<PAGE>
Value Investing In Small Companies For 25 Years
ROYCE
CAPITAL
FUND
Micro-Cap Portfolio
Premier Portfolio
Total Return Portfolio
1998 Semi-Annual Report
<PAGE>
SEMI-ANNUAL REPORT REFERENCE GUIDE
- -----------------------------------------------------------------------------
LETTER TO SHAREHOLDERS 2
All major stock indices reached record highs during 1998's first
six months . . . substantial performance disparity between
large-cap and small-cap stocks . . . we believe that a
correction may be ahead.
PERFORMANCE AND PORTFOLIO REVIEW 4
Micro-Cap Portfolio returned 6.0% for the first six months of 1998.
Premier Portfolio was up 11.4% for the first six months of 1998.
SCHEDULES OF INVESTMENTS AND OTHER FINANCIAL STATEMENTS 8
[PULL QUOTE]
For over 25 years, our value approach has focused on evaluating a
company's "private worth" - what we believe an enterprise would sell for
in a private transaction between rational and well-informed parties.
This requires a thorough analysis of the financial and operating dynamics
of a business, as though we were purchasing the entire company. The
price we will pay for a security must be significantly lower than our
appraisal of its private worth.
[END PULL QUOTE]
<PAGE>
LETTER TO OUR SHAREHOLDERS
- -----------------------------------------------------------------------------
Dear Shareholder,
Returns continued their ascent as all major stock market indices
reached record highs during 1998's first six months. Like the bully at
the playground, the "biggest" companies enjoyed the biggest rewards. The
large-cap indices - the S&P 500 and Dow Jones Industrial Average ("DJIA")
- - along with the technology driven Nasdaq Composite, all posted six-month
results well in excess of their average historic 12-month returns. We
expect that most investors never imagined investing would be so easy. As
Berkshire Hathaway Vice Chairman Charlie Munger once quipped, "If
successful investing required merely extrapolating history (and
especially recent market returns), the Forbes 400 would consist entirely
of librarians."
For the first six months of 1998, the S&P 500 and DJIA were up 17.7%
and 14.2%, respectively, while the Nasdaq Composite was up an even more
amazing 20.7%. According to statistics published by FactSet Data, the S&P
500's 50 largest companies rose nearly 26% in the first half, while the
other 450 gained just 9.5%. Investors' preferences for the biggest and
most well known companies stem from concerns about a potential economic
slowdown, global unrest and liquidity (the ability to easily buy and sell
securities). We find this ironic in that we believe that many of the
companies most likely to be affected by global unrest are precisely the
ones whose share prices are rising the fastest.
We were pleased with our first-half results, especially considering
the higher level of volatility in the small-cap market. ROYCE PREMIER
PORTFOLIO was up 11.4% for the first six months, and ROYCE MICRO-CAP
PORTFOLIO was up 6.0% for the same period. Both outperformed their
benchmark, the small-cap oriented Russell 2000 index, which was up 4.9%
through June 30, 1998. ROYCE TOTAL RETURN PORTFOLIO commenced operations
on May 15, 1998 and through June 30 was down 0.2%. The Portfolio uses a
value approach to invest primarily in dividend-paying small-cap
companies. For a complete review and discussion of our results and risk
profiles, please see pages 4 - 5. December 1998's Annual Report will
provide more complete performance and portfolio information for Royce
Total Return Portfolio.
Since the trough in October 1990, small-cap stocks, as measured by
the Russell 2000, have provided a 21.4% average annual total return.
However, since the May 1996 peak, the Russell 2000 has generated a 12.7%
average annual total return. What's so bad about a 12.7% average annual
total return? Nothing, until you compare it to the large-cap S&P 500,
which over the same period compounded at a 29.9% average annual rate.
Contributing to this substantial performance disparity were more frequent
and severe declines within the small-cap sector. In fact, since the May
1996 small-cap peak, the Russell 2000 has undergone three separate 10%+
declines, while the S&P 500 has endured only one. As we have suggested
in past letters, higher volatility generally precedes lower returns and,
in our opinion, an edge for value. Performance results for the "growth"
and "value" segments of the Russell 2000 bore this out. From the May 22,
1996 peak through June 30, 1998, the Russell 2000 Value Index was up
51.5% versus a gain of only 9.6% for the Russell 2000 Growth Index.
We believe that small-cap's higher level of volatility may have
implications for large-cap stocks as well - though many investors tend to
look at this the other way around and insist that large-caps lead small-
caps. To us, however, the small-cap world is more indicative of the
"average" stock, so that at some point, large-cap stocks will take their
cues from small-cap's higher volatility and overall performance. A
period of high returns (similar to what we are experiencing now) - when
accompanied by continued performance divergence - often precedes a
substantial market correction. We believe that this may occur in the
months ahead.
<PAGE>
- -----------------------------------------------------------------------------
As we sit back and assess our own six-month results, we are reminded
of a simple, yet important, premise - while we can control our investment
process, we cannot control our relative investment results, especially
over the short term. We believe that a well-planned and consistently
applied approach will result in attractive long-term returns, even when
compared to appropriate indices and peers. In the short term, however,
anything can happen and usually does. Thus, when we report our semi-
annual performance results, we try to temper our enthusiasm when things
have gone well and to keep our chins up when they have not. By not
focusing over the long run on what we can't control, our relative
results, we are able to focus on what is important - understanding risk
and reward while maintaining a long-term perspective.
We remain committed to the same principles that have served us well
over the last 25 years. A higher level of volatility, present since the
small-cap peak in May 1996, in our opinion favors a value style of
investing. We believe that our focus on managing risk within the more
volatile small-cap and micro-cap sectors is especially appropriate at
this juncture in the market. We appreciate your continued support of our
work. Your questions and comments are welcomed. Happy summer days.
[Photo of Charles M. Royce, W. Whitney George and Jack E. Fockler, Jr.]
Sincerely,
/s/ Charles M. Royce /s/ W. Whitney George /s/ Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George Jack E. Fockler, Jr.
President Vice President Vice President
July 20, 1998
NOTES TO PERFORMANCE AND RISK INFORMATION
All performance information is presented on a total return basis and
reflects the reinvestment of distributions. Past performance is no
guarantee of future results. Investment return and principal value will
fluctuate so that shares may be worth more or less than their original
cost when redeemed. Royce Capital Fund portfolios invest in small and
micro-cap companies that may involve considerably more risk than
investments in securities of larger-cap companies (see "Investment Risks"
in the prospectus). Please read the prospectus carefully before sending
money.
The Russell 2000, Russell 2000 Value and Russell 2000 Growth are
unmanaged indices of domestic small-cap common stocks. The S&P 500 and
Dow Jones Industrial Average are unmanaged indices of domestic large-cap
common stocks.
<PAGE>
Royce Micro-Cap Portfolio Performance and Portfolio Review
- -----------------------------------------------------------------------------
WHAT WE DO Royce Micro-Cap Portfolio uses a value approach to invest
primarily in companies with market capitalizations of $300 million or
less. We believe that the buying opportunities in this more volatile
sector have a greater potential for higher returns than any other in the
domestic equity market due to limited institutional attention and
research coverage.
Average Annual Total Returns Through 6/30/98
- ----------------------------------------------
<TABLE>
<S> <C>
Year-to-Date* 6.0%
1-Year 23.6
Since Inception (12/27/96) 18.3
</TABLE>
*Not annualized.
Portfolio Diagnostics
- ---------------------
<TABLE>
<S> <C>
Median Market Cap $153 million
Weighted Average P/E Ratio 13.6x
Weighted Average P/B Ratio 1.8x
Weighted Average Yield 0.7%
Net Assets $2.5 million
</TABLE>
Royce Micro-Cap Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment
Inception (12/27/96) Through 6/30/98
[LINE CHART]
<TABLE>
<CAPTION>
Royce
Capital Russell
Date Micro-Cap 2000
----- --------- -------
<S> <C> <C>
Dec-96 10,000 10,000
Jan-97 10,140 10,393
Feb-97 10,161 10,140
Mar-97 9,820 9,662
Apr-97 9,720 9,689
May-97 10,200 10,767
Jun-97 10,420 11,229
Jul-97 10,980 11,751
Aug-97 11,080 12,020
Sep-97 11,460 12,900
Oct-97 12,100 12,334
Nov-97 12,039 12,254
Dec-97 12,147 12,468
Jan-98 12,083 12,271
Feb-98 12,523 13,178
Mar-98 13,277 13,721
Apr-98 13,256 13,797
May-98 13,172 13,053
Jun-98 12,879 13,081
</TABLE>
Portfolio Composition
<TABLE>
<CAPTION>
% of
Top Five Positions Net Assets
- ------------------ ----------
<S> <C>
Richardson Electronics 4.9%
BioReliance Corporation 4.1
Industrial Scientific Corporation 2.9
Lone Star Steakhouse & Saloon 2.8
Pennsylvania Manufacturers
Corporation Cl. A 2.7
<CAPTION>
% of
Top Five Sectors Net Assets*
- ------------------ ----------
<S> <C>
Technology 24%
Industrial Products 24
Financial Intermediaries 13
Industrial Services 10
Consumer Products 10
</TABLE>
*Excludes cash and cash equivalents.
HOW WE DID Royce Micro-Cap Portfolio outperformed its benchmark index,
the small-cap oriented Russell 2000, for the first six months, returning
6.0% versus 4.9% for the index in what was a difficult period for small
and micro-cap stocks. Companies in the financial services and
intermediaries and industrial services sectors led the way in terms of
the portfolio's performance. Although the micro-cap investment category
is beginning to emerge, it is still not well known or well understood by
many investors. While micro-cap companies are higher in risk than larger,
more established companies, we believe that the sector offers one of the
best values in the domestic equity arena. Thus, our enthusiasm for micro-
cap stocks remains very strong.
<PAGE>
Royce Premier Portfolio Performance and Portfolio Review
- -----------------------------------------------------------------------------
WHAT WE DO Royce Premier Portfolio uses a value approach to invest
primarily in a concentrated portfolio of small-cap stocks with market
caps between $300 million and $1 billion. In selecting securities for
Premier's portfolio, we search for companies that possess solid balance
sheets, excellent prospects and high internal rates of return.
Average Annual Total Returns Through 6/30/98
- ----------------------------------------------
<TABLE>
<S> <C>
Year-to-Date* 11.4%
1-Year 17.8
Since Inception (12/27/96) 20.0
</TABLE>
* Not annualized.
Portfolio Diagnostics
- ---------------------
<TABLE>
<S> <C>
Median Market Cap $507 million
Weighted Average P/E Ratio 20.5x
Weighted Average P/B Ratio 1.9x
Weighted Average Yield 1.6%
Net Assets $0.3 million
</TABLE>
Royce Premier Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment
Inception (12/27/96) Through 6/30/98
[LINE CHART]
<TABLE>
<CAPTION>
Royce
Capital Russell
Date Premier 2000
- ----- --------- -------
<S> <C> <C>
Dec-96 10,000 10,000
Jan-97 10,160 10,393
Feb-97 10,180 10,140
Mar-97 10,300 9,662
Apr-97 10,500 9,689
May-97 10,780 10,767
Jun-97 11,180 11,229
Jul-97 11,500 11,751
Aug-97 11,800 12,020
Sep-97 12,140 12,900
Oct-97 12,041 12,334
Nov-97 11,860 12,254
Dec-97 11,826 12,468
Jan-98 11,672 12,271
Feb-98 12,531 13,178
Mar-98 13,280 13,721
Apr-98 13,522 13,797
May-98 13,192 13,053
Jun-98 13,170 13,081
</TABLE>
Portfolio Composition
<TABLE>
<CAPTION>
% of
Top Five Positions Net Assets
- ------------------ ----------
<S> <C>
Enesco Group 5.4%
Lincoln Electric Holding Co. 5.2
Denbury Resources 3.9
Trenwick Group 3.4
The Commerce Group 3.4
<CAPTION>
% of
Top Five Sectors Net Assets*
- ------------------ ----------
<S> <C>
Industrial Products 24%
Financial Intermediaries 20
Consumer Products 15
Financial Services 13
Industrial Services 10
</TABLE>
* Excludes cash and cash equivalents.
HOW WE DID Royce Premier Portfolio, with its concentrated portfolio of
high-quality small-cap companies, effectively navigated the more
difficult second quarter and outperformed its benchmark index, the small-
cap oriented Russell 2000, for the first six months of 1998. The
Portfolio was up 11.4% versus 4.9% for the Russell 2000 for the period.
Strong performances by portfolio companies in the consumer, industrial
and financial sectors contributed to the Fund's gains, while our focus on
risk management helped to limit the Fund's exposure to the higher levels
of volatility exhibited by small-cap stocks.
<PAGE>
[This page intentionally left blank.]
<PAGE>
Royce Capital Fund
- -----------------------------------------------------------------------------
Financial Statements
=============================================================================
Schedules of Investments 8-11
- -----------------------------------------------------------------------------
Statements of Assets and Liabilities 12
- -----------------------------------------------------------------------------
Statements of Changes in Net Assets 13
- -----------------------------------------------------------------------------
Statements of Operations and
Financial Highlights 14
- -----------------------------------------------------------------------------
Notes to Financial Statements 15-16
- -----------------------------------------------------------------------------
<PAGE>
SCHEDULES OF INVESTMENTS
- -------------------------------------------------------------------------
ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO June 30 ,1998 (unaudited)
- --------------------------------------------------------------------------
COMMON STOCKS - 81.4%
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Consumer Products - 8.1%
Home Furnishings/ Appliances - 2.8%
Conso Products* 4,000 $33,000
Meadowcraft 2,500 27,500
Neutral Posture Ergonomics 3,000 9,750
---------
70,250
---------
Publishing - 0.7%
The Topps Company* 5,000 15,469
---------
Sports and Recreation - 3.2%
Lund International Holdings* 4,900 55,737
RockShox* 6,000 24,000
---------
79,737
---------
Other Consumer Products - 1.4%
Lazare Kaplan International* 2,000 21,125
Toy Biz* 1,500 13,875
---------
35,000
---------
200,456
---------
Consumer Services - 5.3%
Leisure/Entertainment - 1.5%
Seattle Filmworks* 5,000 38,594
---------
Restaurants/Lodging - 3.8%
Lone Star Steakhouse & Saloon* 5,000 69,062
Pizza Inn 4,400 24,475
---------
93,537
---------
132,131
---------
Financial Intermediaries - 9.6%
Insurance - 9.6%
ALLIED Life Financial Corporation 1,000 28,875
Capitol Transamerica Corporation 2,900 59,631
Highlands Insurance Group* 1,500 27,750
Intercargo Corporation 500 5,875
NYMAGIC 100 2,738
The Navigators Group* 2,100 39,769
Nobel Insurance Limited 400 5,400
Pennsylvania Manufacturers
Corporation Cl. A 2,900 66,700
---------
236,738
---------
Financial Services - 1.6%
Information and Processing - 1.6%
Duff & Phelps Credit Rating Co. 700 39,025
---------
Health - 4.1%
Drugs and Biotech - 4.1%
BioReliance Corporation* 6,700 100,919
---------
Industrial Products - 19.5%
Aerospace/Defense - 1.1%
Special Metals Corporation* 2,000 28,000
---------
Building Systems and Components - 3.2%
Falcon Products 4,000 50,500
International Aluminum Corporation 200 6,200
Skyline Corporation 100 3,263
Woodhead Industries 1,300 19,987
---------
79,950
---------
Construction Materials - 2.6%
The Monarch Cement Company 2,500 63,750
---------
Machinery - 0.2%
DeVlieg-Bullard* 1,500 3,375
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Paper and Packaging - 1.7%
PalEx* 4,500 $42,750
---------
Pumps, Valves and Bearings - 1.2%
Sun Hydraulics Corporation 1,800 28,800
---------
Specialty Chemicals and Materials - 7.2%
Aldila* 2,000 13,250
CFC International* 3,500 38,719
Chemfab Corporation* 1,500 31,218
Hauser* 7,100 41,269
Hawkins Chemical 1,000 12,000
Synalloy Corporation 3,000 40,500
---------
176,956
---------
Textiles - 0.2%
Fab Industries 200 5,575
---------
Other Industrial Products - 2.1%
BHA Group Holdings 1,100 18,150
Modern Controls 4,500 33,750
---------
51,900
---------
481,056
---------
Industrial Services - 8.9%
Commercial Services - 0.8%
BHI Corporation 500 19,750
---------
Engineering and Construction - 0.9%
Sevenson Environmental Services 480 4,020
Willbros Group* 1,200 18,750
---------
22,770
---------
Food/Tobacco Processors - 2.7%
Midwest Grain Products* 4,200 60,900
Standard Commercial Corporation* 606 6,666
---------
67,566
---------
Industrial Distribution - 1.1%
Vallen Corporation* 1,400 27,825
---------
Printing - 1.2%
Ennis Business Forms 2,500 29,063
---------
Transportation and Logistics - 2.2%
Frozen Food Express Industries 2,000 19,750
Kenan Transport Company 1,000 34,375
---------
54,125
---------
221,099
---------
Natural Resources - 4.0%
Metals and Mining - 0.6%
MK Gold Company* 15,000 14,062
---------
Oil and Gas - 3.4%
Denbury Resources* 3,000 39,187
PetroCorp Incorporated* 500 3,813
Titan Exploration* 4,800 42,600
---------
85,600
---------
99,662
---------
</TABLE>
<PAGE>
SCHEDULES OF INVESTMENTS
- -------------------------------------------------------------------------
ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO June 30, 1998 (unaudited)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Technology - 20.3%
Distribution - 7.7%
Perceptron* 2,500 $30,000
Pioneer-Standard Electronics 4,000 38,500
Richardson Electronics 9,000 121,500
---------
190,000
---------
Hardware - 7.8%
Axiohm Transaction Solutions* 700 7,175
Exar Corporation* 1,500 31,500
Industrial Scientific Corporation 2,900 71,050
Intevac* 5,000 53,750
Newport Corporation 1,500 29,625
---------
193,100
---------
Software/Services - 4.8%
ANSYS* 1,800 17,775
Kronos Incorporated* 1,800 65,250
MacNeal-Schwendler Corporation* 2,000 19,625
VideoServer* 1,300 15,925
---------
118,575
---------
501,675
---------
TOTAL COMMON STOCKS
(Cost $2,036,523) 2,012,761
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
-----
<S> <C>
REPURCHASE AGREEMENT - 16.2%
State Street Bank and Trust Company,
5.15% dated 6/30/98, due 7/01/98,
maturity value $400,057
(collateralized by U.S. Treasury Bonds,
7.25% due 5/15/16, valued at $411,195)
(Cost $400,000) $400,000
---------
TOTAL INVESTMENTS - 97.6%
(Cost $2,436,523) 2,412,761
CASH AND OTHER ASSETS
LESS LIABILITIES - 2.4% 60,045
---------
NET ASSETS - 100.0% $2,472,806
---------
</TABLE>
* Non-income producing.
INCOME TAX INFORMATION - The cost of total investments for federal income
tax purposes was $2,436,523. At June 30, 1998, net unrealized depreciation
for all securities was $23,762, consisting of aggregate gross unrealized
appreciation of $126,019 and aggregate gross unrealized depreciation of
$149,781.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SCHEDULES OF INVESTMENTS
- ----------------------------------------------------------------------------
ROYCE CAPITAL FUND - PREMIER PORTFOLIO June 30, 1998 (unaudited)
- ----------------------------------------------------------------------------
COMMON STOCKS - 79.8%
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Consumer Products - 11.9%
Apparel and Shoes - 2.0%
Oakley* 500 $6,687
--------
Collectibles - 5.4%
Enesco Group 600 18,450
--------
Publishing - 3.0%
Gibson Greetings* 400 10,000
--------
Sports and Recreation - 1.5%
Sturm, Ruger & Company 300 5,025
--------
40,162
--------
Consumer Services - 5.2%
Restaurants/Lodging - 2.0%
Applebee's International 300 6,712
--------
Retail - 3.2%
Charming Shoppes* 2,300 10,925
--------
17,637
--------
Financial Intermediaries - 15.8%
Insurance - 15.8%
The Commerce Group 300 11,625
Leucadia National Corporation 300 9,919
Pennsylvania Manufacturers
Corporation Cl. A 400 9,200
Trenwick Group 300 11,653
Zenith National Insurance 400 11,275
--------
53,672
--------
Financial Services - 10.4%
Information and Processing - 1.6%
Duff & Phelps Credit Rating Co. 100 5,575
--------
Insurance Brokers - 6.1%
E.W. Blanch Holdings 200 7,350
Arthur J. Gallagher & Co. 100 4,475
Willis Corroon Group ADR+ 700 8,794
--------
20,619
--------
Investment Management - 2.7%
Affiliated Managers Group* 100 3,713
The Pioneer Group 200 5,262
--------
8,975
--------
35,169
--------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Industrial Products - 18.8%
Aerospace/Defense - 5.1%
Curtiss-Wright Corporation 200 $7,838
Woodward Governor Company 300 9,262
--------
17,100
--------
Building Systems and Components - 2.3%
Simpson Manufacturing* 200 7,725
--------
Construction Materials - 1.9%
CalMat 300 6,600
--------
Machinery - 6.6%
Lincoln Electric Holding Co. 800 17,700
Nordson Corporation 100 4,700
--------
22,400
--------
Specialty Chemicals and Materials - 1.3%
Lilly Industries Cl. A 200 4,325
--------
Textiles - 1.6%
Fab Industries 200 5,575
--------
63,725
--------
Industrial Services - 8.3%
Engineering and Construction - 5.5 %
Morrison Knudsen Corporation* 700 9,844
Stone & Webster 100 3,963
Willbros Group* 300 4,687
--------
18,494
--------
Printing - 2.8%
New England Business Service 300 9,675
--------
28,169
--------
Natural Resources - 6.6%
Oil and Gas - 6.6%
Tom Brown* 500 9,406
Denbury Resources* 1,000 13,063
--------
22,469
--------
Technology - 2.8%
Software/Services - 2.8%
National Computer Systems 400 9,600
--------
TOTAL COMMON STOCKS
(Cost $242,657) 270,603
--------
TOTAL INVESTMENTS - 79.8%
(Cost $242,657) 270,603
CASH AND OTHER ASSETS
LESS LIABILITIES - 20.2% 68,341
--------
NET ASSETS - 100.0% $338,944
--------
</TABLE>
* Non-income producing.
+ American Depository Receipt.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $242,657. At June 30, 1998, net unrealized appreciation for all
securities was $27,946, consisting of aggregate gross unrealized appreciation
of $38,378 and aggregate gross unrealized depreciation of $10,432.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SCHEDULES OF INVESTMENTS
- ----------------------------------------------------------------------------
ROYCE CAPITAL FUND - TOTAL RETURN PORTFOLIO June 30, 1998 (unaudited)
- ----------------------------------------------------------------------------
COMMON STOCKS - 44.8%
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Consumer Products - 8.1%
Home Furnishings/Appliances - 5.0%
Bassett Furniture Industries 200 $5,550
---------
Sports and Recreation - 3.1%
Sturm, Ruger & Company 200 3,350
---------
8,900
---------
Financial Intermediaries - 6.4%
Insurance - 6.4%
Pennsylvania Manufacturers
Corporation Cl. A 200 4,225
Zenith National Insurance 100 2,838
---------
7,063
---------
Financial Services - 8.2%
Insurance Brokers - 5.8%
Crawford & Company Cl. A 200 3,841
Willis Corroon Group ADR+ 200 2,513
---------
6,354
---------
Investment Management - 2.4%
The Pioneer Group 100 2,631
---------
8,985
---------
Industrial Products - 14.4%
Aerospace/Defense - 3.6%
Curtiss-Wright Corporation 100 3,943
---------
Construction Materials - 3.9%
CalMat 200 4,339
---------
Machinery - 4.0%
Lincoln Electric Holding Co. 200 4,350
---------
Paper and Packaging - 2.9%
P. H. Glatfelter Company 200 3,164
---------
15,796
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Natural Resources - 7.7%
Oil and Gas - 7.7%
Devon Energy Corporation 200 $6,714
Redwood Trust 100 1,756
---------
8,470
---------
TOTAL COMMON STOCKS
(Cost $49,245) 49,214
---------
CORPORATE BOND - 5.4%
Charming Shoppes 7.50%
Conv. Sub. Note due 7/15/06,
principal amount $6,000
(Cost $5,985) 5,887
---------
TOTAL INVESTMENTS - 50.2%
(Cost $55,230) 55,101
CASH AND OTHER ASSETS
LESS LIABILITIES - 49.8% 54,598
---------
NET ASSETS - 100.0% $109,699
---------
</TABLE>
+ American Depository Receipt.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $55,230. At June 30, 1998, net unrealized depreciation for all
securities was $129, consisting of aggregate gross unrealized appreciation of
$59 and aggregate gross unrealized depreciation of $188.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF ASSETS AND LIABILITIES June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier Total Return
Portfolio Portfolio Portfolio
--------- --------- ------------
<S> <C> <C> <C>
ASSETS:
Investments at value (identified cost $2,036,523,
$242,657 and $55,230, respectively) $ 2,012,761 $ 270,603 $ 55,101
Repurchase agreements (at cost and value) 400,000 - -
Cash 72,095 63,531 97,140
Receivable for capital shares sold 145,478 - -
Receivable for investments sold 27,499 - -
Receivable for dividends and interest 702 451 207
Prepaid expenses and other assets 7,329 7,275 -
- -----------------------------------------------------------------------------------------------
Total Assets $ 2,665,864 $341,860 $ 152,448
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed 112,787 - -
Payable for investments purchased 76,375 - 40,714
Accrued expenses 3,896 2,916 2,035
- -----------------------------------------------------------------------------------------------
Total Liabilities 193,058 2,916 42,749
- -----------------------------------------------------------------------------------------------
Net Assets $ 2,472,806 $338,944 $ 109,699
===============================================================================================
ANALYSIS OF NET ASSETS:
Undistributed net investment (loss) $ (7,096) $ (153) $ (172)
Accumulated net realized gain on investments 147,716 24,179 -
Net unrealized appreciation (depreciation)
on investments (23,762) 27,946 (129)
Capital shares 402 57 22
Additional paid-in capital 2,355,546 286,915 109,978
- -----------------------------------------------------------------------------------------------
Net Assets $ 2,472,806 $338,944 $ 109,699
===============================================================================================
SHARES OUTSTANDING:
(unlimited number of $.001 par value
shares authorized for each Fund) 401,798 56,711 22,000
===============================================================================================
NET ASSET VALUES (Net Assets/Shares Outstanding):
(offering and redemption price per share) $ 6.15 $ 5.98 $ 4.99
===============================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Micro-Cap Portfolio Premier Portfolio Total Return Portfolio
----------------------------- ------------------------------- ----------------------
Six months ended Year ended Six months ended Year ended Period ended
June 30, 1998 December 31, June 30, 1998 December 31, June 30, 1998
(unaudited) 1997 (unaudited) 1997 (unaudited) (a)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment (loss) $ (7,096) $ (3,631) $ (153) $ (488) $ (172)
Net realized gain on investments 145,996 47,820 23,906 27,763 -
Net change in unrealized appreciation
(depreciation) on investments (55,577) 31,285 9,568 15,891 (129)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from investment operations 83,323 75,474 33,321 43,166 (301)
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income - - - - -
Net realized gain on investments - (42,470) - (27,004) -
- -------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions - (42,470) - (27,004) -
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 1,741,122 740,441 10,000 38 110,000
Dividends reinvested - 42,470 - 27,004 -
Cost of shares redeemed (416,021) (1,995) - - -
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
capital share transactions 1,325,101 780,916 10,000 27,042 110,000
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 1,408,424 813,920 43,321 43,204 109,699
NET ASSETS:
Beginning of period 1,064,382 250,462 295,623 252,419 -
- -------------------------------------------------------------------------------------------------------------------------------
End of period (b) $ 2,472,806 $ 1,064,382 $ 338,944 $ 295,623 $ 109,699
===============================================================================================================================
CAPITAL SHARE TRANSACTIONS:
Shares sold 288,829 126,411 1,648 7 22,000
Shares issued for reinvestment
of dividends and distributions - 7,412 - 5,056 -
Shares redeemed (70,520) (334) - - -
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 218,309 133,489 1,648 5,063 22,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total Return Portfolio commenced operations on May 15, 1998.
(b) Includes undistributed net investment loss of $7,096, $153 and $172 in 1998
for Micro-Cap Portfolio, Premier Portfolio and Total Return Portfolio,
respectively, and $0 for each portfolio in 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF OPERATIONS Period ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier Total Return
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 4,887 $ 1,995 $ -
Interest 88 2 19
- ---------------------------------------------------------------------------------------------
Total Income 4,975 1,997 19
- ---------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees 11,176 1,593 141
Custodian fees 3,999 2,587 412
Shareholding servicing fees 3,909 3,909 1,300
Audit fees 1,455 1,455 625
Organizational expenses 1,062 1,062 348
Legal fees 1,031 204 1
Trustees' fees 711 25 39
Administrative and office facilities expenses 291 79 4
Other expenses 1,503 997 1
- --------------------------------------------------------------------------------------------
Total Expenses 25,137 11,911 2,871
Fees Waived by Investment Adviser 11,176) (1,593) (141)
Expenses Reimbursed by Investment Adviser (1,890) (8,168) (2,539)
- ---------------------------------------------------------------------------------------------
Net Expenses 12,071 2,150 191
- ---------------------------------------------------------------------------------------------
Net Investment (Loss) (7,096) (153) (172)
- ---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 145,996 23,906 -
Net change in unrealized appreciation
(depreciation) on investments (55,577) 9,568 (129)
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 90,419 33,474 (129)
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS $ 83,323 $ 33,321 (301)
- ---------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating each Fund's
performance for the periods presented.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value, Net Investment Net Realized and Dividends From Distributions From Net Asset Value,
Beginning Income Unrealized Gain on Net Investment Net Realized Gain End Total
of Period (Loss) Investments Income on Investments of Period Return
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
-----------------------
+ 1998 $5.80 ($0.02) $0.37 $0.00 $0.00 $6.15 6.0%
1997 5.01 (0.02) 1.08 - (0.27) 5.80 21.2%
1996 5.00 - 0.01 - - 5.01 0.2%
Premier Portfolio (b)
---------------------
+ 1998 $5.37 $0.00 $0.61 $0.00 $0.00 $5.98 11.4%
1997 5.05 (0.01) 0.87 - (0.54) 5.37 17.1%
1996 5.00 - 0.05 - - 5.05 1.0%
Total Return Portfolio (c)
--------------------------
+ 1998 $5.00 ($0.01) $0.00 - $0.00 $4.99 -0.2%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of Expenses Ratio of Net Average
Net Assets, to Average Investment (Loss) to Portfolio Commission Rate
End of Period Net Assets Average Net Assets Turnover Rate Paid
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+ $2,472,806 1.35% * -0.79% * 46% $0.0621
1,064,382 1.35% -0.96% 132% 0.0496
250,462 1.99% * -1.99% * 0% 0.0499
+ $338,944 1.35% * -0.10% * 46% $0.0650
295,623 1.35% -0.18% 79% 0.0606
252,419 1.99% * -1.99% * 0% 0.0667
+ $109,699 1.35% * -1.22% * 0% $0.0477
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Expense ratios are shown after fee waivers and expense reimbursements by
the investment adviser. For the periods ended June 30, 1998,
December 31, 1997 and 1996, the expense ratios before the waivers and
reimbursements would have been 2.81%, 7.32% and 22.49%, respectively.
The Fund commenced operations on December 27, 1996.
(b) Expense ratios are shown after fee waivers and expense reimbursements by
the investment adviser. For the periods ended June 30, 1998,
December 31, 1997 and 1996, the expense ratios before the waivers and
reimbursements would have been 7.48%, 8.87% and 22.49%, respectively.
The Fund commenced operations on December 27, 1996.
(c) Expense ratios are shown after fee waivers and expense reimbursements by
the investment adviser. For the period ended June 30, 1998, the expense
ratio before the waivers and reimbursements would have been 20.32%.
The Fund commenced operations on May 15, 1998.
* Annualized.
+ Period ended June 30, 1998 (unaudited).
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Micro-Cap Portfolio, Royce Premier Portfolio and Royce Total Return
Portfolio (the "Fund" or "Funds") are three series of Royce Capital Fund (the
"Trust"), a diversified open-end management investment company organized as a
Delaware business trust. The Micro-Cap Portfolio and Premier Portfolio
commenced operations on December 27, 1996 and the Total Return Portfolio
commenced operations on May 15, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
VALUATION OF INVESTMENTS:
Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked prices
for Nasdaq securities. Quotations are taken from the market where the security
is primarily traded. Other over-the-counter securities for which market
quotations are readily available are valued at their bid price. Securities for
which market quotations are not readily available are valued at their fair value
under procedures established and supervised by the Board of Trustees. Bonds and
other fixed income securities may be valued by reference to other securities
with comparable ratings, interest rates and maturities, using established
independent pricing services.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date. Dividend
income is recorded on the ex-dividend date and any non-cash dividend income is
recorded at the fair market value of the securities received. Interest income
is recorded on the accrual basis. Realized gains and losses from investment
transactions and unrealized appreciation and depreciation are determined on the
basis of identified cost for book and tax purposes.
EXPENSES:
The Fund incurs direct and indirect expenses. Expenses directly
attributable to a Fund are charged to the Fund's operations, while expenses
applicable to one or more Royce Funds are allocated in an equitable manner.
Allocated personnel costs of employees of The Royce Funds are included in
administrative and office facilities expenses.
TAXES:
As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, the Funds are not subject to income taxes to the extent
that each Fund distributes substantially all of its taxable income for its
fiscal year. The Schedules of Investments include information regarding income
taxes under the caption "Income Tax Information."
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)(continued)
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Any dividend and capital gain distributions are recorded on the ex-dividend
date and paid annually in December. These distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications within the capital
accounts. Undistributed net investment income may include temporary book and
tax basis differences which will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributable in the following
year.
REPURCHASE AGREEMENTS:
The Funds enter into repurchase agreements with respect to portfolio
securities solely with State Street Bank and Trust Company ("SSB&T"), the
custodian of the Funds' assets. Each Fund restricts repurchase agreements to
maturities of no more than seven days. Securities pledged as collateral for
repurchase agreements, which are held by SSB&T until maturity of the repurchase
agreements, are marked-to-market daily and maintained at a value at least equal
to the principal amount of the repurchase agreement (including accrued
interest). Repurchase agreements could involve certain risks in the event of
default or insolvency of SSB&T, including possible delays or restrictions upon
the ability of each Fund to dispose of its underlying securities.
ORGANIZATIONAL EXPENSES:
Costs incurred by the Funds in connection with its organization and initial
registration of shares of $10,000 per portfolio have been deferred and are being
amortized on a straight line basis over a five-year period from the date of
commencement of operations.
INVESTMENT ADVISER:
Under the Trust's investment advisory agreements with Royce & Associates,
Inc. ("Royce"), Royce is entitled to receive management fees which are computed
daily and payable monthly. The agreements provide for advisory fees equal to
1.25%, 1.0% and 1.0% per annum of the average net assets of Micro-Cap Portfolio,
Premier Portfolio and Total Return Portfolio, respectively. For the six months
ended June 30, 1998, Royce voluntarily waived advisory fees of $11,176 for
Micro-Cap Portfolio, $1,593 for Premier Portfolio and $141 for Total Return
Portfolio.
PURCHASES AND SALES OF INVESTMENT SECURITIES:
For the six months ended June 30, 1998, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
were as follows:
Micro-Cap Portfolio Premier Portfolio Total Return Portfolio
------------------- ----------------- ----------------------
Purchases $1,856,445 $118,219 $55,230
Sales $ 589,070 $128,434 $ 0
