Value Investing in Small Companies for More Than 25 Years
ROYCE CAPITAL FUND
Micro-Cap Portfolio
Premier Portfolio
Total Return Portfolio
1998 Annual Report
<PAGE>
ANNUAL REPORT REFERENCE GUIDE
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LETTER TO OUR SHAREHOLDERS 2
The stock market continued to excite in 1998. Both the Dow
Jones Industrial Average and the S&P 500 reached record highs
despite third quarter setbacks. Meanwhile, small-cap securities
struggled in the second and third quarters, but rebounded
strongly in the fourth quarter.
PERFORMANCE AND PORTFOLIO REVIEW 4
All Royce Capital Portfolios outperformed their benchmark
index, the Russell 2000, in 1998.
Royce Micro-Cap Portfolio returned 4.1% in 1998.
Royce Premier Portfolio returned 8.9% in 1998.
Royce Total Return Portfolio returned 2.4% since
its inception (5/15/98).
SCHEDULES OF INVESTMENTS AND OTHER FINANCIAL STATEMENTS 7
For more than 25 years, our value approach has focused on evaluating a
company's 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 worth.
<PAGE>
LETTER TO OUR SHAREHOLDERS
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[Cartoon graphic: Dancers "jiving" to the groove at the "Wall Street Hop"]
-c-Blaustein '99
Dear Shareholder,
Although the stock market took a brief but dramatic downturn during the third
quarter, it was not enough to keep its swinging participants off the dance
floor. In three out of four quarters in 1998, large-cap stocks provided
investors with jazzed-up returns. In contrast, small-cap securities grooved
in quarters one and four, but sang the blues in quarters two and three.
On an intra-year basis, the large-cap S&P 500 was off 19.2% from its peak on
July 17, 1998 to its trough on August 31, 1998, while the small-cap Russell
2000 was off 36.5% from its April 21 peak to its October 8 trough. ALTHOUGH
BOTH LARGE- AND SMALL-CAP SECURITIES RALLIED IN 1998'S FOURTH QUARTER, THE
CALENDAR-YEAR PERFORMANCE DISPARITY BETWEEN THE TWO INDICES WAS THE WIDEST
SINCE THE INCEPTION OF THE RUSSELL 2000 IN 1979.
Large-cap and technology stocks were at the top of the charts in 1998. Both
the Dow Jones Industrial Average ("Dow") and S&P 500 reached record highs
despite third quarter setbacks. The Dow (+18.1%) generated its fourth
consecutive year of double digit gains, and the S&P 500 (+28.6%) posted an
unprecedented fourth consecutive year of 20%+ returns. If this were not
amazing enough, consider the results of the Nasdaq Composite, which was up
39.6% for the year. How much of a difference did technology make? The tech-
heavy Nasdaq 100 finished 1998 up 85.5% versus only 6.8% for the Nasdaq
Industrials. Wow!
While large-cap companies enjoyed cheers and applause in 1998, small-cap
securities endured catcalls. However, even though the small-cap oriented
Russell 2000 did hit some sour notes - the index was down 2.6% for the full
year - it was not entirely off key, considering it was down 23.9% for the
combined second and third quarters. Just how tough was it for small-cap
mutual fund investors? According to fund rating service Morningstar, out of
2,802 domestic equity funds overall, only 12 of the 397 small-cap objective
funds with a three-year history garnered four or five star ratings as of
December 31, 1998. This means that out of the 910 funds that received four or
five star ratings, only 1.3% were small-cap portfolios.
Fortunately, small-cap securities staged a short, but impressive, rally at
year-end. FROM ITS BOTTOM ON OCTOBER 8 THROUGH DECEMBER 31, THE RUSSELL 2000
WAS UP 36.3%, COMFORTABLY AHEAD OF THE S&P 500, WHICH WAS UP 28.1%. A little
more of this in 1999 would be music to our ears.
<PAGE>
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The small-cap market's year-end rally helped our Portfolios post solid
returns in 1998. For the year, ROYCE MICRO-CAP PORTFOLIO returned a modest
4.1%, ROYCE PREMIER PORTFOLIO gained 8.9% and ROYCE TOTAL RETURN PORTFOLIO
rose 2.4% since its inception on May 15, 1998. All three Portfolios
outperformed their benchmark, the small-cap oriented Russell 2000, which was
off 2.6% for the year and down 10.0% since May 15, 1998.
THE DOMINANT THEME IN 1998 WAS CHANGE. This summer's decline gave us a rare
investment opportunity, as virtually all small-cap securities were repriced
regardless of an individual company's circumstances. The last time such a
substantial small-cap sector repricing occurred was 1990. If one believes (as
we do) that long-term outperformance is directly related to exploiting
valuation discrepancies, then this summer's downturn provided us with
substantial future performance potential.
In the fourth quarter, market leadership shifted away from the trio of global
multinationals, large financials and technology, leaving technology as a solo
act - more exciting, but much less stable. According to Goldman Sachs, the
average Internet stock - a dominant force inside the technology sector - was
up 225% in 1998. Internet frenzy has recently consumed the market landscape.
It seems a fitting coda to this decade's bull market, an outsized,
speculative phase to an outsized market cycle. However, when this sector
corrects, a subsequent correction to the market as a whole seems likely, and
a new cycle will be under way for certain. It is in this new cycle that we
believe our guarded optimism for small-caps will be substantiated. We are
also confident that in this low-return environment, there will be great value
in "value."
[Photo: (l-r) 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
February 9, 1999
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 investing or sending money.
Morningstar proprietary ratings reflect historical risk-adjusted performance
as of 12/31/98 and are subject to change monthly. The ratings are calculated
from a fund's three-, five- and 10-year average annual returns with
appropriate fee adjustments and a risk factor that reflects performance
relative to three-month treasury bill returns. Ten percent of the funds in
the domestic equity category receive five stars and 22.5% receive four stars.
The Russell 2000, Nasdaq Composite, Nasdaq Industrials, Nasdaq 100, S&P 500
and Dow Jones Industrial Average are unmanaged indices of domestic common
stocks.
<PAGE>
ROYCE MICRO-CAP PORTFOLIO PERFORMANCE AND PORTFOLIO REVIEW
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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 12/31/98 Portfolio Diagnostics
- --------------------------------- -----------------------------------------
Fourth Quarter* 22.9% Median Market Capitalization $152 million
July - December* -1.9 Weighted Average P/E Ratio 13.7x
1-Year 4.1 Weighted Average P/B Ratio 1.5x
Since Inception (12/27/96) 12.4 Weighted Average Yield 0.7%
Net Assets $3.3 million
*Not annualized.
Royce Micro-Cap Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment,
From Inception (12/27/96) Through 12/31/98
[LINE CHART]
Royce
Capital Russell
Date Micro-Cap 2000
- ---- --------- -------
Dec-96 10,000 10,000
Mar-97 9,820 9,662
Jun-97 10,420 11,229
Sep-97 11,460 12,900
Dec-97 12,147 12,468
Mar-98 13,277 13,721
Jun-98 12,879 13,081
Sep-98 10,282 10,442
Dec-98 12,641 12,041
[END LINE CHART]
Portfolio Composition
- ---------------------------------------
Top Five Positions % of Net Assets
Velcro Industries 4.5%
800-JR CIGAR 4.2
Circle International Group 3.7
REMEC 3.1
Richardson Electronics 2.6
Top Five Sectors % of Net Assets
Technology 29.0%
Consumer Products 19.1
Industrial Products 14.9
Industrial Services 13.0
Health 6.9
HOW WE DID In an exciting fourth quarter for small-cap stocks, Royce Micro-
Cap Portfolio outperformed its benchmark index, the small-cap oriented
Russell 2000, with a strong 22.9% return versus 16.3% for the index. The
Portfolio also outperformed the index for the second half of 1998, falling
just 1.9% versus a decline of 7.1% for the Russell 2000. In what was a
difficult year for micro-cap stocks, we were pleased with Royce Micro-Cap
Portfolio's return of 4.1%, especially when compared to a decline of 2.6%
generated by the Russell 2000. In addition, since its inception on 12/27/96,
the Portfolio has outperformed the Russell 2000.
Investors' preference for larger, more liquid stocks kept micro-cap companies
out of the investment spotlight in 1998, with the exception of technology, a
market-leading sector within both large- and small-cap. In the second half of
the year, the Portfolio benefited from an increased exposure to technology
stocks, reflecting the growing role technology plays in the economy (which
includes a vastly expanding universe of small-cap technology companies) and
the attractive values brought about by this year's market downturn. 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
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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 the
Portfolio, we search for companies that possess excellent business strengths
and/or prospects, high internal rates of return and low leverage.
Average Annual
Total Returns Through 12/31/98 Portfolio Diagnostics
- --------------------------------- ------------------------------------------
Fourth Quarter* 12.7% Median Market Capitalization $511 million
July - December* -2.2 Weighted Average P/E Ratio 15.7x
1-Year 8.9 Weighted Average P/B Ratio 1.7x
Since Inception (12/27/96) 13.4 Weighted Average Yield 1.5%
Net Assets $0.4 million
* Not annualized.
Royce Premier Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment,
From Inception (12/27/96) Through 12/31/98
[LINE CHART]
Royce
Capital Russell
Date Premier 2000
- ---- ------- -------
Dec-96 10,000 10,000
Mar-97 10,300 9,662
Jun-97 11,180 11,229
Sep-97 12,140 12,900
Dec-97 11,826 12,468
Mar-98 13,280 13,721
Jun-98 13,170 13,081
Sep-98 11,430 10,442
Dec-98 12,881 12,041
[END LINE CHART]
Portfolio Composition
- ---------------------------------------
Top Five Positions % of Net Assets
W. R. Berkley 4.5%
Kaydon Corporation 4.3
Florida Rock Industries 4.1
Simpson Manufacturing Co. 4.0
Lincoln Electric Holdings 3.6
Top Five Sectors % of Net Assets
Industrial Products 20.1%
Financial Intermediaries 15.0
Technology 11.0
Industrial Services 10.7
Consumer Products 8.6
HOW WE DID Royce Premier Portfolio's concentrated approach outperformed its
benchmark index, the small-cap oriented Russell 2000, for both the second
half of 1998 and the full year. The Portfolio fell 2.2% versus a decline of
7.1% for the Russell 2000 in the second half, and gained 8.9% versus a
decline of 2.6% for the index for the year. In addition, since its inception
on 12/27/96, the Portfolio outperformed the Russell 2000.
In the second half of 1998, the Portfolio benefited from an increased
exposure to technology stocks, a market-leading sector within both large- and
small-cap in 1998. This increased exposure to technology is not indicative of
a change in our investment style, but instead reflects the growing role
technology plays in the economy (which includes a vastly expanding universe
of small-cap technology companies) and the attractive values brought about by
this year's market downturn. We remain committed to absolute valuation
measures in our selection process.
<PAGE>
ROYCE TOTAL RETURN PORTFOLIO PERFORMANCE AND PORTFOLIO REVIEW
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WHAT WE DO Royce Total Return Portfolio uses a value approach to invest
primarily in dividend-paying small-cap companies. We believe that the
combination of current yield and capital appreciation potential has allowed
the Portfolio to participate in the returns available from the small-cap
market with less volatility.
Total Returns Through 12/31/98 Portfolio Diagnostics
- --------------------------------- ------------------------------------------
Fourth Quarter 4.7% Median Market Capitalization $402 million
July - December 2.6 Weighted Average P/E Ratio 15.2x
Since Inception (5/15/98) 2.4 Weighted Average P/B Ratio 1.8x
Weighted Average Yield 3.7%
Net Assets $0.1 million
Royce Total Return Portfolio vs. Russell 2000
Growth of a $10,000 Initial Investment,
From Inception (5/15/98) Through 12/31/98
[LINE CHART]
Royce
Capital Russell
Date Total Return 2000
- ---- ------------ -------
15-May-98 10,000 10,000
May-98 10,000 9,667
Jun-98 9,980 9,687
Jul-98 9,900 8,902
Aug-98 9,280 7,171
Sep-98 9,780 7,732
Oct-98 10,000 8,047
Nov-98 10,180 8,468
Dec-98 10,242 8,997
[END LINE CHART]
Portfolio Composition
- ---------------------------------------
Top Five Positions % of Net Assets
Curtiss-Wright Corporation 6.6%
Charming Shoppes 4.6
Bassett Furniture Industries 4.1
Enesco Group 4.0
Zenith National Insurance 4.0
Top Five Sectors % of Net Assets
Consumer Products 13.7%
Financial Intermediaries 13.6
Industrial Products 13.0
Technology 10.3
Natural Resources 6.0
HOW WE DID Although Royce Total Return Portfolio underperformed its
benchmark index, the small-cap oriented Russell 2000, in the fourth quarter,
it did outperform the index for the second half of 1998, returning 2.6%
versus a decline of 7.1% for the index. In addition, the Portfolio
outperformed the Russell 2000 since its inception, rising 2.4% versus a
decline of 10.0% for the index. Although the performance history for this
Portfolio has been short, we are excited about the prospects for investing in
dividend-paying small-cap stocks and believe that this strategy may provide a
substantial long-term performance edge.
<PAGE>
SCHEDULES OF INVESTMENTS
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ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO December 31, 1998
- ------------------------------------------------------------------------------
COMMON STOCKS - 94.4%
SHARES VALUE
------ -----
Consumer Products - 19.1%
Apparel and Shoes - 1.0%
The North Face* 2,500 $32,500
-----------
Food/Beverage/Tobacco - 4.2%
800-JR CIGAR* 6,000 139,500
-----------
Home Furnishing/Appliances - 2.3%
Conso International Corporation* 6,000 35,250
Meadowcraft* 2,500 27,969
Neutral Posture Ergonomics* 3,000 12,000
-----------
75,219
-----------
Publishing - 0.7%
The Topps Company* 5,000 25,000
-----------
Sports and Recreation - 1.7%
Aldila* 13,000 32,500
RockShox* 10,000 25,625
-----------
58,125
-----------
Other Consumer Products - 9.2%
Koala Corporation 3,500 60,813
Lazare Kaplan International* 10,000 70,000
Marvel Enterprises* 4,500 27,844
Velcro Industries 1,000 149,000
-----------
307,657
-----------
638,001
-----------
Consumer Services - 1.5%
Leisure/Entertainment - 0.6%
Seattle Filmworks* 4,000 18,500
-----------
Restaurants/Lodging - 0.9%
Pizza Inn 6,600 29,287
-----------
47,787
-----------
Financial Intermediaries - 3.6%
Insurance - 3.6%
Capitol Transamerica Corporation 2,900 54,194
Highlands Insurance Group* 1,500 19,594
The Navigators Group* 2,100 32,550
Nobel Insurance Limited 400 312
PICO Holdings* 1,000 13,250
-----------
119,900
-----------
Financial Services - 1.2%
Information and Processing - 1.2%
Duff & Phelps Credit Rating 700 38,369
-----------
Health - 6.9%
Commercial Service - 1.3%
Young Innovations* 3,400 44,625
-----------
Drugs and Biotech - 5.6%
BioReliance Corporation* 6,700 53,600
International Isotopes* 4,000 64,000
Myriad Genetics* 5,000 50,000
ViroPharma Incorporated* 2,000 18,625
-----------
186,225
-----------
230,850
-----------
SHARES VALUE
------ -----
Industrial Products - 14.9%
Building Systems and Components - 1.4%
Falcon Products 4,000 $48,000
-----------
Construction Materials - 2.2%
Florida Rock Industries 600 18,600
The Monarch Cement Company 2,500 55,625
-----------
74,225
-----------
Industrial Components - 0.5%
Woodhead Industries 1,300 16,900
-----------
Machinery - 1.3%
DeVlieg-Bullard* 1,500 937
Lund International Holdings* 4,900 41,650
-----------
42,587
-----------
Paper and Packaging - 2.0%
PalEx* 9,000 68,062
-----------
Pumps, Valves and Bearings - 0.5%
Sun Hydraulics Corporation 1,800 14,963
-----------
Specialty Chemicals and Materials - 5.7%
CFC International* 7,500 60,000
Chemfab Corporation* 3,000 62,062
Hauser* 7,100 31,506
Hawkins Chemical 1,000 10,000
Synalloy Corporation 3,000 26,250
-----------
189,818
-----------
Other Industrial Products - 1.3%
BHA Group Holdings 3,100 43,013
-----------
497,568
-----------
Industrial Services - 13.0%
Commercial Services - 1.7%
BHI Corporation* 500 15,375
Business Resource Group* 12,500 42,188
-----------
57,563
-----------
Engineering and Construction - 0.1%
Sevenson Environmental Services 480 4,080
-----------
Food/Tobacco Processors - 2.3%
Midwest Grain Products* 5,200 70,850
Standard Commercial Corporation 606 5,189
-----------
76,039
-----------
Industrial Distribution - 0.8%
Vallen Corporation* 1,400 28,000
-----------
Printing - 0.8%
Ennis Business Forms 2,500 24,844
-----------
Transportation and Logistics - 7.3%
Circle International Group 6,100 125,050
Eagle USA Airfreight* 3,500 85,750
Kenan Transport Company 1,000 33,500
-----------
244,300
-----------
434,826
-----------
<PAGE>
SCHEDULES OF INVESTMENTS
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ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO December 31, 1998
- ------------------------------------------------------------------------------
SHARES VALUE
------ -----
Natural Resources - 5.2%
Metals and Mining - 0.2%
MK Gold Company* 15,000 $8,437
-----------
Oil and Gas - 5.0%
Denbury Resources* 20,000 81,250
PetroCorp Incorporated* 500 2,875
Titan Exploration* 12,500 82,031
-----------
166,156
-----------
174,593
-----------
Technology - 29.0%
Aerospace/Defense - 1.6%
Special Metals Corporation* 6,100 54,519
-----------
Components and Systems - 7.6%
Axiohm Transaction Solutions* 700 4,550
Industrial Scientific Corporation 2,900 67,425
Modern Controls 4,500 25,875
Newport Corporation 3,000 50,625
PCD* 5,000 65,000
Perceptron* 2,500 16,563
VideoServer* 1,300 23,887
-----------
253,925
-----------
Distribution - 5.1%
Pioneer-Standard Electronics 9,000 84,375
Richardson Electronics 9,000 86,625
-----------
171,000
-----------
Semiconductors and Equipment - 4.0%
Exar Corporation* 3,000 48,375
Helix Technology Corporation 4,000 52,000
Intevac* 5,000 31,875
-----------
132,250
-----------
SHARES VALUE
------ -----
Software/Services - 7.6%
ANSYS* 1,800 $19,800
Cognex Corporation* 2,000 40,000
JDA Software Group* 6,000 58,125
Kronos Incorporated* 1,800 79,762
MacNeal-Schwendler Corporation* 8,000 56,000
-----------
253,687
-----------
Telecommunications - 3.1%
REMEC* 5,700 102,600
-----------
967,981
-----------
TOTAL COMMON STOCKS
(Cost $3,386,473) 3,149,875
-----------
TOTAL INVESTMENTS- 94.4%
(Cost $3,386,473) 3,149,875
CASH AND OTHER ASSETS
LESS LIABILITIES - 5.6% 187,505
-----------
NET ASSETS - 100% $3,337,380
-----------
* Non-income producing.
INCOME TAX INFORMATION - The cost of total investments for Federal income
tax purposes was $3,386,473. At December 31, 1998, net unrealized
depreciation for all securities was $236,598, consisting of aggregate gross
unrealized appreciation of $338,367 and aggregate gross unrealized depreciation
of $574,965.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SCHEDULES OF INVESTMENTS
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ROYCE CAPITAL FUND - PREMIER PORTFOLIO December 31, 1998
- ------------------------------------------------------------------------------
COMMON STOCKS - 84.7%
SHARES VALUE
------ -----
Consumer Products - 8.6%
Apparel and Shoes - 1.9%
Superior Uniform Group 500 $7,250
-----------
Collectibles - 1.9%
Enesco Group 300 6,975
-----------
Publishing - 1.3%
Gibson Greetings* 400 4,750
-----------
Sports and Recreation - 3.5%
Oakley* 1,000 9,438
Sturm, Ruger & Company 300 3,581
-----------
13,019
-----------
31,994
-----------
Consumer Services - 4.3%
Restaurants/Lodging - 1.7%
Applebee's International 300 6,187
-----------
Retail Stores - 2.6%
Charming Shoppes* 2,300 9,919
-----------
16,106
-----------
Financial Intermediaries - 15.0%
Insurance - 15.0%
W. R. Berkley 500 17,031
Leucadia National Corporation 200 6,300
Orion Capital Corporation 200 7,962
PMA Capital Cl. A 300 5,869
Trenwick Group 300 9,787
Zenith National Insurance 400 9,250
-----------
56,199
-----------
Financial Services - 7.9%
Information and Processing - 1.4%
Duff & Phelps Credit Rating 100 5,481
-----------
Insurance Brokers - 4.9%
E.W. Blanch Holdings 200 9,488
Arthur J. Gallagher & Co. 200 8,825
-----------
18,313
-----------
Investment Management - 1.6%
The Pioneer Group* 300 5,925
-----------
29,719
-----------
Health - 3.5%
Drugs and Biotech - 3.5%
Chiron Corporation* 500 13,094
-----------
Industrial Products - 20.1%
Building Systems and Components - 4.0%
Simpson Manufacturing Co.* 400 14,975
-----------
Construction Materials - 5.8%
CalMat 200 6,175
Florida Rock Industries 500 15,500
-----------
21,675
-----------
SHARES VALUE
------ -----
Machinery - 4.9%
Lincoln Electric Holdings 600 $13,350
Nordson Corporation 100 5,138
-----------
18,488
-----------
Pumps, Valves and Bearings - 4.3%
Kaydon Corporation 400 16,025
-----------
Specialty Chemicals and Materials - 1.1%
Lilly Industries Cl. A 200 3,987
-----------
75,150
-----------
Industrial Services - 10.7%
Engineering and Construction - 5.3%
Morrison Knudsen Corporation* 1,000 9,750
Stone & Webster 300 9,975
-----------
19,725
-----------
Printing - 3.1%
New England Business Service 300 11,738
-----------
Transportation and Logistics - 2.3%
Air Express International Corporation* 400 8,700
-----------
40,163
-----------
Natural Resources - 3.6%
Energy Services - 1.0%
Input Output* 500 3,656
-----------
Oil and Gas - 2.6%
Barrett Resources* 200 4,800
Tom Brown* 500 5,016
-----------
9,816
-----------
13,472
-----------
Technology - 11.0%
Aerospace/Defense- 3.0%
Curtiss-Wright Corporation 300 11,437
-----------
Distribution - 6.0%
Analog Devices* 200 6,275
Daisytek International Corporation* 200 3,800
Marshall Industries* 500 12,250
-----------
22,325
-----------
Software/Services - 2.0%
National Computer Systems 200 7,400
-----------
41,162
-----------
TOTAL COMMON STOCKS
(Cost $295,636) 317,059
-----------
TOTAL INVESTMENTS - 84.7%
(Cost $295,636) 317,059
CASH AND OTHER ASSETS
LESS LIABILITIES - 15.3% 57,358
-----------
NET ASSETS - 100% $374,417
-----------
* Non-income producing.
INCOME TAX INFORMATION - The cost of total investments for Federal income tax
purposes was $297,544. At December 31, 1998, net unrealized appreciation
for all securities was $19,515, consisting of aggregate gross unrealized
appreciation of $43,913 and aggregate gross unrealized depreciation of
$24,398. The Fund designated $3,015 as a capital gain dividend for the purpose
of the dividend paid deduction.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SCHEDULES OF INVESTMENTS
- ------------------------------------------------------------------------------
ROYCE CAPITAL FUND - TOTAL RETURN PORTFOLIO December 31, 1998
- ------------------------------------------------------------------------------
COMMON STOCKS - 67.5%
SHARES VALUE
------ -----
Consumer Products - 13.7%
Apparel and Shoes - 2.5%
Superior Uniform Group 200 $2,900
-----------
Collectibles - 4.0%
Enesco Group 200 4,650
-----------
Home Furnishings/Appliances - 4.1%
Bassett Furniture Industries 200 4,825
-----------
Sports and Recreation - 3.1%
Sturm, Ruger & Company 300 3,581
-----------
15,956
-----------
Financial Intermediaries - 13.6%
Insurance - 13.6%
Orion Capital Corporation 100 3,981
PMA Capital Cl. A 200 3,913
Trenwick Group 100 3,262
Zenith National Insurance 200 4,625
-----------
15,781
-----------
Financial Services - 5.5%
Insurance Brokers - 2.3%
Crawford & Company Cl. A 200 2,675
-----------
Investment Management - 3.2%
The John Nuveen Company Cl. A 100 3,713
-----------
6,388
-----------
Industrial Products - 13.0%
Building Systems and Components-2.1%
Falcon Products 200 2,400
-----------
Machinery - 3.8%
Lincoln Electric Holdings 200 4,450
-----------
Paper and Packaging - 2.1%
P. H. Glatfelter Company 200 2,475
-----------
Pumps, Valves and Bearings - 3.5%
Kaydon Corporation 100 4,006
-----------
SHARES VALUE
------ -----
Specialty Chemicals and Materials - 1.5%
Synalloy Corporation 200 $1,750
-----------
15,081
-----------
Industrial Services - 5.4%
Engineering and Construction-2.8%
Stone & Webster 100 3,325
-----------
Printing - 2.6%
Ennis Business Forms 300 2,981
-----------
6,306
-----------
Natural Resources- 6.0%
Gold - 3.4%
Anglogold Limited ADR+ 200 3,913
-----------
Oil and Gas - 2.6%
Devon Energy Corporation 100 3,069
-----------
6,982
-----------
Technology - 10.3%
Aerospace/Defense - 10.3%
Curtiss-Wright Corporation 200 7,625
Woodward Governor Company 200 4,425
-----------
12,050
-----------
TOTAL COMMON STOCKS
(Cost $80,620) 78,544
-----------
CORPORATE BOND - 4.6%
Charming Shoppes 7.50%
Conv. Sub. Note due 7/15/06,
principal amount $6,000
(Cost $5,985) 5,400
-----------
TOTAL INVESTMENTS - 72.1%
(Cost $86,605) 83,944
CASH AND OTHER ASSETS
LESS LIABILITIES - 27.9% 32,425
-----------
NET ASSETS - 100% $116,369
-----------
+ American Depository Receipt.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $86,605. At December 31, 1998, net unrealized depreciation
for all securities was $2,661, consisting of aggregate gross unrealized
appreciation of $2,707 and aggregate gross unrealized depreciation of $5,368.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF ASSETS AND LIABILITIES December 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier Total Return
Portfolio Portfolio Portfolio
--------- --------- ------------
<S> <C> <C> <C>
ASSETS:
Investments at value (identified cost $3,386,473,
$295,636 and $86,605, respectively) $3,149,875 $317,059 $83,944
Cash 197,140 48,612 35,460
Receivable for investments sold - 6,354 20,570
Receivable for dividends and interest 890 612 303
Prepaid expenses and other assets 6,285 6,210 9,047
- -----------------------------------------------------------------------------------------------
Total Assets $3,354,190 $378,847 $149,324
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed 8,301 47 42
Payable for investments purchased - - 28,876
Accrued expenses 8,509 4,383 4,037
- -----------------------------------------------------------------------------------------------
Total Liabilities 16,810 4,430 32,955
- -----------------------------------------------------------------------------------------------
Net Assets $3,337,380 $374,417 $116,369
===============================================================================================
ANALYSIS OF NET ASSETS:
Accumulated net realized gain on investments $305 $401 $4,242
Net unrealized appreciation (depreciation)
on investments (236,598) 21,423 (2,661)
Capital shares 637 69 23
Additional paid-in capital 3,573,036 352,524 114,765
- -----------------------------------------------------------------------------------------------
Net Assets $3,337,380 $374,417 $116,369
===============================================================================================
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares
authorized for each Fund) 636,678 68,505 22,949
===============================================================================================
NET ASSET VALUES (Net Assets/Shares Outstanding):
(offering and redemption price per share) $5.24 $5.47 $5.07
===============================================================================================
</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
-------------------------- -------------------------- ----------------------
Year ended Year ended Year ended Year ended Period ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1998 1997 1998 (a)
==================================================================================
<S> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment income (loss) ($17,548) ($3,631) ($260) ($488) $56
Net realized gain on investments 434,110 47,820 23,777 27,763 5,322
Net change in unrealized appreciation
(depreciation) on investments (268,413) 31,285 3,045 15,891 (2,661)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
from investment operations 148,149 75,474 26,562 43,166 2,717
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net investment income - - - - (227)
Net realized gain on investments (417,977) (42,470) (23,389) (27,004) (909)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (417,977) (42,470) (23,389) (27,004) (1,136)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Value of shares sold 2,647,803 740,441 52,281 38 113,694
Distributions reinvested 417,974 42,470 23,387 27,004 1,136
Value of shares redeemed (522,951) (1,995) (47) - (42)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
capital share transactions 2,542,826 780,916 75,621 27,042 114,788
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 2,272,998 813,920 78,794 43,204 116,369
NET ASSETS:
Beginning of period 1,064,382 250,462 295,623 252,419 -
- -------------------------------------------------------------------------------------------------------------------------
End of period $3,337,380 $1,064,382 $374,417 $295,623 $116,369
=========================================================================================================================
CAPITAL SHARE TRANSACTIONS (in shares):
Shares sold 460,617 126,411 9,013 7 22,728
Shares issued for reinvestment
of distributions 84,099 7,412 4,438 5,056 229
Shares redeemed (91,527) (334) (9) - (8)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 453,189 133,489 13,442 5,063 22,949
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total Return Portfolio commenced operations on May 15, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF OPERATIONS Period ended December 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier Total Return
Portfolio Portfolio Portfolio
--------- --------- ------------
<C> <S> <S> <S>
INVESTMENT INCOME:
Income:
Dividends $ 12,442 $ 4,184 $ 744
Interest 89 2 244
- ----------------------------------------------------------------------------------------------------------------
Total Income 12,531 4,186 988
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees 27,851 3,293 690
Custodian 8,823 5,740 2,371
Shareholding servicing 7,812 7,811 5,201
Audit fees 5,155 2,855 2,700
Organizational expenses 2,124 2,124 1,391
Trustees' fees 1,568 156 83
Administrative and office facilities expenses 704 146 27
Legal fees 659 129 2
Other expenses 2,926 948 16
- ----------------------------------------------------------------------------------------------------------------
Total Expenses 57,622 23,202 12,481
Fees Waived by Investment Adviser (27,543 (3,293) (690)
Expenses Reimbursed by Investment Adviser 0 (15,463) (10,859)
- ----------------------------------------------------------------------------------------------------------------
Net Expenses 30,079 4,446 932
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (17,548) (260) 56
- ----------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 434,110 23,777 5,322
Net change in unrealized appreciation (depreciation) on investments (268,413) 3,045 (2,661)
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 165,697 26,822 2,661
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS $ 148,149 $26,562 $ 2,717
================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<TABLE>
- --------------------------------------------------------------------------------------------
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.
============================================================================================
<CAPTION>
Net Realized Distributions
Net Asset Net and Distributions From Net Net Asset
Value, Investment Unrealized From Net Realized Value,
Beginning Income Gain on Investment Gain on End
of Period (Loss) Investments Income Investments of Period
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
- -----------------------
1998 $5.80 ($0.03) $0.23 - ($0.76) $5.24
1997 5.01 (0.02) 1.08 - (0.27) 5.80
1996 5.00 - 0.01 - - 5.01
Premier Portfolio (b)
- ---------------------
1998 $5.37 $0.00 $0.47 - ($0.37) $5.47
1997 5.05 (0.01) 0.87 - (0.54) 5.37
1996 5.00 - 0.05 - - 5.05
Total Return Portfolio (c)
- --------------------------
1998 $5.00 $0.01 $0.11 ($0.01) ($0.04) $5.07
<CAPTION>
================================================================================
Ratio of Net
Ratio of Investment
Expenses Income (Loss)
Total Net Assets, to Average to Average Portfolio
Return End of Period Net Assets Net Assets Turnover Rate
===============================================================================
<S> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
- -----------------------
1998 4.1% $3,337,380 1.35% -0.79% 88%
1997 21.2% 1,064,382 1.35% -0.96% 132%
1996 0.2% 250,462 1.99% * -1.99% * 0%
Premier Portfolio (b)
- ---------------------
1998 8.9% $374,417 1.35% -0.08% 109%
1997 17.1% 295,623 1.35% -0.18% 79%
1996 1.0% 252,419 1.99% * -1.99% * 0%
Total Return Portfolio (c)
- --------------------------
1998 2.4% $116,369 1.35% * 0.08% * 77%
===============================================================================
</TABLE>
(a) Expense ratios are shown after fee waivers and expense reimbursements
by the investment adviser. For the periods ended December 31, 1998,
1997 and 1996, the expense ratios before the waivers and reimbursements
would have been 2.59%, 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, 1998,
1997 and 1996, the expense ratios before the waivers and reimbursements
would have been 7.05%, 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 December 31, 1998,
the expense ratio before the waivers and reimbursements would have
been 18.08%. The Fund commenced operations on May 15, 1998.
* Annualized.
<PAGE>
ROYCE CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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 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 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 series of the Trust 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>
ROYCE CAPITAL FUND
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 that 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
undistributed 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 at an annual rate of 1.25%, 1.0% and 1.0% of the average net
assets of Micro-Cap Portfolio, Premier Portfolio and Total Return Portfolio,
respectively. The Investment Adviser had voluntarily committed to waive its
fees and reimburse for certain expenses to the extent necessary to maintain
the ratio of expenses to average net assets at or below 1.35% for each fund.
For the period ended December 31, 1998, Micro-Cap Portfolio recorded advisory
fees of $308 ( net of voluntary waivers of $27,543). Royce voluntarily waived
advisory fees of $3,293 for Premier Portfolio and $690 for Total Return
Portfolio.
Purchases and Sales of Investment Securities:
For the period ended December 31, 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 $3,938,321 $339,046 $134,117
Sales $1,609,110 $296,153 $ 52,834
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Board of Trustees of Royce Capital Fund and Shareholders of Royce
Capital Fund - Micro-Cap Portfolio, Royce Capital Fund - Premier Portfolio,
and Royce Capital Fund - Total Return Portfolio:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial positions of Royce Capital
Fund - Micro-Cap Portfolio, Royce Capital Fund - Premier Portfolio, and Royce
Capital Fund - Total Return Portfolio (the "Funds") at December 31, 1998, and
the results of their operations, the changes in their net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of investments owned at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 1999
