[FRONT COVER]
Value Investing In Small Companies For Over 20 Years
ROYCE
CAPITAL
FUND
Micro-Cap Portfolio
Premier Portfolio
1997 Annual Report
<PAGE>
Annual Report Reference Guide
Letter to Shareholders 2-3
Large-cap stocks shine for a fourth straight year . . . while small-cap stocks
wait in the wings . . . higher market volatility may result in a more
favorable climate for small and micro-cap companies.
Performance and Portfolio Review 4-5
Micro-Cap Portfolio focuses on companies with market capitalizations
below $300 million.
Premier Portfolio invests in a limited number of companies with market
capitalizations between $300 million and $1 billion.
Schedules of Investments and other Financial Statements 6-12
[BEGIN PULL QUOTE]
For over twenty years, our risk-averse approach has focused on evaluating a
company's "private worth" - what we believe an enterprise would sell for in a
private transaction between rational 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,
The Dow Jones Industrial Average ("Dow") finished the year up over 20% for an
unprecedented third year in a row, turning in its best 10-year performance
period ever! The other popular large-cap index, the S&P 500, was even more
impressive, up 33.4% in 1997. Small and micro-cap stocks, by comparison, were
left waiting in the wings, underperforming their large company counterparts for
a fourth straight year. The year's performance differential is primarily
attributable to the first and fourth quarters, when small-cap indices were in
the red versus positive gains for their large-cap brethren. Small-cap investors
(ourselves included) could be disappointed, but when you consider that the
Russell 2000 index of small-cap issues was up 22.4% for the year, it's only a
matter of degree.
Despite its record-setting performance, the stock market had its anxious
moments, namely the single biggest one day decline ever of 554 points in the Dow
on October 27, the vicious downturn in technology stocks and the significant
increase in overall market volatility. The Dow recorded 52 days in which the
index closed either up or down more than 100 points. This compares to only 6
days in 1996 and 1 day in 1995. S&P 500 volatility, as measured by standard
deviation, was 50% higher in the second half of the year than in the first six
months. While higher market volatility can be frustrating for investors, it
does allow active managers to take center stage.
While we have stated our expectation of lower equity returns for the last three
years, we take solace that neither our careers nor your hard earned money are
dependent on our accurately predicting the direction of, or specific performance
prospects for, the overall stock market. We learned a long time ago that the
best thing we can do for our shareholders is to stay invested, even during times
of uncertainty, and not lose sight of the real goal - COMPOUNDING WEALTH. We
are as mindful of this goal as we are of the risk necessary for its achievement.
We were pleased with our absolute returns in 1997, especially since they
approximated or exceeded the level of return we strive for when selecting
companies for the portfolios. For the full year Royce Micro-Cap Portfolio was
up 21.2% and Royce Premier Portfolio was up 17.1%. These returns compare to
22.4% for the Russell 2000 index of small companies. Although both Funds
underperformed their benchmark during the opening performance period, we remain
enthused about the long-term opportunities that both the micro-cap and small-cap
asset classes offer.
While we have no idea where the Dow will end in 1998, we do believe that the
current backdrop of higher market volatility, overseas vulnerability, and
potential interest rate uncertainty may result in a favorable investment
environment for small and micro-cap companies. Higher volatility usually
translates into lower returns - total return for the S&P 500 for the six months
ended 12/31/97 was
<PAGE>
approximately half that of the first six months; and an edge for value because
the discipline demands buying stocks as they decline and selling them as they go
up. By its very nature, small-cap value generally has limited foreign exposure,
an advantage given the current turmoil in Southeast Asia. In our judgment, it
is unlikely that a 25% decline in long-term interest rates and a 125% rise in
the S&P 500 will be repeated in the next three years.
Our twenty-four years of investment management experience add to our confidence
in the long-term prospects of our risk-averse approach.
[PHOTO OF CHUCK ROYCE, W. WHITNEY GEORGE & 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
February 17, 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 value when redeemed. Royce Micro-
Cap Portfolio invests primarily in securities of micro-cap companies which may
involve considerably more risk than investments in securities of larger-cap
companies (see "Investment Risks" in the prospectus). This report is not
authorized for distribution unless preceded or accompanied by a current
prospectus. Please read the prospectus carefully before investing or sending
money.
Lipper Analytical Services, Inc. ratings reflect historical net asset value
total return for the three month period ended 12/31/97 for 80 small-cap variable
annuity portfolios and are subject to change quarterly. To qualify as "small-
cap", Lipper requires that a fund's portfolio have a median market cap below $1
billion.
The Russell 2000, S&P 500 and Dow Jones Industrial Average are unmanaged indices
of domestic common stocks.
<PAGE>
Royce Micro-Cap Portfolio Performance and Portfolio Review
______________________________________________________________________________
WHAT WE DO Royce Micro-Cap Portfolio invests primarily in companies with market
capitalizations of $300 million or less. Due to limited institutional attention
and research coverage, we believe that investment opportunities in this more
volatile sector have more potential for higher returns than any other in the
domestic quity market.
Total Returns (through 12/31/97) Portfolio Diagnostics
- -------------------------------- ---------------------
Median Market Cap: $128 million
4th Quarter 1997: 6.0% Wtd. Avg. P/E Ratio: 17.7x
Jul - Dec 1997: 16.6% Wtd. Avg. P/B Ratio: 2.3x
1-Year: 21.2% Wtd. Avg. Yield: 1.0%
Since Inception Avg. Annual: 21.2% Net Assets: $1.1 million
Inception date was 12/27/96.
Royce Micro-Cap Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment
From Inception (12/27/96) through 12/31/97
[LINE CHART]
Date Micro-Cap Russell 2000
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
Portfolio Composition
% of
Top Five Positions Net Assets
- ------------------ ----------
1. Richardson Electronics 3.1%
2. Duff & Phelps Credit Rating Co. 2.7%
3. Pizza Inn 2.3%
4. Suburban Ostomy Supply Co. 2.2%
5. Ennis Business Forms 2.2%
% of
Top Five Sectors Net Assets*
- ------------------ ----------
1. Technology 24%
2. Industrial Services 17%
3. Consumer Products 15%
4. Industrial Products 13%
5. Health 9%
* excludes cash and cash equivalents
HOW WE DID After a slow start, micro-cap stocks emerged in 1997's second half.
For the fourth quarter and second half, Royce Micro-Cap Portfolio was up 6.0%
and 16.6%, respectively. This compares to returns of -3.4% and 11.0% for the
Fund's benchmark index, the small-cap oriented Russell 2000. For the full year,
the portfolio was up 21.2% versus 22.4% for the Russell 2000. Royce Micro-Cap
Portfolio's fourth quarter total return of 6.0% made it the #1 performing small-
cap variable annuity portfolio out of 80 portfolios ranked by Lipper Analytical
Services for the quarter ended December 31, 1997.
Although many micro-cap portfolios have been introduced over the last several
years, the universe remains large, diverse and, we believe, relatively
unexploited. The sheer size of this universe (over 6,400 names) and our belief
that increased volatility will lead to investment opportunities support our
enthusiasm for the long-term prospects of this asset class.
<PAGE>
Royce Premier Portfolio Performance and Portfolio Review
______________________________________________________________________________
WHAT WE DO Royce Premier Portfolio uses a risk-averse value approach to invest
primarily in a concentrated portfolio of small-cap stocks with market
capitalizations between $300 million and $1 billion. The securities in the
portfolio include our highest confidence selections, those we define as
"superior companies" because of their solid balance sheets, excellent prospects
and high internal rates of return.
Total Returns (through 12/31/97) Portfolio Diagnostics
- -------------------------------- ---------------------
Median Market Cap: $515 million
4th Quarter 1997: -2.6% Wtd. Avg. P/E Ratio: 19.4x
Jul - Dec 1997: 5.8% Wtd. Avg. P/B Ratio: 1.7x
1-Year: 17.1% Wtd. Avg. Yield: 2.0%
Since Inception Avg. Annual: 18.0% Net Assets: $0.3 million
Inception date was 12/27/96
Royce PREMIER Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment
From Inception (12/27/96) through 12/31/97
[LINE CHART]
Date Premier Russell 2000
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
Portfolio Composition
% of
Top Five Positions Net Assets
- ------------------ ----------
1. CalMat 4.7%
2. The Commerce Group 4.4%
3. Duff & Phelps Credit Rating Co. 4.1%
4. Affiliated Managers Group 3.9%
5. Trenwick Group 3.8%
% of
Top Five Sectors Net Assets*
- ---------------- ----------
1. Financial Intermediaries 19%
2. Industrial Products 19%
3. Financial Services 16%
4. Consumer Products 12%
5. Industrial Services 10%
* excludes cash and cash equivalents
HOW WE DID Royce Premier Portfolio's risk-averse approach provided a
performance edge over its benchmark, the small-cap oriented Russell 2000 index
(+10.7% vs. +10.2%) during 1997's first half. The Portfolio also outperformed
the Russell 2000 for the fourth quarter (-2.6% vs. -3.4%). However, the
Portfolio lagged during the second half (+5.8% vs. +11.0%). For the full year,
the portfolio was up 17.1%, while the Russell 2000 was up 22.4%.
Although we are somewhat disappointed with the second half results, we are
confident about the long-term prospects for the portfolio. We fully recognize
that concentration increases the opportunity for short-term out of sync
performance; however, we believe that it is the appropriate strategy for the
upper tier of the small-cap market and expect to take advantage of the
opportunities that higher levels of market volatility often create.
<PAGE>
SCHEDULES OF INVESTMENTS
ROYCE CAPITAL FUND- MICRO-CAP PORTFOLIO December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS - 61.5%
SHARES VALUE SHARES VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Consumer Products - 9.2% Industrial Services - 10.2%
Conso Products* 2,000 $ 15,250 Dril-Quip* 500 $ 17,563
Lazare Kaplan International* 1,000 13,500 Ennis Business Forms 2,500 23,125
Lund International Holdings* 1,500 17,813 Frozen Food Express Industries 2,000 18,000
Neutral Posture Ergonomics* 3,000 14,250 Kenan Transpor Company 200 7,325
Skyline Corporation 100 2,750 Sevenson Environmental Services 480 5,880
TEFRON* 500 11,500 Standard Commercial Corporation* 606 10,037
The Topps Company* 5,000 11,094 Vallen Corporation* 400 8,300
Toy Biz* 1,500 11,625 Willbros Group* 1,200 18,000
--------- --------
97,782 108,230
--------- --------
Consumer Services - 3.6% Natural Resources - 2.5%
MovieFone Cl. A* 2,000 13,500 MK Gold Company* 15,000 22,500
Pizza Inn 4,400 24,750 PetroCorp Incorporated* 500 4,125
--------- --------
38,250 26,625
--------- --------
Financial Intermediaries - 5.0% Technology - 14.9%
BHI Corporation 700 21,525 ANSYS* 1,800 13,050
Intercargo Corporation 500 6,625 Axiohm Transaction Solutions* 700 11,900
Lawyers Title Corporation 300 9,431 8x8* 1,400 15,312
NYMAGIC 100 2,756 Faroudja* 1,000 10,375
Nobel Insurance Limited 400 5,250 Industrial Scientific Corporation 600 12,450
Pennsylvania Manufacturers MacNeal-Schwendler Corporation* 1,500 14,438
Corporation Cl. A 500 8,000 Richardson Electronics 3,000 33,375
---------
53,587 Spectra-Physics Lasers* 1,000 12,500
---------
Financial Services - 2.7% VideoServer* 1,300 20,637
Duff & Phelps Credit Rating Co. 700 28,437 Xylan Corporation* 1,000 15,125
--------- --------
159,162
--------
Health - 5.5%
Healthworld Corporation* 1,800 21,713 TOTAL COMMON STOCKS
International Isotopes* 1,600 14,000 (Cost $623,152) 654,967
Suburban Ostomy Supply* 2,000 23,250 --------
----------
58,963 REPURCHASE AGREEMENT - 18.8%
Industrial Products - 7.9% ---------- State Street Bank & Trust Company,
BHA Group Holdings 700 13,650 5.15% dated 12/31/97, due 1/02/98,
DeVlieg-Bullard* 1,500 5,719 maturity value $200,057 (collaterized
Fab Industries 200 6,225 by Federal National Mortgage
Falcon Products 1,200 17,025 Association, 6.50% due 12/25/16,
Hawkins Chemical 1,000 11,562 valued at $210,000)
International Aluminum (Cost $200,000) 200,000
Corporation 200 6,250 ---------
Midwest Grain Products* 1,400 17,500
Sun Hydraulics Corporation 500 6,000 TOTAL INVESTMENTS - 80.3%
-------- (Cost $823,152) 854,967
83,931
-------- CASH AND OTHER ASSETS
LESS LIABILITIES - 19.7% 209,415
----------
NET ASSETS - 100.0% $ 1,064,382
----------
</TABLE>
* Non-income producing.
Income Tax Information - The cost of total investments for federal income tax
purposes was $823,152. At December 31, 1997, net unrealized
appreciation for all securities was $31,815, consisiting of aggregate gross
unrealized appreciation of $60,472 and aggregate gross unrealized
depreciation of $28,657.
The accompanying notes are an integral part of the financial statements.
<PAGE>
SCHEDULES OF INVESTMENTS
ROYCE CAPITAL FUND- PREMIER PORTFOLIO December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS - 83.7%
SHARES VALUE SHARES VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Consumer Products - 9.8% Industrial Services - 8.2%
Gibson Greetings* 400 $ 8,750 Morrison Knudsen Corporation* 500 $4,875
Oakley* 500 4,531 New England Business Service 300 10,125
Stanhome 400 10,275 Stone & Webster 100 4,688
Sturm, Ruger & Company 300 5,531 Willbros Group* 300 4,500
------ ------
29,087 24,188
------ ------
Financial Intermediaries - 15.6% Natural Resources - 8.0%
The Commerce Group 400 13,050 Tom Brown* 500 9,625
Leucadia National Corporation 300 10,350 CalMat 500 13,937
Pennsylvania Manufacturers ------
Corporation Cl. A 400 6,400 23,562
Trenwick Group 300 11,288 Retail - 7.1% ------
Zenith National Insurance 200 5,150 Charming Shoppes* 2,100 9,844
------ Sotheby's Holdings Cl. A 400 7,400
46,238 The Talbots 200 3,625
------ ------
Financial Services - 13.2% 20,869
Affiliated Managers Group* 400 11,600 ------
Duff & Phelps Credit Rating Co. 300 12,187 Technology - 6.1%
Arthur J. Gallagher & Co. 100 3,444 National Computer Systems 300 10,575
The Pioneer Group 200 5,625 Xylan Corporation* 500 7,563
Willis Corroon Group ADR+ 500 6,156 ------
------ 18,138
39,012 ------
------
Industrial Products - 15.7% TOTAL COMMON STOCKS
Curtiss-Wright Corporation 200 7,263 (Cost $228,966) 247,344
Fab Industries 200 6,225 -------
Kaydon Corporation 100 3,262 TOTAL INVESTMENTS - 83.7%
Lilly Industries Cl. A 400 8,250 (Cost $228,966) 247,344
Nordson Corporation 100 4,588
The Standard Register Company 200 6,950 CASH AND OTHER ASSETS
Woodward Governor Company 300 9,712 LESS LIABILITIES - 16.3% 48,279
------ -------
46,250
------ NET ASSETS - 100.0% 295,623
</TABLE> -------
* Non-income producing.
+ American Depository Receipt.
Income Tax Information - The cost of total investments for federal income
tax purposes was $228,966. At December 31, 1997, net unrealized
appreciation for all securities was $18,378, consisiting of aggregate
gross unrealized appreciation of $27,088 and aggregate gross
unrealized depreciation of $8,710.
The accompanying notes are an integral part of the financial statements.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF ASSETS AND LIABILITIES December 31, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier
Portfolio Portfolio
--------- ---------
<S> <C> <C>
ASSETS:
Investments at value (identified cost $623,152
and $228,966, respectively) $ 654,967 $ 247,344
Repurchase agreement (at cost and value) 200,000 -
Cash 136,100 44,063
Receivable for capital shares sold 73,976 -
Receivable for dividends and interest 238 467
Prepaid expenses and other assets 8,318 8,318
---------- ----------
Total Assets 1,073,599 300,192
---------- ----------
LIABILITIES:
Payable for investments purchased 4,063 -
Accrued expenses 5,154 4,569
---------- ----------
Total Liabilities 9,217 4,569
---------- ----------
Net Assets $ 1,064,382 $ 295,623
---------- ----------
ANALYSIS OF NET ASSETS:
Accumulated net realized gain on investments $ 1,720 $ 273
Net unrealized appreciation on investments 31,815 18,378
Capital shares 183 55
Additional paid-in capital 1,030,664 276,917
---------- ----------
Net Assets $ 1,064,382 $ 295,623
========== ==========
SHARES OUTSTANDING:
(unlimited number of $.001 par value
shares authorized for each Fund) 183,489 55,063
========== ==========
NET ASSET VALUE (Net assets/outstanding shares):
(offering and redemption price per share) $5.80 $5.37
========== ==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Portfolio
-------------------
Year ended Period ended
December 31, December 31,
------------ -------------
INVESTMENT OPERATIONS: 1997 1996(a)
---- -------
<S> <C> <C>
Net investment (loss) $ (3,631) $ (68)
Net realized gain on investments
Net change in unrealized appreciation on investments 31,285 530
Net increase in net assets from investment operations 75,474 462
DIVIDENDS AND DISTRIBUTIONS:
Net investment income - -
Net realized gain on investments
----------- ---------
Total dividends and distributions (42,470) -
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 740,441 250,000
Dividends reinvested 42,470 -
Cost of shares redeemed (1,995) -
----------- ---------
Net increase in net assets from capital share transactions 780,916 250,000
----------- ---------
NET INCREASE IN NET ASSETS 813,920 250,462
----------- --------
NET ASSETS:
Beginning of period 250,462 -
----------- --------
End of period $ 1,064,382 $ 250,462
=========== ==========
CAPITAL SHARE TRANSACTIONS:
Shares sold 126,411 50,000
Shares issued for reinvestment of dividends and distributions 7,412 -
Shares redeemed (334) -
----------- --------
Net increase in shares outstanding 133,489 50,000
----------- --------
Premier Portfolio
-----------------
Year ended Period ended
December 31, December 31,
------------ -------------
INVESTMENT OPERATIONS: 1997 1996(a)
---- -------
<S> <C> <C>
Net investment (loss) $ (488) $ (68)
Net realized gain on investments 27,763 -
Net change in unrealized appreciation on investments 15,891 2,487
---------- ---------
Net increase in net assets from investment operations 43,166 2,419
DIVIDENDS AND DISTRIBUTIONS:
Net investment income - -
Net realized gain on investments (27,004) -
---------- ---------
Total dividends and distributions (27,004) -
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 38 250,000
Dividends reinvested 27,004 -
Cost of shares redeemed - -
Net increase in net assets from capital share transactions 27,042 250,000
---------- ---------
NET INCREASE IN NET ASSETS 43,204 252,419
---------- ---------
NET ASSETS:
Beginning of period 252,419 -
End of period $ 295,623 $ 252,419
========= =========
CAPITAL SHARE TRANSACTIONS:
Shares sold 7 50,000
Shares issued for reinvestment of dividends and distributions 5,056 -
Shares redeemed - -
---------- ---------
Net increase in shares outstanding 5,063 50,000
---------- ---------
</TABLE>
(a) Both Portfolios commenced operations on December 27, 1996.
The accompanying notes are an integral part of the financial statements.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF OPERATIONS Year ended December 31, 1997
- ------------------------------------------------------------------------------
Micro-Cap Premier
Portfolio Portfolio
--------- ---------
INVESTMENT INCOME:
Income:
Dividends $ 1,464 $ 3,266
Interest 29 -
------- --------
Total Income 1,493 3,266
------- --------
Expenses:
Investment advisory fees 4,746 2,783
Custodian and shareholding servicing fees 13,410 12,393
Administrative and office facilities expenses 167 141
Professional fees 5,797 5,797
Trustees' fees 712 794
Organizational expenses 2,117 2,117
Other expenses 833 660
------- --------
Total Expenses 27,782 24,685
Fees Waived by Investment Adviser (4,746) (2,783)
Expenses Reimbursed by Investment Adviser (17,912) 18,148)
------- --------
Net Expenses 5,124 3,754
------- --------
Net Investment (Loss) (3,631) (488)
------- --------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 47,820 27,763
Net change in unrealized appreciation on investments 31,285 15,891
------- --------
Net realized and unrealized gain on investments 79,105 43,654
NET INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS $ 75,474 $ 43,166
======== ========
The accompanying notes are an integral part of the 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 the Funds'
performance for the periods presented.
<TABLE>
<CAPTION>
Net Asset Value, Net Investment Net Realized and Distributions From Distributions From Net Asset Value,
Beginning Income Unrealized Gain on Net Investment Net Realized Gain End
of Period (Loss) Investments Income on Investments of Period
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
- -----------------------
1997 $5.01 ($0.02) $1.08 - ($0.27) $5.80
1996 5.00 - 0.01 - - 5.01
Premier Portfolio (b)
- -----------------------
1997 $5.05 ($0.01) $0.87 - ($0.54) $5.37
1996 5.00 - 0.05 - - 5.05
Ratio of Expenses Ratio of Net Average
Total Net Assets to Average Investment Income to Portfolio Commission Rate
Return End of Period Net Assets Average Net Assets Turnover Rate Paid
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
- -----------------------
1997 21.2% $ 1,064,382 1.35% -0.96% 132% $ 0.0496
1996 0.2% 250,462 1.99% * -1.99% * 0% 0.0499
Premier Portfolio (b)
- -----------------------
1997 17.1% $ 295,623 1.35% -0.18% 79% $ 0.0606
1996 1.0% 252,419 1.99% * -1.99% * 0% 0.0667
</TABLE>
- -----------------------------------
(a) Expense ratios are shown after fee waivers and expense reimbursements by
the investment adviser. For the periods ended
December 31, 1997 and 1996, the expense ratios before the waivers and
reimbursements would have been 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
December 31, 1997 and 1996, the expense ratios before the waivers and
reimbursements would have been 8.87% and 22.49%,
respectively. The Fund commenced operations on December 27, 1996.
* Annualized.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Summary of Significant Accounting Policies:
Royce Micro-Cap Portfolio and Royce Premier Portfolio (the "Fund" or
"Funds") are two series of Royce Capital Fund (the "Trust"). The Trust, a
Delaware business trust, is a diversified open-end management investment
company. The Funds commenced operations on December 27, 1996.
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 and dividend
income is recorded on the ex-dividend date. 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:
Expenses directly attributable to a Fund are charged to that Fund's
operations while expenses applicable to more than one series of the Trust are
allocated in an equitable manner.
Taxes:
As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, a fund is not subject to income taxes to the extent that
the 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 (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 to paid-in capital.
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 distributed 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 are held by SSB&T until maturity of the repurchase
agreements. 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") (formerly Quest Advisory Corp.), Royce is paid a monthly fee at
an annual rate of 1.25% and 1.0% of the average net assets of Micro-Cap
Portfolio and Premier Portfolio, respectively. Prior to January 1, 1997, the
fee for Micro-Cap Portfolio was 1.50%. For the year ended December 31, 1997,
Royce voluntarily waived advisory fees of $4,746 for Micro-Cap Portfolio and
$2,783 for Premier Portfolio.
Purchases and Sales of Investment Securities:
For the year ended December 31, 1997, 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
------------------- -----------------
Purchases $815,417 $271,127
Sales $307,339 $132,700
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Trustees of Royce Capital Fund and Shareholders of Royce Capital
Fund -Micro-Cap Portfolio and Royce Capital Fund - Premier Portfolio:
We have audited the accompanying statements of assets and liabilities of
Royce Capital Fund - Micro-Cap Portfolio and Royce Capital Fund - Premier
Portfolio, including the schedules of investments as of December 31, 1997, the
related statements of operations for the year then ended, the statements of
changes in net assets for the year then ended and for the period from December
27, 1996 (commencement of operations) to December 31, 1996, and the financial
highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Royce Capital Fund - Micro-Cap Portfolio and Royce Capital Fund - Premier
Portfolio as of December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for the year then ended and for the
period from December 27, 1996 (commencement of operations) to December 31, 1996,
and the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1998
