------------
Financial Highlights Information
The financial highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception, and reflects financial
results for a single Fund share. The total returns in the table represent
the rate that an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Periods Ended December 31,
------------------------------------
1999 1998 1997 1996*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $5.47 $5.37 $5.05 $5.00
Income from Investment Operations
- ---------------------------------
Net Investment Income (Loss) (0.00) (0.00) (0.01) (0.00)
Net Gains on Securities (both realized and unrealized) 0.43 0.47 0.87 0.05
---- ---- ---- ----
Total from Investment Operations 0.43 0.47 0.86 0.05
---- ---- ---- ----
Less Distributions
Distributions from net investment income (0.00) (0.00) (0.00) (0.00)
Distributions from realized gains (0.67) (0.37) (0.54) (0.00)
---- ---- ---- ----
Total Distributions (0.67) (0.37) (0.54) (0.00)
---- ---- ---- ----
Net Asset Value, End of Period $5.23 $5.47 $5.37 $5.05
---- ---- ---- ----
Total Return 8.2% 8.9% 17.1% 1.0%
Ratios/ Supplemental Data
- -------------------------
Net Assets, End of Period (thousands) $428 $374 $296 $252
Ratio of Expenses to Average Net Assets** 1.35% 1.35% 1.35% 1.99%***
Ratio of Net Investment Loss to Average Net Assets -0.06% -0.08% -0.18% -1.99%
Portfolio Turnover Rate 70% 109% 79% 0%
</TABLE>
* The Fund commenced operations on December 27, 1996.
** Expense ratios are shown after fee waivers and expense reimbursements by
Royce. For the periods ended December 31, 1999, 1998, 1997 and 1996,
before fee waivers and reimbursements, these ratios would have been 5.63%,
7.05%, 8.87% and 22.49%, respectively.
***Annualized.
<PAGE>
Royce Micro-Cap Portfolio
- -------------------------
Investment Goal and Principal Strategies
Royce Micro-Cap Portfolio's investment goal is long-term growth of capital.
Royce invests the Fund's assets primarily in a broadly diversified portfolio
of equity securities issued by micro-cap companies (companies with stock
market capitalizations less than $300 million). Royce selects these
securities from a universe of more than 6,200 micro-cap companies, generally
focusing on companies that it believes are trading considerably below its
estimate of their current worth. At December 31, 1999, the Fund had 73
securities in its portfolio.
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of small-cap (companies with stock market
capitalizations below $1.5 billion) and micro-cap companies. At least 65% of
its assets will be in micro-cap securities at the time of investment. Royce
expects the Fund's portfolio to have a median market cap below $300 million.
At December 31, 1999, the Fund had a median market cap of $206 million.
Primary Risks for Fund Investors
As with any mutual fund that invests in common stocks, Royce Micro-Cap
Portfolio is subject to market risk - the possibility that common stock
prices will decline over short or extended periods of time. As a result, the
value of your investment in the Fund will fluctuate with the market, and you
could lose money over short or even long periods of time.
The prices of micro-cap securities are generally even more volatile and their
market is even less liquid relative to both small-cap and large-cap
securities. Therefore, the Fund may involve considerably more risk of loss
and its returns may differ significantly from funds investing in small- or
larger-cap companies or other asset classes.
<PAGE>
- -------------------------------------------------------------------------------
The following information provides some indication of the past rewards and
risks of investing in the Fund by showing its performance from year to year
since its inception and by showing how the Fund's average annual total
returns for various periods compare with those of the Russell 2000, the
Fund's benchmark index. The Fund's total returns do not reflect any
deduction for charges or expenses of the variable contracts or retirement
plans investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
[BAR CHART]
CALENDAR YEAR RETURNS - in Percentages (%)
1997 (+17.09%)
1998 (+8.92%)
1999 (+8.22%)
[END BAR CHART]
[PULL QUOTE]
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.18% (quarter ended 06/30/99) and the lowest return for a
calendar quarter was -20.16% (quarter ended 9/30/98).
[END PULL QUOTE]
<TABLE>
<CAPTION>
Annualized Returns - in Percentages (%)
- ---------------------------------------
One-Year Three-Year From Inception (12/27/96) to 12/31/99
-------- ---------- -------------------------------------
<S> <C> <C> <C>
Royce Micro-Cap Portfolio 28.14 17.36 17.37
Russell 2000 21.26 13.08 13.39
</TABLE>
- -------------------------------------------------------------------------------
Fees and Expenses of the Fund
The following table presents the fees and expenses that you may pay if you
buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge None
Maximum sales charge (load) imposed on reinvested dividends None
Redemption fee None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management fees 1.25%
Distribution (12b-1) fees None
Other expenses 0.99
----
Total Annual Fund Operating Expenses 2.24
Fee waiver and expense reimbursement 0.89
----
Net Annual Fund Operating Expenses 1.35%
=====
Royce has contractually agreed to waive its fee and reimburse expenses to the
extent necessary to maintain the Fund's Net Annual Operating Expense ratio at
or below 1.35% through December 31, 2000 and 1.99% through December 31, 2009.
<PAGE>
Example:
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
$137 $563 $1,014 $2,265
An investor will incur additional expenses under the variable contracts or
retirement plans investing in the Fund. These expenses are not described in
this Prospectus and variable contract owners and retirement plan participants
should consult the disclosure documents or plan information regarding these
expenses.
- -------------------------------------------------------------------------------
Financial Highlights Information
The financial highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception, and reflects financial
results for a single Fund share. The total returns in the table represent
the rate that an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Periods Ended December 31,
------------------------------------
1999 1998 1997 1996*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $5.24 $5.80 $5.01 $5.00
Income from Investment Operations
Net Investment Income (Loss) (0.02) (0.03) (0.02) (0.00)
Net Gains on Securities (both realized and unrealized) 1.46 0.23 1.08 0.01
---- ---- ---- ----
Total from Investment Operations 1.44 0.20 1.06 0.01
---- ---- ---- ----
Less Distributions
Distributions from net investment income (0.00) (0.00) (0.00) (0.00)
Distributions from realized gains (0.55) (0.76) (0.27) (0.00)
---- ---- ---- ----
Total Distributions (0.55) (0.76) (0.27) (0.00)
---- ---- ---- ----
Net Asset Value, End of Period $6.13 $5.24 $5.80 $5.01
---- ---- ---- ----
Total Return 28.1% 4.1% 21.2% 0.2%
Ratios/ Supplemental Data
Net Assets, End of Period (thousands) $7,468 $3,337 $1,064 $250
Ratio of Expenses to Average Net Assets** 1.35% 1.35% 1.35% 1.99%***
Ratio of Net Investment Loss to Average Net Assets -0.53% -0.79% -0.96% -1.99%
Portfolio Turnover Rate 102% 88% 132% 0%
</TABLE>
* The Fund commenced operations on December 27, 1996.
** Expense ratios are shown after fee waivers and expense reimbursements by
Royce. For the periods ended December 31, 1999, 1998, 1997 and 1996,
before fee waivers and reimbursements, these ratios would have been 2.24%,
2.59%, 7.32% and 22.49%, respectively
***Annualized.
<PAGE>
Investing in Small-Company Stocks
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having
two investment segments or tiers. While small-caps are generally defined as
those companies with market capitalizations of less than $1.5 billion, Royce
refers to the segment of small-cap companies with market capitalizations
below $300 million as micro-cap.
Small- and micro-cap companies offer investment opportunities and additional
risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors and may not have steady
earnings growth. In addition, the securities of such companies may be more
volatile in price, have wider spreads between their bid and ask prices and
have significantly lower trading volumes than larger capitalization stocks.
As a result, the purchase or sale of more than a limited number of shares of
a small- or micro-cap security may affect its market price. Royce may need a
considerable amount of time to purchase or sell its positions in these
securities, particularly when other Royce-managed accounts or other investors
are also seeking to purchase or sell them. Accordingly, Royce's investment
focus on small- and micro-cap securities generally requires it to have a long-
term (at least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,200 companies with market caps
less than $300 million. These companies are followed by few, if any,
securities analysts, and there tends to be less publicly available
information about them. Their securities generally have even more limited
trading volumes and are subject to even more abrupt or erratic market price
movements than are the securities in the upper tier, and Royce may be able to
deal with only a few market-makers when purchasing and selling these
securities. Such companies may also have limited product lines, markets or
financial resources, may lack management depth and may be more vulnerable to
adverse business or market developments. These conditions, which create
greater opportunities to find securities trading well below Royce's estimate
of the company's current worth but also involve increased risk, lead Royce to
more broadly diversify most of the Funds investing in the micro-cap tier by
holding proportionately smaller positions in more companies.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of ownership by
institutional investors and more research coverage by brokers than generally
exists for micro-cap companies. This greater attention makes the market for
such securities more efficient compared to micro-cap securities in that they
have somewhat greater trading volumes and narrower bid/ask spreads. As a
result, Royce normally employs a more concentrated approach when investing in
the upper tier of small-caps, holding proportionately larger positions in a
relatively limited number of securities.
[SIDEBAR]
Small-capitalization stocks or Small-caps are stocks with market
capitalizations of $1.5 billion or less.
Market capitalization is the number of a company's outstanding shares of
stock multiplied by its most recent closing price per share.
The Russell 2000 is an unmanaged index of U.S. small-company common stocks
that Royce and others use to benchmark the performance of small- and micro-
cap funds. It includes the smallest 2,000 companies (based on market
capitalization) among the top 3,000 companies tracked by Frank Russell
Company.
[END SIDEBAR]
<PAGE>
- -------------------------------------------------------------------------------
Value Investing
Royce uses a "value" method in managing the Funds' assets. In selecting
securities for the Funds, Royce assesses the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth. Royce bases this assessment on either what it believes a
knowledgeable buyer might pay to acquire the entire company or what it thinks
the value of the company should be in the stock market, taking into
consideration a number of relevant factors, including the company's future
growth prospects.
Royce attempts to invest in securities of companies that are trading
significantly below its estimate of the company's current worth, with the
expectation that the market price of its securities should increase over a
three to five year period towards this estimate, resulting in capital
appreciation for Fund investors.
Royce's value approach strives to reduce some of the risks of investing in
small and micro-cap securities for each Fund's portfolio taken as a whole.
In addition to focusing on companies trading significantly below its estimate
of their current worth to reduce valuation risk, Royce evaluates various
other risk factors in selecting securities for the Funds. It attempts to
lessen financial risk by buying companies that combine strong balance sheets
with low leverage. Royce attempts to decrease portfolio risk in the micro-
cap segment of the small-cap universe by broadly diversifying the portfolio
holdings of Royce Micro-Cap Portfolio.
While there can be no assurance that this risk-averse approach will be
successful, Royce believes that it can reduce some of the risks of investing
in small- and micro-cap companies, which are inherently fragile in nature and
whose securities have substantially greater market price volatility.
Additionally, although Royce's approach to security selection seeks to reduce
downside risk to Fund portfolios taken as a whole during periods of broad
small-cap market declines, it may also reduce gains in strong small-cap up
markets.
Temporary Investments
Each of the Funds may invest in short-term fixed income securities for
temporary defensive purposes, to invest uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions. If a Fund should
implement a temporary investment policy, it may not achieve its investment
goal while that policy is in effect.
Total Return
Total return is the percentage rate of return on an amount invested in a fund
from the beginning to the end of a stated period. Average annual total
return is the annual compounded percentage change in the value of an amount
invested in a fund from the beginning to the end of a stated period. Total
returns, which assume the reinvestment of all distributions, are historical
and do not indicate future performance.
[PULL QUOTE]
Current worth is what a knowledgeable buyer might pay to acquire the entire
company or what the value of the company should be in the stock market,
taking into consideration a number of relevant factors, including the
company's future growth prospects.
[END PULL QUOTE]
<PAGE>
- ------------------------------------------------------------------------------
General Shareholder Information
Royce Capital Fund 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 and literature, or to obtain
information regarding the availability of Fund shares or how Fund shares are
redeemed, call Royce Capital Fund at (800) 221-4268 or send an e-mail to
[email protected].
Purchasing and Redeeming Shares of the Funds
Shares of the Funds will be sold on a continuous basis to separate accounts
of insurance companies or to retirement plans. The Funds will not issue
stock certificates; 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 a 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 of
selected portfolio securities.
Fund shares are purchased or redeemed at the net asset value per share next
computed after receipt of a purchase or redemption order by Royce Capital
Fund's transfer agent or an authorized service agent or sub-agent. Payment
for redeemed shares will generally be made within three business days
following the date of request for redemption. However, payment may be
postponed under unusual circumstances, such as when normal trading is not
taking place on the New York Stock Exchange, an emergency as defined by the
Securities and Exchange Commission exists or as permitted by the Securities
and Exchange Commission.
Shareholder Communications
Owners of variable contracts and retirement plans and their administrators
will receive annual and semi-annual reports, including the financial
statements of the Funds that they have authorized for investment. Each
report will also show the investments owned by each Fund and the market
values thereof, as well as other information about the Funds and their
operations. Royce Capital Fund's fiscal year ends December 31.
Net Asset Value per Share
The price of shares that you purchase or redeem will be at their net asset
value. The net asset value per share (NAV) for each Fund is calculated at
the close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net
asset value per share is calculated by dividing the value of a Fund's net
assets by the number of its outstanding shares. Each Fund's investments are
valued based on market value or, if market quotations are not readily
available, at their fair value as determined in good faith under procedures
established by Royce Capital Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based
on the next calculation of net asset value after the order is processed.
<PAGE>
Dividends, Distributions and Taxes
The Funds pay any dividends from net investment income and make any
distributions from net realized capital gains each year 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 of 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 a retirement plan are not taxable to the retirement plan 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 own tax advisors.
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 more information.
- -------------------------------------------------------------------------------
Management of the Funds
Royce & Associates Inc. is the Funds' investment adviser and is responsible
for the management of their assets. Its offices are located at 1414 Avenue
of the Americas, New York, NY 10019. Royce has been investing in small-cap
securities with a value approach for more than 25 years. Charles M. Royce
has been the firm's President and Chief Investment Officer since 1973. He is
also the primary manager of the Funds' portfolios. Mr. Royce is assisted by
Royce's investment staff, which includes W. Whitney George, Managing
Director, Vice President and Senior Portfolio Manager; Boniface A. Zaino,
Managing Director and Senior Portfolio Manager; and Charles R. Dreifus,
Principal and Senior Portfolio Manager; and by Jack E. Fockler, Jr., Managing
Director and Vice President. Mr. George has been employed by Royce since
1991. Mr. Zaino joined Royce in April 1998 and previously was Group Managing
Director at Trust Company of the West. Mr. Dreifus joined Royce in February
1998 and previously was Managing Director (since June 1995) and General
Partner (until June 1995) of Lazard Freres & Co. LLC. Mr. Fockler has been
employed by Royce since 1989.
Royce receives advisory fees monthly as compensation for its services to the
Funds. The annual rates of these fees, before any waiver required to
maintain the expense ratios of certain Funds at or below specified levels as
shown in the Fees and Expenses table, are:
- - 1% of the average net assets of Royce Premier Portfolio.
- - 1.25% of the average net assets of Royce Micro-Cap Portfolio.
For 1999, the fees paid to Royce on average net assets were 0.36% for Royce
Micro-Cap Portfolio. Royce voluntarily waived the fees accrued for Royce
Premier Portfolio in 1999.
<PAGE>
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. Payment of such amounts by Royce will not
increase the fees paid by the Funds or their shareholders.
State Street Bank & Trust Company is the custodian of the Funds' securities,
cash and other assets. State Street's agent, National Financial Data
Services ("NFDS"), is the Funds' transfer agent. PricewaterhouseCoopers LLP
serves as the Funds' independent accountants.
<PAGE>
Royce Capital Fund
- ------------------
More information on Royce Capital Fund is available free upon request,
including the following:
Annual/Semi-annual Reports
Additional information about a Fund's investments, together
with a discussion of market conditions and investment strategies
that significantly affected the Fund's performance, is available in
the Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information ("SAI")
Provides more details about Royce Capital Fund and its
policies. A current SAI is on file with the Securities and
Exchange Commission ("SEC") and is incorporated by reference (is
legally considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
Royce Capital Fund
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Text only versions of the Funds' prospectus, SAI and other
documents filed with the SEC can be viewed online or downloaded
from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting
the SEC's Public Reference Room in Washington, DC (telephone (800) SEC-
0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
SEC File # 811-1073
<PAGE>
ROYCE CAPITAL FUND
STATEMENT OF ADDITIONAL INFORMATION
ROYCE CAPITAL FUND (the "Trust"), a Delaware business trust organized in
January 1996, is a diversified, open-end registered management investment
company, which has two portfolios or series ("Funds"). Each Fund has
distinct investment goals and/or strategies, and a shareholder's interest is
limited to the Fund in which the shareholder owns shares. The two Funds are:
ROYCE PREMIER PORTFOLIO
ROYCE MICRO-CAP PORTFOLIO
Shares of the Funds are offered to life insurance companies ("Insurance
Companies") for allocation to certain separate accounts established for the
purpose of funding qualified and non-qualified variable annuity contracts and
variable life insurance contracts ("Variable Contracts"), and may also be
offered directly to certain pension plans and retirement plans and accounts
permitting accumulation of assets on a tax-deferred basis ("Retirement
Plans").
This Statement of Additional Information is not a prospectus, but should
be read in conjunction with the Trust's current Prospectus each of which is
dated April 20, 2000. Please retain this document for future reference. The
audited financial statements and schedules of investments included in the
Funds' Annual Reports to Shareholders for the fiscal year ended December 31,
1999 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 20, 2000
TABLE OF CONTENTS
PAGE
OTHER INVESTMENT STRATEGIES 2
INVESTMENT POLICIES AND LIMITATIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 4
MANAGEMENT OF THE TRUST 9
PRINCIPAL HOLDERS OF SHARES 12
INVESTMENT ADVISORY SERVICES 12
CUSTODIAN 13
INDEPENDENT ACCOUNTANTS 14
PORTFOLIO TRANSACTIONS 14
CODE OF ETHICS AND RELATED MATTERS 16
PRICING OF SHARES BEING OFFERED 17
REDEMPTIONS IN KIND 17
TAXATION 17
DESCRIPTION OF THE TRUST 19
PERFORMANCE DATA 21
<PAGE>
OTHER INVESTMENT STRATEGIES
In addition to the principal investment strategies described in their
respective Prospectuses, each Fund may invest the balance of its assets as
described below.
Royce Premier Portfolio - in securities of companies with stock market
capitalizations above $1.5 billion, non-dividend-paying common stocks and non-
convertible preferred stocks and debt securities.
Royce Micro-Cap Portfolio - in securities of companies with stock market
capitalizations above $300 million and non-convertible preferred stocks and
debt securities.
INVESTMENT POLICIES AND LIMITATIONS
Listed below are the Funds' fundamental investment policies and
limitations. 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 or at the time of 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;
<PAGE>
8. Invest more than 10% of its assets in securities for which market
quotations are not readily available (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;
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
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 determines
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
<PAGE>
company's board of directors or
management; seeking changes in a company's direction or policies; seeking the
sale or reorganization of a company or a portion of its assets; or supporting
or opposing third party takeover attempts. This area of corporate activity
is increasingly prone to litigation, and it is possible that a Fund could be
involved in lawsuits related to such activities. Royce will monitor such
activities with a view to mitigating, to the extent possible, the risk of
litigation against the Funds and the risk of actual liability if a Fund is
involved in litigation. However, no guarantee can be made that litigation
against a Fund will not be undertaken or liabilities incurred.
A Fund may, at its expense or in conjunction with others, pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if Royce and the Trust's Board of
Trustees determine this to be in the best interests of a Fund's shareholders.
Securities Lending
The Funds may lend up to 25% of their respective assets to brokers,
dealers and other financial institutions. Securities lending allows a Fund
to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities or even a loss of rights in collateral supplied should the
borrower fail financially, loans will be made only to parties that
participate in a Global Securities Lending Program organized and 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.
The current view of the staff of the Securities and Exchange Commission
is 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) and Investment Grade 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.
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
<PAGE>
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.
Each of the Funds may also invest in non-convertible debt securities in
the lowest rated category of investment grade debt. Such securities may have
speculative characteristics, and adverse changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade
securities.
The Funds may also invest in investment grade non-convertible debt
securities. Such securities include those rated Aaa by Moody's (which are
considered to be of the highest credit quality and where the capacity to pay
interest and repay principal is extremely strong), those rated Aa by Moody's
(where the capacity to repay principal is considered very strong, although
elements may exist that make risks appear somewhat larger than expected with
securities rated Aaa), securities rated A by Moody's (which are considered to
possess adequate factors giving security to principal and interest) and
securities rated Baa by Moody's (which are considered to have an adequate
capacity to pay interest and repay principal, but may have some speculative
characteristics).
Foreign Investments
Each Fund may invest up to 10% of its assets in the securities of
foreign issuers. Foreign investments involve certain risks which typically
are not present in securities of domestic issuers. There may be less
information available about a foreign company than a domestic company;
foreign companies may not be subject to accounting, auditing and reporting
standards and requirements comparable to those applicable to domestic
companies; and foreign markets, brokers and issuers are generally subject to
less extensive government regulation than their domestic counterparts.
Markets for foreign securities may be less liquid and may be subject to
greater price volatility than those for domestic securities. Foreign
brokerage commissions and custodial fees are generally higher than those in
the United States. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, thereby making it difficult to conduct such transactions.
Delays or problems with settlements might affect the liquidity of a Fund's
portfolio. Foreign investments may also be subject to local economic and
political risks, political, economic and social instability, military action
or unrest or adverse diplomatic developments, and possible nationalization of
issuers or expropriation of their assets, which might adversely affect a
Fund's ability to realize on its investment in such securities. Royce may
not be able to anticipate these potential events or counter their effects.
Furthermore, some foreign securities are subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale.
Although changes in foreign currency rates may adversely affect the
Funds' foreign investments, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to
lock in the value of any foreign securities they purchase. Consequently, the
risks associated with such investments may be greater than if the Funds were
to engage in foreign currency transactions for hedging purposes.
<PAGE>
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.
The Funds may purchase the securities of foreign companies in the form
of American Depositary Receipts ("ADRs"). 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.
Depositories may establish either unsponsored or sponsored ADR
facilities. 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. Depositories create sponsored ADR
facilities 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 requires or obligates 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 the Funds 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
<PAGE>
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 a 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
a 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 a 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 a Fund to incur additional risk and/or
to hedge against risk.
State Insurance Restrictions
The Funds are sold to 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.
* * *
Royce believes that Royce Micro-Cap Portfolio and Royce Premier
Portfolio are suitable for those investors who are in a financial position to
assume above-average investment risks in search for long-term capital
appreciation.
<PAGE>
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee
and officer of the Trust:
Position Held
with the Principal Occupations During
Name, Address and Age Trust Past 5 Years
- --------------------- ------------- ----------------------------
Charles M. Royce* Trustee, President, Managing Director
(60) President and (since April 1997),
1414 Avenue of the Treasurer Secretary, Treasurer, sole
Americas director and sole voting
New York, NY 10019 shareholder of Royce &
Associates, Inc. ("Royce"),
the Trust's investment
adviser; Trustee, President
and Treasurer of The Royce
Fund ("TRF"), 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") and Royce Focus
Trust, Inc. ("RFT") (since
October 1996) closed-end
management investment
companies of which Royce is
the investment adviser (TRF,
RVT, OTCM and RFT
collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Royce Fund Services, Inc.
("RFS), a wholly-owned
subsidiary of Royce and the
distributor of TRF's shares;
and managing general partner
of Royce Management Company
("RMC"), a registered
investment adviser, and its
predecessor.
Donald R. Dwight (68) Trustee President of Dwight
16 Clover Mill Lane Partners, Inc.; Trustee of
Lyme, NH 03768 the registered investment
companies constituting the
Eaton Vance Funds; Chairman
(until March 1998) and
Chairman Emeritus (since
March 1998) of Newspapers of
New England, Inc. Mr.
Dwight's prior experience
includes having served as
Lieutenant Governor of the
Commonwealth of
Massachusetts and as
President and Publisher of
Minneapolis Star and Tribune
Company.
<PAGE>
Position Held
with the Principal Occupations During
Name, Address and Age Trust Past 5 Years
- --------------------- ------------- ----------------------------
Richard M. Galkin Trustee Private investor and
(61) President of Richard M.
654 Boca Marina Court Galkin Associates, Inc.,
Boca Raton, FL 33487 tele-communications
consultants. Mr. Galkin's
prior business experience
includes having served as
President of Manhattan Cable
Television (a subsidiary of
Time Inc.), President of
Haverhills Inc. (another
Time Inc. subsidiary),
President of Rhode Island
Cable Television and Senior
Vice President of Satellite
Television Corp. (a
subsidiary of Comsat).
Stephen L.Isaacs Trustee President of The Center for
(60) Health and Social Policy
847 25th Avenue since September 1996;
San Francisco, CA President of Stephen L.
94121 Isaacs Associates,
Consultants; and Director of
Columbia University
Development Law and Policy
Program and Professor at
Columbia University until
August 1996.
David L. Meister (60) Trustee Chief Executive Officer of
1535 Michael Lane Seniorlife.com since
Pacific Palisades, CA December 1999 and prior
90272 thereto a consultant to the
communications industry.
Mr. Meister's prior business
experience includes having
served as President of
Financial News Network,
Senior Vice President of
HBO, President of Time-Life
Films and Head of
Broadcasting for Major
League Baseball.
John D. Diederich* Trustee and Director of Administration
(48) Vice of TRF, RVT and OTCM; Vice
1414 Avenue of the President President and Director
Americas (since April 1997 and June
New York, NY 10019 1997, respectively) of RVT
and OTCM; Vice President of
RFT (since October 1996) and
of RCF (since December
1996); President of RFS
since November 1995; and
President of Fund/Plan
Services, Inc. from January
1988 to December 1992.
<PAGE>
Position Held
with the Principal Occupations During
Name, Address and Age Trust Past 5 Years
- --------------------- ------------- ----------------------------
Jack E. Fockler, Jr.* Vice Managing Director (since
(41) President April 1997) and Vice
1414 Avenue of the President of Royce, having
Americas been employed by Royce since
New York, NY 10019 October 1989; Vice President
of RFT (since October 1996),
of RCF (since December
1996), and of the other
Royce Funds (since April
1995); Vice President of RFS
(since November 1995); and
general partner of RMC.
W. Whitney George* Vice Managing Director (since
(41) President April 1997) and Vice
1414 Avenue of the President of Royce, having
Americas been employed by Royce since
New York, NY 10019 October 1991; Vice President
of RFT (since October 1996),
of RCF (since December
1996), and of the other
Royce Funds (since April
1995); and general partner
of RMC.
Daniel A. O'Byrne* Vice Vice President of Royce
(37) President (since May 1994), having
1414 Avenue of the and Assistant been employed by Royce since
Americas Secretary October 1986; and Vice
New York, NY 10019 President of RFT (since
October 1996), of RCF since
December 1996, and of the
other Royce Funds (since
July 1994).
John E. Denneen* (33) Secretary
1414 Avenue of the Associate General Counsel of
Americas Royce (since May 1996);
New York, NY 10019 Secretary of RFT (since
October 1996), of RCF (since
December 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 RFT.
The Board of Trustees has an Audit Committee, comprised of Donald R.
Dwight, Richard M. Galkin, Stephen L. Isaacs and David L. Meister. The Audit
Committee is responsible for, among other things, the selection and
nomination of the Funds' independent accountants and for conducting post-
audit reviews of the Funds' financial conditions with such independent
accountants. Mr. Galkin serves as Chairman of the Audit Committee.
For the year ended December 31, 1999, the following Trustees received
compensation from the Trust and/or 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
- ---- ---------------------- --------------------
Donald R. Dwight $500 $61,750*
Richard M. Galkin 500 58,000
Stephen L. Isaacs 500 61,750
David L. Meister 500 61,750
* Includes $9,187 from other Royce Funds deferred during 1999 at the
election of Mr. Dwight under The Royce Funds' Deferred Compensation Plan for
directors/trustees.
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, 2000, Royce & Associates, Inc. Money Purchase Pension Plan
owned of record 93,056 shares of the Trust, consisting of 66,633 shares of
Royce Premier Portfolio and 26,423 shares of Royce Micro-Cap Portfolio,
representing 62.77% and 1.29% of each Fund's then outstanding shares,
respectively. All of these shares were beneficially owned by Charles M.
Royce. Select Reserve Variable Annuities, c/o American General Life
Insurance Company, P.O. Box 1591, Houston, TX 77251-1591, owned of record
39,231 shares of Royce Premier Portfolio representing 36.96% of the Fund's
then outstanding shares. IL Annuity and Insurance Company, Visionary Choice,
2960 North Meridian Street, P.O. Box 71499, Indianapolis, IN 46207-7149,
owned of record 671,791 shares of Royce Micro-Cap Portfolio representing
32.73% of the Fund's then outstanding shares. IDS Life Insurance Company,
IDS Tower 10, T11/229, Minneapolis, MN 55440, owned of record 1,279,976
shares of Royce Micro-Cap Portfolio representing 62.35% of the Fund'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:
<PAGE>
Fund Percentage Per Annum of Fund's Average Net Assets
---- -------------------------------------------------
Royce Premier 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.
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 each of the three years ended December 31, 1997, 1998 and 1999 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
- -----------------------
1997 $0 $ 2,783
1998 0 3,293
1999 0 4,064
Royce Micro-Cap Portfolio
- -------------------------
1997 $0 $ 4,746
1998 0 27,543
1999 12,725 31,424
________________
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 each Fund's shares, 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 02110.
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,
<PAGE>
Missouri 64105.
State Street is responsible for calculating each Fund's daily net asset
value per share and for maintaining its portfolio and general accounting
records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, whose address is 160 Federal Street, Boston,
Massachusetts, 02110, are the Trust's independent accountants.
PORTFOLIO TRANSACTIONS
Royce is responsible for selecting the brokers who effect the purchases
and sales of each Fund's portfolio securities. Royce does not select a
broker to effect a securities transaction for a Fund unless Royce believes
such broker is capable of obtaining the best execution for the security
involved in the transaction. Best execution is comprised of several factors,
including the liquidity of the market for 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 research and brokerage services which the broker has
provided to it, including any research relating to the security involved in
the transaction and/or to other securities. Royce may use commission dollars
generated by agency transactions for the Funds and its other client accounts
to pay for such services. Research services that may be paid for in this way
assist Royce in carrying out its investment decision-making responsibilities.
They may include general economic research, market and statistical
information, industry and technical research, strategy and company research,
advice as to the availability of securities or purchasers or sellers of a
particular security, research related to portfolio company shareholder voting
and performance measurement, and may be written or oral. Brokerage services
that may be paid for in this way include effecting securities transactions
and incidental functions such as clearance, settlement and custody.
Royce is authorized, in accordance with Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreements with the
Trust, to cause the Funds to pay brokerage commissions in excess of those
which another broker might have charged for effecting the same transaction,
in recognition of the value of research and brokerage services provided to
Royce by the broker. Thus, the Funds generally pay higher commissions to
those brokers who provide both such research and brokerage services than
those who provide only execution services. Royce determines the overall
reasonableness of brokerage commissions paid based on prevailing commission
rates for similar transactions and the value it places on the research and/or
brokerage services provided to it by the broker, viewed in terms of either
the particular transaction or Royce's overall responsibilities with respect
to its accounts and those of RMC.
Research and brokerage 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 Royce may not use all of such services in
connection with the Trust or any one of its Funds. Moreover, Royce's receipt
of these services does not reduce the investment advisory fees payable to
Royce, even though Royce might otherwise be required to purchase some of them
for cash. Royce may, therefore, be viewed as having a conflict of interest
relating to its obtaining such research services with Fund and other client
account commission dollars.
<PAGE>
Firms that provide such research and brokerage services to Royce may
also promote the sale of the Funds' shares, and Royce and/or RFS may
separately compensate them for doing so. RFS does not effect portfolio
security transactions for the Funds or others.
Even though Royce makes investment decisions for each Fund independently
from those for the other Funds and the other accounts managed by Royce and
RMC, Royce frequently purchases, holds or sells securities of the same issuer
for more than one Royce/RMC account because the same security may be suitable
for more than one of them. When Royce is purchasing or selling the same
security for more than one Royce/RMC account managed by the same primary
portfolio manager on the same trading day, Royce generally seeks to average
the transactions as to price and allocate them as to amount in a manner
believed by Royce to be equitable to each. Royce generally effects such
purchases and sales of the same security pursuant to Royce/RMC's Trade
Allocation Guidelines and Procedures. Under such Guidelines and Procedures,
Royce places and executes unallocated orders with broker-dealers during the
trading day and then allocates the securities purchased or sold in such
transactions to one or more of Royce's and RMC's accounts at or shortly
following the close of trading, generally using the average net price
obtained by accounts with the same primary portfolio manager. Royce does such
allocations based on a number of judgmental factors that it 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 obtained for a Fund.
During each of the three years ended December 31, 1997, 1998 and 1999,
the Funds paid brokerage commissions as follows:
Fund 1997 1998 1999
- ---- ---- ---- ----
Royce Premier Portfolio $1,000 $1,371 $ 714
Royce Micro-Cap Portfolio 3,257 9,694 20,307
For the year ended December 31, 1999, 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 $ 172,017 $ 381
Royce Micro-Cap Portfolio 3,063,140 12,211
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 generally 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. The Code
of Ethics permits such persons to engage in other personal securities
transactions if (i) the securities involved are United States Government debt
securities, municipal debt securities, money market
<PAGE>
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, (ii) the transactions are either non-volitional or are
effected in an account over which such person has no direct or indirect
influence or control or (iii) 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 permission to
trade will be usually granted only in accordance with such standards.
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 and transactions for such
accounts are subject to Royce's and RMC's allocation policies and procedures.
See "Portfolio Transactions".
As of February 29, 2000, 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 $45.2 million, and such persons beneficially owned
equity interests in Royce-related private investment companies totalling
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", State Street determines
each Fund's net asset value per share at the close of regular trading on the
New York Stock Exchange (generally at 4:00 p.m. Eastern Time) 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
Conditions may arise in the future which would, in the judgment of the
Trust's 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 is
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. Royce would select the
securities delivered in payment of redemptions, valued at the same value
assigned to them in computing the Fund's 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
<PAGE>
accounts permitting the accumulation of funds on a tax-deferred basis. See
the disclosure documents for the Variable Contracts or the plan documents for
the Retirement Plans for a discussion of the special taxation of insurance
companies with respect to the separate accounts and the Variable Contracts,
and the holders thereof, or the special taxation of Retirement Plans and the
participants therein.
Each Fund intends to qualify and to remain qualified each year for the
tax treatment applicable to a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). To so
qualify, a Fund must comply with certain requirements of the Code relating
to, among other things, the source of its income and the diversification of
its assets.
As a regulated investment company, a Fund will not be subject to Federal
income tax on net investment income and capital gains (short- and long-term),
if any, that it distributes to its shareholders if at least 90% of its net
investment income and net short-term capital gains for the taxable year are
distributed, but will be subject to tax at regular corporate rates on any
income or gains that are not distributed. In general, dividends will be
treated as paid when actually distributed, except that dividends declared in
October, November or December and made payable to shareholders of record in
such a month will be treated as having been paid by the Fund (and received by
shareholders) on December 31, provided the dividend is paid in the following
January. Each Fund intends to satisfy the distribution requirements in each
taxable year.
The Funds will not be subject to the 4% Federal excise tax imposed on
registered investment companies that do not distribute substantially all of
their income and gains each calendar year because such tax does not apply to
a registered investment company whose only 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"), it 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 Fund would determine the tax by allocating such distribution or
gain ratably to each day of the Fund's holding period for the stock. The
Fund would be taxed on the amount so allocated to any taxable year of the
Fund prior to the taxable year in which the excess distribution or
disposition occurs, at the highest marginal income tax rate in effect for
such years, and the tax would be further increased by an interest charge.
The Fund would include in its investment company taxable income the amount
allocated to the taxable year of the distribution or disposition and,
accordingly, it would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to shareholders. In lieu of being taxable in the
manner described above, such Fund may be able to elect to include annually in
income its pro rata share of the ordinary earnings and net capital gain
(whether or not distributed) of the PFIC. In order to make this election,
the Fund would be required to obtain annual information from the PFICs in
which it invests, which in many cases may be difficult to obtain.
Alternatively, if eligible, the Fund may be able to elect to mark to market
its PFIC stock, resulting in the stock being treated as sold at fair market
value on the last
<PAGE>
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's business and affairs
are managed under the direction of its Board of Trustees.
The Trust has an unlimited authorized number of shares of beneficial
interest, which the Board of Trustees may divide into an unlimited number of
series and/or classes without shareholder approval. (The Trust presently has
two series, each of which has only one class of shares.) Shareholders are
entitled to one vote per share (with proportional voting for fractional
shares) on such matters as shareholders are entitled to vote. Shares vote by
individual series, except as otherwise required by the 1940 Act or when the
Trustees determine that the matter affects shareholders of more than one
series.
There will normally be no meeting of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
current five Trustees remain in office, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by written consents signed by
the holders of 66 2/3% of the outstanding shares of the Trust and filed with
the Trust's custodian or by a vote of the holders of 66 2/3% of the
outstanding shares of the Trust at a meeting duly
<PAGE>
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 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.
The Funds currently do not foresee any disadvantages to policyowners
arising out of the fact that each Fund offers its shares to retirement plans
and to variable and variable life insurance separate accounts of insurance
companies. 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 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 retirement 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.
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
<PAGE>
risk of personal liability to a shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds will be historical and is not intended to
indicate future returns. Each Fund's share price and total returns fluctuate
in response to market conditions and other factors, and the value of a Fund's
shares when redeemed may be more or less than their original cost. The
Funds' performance figures do not reflect expenses of the separate accounts
of Insurance Companies, expenses imposed under the Variable Contracts or
expenses imposed by the Retirement Plans.
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
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.
<PAGE>
Period Ended
Fund December 31, 1999 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Premier Portfolio
- -----------------------
1 Year Total Return 8.2% 21.3% 21.1%
Average Annual Total Return 11.7% 13.4% 26.5%
since 12-27-96
(commencement of
operations)
Royce Micro-Cap Portfolio
- -------------------------
1 Year Total Return 28.1% 21.3% 21.1%
Average Annual Total Return 17.4% 13.4% 26.5%
since 12-27-96
(commencement of
operations)
During the applicable period ended December 31, 1999, 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, 1999
- ------------------------------- --------------------------------------------
Royce Premier Portfolio $13,940
(12-27-96)
Royce Micro-Cap Portfolio $16,197
(12-27-96)
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, 1999 were:
Fund Lipper Ranking
---- --------------
Royce Premier Portfolio 95 out of 121 underlying small-cap funds
Royce Micro-Cap Portfolio 59 out of 121 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).
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
<PAGE>
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, 1999, the weighted mean market value of a
company in this Index was approximately $1.1 billion.
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,
1999, the average included 1,128 large-cap funds, 1,358 multi-cap funds, 610
mid-cap funds, 831 small-cap funds, 116 S&P 500 funds, 229 equity income
funds and 29 special equity funds.
Ibbotson Associates (Ibbotson) provides historical returns of the
capital markets in the United States. The Funds' performance may be compared
to the long-term performance of the U.S. capital markets in order to
demonstrate general long-term risk versus reward investment scenarios.
Performance comparisons could also include the value of a hypothetical
investment in common stocks, long-term bonds or U.S. Treasury securities.
Ibbotson calculates total returns in the same manner as the Funds.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, U.S. Treasury bills and the
U.S. rate of inflation. These capital markets are based on the returns of
several different indices. For common stocks, the S&P 500 is used. For small
capitalization stocks, return is based on the return achieved by Dimensional
Fund Advisors (DFA) Small Company Fund. This fund is a market-value-weighted
index of the ninth and tenth deciles of the New York 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 December 31, 1999, DFA contained approximately 2,728
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
<PAGE>
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, 1999, the
average risk score for the 2,491 domestic equity funds rated by Morningstar
with a three-year history was 1.07; and the average risk score for the 476
small company funds rated by Morningstar with a three-year history was 1.36.
The Funds' performances may also be compared to those of other
compilations or indices.
Advertising for the Funds may contain examples of the effects of
periodic investment plans, including the principle of dollar cost averaging.
In such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high and
more shares when prices are low. While such a strategy does not assure a
profit or guard against loss in a declining market, the investor's average
cost per share can be lower than if fixed numbers of shares are purchased at
the same intervals. In evaluating such a plan, investors should consider
their ability to continue purchasing shares during periods of low price
levels.
Risk Measurements
Quantitative measures of "total risk," which quantify the total
variability of a portfolio's returns around or below its average return, may
be used in advertisements and in communications with current and prospective
shareholders. These measures include standard deviation of total return and
the Morningstar risk statistic. Such communications may also include market
risk measures, such as beta, and risk-adjusted measures of performance, such
as the Sharpe Ratio, Treynor Ratio, Jensen's Alpha and Morningstar's star
rating system.
Standard Deviation. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation
of those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average
monthly total return, the fund's monthly total returns have been over the
prior period. Standard deviation of total return can be calculated for funds
having different objectives, ranging from equity funds to fixed income funds,
and can be measured over different time frames. The standard deviation
figures presented would be annualized statistics based on the trailing 36
monthly returns. Approximately 68% of the time, the annual total return of a
fund will differ from its mean annual total
<PAGE>
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.
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 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, 1999:
$1,000 (1+ .082)(1) = $1,082 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 27, 1996 through
December 31, 1999:
$1,000 (1+ .117)(3.0137) = $1,396 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 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
$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, 1999:
$1,000 (1+ .281)(1) = $1,281 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 27, 1996 through
December 31, 1999:
$1,000 (1+ .174)(3.0137) = $1,622 ERV
<PAGE>
PART C -- OTHER INFORMATION
Item 23. Exhibits:
The exhibits required by Items (a) through (l), to the extent
applicable to the Registrant, have been filed with the Registrant's initial
Registration Statement and Pre-Effective Amendments Nos. 1 through 6 and Post-
Effective Amendment Nos. 1 through 9 (No. 333-1073) and are incorporated by
reference herein.
(i) Consent of PricewaterhouseCoopers LLP, dated April
19, 2000.
(p) Code of Ethics for The Royce Funds and The Royce Companies, as
amended through March 1, 2000.
Item 24. 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 25. Indemnification
(a) Article IX of the Trust Instrument of the Registrant provides as
follows:
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons contracting with or
having any claim against the Trust or a particular Series shall look only to
the assets of the Trust or such Series for payment under such contract or
claim; and neither the Trustees nor any of the Trust's officers, employees or
agents, whether past, present or future, shall be personally liable therefor.
Every written instrument or obligation on behalf of the Trust or any Series
shall contain a statement to the foregoing effect, but the absence of such
statement shall not operate to make any Trustee or officer of the Trust
liable thereunder. None of the Trustees or officers of the Trust shall be
responsible or liable for any act or omission or for neglect or wrongdoing by
him or by any agent, employee, investment adviser or independent contractor
of the Trust, but nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of the Trust against
liability to the Trust or to Shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Section 2. Indemnification. (a) Subject to the exceptions and
limitations contained in subsection (b) below:
(i) every person who is, or has been, a Trustee or an
officer, employee or agent of the Trust ("Covered Person") shall be
indemnified by the Trust or the appropriate Series to the fullest
extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party
or otherwise by virtue of his being or having been a Covered Person
and against amounts paid or incurred by him in the settlement
thereof;
<PAGE>
(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 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,
<PAGE>
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 (in
cluding reasonable attorneys' fees and amounts reasonably paid in
settlement) incurred by the Adviser in or by reason of any pending,
threatened or completed action, suit, investigation or other
proceeding (including an action or suit by or in the right of the
Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Adviser in connection
with the performance of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the Fund or such
series. Notwithstanding the preceding sentence of this Paragraph 8
to the contrary, nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to
entitle the Adviser to indemnification in respect of, any liability
to the Fund or to any portfolio series thereof or its security
holders to which the Adviser would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the per
formance of its duties or by reason of its reckless disregard of
its duties and obligations under this Agreement.
Determinations of whether and the extent to which the
Adviser is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or
other 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 26. 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.
<PAGE>
Item 27. Principal Underwriters
Inapplicable. The Registrant does not have any principal
underwriters.
Item 28. 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
Item 29. 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 years ended December
31, 1997, 1998 and 1999:
1997: $10,181
1998: 16,934
1999: 18,746
Item 30. 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
<PAGE>
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 19th day of April, 2000.
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 one 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, 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 April 19, 2000
Charles M. Royce and Trustee
(Principal Executive,
Accounting
and Financial Officer)
/s/ John D. Diederich Trustee April 19, 2000
John D. Diederich
/s/ Donald R. Dwight Trustee April 19, 2000
Donald R. Dwight
/s/ Richard M. Galkin Trustee April 19, 2000
Richard M. Galkin
/s/ Stephen L. Isaacs Trustee April 19, 2000
Stephen L. Isaacs
/s/ David L. Meister Trustee April 19, 2000
David L. Meister
NOTICE
A copy of the Trust Instrument 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
----------------------------------
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated February 10, 2000, relating to the
financial statements and financial highlights which appears in the December
31, 1999 Annual Report to Shareholders of Royce Capital Fund, which are also
incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights
Information", "Management of the Funds" and "Independent Accountants" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, MA
April 19, 2000
CODE OF ETHICS
FOR
THE ROYCE FUNDS
AND
THE ROYCE COMPANIES
Adopted -- As of December 30, 1994
As amended as of March 1, 2000
1. Definitions.
(a) "Fund" means each of The Royce Fund, Royce Capital Fund,
Royce Value Trust, Inc., Royce Micro-Cap Trust, Inc., Royce Focus Trust, Inc.
and any other investment company registered as such under the Investment
Company Act of 1940 which has the same investment adviser as the Fund.
(b) "Royce" means Royce & Associates, Inc., Royce Management
Company and Royce Fund Services, Inc.
(c) "Covered Person" means any interested director, officer,
employee or Advisory Person of the Fund or any general partner, director,
officer, employee or Advisory Person of Royce.
(d) "Advisory Person" means any natural person in a control
relationship to the Fund or Royce who obtains information concerning
recommendations made to the Fund or any other Royce client with regard to the
purchase or sale of a security.
(e) A security is "being considered for purchase or sale"
when a recommendation to purchase or sell such security has been made and
communicated and, with respect to the person making the recommendation, when
such person seriously considers making such a recommendation.
(f) "Beneficial ownership" shall be interpreted in the same
manner as it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
and regulations thereunder, except that the determination of direct or
indirect beneficial ownership shall apply to all securities which a Covered
Person has or acquires. It includes ownership by a member of a Covered
Person's immediate family (such as spouse, minor children and adults living
in a Covered Person's home) and trusts of which a Covered Person or such an
immediate family member is a trustee or in which any such person has a
beneficial interest.
(g) "Control" shall have the same meaning as that set forth
in Section 2(a)(9) of the Investment Company Act of 1940.
(h) "Disinterested Director" means a trustee or director of
the Fund who is not an 'interested person' of the Fund within the meaning of
Section 2(a)(19) of the Investment Company Act of 1940.
<PAGE>
(i) "Interested Director" means a trustee or director of the
Fund who is an 'interested person' of the Fund within the meaning of Section
2(a)(19) of the Investment Company Act of 1940.
(j) "Purchase or sale of a security" includes, inter alia,
the writing of an option to purchase or sell a security.
(k) "Security" shall have the meaning set forth in Section 2(a)
(36) of the Investment Company Act of 1940, except that it shall not include
(i) shares of registered open-end investment companies and (ii) securities
which are direct obligations of the United States.
(l) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements of
Sections 13 or 15(d) of the Securities Exchange Act of 1934.
2. Statement of General Principles. Each Covered Person shall,
in connection with his or her personal investment activities, (i) at all
times place the interests of Royce clients and Fund shareholders first, (ii)
conduct all such transactions consistent with this Code and in such a manner
as to avoid any actual or potential conflict of interest or any abuse of his
or her position of trust and responsibility and (iii) not take any
inappropriate advantage of his or her positions.
3. Prohibited Purchases and Sales. (a) No Covered Person shall
purchase or sell, directly or indirectly, any security in which he or she
has, or by reason of such transaction acquires, any direct or indirect
beneficial ownership unless such purchase or sale is exempted pursuant to
Section 4 of this Code. The preceding sentence of this Section 3(a) shall
not prohibit the purchase or sale of any security by Royce for the account of
any pooled investment vehicle managed by Royce, including a limited
partnership, limited liability company or other entity in which Royce or a
Covered Person has a beneficial interest as a general partner and/or
otherwise, provided that the aggregate beneficial interests of Royce and/or
all Covered Persons in any such pooled investment vehicle shall not exceed
(i) 4.90% of such vehicle's capital accounts or other equity interests or
(ii) 20% of such vehicle's realized and unrealized net capital gains from
securities transactions. However, purchases of Initial Public Offerings or
private placement securities by any such pooled investment vehicle in which a
Covered Person has a beneficial interest shall be pre-approved in writing by
the Compliance Officer and an Executive Officer of Royce.
(b) No Disinterested Director shall purchase or sell,
directly or indirectly, any security in which he or she has, or by reason of
such transaction acquires, any direct or indirect beneficial ownership if
such director knew or, in the ordinary course of fulfilling his or her
official duties as a director or trustee of the Fund, should have known that
such security was then being purchased or sold by the Fund or was then being
considered by the Fund or Royce for purchase or sale by the Fund, unless such
purchase or sale is exempted pursuant to Section 4 of this Code.
4. Exempted Transactions. The prohibitions of Sections 3(a) and
3(b) of this Code shall not apply to:
<PAGE>
(a) Purchases or sales effected in any account over which the
Covered Person or Disinterested Director has no direct or indirect influence
or control.
(b) Purchases or sales which are non-volitional on the part
of either the Covered Person, the Disinterested Director or the Fund or other
Royce client.
(c) Purchases which are part of an automatic distribution
reinvestment plan or an employer-sponsored, automatic payroll deduction, cash
purchase plan.
(d) Purchases effected upon the exercise of rights issued by
an issuer pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights so
acquired.
(e) Purchases or redemptions or sales of (i) debt securities
which are either "Government securities" within the meaning of Section
2(a)(16) of the Investment Company Act of 1940 or "municipal securities"
within the meaning of Section 3(a)(29) of the Securities Exchange Act of 1934
and (ii) bankers' acceptances, bank certificates of deposit, commercial paper
and other money market instruments.
(f) Purchases or sales by a Covered Person which receive the
prior approval of the Compliance Officer and an executive officer of Royce
(to be promptly confirmed in writing) because (i) they are not eligible for
purchase or sale by the Fund or any other Royce account, (ii) they are only
remotely potentially harmful to the Fund and Royce's other accounts because
they would be very unlikely to affect a highly institutional market, (iii)
they clearly are not related economically to the securities to be purchased,
sold or held by the Fund or any other Royce account or (vi) they are not then
being purchased or sold or considered for purchase or sale by the Fund or any
other Royce account.
Such prior approvals shall be granted only in a limited number
of instances, and any prior approval granted pursuant to this Section 4(f)
shall be subject to the following restrictions and conditions:
(1) Each written confirmation by the Compliance Officer
and Royce officer of their prior approval of a purchase or sale by a Covered
Person shall show the basis on which the prior approval was granted and the
period for which it was granted (which shall not exceed five trading days
from the date of the grant).
(2) No Covered Person shall be permitted to acquire any
securities in an Initial Public Offering, except to the extent set forth in
Section 3(a) above.
(3) Prior approval is required for a Covered Person to
acquire any securities (including limited partnership interests) in a private
placement. Such prior approval should take into account, among other factors,
whether the investment opportunity should be reserved for the Fund and/or other
Royce account(s), and whether the opportunity is being offered to the Covered
Person by virtue of his or her position with the Fund or Royce. Any Covered
Person who may be authorized to acquire securities in a private placement
shall disclose that investment when he or she plays a part in the Fund's or
Royce's subsequent consideration of an
<PAGE>
investment in the issuer, and, in such
circumstances, the Fund's and/or Royce's decision to purchase securities of
the issuer shall be subject to an independent review by investment personnel
with no personal interest in the issuer.
(4) No Covered Person shall be permitted to purchase or
sell a security within at least seven calendar days before and after the Fund
or any other Royce account trades in that security, and any profits realized
on trades within such proscribed periods shall be disgorged by the Covered
Person.
(5) No Covered Person, except in unusual or exceptional
circumstances, may profit in the purchase and sale, or sale and purchase, of
the same (or equivalent) securities within 60 calendar days, and any profits
realized on such short-term trades shall, except in such circumstances, be
disgorged by the Covered Person.
5. Gifts. No Covered Person shall receive any gift or other
thing of more than $100 in value from any individual or entity that does
business with or on behalf of the Fund or any other Royce account. This
prohibition does not extend to bona fide business-related entertainment
and/or travel.
6. Service as a Director. No Covered Person may serve on the
board of directors of any publicly-traded company, absent prior authorization
based upon a determination that the board service would be consistent with
the interests of the Fund and Royce's other accounts. In the relatively
small number of instances in which board service may be authorized, the
Covered Person serving as a director normally should be isolated from those
making investment decisions through "Chinese Wall" or other procedures.
7. Reporting.
(a) Every Covered Person shall report to the Fund and Royce
the information described in Section 7(c) of this Code with respect to
transactions in any security in which such Covered Person has, or by reason
of such transaction acquires, any direct or indirect beneficial ownership in
the security; provided, however, that a Covered Person shall not be required
to make a report with respect to transactions effected for any account over
which such Covered Person does not have any direct or indirect influence or
control.
(b) A Disinterested Director need only report to the Fund a
transaction in a security if such director, at the time of that transaction,
knew or, in the ordinary course of fulfilling his or her official duties as a
director, should have known that, during the seven calendar days before and
after the date of the transaction by the director, such security was
purchased or sold by the Fund or was being considered by the Fund or Royce
for purchase or sale by the Fund.
(c) Every report shall be in writing, shall be signed by the
person making it, shall be made not later than ten days after the end of the
calendar quarter in which the transaction to which the report relates was
effected and shall contain the following information:
(i) The date of the transaction, the title and the
number of shares, and the principal amount of each security involved;
<PAGE>
(ii) The nature of the transaction -- i.e., purchase,
sale or any other type of acquisition or disposition;
(iii) The price at which the transaction was effected;
and
(iv) The name of the broker, dealer or bank with or
through whom the transaction was effected.
(d) Any such report shall include transactions exempted
pursuant to Section 4 of this Code and may contain a statement that the
report shall not be construed as an admission by the person making such
report that he or she has any direct or indirect beneficial ownership in the
security to which the report relates.
(e) All Covered Persons shall (i) direct their brokers to
supply to the Compliance Officer, on a timely basis, duplicate copies of
confirmations of all personal securities transactions and copies of periodic
statements for all securities accounts and (ii) disclose to the Fund and
Royce all personal securities holdings upon commencement of employment and
thereafter on an annual basis.
8. Sanctions. Upon discovering a violation of this Code,
Royce and/or the Board of Trustees/Directors of the Fund may impose such
sanctions as it deems appropriate, including, inter alia, a letter of censure
or suspension or termination of the employment of the violator.
