1999 Annual Report
Value Investing In Small Companies
For More Than 25 Years
ROYCE
CAPITAL
FUND
Micro-Cap Portfolio
Premier Portfolio
<PAGE>
ANNUAL REPORT REFERENCE GUIDE
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Letter to our Shareholders 2
Performance and Portfolio Reviews 4
Schedules of Investments and Other Financial Statements 8
For more than 25 years, our value approach has focused on evaluating a
company's current 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 that we will pay for
a security must be significantly lower than our appraisal of its current
worth.
<PAGE>
Letter to our Shareholders
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It was only fitting that the stock market concluded the year with a
fireworks display that figured to make the pyrotechnists at the Eiffel Tower
envious. The technology-laden Nasdaq Composite exploded with an 85.6% gain
for 1999, the best single-year performance ever by a diversified domestic
equity index. For an unprecedented fifth consecutive year, the large-cap
indices, the S&P 500 and Dow Jones Industrial Average, concluded 1999 with
strong double-digit gains. Small-cap companies managed a fourth-quarter
flurry of their own that enabled the Russell 2000 (+21.3%) to edge out the
S&P 500 (+21.1%) in 1999 for the first time since 1993, news that risks being
ignored in the wake of the Nasdaq Composite's record-shattering year.
We can perhaps be indulged in a bit of hyperbole in saying that small-
cap stocks, like the heroic warriors in Braveheart, refused to surrender to
their large-cap counterparts. After five long years of underperformance, the
Russell 2000 eked out its small edge versus the S&P 500 with better
performance in the second and fourth quarters after a complete disconnect in
the first quarter. Not on most investors' radar screens is the fact that
1999's calendar year results also reflected excellent small-cap performance
from both the 10/8/98 Russell 2000 market trough (Russell 2000 +65.2% versus
S&P 500 +55.6%) and the 1999 Russell 2000 low on 3/23/99 (Russell 2000 +33.1%
versus S&P 500 +17.5%). Another little noticed, but compelling statistic is
that, for the first time ever, the dividend yield of the Russell 2000 is
greater than that of the S&P 500 and was so for all of 1999. Do we think
that this is the start of something good for our asset class? "You betcha."
Never Surrender
Technology's dominance extended across all capitalization categories.
The sector now accounts for approximately 30% of the S&P 500. In 1999, 66%
of the S&P 500's return was attributable to just 10 stocks, eight of which
were technology issues. Approximately 93% of the Russell 2000's gain for the
year resulted from stocks in the technology sector, and it is now the largest
sector in the Russell 2000, up from third at the beginning of 1999 (Source:
USA Today). In spite of these impressive statistics, technology's impact was
perhaps nowhere more evident than in the divergence between growth and value
investment styles. In all capitalization classes, growth stocks, typically
those with high price/earnings and price/book ratios and high earnings growth
rates, handily trounced value stocks, typically those with low P/E and P/B
ratios and cyclical growth rates. In 1999, the year was like the old country
music song, in which growth investors got the goldmine and value investors
got the shaft.
The divergence between growth and value in the small-cap sector was
especially prominent. There was also substantial disparity within small-cap
value. While performance spreads were consistent between growth and value in
the Russell and the Wilshire small-cap style indices - growth significantly
outdistanced value - 1999 returns within the small-cap value category itself
were markedly different for each index. The Russell 2000 Value index lost
1.5% in 1999, yet the Wilshire Small-Cap Value index's return was even more
miserable, down 15.6%. Since the Wilshire Small-Cap Value Index is made up
of arguably higher-quality companies than is the Russell 2000 Value, as
measured by lower debt-to-capital and higher return-on-assets and return-on-
equity ratios, the travails suffered by small-cap value investors in 1999 are
readily evident.
New Millennium Conjecture
Like most people, we have spent some time reflecting on what the future
might bring. Perhaps it is an occupational hazard, but looking forward
always involves some looking backward for us as well. Investors in general
seem comfortable taking more risk in order to achieve higher returns. Within
the small-cap universe in 1999, the market appeared to undervalue good
financial characteristics and to overvalue hopes, dreams and potential
earnings growth. As a result, many higher-quality small-cap stocks are still
waiting for their chance to shine.
What does it all mean for the future? Consider that, aside from the
technology sector, most stocks had an unspectacular year. Technology
certainly led the market in terms of performance, but other sectors were
generally unable to follow its lead. We think that this very narrow market
environment could be followed by a return to "quality," a period where market
performance will be driven less by momentum and more by business
characteristics. While we recognize that technology is a very important
factor in our economy, this offers no assurance that it must inevitably
remain a market leader.
<PAGE>
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To the Investor Go the Spoils
As we evaluate 1999's performance and consider what 2000 may hold, it
occurs to us that the traditional distinction between the terms "speculator"
and "investor" is more relevant than ever. Speculators ("traders") are
chiefly concerned about a short-term change in price, whereas investors,
ourselves included, are concerned about the long-term appreciation potential
of an enterprise.
We think that the current environment of record-setting stock market
returns is unlikely to continue. For the speculator, this is bad news; for
the long-term investor, it is of less concern. Building long-term wealth is
not simply a matter of participating in a favorable market. It relies on
applying a consistent discipline over time, and recognizing that in order to
provide excellent long-term, absolute and relative results, our portfolios
are likely to underperform over some short-term periods.
[PHOTO: L-R: Charles M. Royce , W. Whitney George and Jack E. Fockler, Jr.]
In this period of extreme divergence between growth and value, we have
no interest in exchanging our investment charter for that of the speculator.
Current conditions seem ripe to us for a return to value, with the
accompanying prospect of higher short-term returns for this style. Whatever
the outcome in the near term, we believe that the individual companies in the
Capital Fund's portfolios offer substantial long-term performance
opportunity.
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
Notes to Performance and Risk Information
Historical market trends are not necessarily indicative of future movements.
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/or micro-cap companies
that may involve considerably more risk than investments in securities of
larger-cap companies (see "Primary Risks" in the prospectus). Please read
the prospectus carefully before investing or sending money.
The Dow Jones Industrial Average, Nasdaq Composite, Russell 2000, Russell
2000 Value, S&P 500 and Wilshire Small-Cap Value are unmanaged indices of
domestic common stocks.
<PAGE>
ROYCE MICRO-CAP PORTFOLIO
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WHAT WE DO Royce Micro-Cap Portfolio (the "Portfolio") seeks long-term
growth of capital. The Portfolio uses a value approach to invest in a
broadly diversified portfolio of micro-cap stocks, companies with market caps
less than $300 million. We believe that the more volatile micro-cap sector,
while often higher in risk, offers greater potential for higher returns than
any other sector of the domestic equity marketplace.
Average Annual Total Returns Through 12/31/99
- ---------------------------------------------
Fourth Quarter* 16.4%
July - December, 1999* 15.8
One-Year 28.1
Three-Year 17.4
Since Inception (12/27/96) 17.4
* Not annualized.
Portfolio Diagnostics
- ---------------------------------------------
Median Market Capitalization $206 million
Weighted Average P/E Ratio 14.0x
Weighted Average P/B Ratio 1.2x
Weighted Average Yield 0.7%
Net Assets $7.5 million
ROYCE MICRO-CAP PORTFOLIO VS. RUSSELL 2000
GROWTH OF A $10,000 INITIAL INVESTMENT,
FROM INCEPTION (12/27/96) THROUGH 12/31/99
[LINE GRAPH]
Royce
Micro-Cap Russell
Portfolio 2000
--------- -------
Dec-1996 10000.00 10000.00
Mar-1997 9820.00 9574.00
Jun-1997 10420.00 11127.00
Sep-1997 11459.00 12783.00
Dec-1997 12146.00 12355.00
Mar-1998 13277.00 13597.00
Jun-1998 12879.00 12963.00
Sep-1998 10283.00 10352.00
Dec-1998 12641.00 12041.00
Mar-1999 10831.00 11388.00
Jun-1999 13992.00 13159.00
Sep-1999 13919.00 12327.00
Dec-1999 16197.00 14601.00
[END LINE GRAPH]
Top Ten Positions % of Net Assets
Titan Exploration 2.7%
Richardson Electronics 2.7
Sevenson Environmental Services 2.4
REMEC 2.4
Sun Hydraulics 2.3
LaSalle Re Holdings 2.0
Willbros Group 1.9
800 JR Cigar 1.9
PXRE Group 1.7
Pioneer-Standard Electronics 1.7
Sector Breakdown % of Net Assets
Technology 17.0%
Industrial Services 16.5
Consumer Products 11.1
Financial Intermediaries 10.2
Industrial Products 10.1
Natural Resources 7.0
Health 5.0
Miscellaneous 4.7
Consumer Services 1.3
Financial Services 0.8
Manager's Discussion
Royce Micro-Cap Portfolio (RCM) enjoyed a very
strong 1999. The Portfolio was up 28.1% for the full year, ahead of its
small-cap benchmark, the Russell 2000, which was up 21.3%. The Portfolio's
average annual total return since inception (12/27/96) was 17.4%.
After being virtually ignored from April `98 through April `99, micro-
cap securities began to rebound in 1999's second quarter, led by technology
stocks. RCM followed suit, posting impressive second-quarter results, more
than holding its own in the third quarter and performing solidly in the
explosive fourth quarter. In fact, if Julius Caesar had gotten his way, and
been allowed to begin the calendar year with the spring equinox, we would be
even more pleased with last year's returns - for the last nine months of the
year (3/31/99 - 12/31/99), the Portfolio was up 49.5% versus 28.2% for the
Russell 2000. In addition, please note that a significant portion of the
Portfolio's 1999 return was attributable to purchases of initial public
offerings (IPOs). It is unlikely that the Portfolio will be able to
participate in IPOs to a similar extent, or with a similar result, in the
future.
<PAGE>
PERFORMANCE AND PORTFOLIO REVIEW
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The Technology sector, which dominated every asset class in the market
last year, was RCM's best performer in 1999, followed by Natural Resources at
a distant second. Software-related companies such as Aspen Technology,
Newport and Kronos were top performers in the technology area. Other
companies with strong showings in this sector included Marshall Industries,
an electronics distributor that was bought out last spring, REMEC, a
microwave component manufacturer whose stock soared in the fourth quarter,
and Helix Technology, a developer of cryogenic and vacuum technology whose
fortunes also rose late in the year.
In the non-technology area, the Portfolio benefitted from stellar
performances from Eagle USA Airfreight, a transportation and logistics
company, and The Topps Company, a marketer of professional athletic
collectibles and the maker of Bazooka bubble gum. Negative returns were
scattered across sectors, in companies such as Special Metals, a diversified
producer of high-performance nickel-based alloys and superalloys, and BHA
Group Holdings, a global filtration company that designs, manufactures and
sells replacement parts and performs rehabilitation conversion services for
industrial air pollution control equipment. In spite of the latter's
disappointing year, we are hopeful that their strong core business will help
the stock to turn around.
There were several new positions in the Portfolio's top-ten holdings.
We increased our exposure in two long-term holdings, Sevenson Environmental
Services and Sun Hydraulics, a designer and manufacturer of high-performance
screw-in hydraulic cartridges and manifolds for fluid power systems, when
declining prices made them attractive buy candidates. Insurance company
stocks also endured a dismal 1999, which enabled us to initiate substantial
positions in LaSalle Re Holdings, a Bermuda-based reinsurer specializing in
catastrophe coverage, and PXRE Group, a holding company with national and
international underwriting and service operations.
While we are pleased by the recent resurgence in micro-cap performance,
we are even more excited about the opportunities in the non-technology
sectors where we believe potential is yet to be realized. Many of these
securities performed far worse in 1999 than those of momentum companies that
are highly leveraged and have no earnings history. This lack of correlation
between individual company quality and 1999 performance fuels our hopes for a
profitable new year.
GOOD IDEAS THAT WORKED
1999 Net Realized and Unrealized Gain
- -------------------------------------
Myriad Genetics $175,996
Marshall Industries $127,296
Eagle USA Airfreight $112,498
REMEC $112,161
Aspen Technology $91,820
Myriad Genetics - We bought this biotech company that specializes in
therapeutic and diagnostic genomic products during 1998's third-quarter
downturn, only to watch the rest of the investment world take notice late in
1999, driving the stock price well beyond our sell target.
Marshall Industries - This electronics distribution firm was battling a
disappointing earnings cycle last spring when a larger company, Avnet, bought
it. Our patience with the company and our belief in its innovative CEO paid
off as Marshall was recognized for its superb value by an industry leader.
GOOD IDEAS AT THE TIME
1999 Net Realized and Unrealized Loss
- -------------------------------------
North Face (The) $87,105
800 JR Cigar $62,619
Balanced Care $54,972
Special Metals $35,075
BHA Group Holdings $34,526
North Face (The) - The stock price of this outerwear designer reflected the
turmoil suffered by the company both financially and organizationally in
1999. We like their strong brand name, but see a need for the company to
strengthen all aspects of its operation before any rebound occurs.
800 JR Cigar - A glut of premium cigars caused this mail-order distributor to
miss quarterly earnings estimates and subsequently slump in 1999. We remain
optimistic owing to the company's low valuation and the fact that management
holds about 75% of the stock.
<PAGE>
ROYCE PREMIER PORTFOLIO
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WHAT WE DO Royce Premier Portfolio (the "Portfolio"), a concentrated
portfolio, seeks long-term growth of capital. The Portfolio uses a value
approach to invest primarily in a limited number of small-cap companies with
market capitalizations between $300 million and $1.5 billion. Royce generally
looks to invest in companies that it considers "premier" - those that have
excellent business strengths and/or prospects for growth, high internal rates
of return and low leverage, and that are trading significantly below our
estimate of their "current worth."
Average Annual Total Returns Through 12/31/99
- ----------------------------------------------
Fourth Quarter* 10.4%
July - December, 1999* 2.8
One-Year 8.2
Three-Year 11.3
Since Inception (12/27/96) 11.7
*Not annualized.
Portfolio Diagnostics
- ----------------------------------------------
Median Market Capitalization $616 million
Weighted Average P/E Ratio 15.2x
Weighted Average P/B Ratio 1.6x
Weighted Average Yield 1.6%
Net Assets $0.4 million
ROYCE PREMIER PORTFOLIO VS. RUSSELL 2000
GROWTH OF A $10,000 INITIAL INVESTMENT,
FROM INCEPTION (12/27/96) THROUGH 12/31/99
[LINE GRAPH]
Royce
Premier Russell
Portfolio 2000
Dec-1996 10000.00 10000.00
Mar-1997 10300.0 9574.00
Jun-1997 11180.00 11127.00
Sep-1997 12140.00 12783.00
Dec-1997 11826.00 12355.00
Mar-1998 13279.00 13597.00
Jun-1998 13169.00 12963.00
Sep-1998 11430.00 10352.00
Dec-1998 12881.00 12041.00
Mar-1999 11562.00 11388.00
Jun-1999 13563.00 13159.00
Sep-1999 12622.00 12327.00
Dec-1999 13940.00 14601.00
[END LINE CHART]
Top Ten Positions % of Net Assets
Wesco Financial 5.7%
Lincoln Electric Holdings 4.8
Curtiss-Wright 4.3
Arrow International 4.1
Charming Shoppes 4.0
Florida Rock Industries 4.0
Schein (Henry) 3.1
Gallagher (Arthur J) & Co. 3.0
Air Express International 3.0
Interim Services 2.9
Sector Breakdown % of Net Assets
Financial Intermediaries 16.2%
Industrial Products 13.4
Health 11.6
Industrial Services 11.1
Technology 10.7
Financial Services 7.6
Consumer Products 4.5
Consumer Services 4.0
Natural Resources 1.4
Manager's Discussion
Royce Premier Portfolio (RCP) was no exception
to the oddities that plagued small-cap value investing in 1999. For the full
year, the Portfolio was up 8.2%, well behind its small-cap benchmark, the
Russell 2000, which was up 21.3%. The Portfolio's average annual total
return since inception was 11.7%.
RCP exemplified in many ways the topsy-turvy nature of the last year.
RCP atypically lost ground against its benchmark in the first quarter
downturn and then atypically outperformed it during the subsequent second-
quarter rally. In the third quarter, the Portfolio again performed
uncharacteristically, narrowly underperforming the Russell 2000 in a
downdraft. In the dynamic fourth quarter, RCP posted a solid 10.4% return,
but lagged its benchmark.
<PAGE>
PERFORMANCE AND PORTFOLIO REVIEW
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The Portfolio's use of concentration, in our view, neither hindered nor
helped its 1999 performance. RCP's preference for small-cap companies with
"higher quality" balance sheets trading at low valuations was out of step
with a market that rewarded higher-risk, higher-valuation investments. The
attributes that we seek, namely strong balance sheets and strong records of
earnings, did not consistently translate into higher valuations in 1999.
However, we did have our share of success stories, as reflected in the panel
below.
Companies in the Consumer Services, Financial Services and Technology
sectors made the greatest positive impact on performance. Charming Shoppes,
a woman's fashion retailer with solid business fundamentals, was a top
performer, as were Duff & Phelps Credit Rating, an international credit
rating agency, and Simpson Manufacturing, a designer and manufacturer of wood-
to-wood, wood-to-concrete and wood-to-masonry connectors that we sold in
August.
There were several new positions among RCP's top-ten holdings in 1999.
We doubled our position in Arrow International, a developer and manufacturer
of clinically advanced disposable catheters, owing to our confidence in the
company's ability to recover after some slow earnings years. We initiated a
position in Henry Schein, a large health-care products distributor, when an
earnings slowdown following some acquisitions dropped its price to a level
that we found attractive. Another new position was Interim Services, a
staffing services company with what we think is a winning combination of low
valuations and a strong balance sheet. Good old-fashioned price appreciation
was responsible for the appearance of both Arthur J. Gallagher & Co., an
insurer specializing in risk management, and Air Express International, a
global logistics services provider for importers and exporters worldwide, in
the top ten holdings.
In our view, the underlying fundamentals of the individual portfolio
companies possess substantial untapped performance opportunity. We believe
that a return to "quality," as opposed to the current environment that has
been dominated by momentum investing, would mean good things for Royce
Premier Portfolio.
GOOD IDEAS THAT WORKED
1999 Net Realized and Unrealized Gain
- ------------------------------------------
C-bridge Internet Solutions $14,219
Avnet $8,854
Caliper Technologies $8,178
Charming Shoppes $7,297
Simpson Manufacturing $6,008
C-bridge Internet Solutions - The Portfolio received an IPO allocation of
this e-commerce business solution provider in December. In less than a week,
the stock price had jumped by more than 250%. Allocations such as this are
typically small and are unlikely to have a similar impact going forward.
Avnet - We purchased the stock of the world's largest distributor of
electronic components at approximately book value, historically a profitable
entry point for companies in this industry. By the end of the year, it was
enjoying a dramatic upswing in its business cycle.
GOOD IDEAS AT THE TIME
1999 Net Realized and Unrealized Loss
- ------------------------------------------
Enesco Group $9,799
Berkley (W.R.) $6,594
Wesco Financial $6,592
Kaydon Corporation $5,300
Stone & Webster $4,931
Enesco Group - The stock price of this designer of collectible figurines and
ornaments enjoyed an all-too-brief second-quarter upswing before a sharp
decline in the collectibles industry began in June and lasted through the end
of the year. We are holding on for now, unsure of the company's ability to
get back on track.
Berkley (W.R.) - Like many insurance companies, this once highly regarded
insurance holding company fell on hard times in 1999 owing in part to a
dearth of investor interest and in part to poor insurance operations. We are
confident, however, that they can participate in an industry rebound.
SCHEDULES OF INVESTMENTS
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ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO December 31, 1999
- ------------------------------------------------------------------------------
COMMON STOCKS - 83.7%
SHARES VALUE
------ -----
Consumer Products- 11.1%
Apparel and Shoes- 2.5%
North Face (The)* 30,700 $124,719
Wolverine World Wide 5,800 63,437
------------
188,156
------------
Collectibles- 1.5%
Enesco Group 10,000 110,625
------------
Food/Beverage/Tobacco- 1.9%
800 JR Cigar* 16,000 139,000
------------
Home Furnishing/Appliances- 1.1%
Bassett Furniture Industries 5,000 80,000
------------
Publishing- 0.8%
Marvel Enterprises* 11,500 63,250
------------
Sports and Recreation- 0.4%
Lund International Holdings* 4,900 28,788
------------
Other Consumer Products- 2.9%
Lazare Kaplan International* 10,000 81,250
Velcro Industries 5,000 60,312
WD-40 3,400 75,225
------------
216,787
------------
826,606
------------
Consumer Services- 1.3%
Restaurants/Lodgings- 0.4%
Pizza Inn 6,600 27,225
------------
Retail Stores- 0.9%
Stein Mart* 12,600 71,662
------------
98,887
------------
Financial Intermediaries- 10.2%
Insurance- 10.2%
Capitol Transamerica 12,900 129,806
Frontier Insurance Group 28,000 96,250
LaSalle Re Holdings 9,100 150,150
The MIIX Group 4,500 65,813
NYMAGIC 7,000 92,313
Navigators Group* 8,800 88,000
Nobel Insurance* 400 100
PICO Holdings* 1,000 12,312
PXRE Group 10,000 130,000
------------
764,744
------------
Financial Services- 0.8%
Information and Processing- 0.8%
Duff & Phelps Credit Rating 700 62,256
------------
SHARES VALUE
------ -----
Health- 5.0%
Commercial Services- 3.7%
PAREXEL International* 10,000 $118,125
Schein (Henry)* 6,000 79,875
Young Innovations* 5,400 79,313
------------
277,313
------------
Drugs and Biotech- 1.3%
Myriad Genetics* 2,000 92,000
------------
369,313
------------
Industrial Products- 10.1%
Building Systems and Components- 0.7%
Falcon Products 6,000 51,750
------------
Construction Materials- 0.7%
Monarch Cement 2,500 51,250
------------
Industrial Components- 1.4%
Herley Industries* 5,000 75,938
Woodhead Industries 2,700 31,387
------------
107,325
------------
Paper and Packaging- 0.9%
PalEx* 9,000 63,000
------------
Pumps, Valves and Bearings- 2.3%
Sun Hydraulics 26,500 172,250
------------
Specialty Chemicals and Materials- 1.6%
CFC International* 7,500 49,219
Chemfab* 3,000 46,875
Synalloy 3,000 22,500
------------
118,594
------------
Other Industrial Products- 2.5%
BHA Group Holdings 8,600 67,725
FLIR Systems* 7,500 121,875
------------
189,600
------------
753,769
------------
Industrial Services- 16.5%
Commercial Services- 5.0%
Applied Analytical Industries* 12,800 116,800
Business Resource Group* 12,500 66,406
Carlisle Holdings* 1,500 18,000
Complete Business Solutions* 3,400 85,425
RCM Technologies* 5,100 87,975
------------
374,606
------------
Engineering and Construction- 5.8%
Sevenson Environmental Services 18,480 177,870
Stone & Webster 7,000 117,687
Willbros Group* 30,300 140,138
------------
435,695
------------
<PAGE>
SCHEDULES OF INVESTMENTS
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ROYCE CAPITAL FUND - MICRO-CAP PORTFOLIO December 31, 1999
- ------------------------------------------------------------------------------
Industrial Services (continued)
Food/Tobacco Processors- 0.5%
Midwest Grain Products* 5,200 $38,350
------------
Printing- 0.8%
Ennis Business Forms 7,500 58,125
------------
Transportation and Logistics- 4.4%
AirNet Systems* 12,700 90,487
Eagle USA Airfreight* 2,700 116,438
Kenan Transport 1,000 31,687
Pittston BAX Group 8,300 88,188
------------
326,800
------------
1,233,576
------------
Natural Resources- 7.0%
Energy Services- 2.3%
Global Industries* 8,600 74,175
Input/Output* 18,700 94,669
------------
168,844
------------
Gold- 0.2%
MK Gold* 15,000 14,062
------------
Oil and Gas- 4.5%
Denbury Resources* 30,000 129,375
PetroCorp* 500 2,906
Titan Exploration* 37,500 203,906
------------
336,187
------------
519,093
------------
Technology- 17.0%
Aerospace/Defense- 0.3%
Special Metals* 6,100 19,444
------------
Components and Systems- 2.2%
MOCON 4,500 27,000
Newport 2,000 91,500
PCD* 5,000 33,750
Perceptron* 2,500 10,000
------------
162,250
------------
Distribution- 4.4%
Pioneer-Standard Electronics 9,000 $129,938
Richardson Electronics 27,000 202,500
------------
332,438
------------
Semiconductors and Equipment- 0.2%
Intevac* 5,000 17,500
------------
Software/Services- 7.5%
ANSYS* 6,800 74,800
Aspen Technology* 2,800 74,025
JDA Software Group* 6,000 98,250
Kronos* 1,500 90,000
MSC.Software* 8,000 81,000
SPSS* 3,000 75,750
Tyler Technologies* 12,500 68,750
------------
562,575
------------
Telecommunication- 2.4%
REMEC* 6,900 175,950
------------
1,270,157
------------
Miscellaneous - 4.7% 349,994
------------
TOTAL COMMON STOCKS
(Cost $6,090,537) 6,248,395
------------
REPURCHASE AGREEMENT - 24.2%
State Street Bank and Trust Company,
2.50% dated 12/31/99, due 1/3/00,
maturity value $1,807,376
(collateralized by U. S. Treasury Bonds,
8.50%-14.00% due 11/15/11-2/15/20,
valued at $1,851,169)
(Cost $1,807,000) 1,807,000
------------
TOTAL INVESTMENTS - 107.9%
(Cost $7,897,537) 8,055,395
LIABILITIES LESS CASH AND
OTHER ASSETS - (7.9)% (587,238)
------------
NET ASSETS - 100.0% $7,468,157
------------
* Non-income producing.
INCOME TAX INFORMATION- The cost of total investments for Federal income tax
purposes was $7,922,403. At December 31, 1999, net unrealized appreciation
for all securities was $132,992, consisting of aggregate gross unrealized
appreciation of $913,680 and aggregate gross unrealized depreciation of
$780,688. The Fund designated $60,596 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 - PREMIER PORTFOLIO December 31, 1999
- ------------------------------------------------------------------------------
COMMON STOCKS- 80.5%
SHARES VALUE
------ -----
Consumer Products- 4.5%
Collectibles- 2.6%
Enesco Group 1,000 $11,063
---------
Sports and Recreation- 1.9%
Oakley* 1,000 5,562
Sturm, Ruger & Co. 300 2,663
---------
8,225
---------
19,288
---------
Consumer Services- 4.0%
Retail Stores- 4.0%
Charming Shoppes* 2,600 17,225
---------
Financial Intermediaries- 16.2%
Insurance- 16.2%
Berkley (W. R.) 500 10,437
Leucadia National 200 4,625
Medical Assurance* 400 8,475
PMA Capital Cl. A 300 5,963
Trenwick Group 300 5,081
Wesco Financial 100 24,500
Zenith National Insurance 500 10,312
---------
69,393
---------
Financial Services- 7.6%
Information and Processing- 2.1%
Duff & Phelps Credit Rating 100 8,894
---------
Insurance Brokers- 4.4%
Blanch (E.W.) Holdings 100 6,125
Gallagher (Arthur J.) & Co. 200 12,950
---------
19,075
---------
Investment Management- 1.1%
Pioneer Group (The)* 300 4,725
---------
32,694
---------
Health- 11.6%
Commercial Services- 5.9%
ICON ADR+* 700 11,900
Schein (Henry)* 1,000 13,313
---------
25,213
---------
Surgical Products and Devices- 5.7%
Arrow International 600 17,400
Haemonetics* 300 7,144
---------
24,544
---------
49,757
---------
Industrial Products- 13.4%
Construction Materials- 4.0%
Florida Rock Industries 500 17,219
---------
Machinery- 6.0%
Lincoln Electric Holdings 1,000 20,625
Nordson 100 4,825
---------
25,450
---------
SHARES VALUE
------ -----
Pumps, Valves and Bearings- 2.5%
Kaydon Corporation 400 $10,725
---------
Specialty Chemicals and Materials- 0.9%
Lilly Industries Cl. A 300 4,031
---------
57,425
---------
Industrial Services- 11.1%
Commercial Services- 4.0%
Interim Services* 500 12,375
Superior Uniform Group 500 4,500
---------
16,875
---------
Engineering and Construction- 3.0%
Morrison Knudsen* 1,000 7,812
Stone & Webster 300 5,044
---------
12,856
---------
Industrial Distribution- 1.1%
Lawson Products 200 4,625
---------
Transportation and Logistics- 3.0%
Air Express International 400 12,925
---------
47,281
---------
Natural Resources- 1.4%
Oil and Gas- 1.4%
Barrett Resources* 200 5,888
---------
Technology- 10.7%
Aerospace/Defense- 4.3%
Curtiss-Wright 500 18,437
---------
Components and Systems- 1.4%
National Instruments* 150 5,738
---------
Distribution- 2.4%
Avnet 169 10,224
---------
Software/Services- 2.6%
National Computer Systems 300 11,287
---------
45,686
---------
TOTAL COMMON STOCKS
(Cost $342,476) 344,637
---------
TOTAL INVESTMENTS- 80.5%
(Cost $342,476) 344,637
CASH AND OTHER ASSETS
LESS LIABILITIES- 19.5% 83,583
---------
NET ASSETS- 100.0% $428,220
---------
* Non-income producing.
+ American Depository Receipt.
INCOME TAX INFORMATION- The cost of total investments for Federal income tax
purposes was $344,226. At December 31, 1999, net unrealized appreciation for
all securities was $411, consisting of aggregate gross unrealized
appreciation of $57,547 and aggregate gross unrealized depreciation of
$57,136. The Fund designated $3,615 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>
ROYCE CAPITAL FUND
STATEMENTS OF ASSETS AND LIABILITIES December 31, 1999
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION?
Micro-Cap Premier
Portfolio Portfolio
--------- ---------
<S> <C> <C>
ASSETS:
Investments at value* $ 6,248,395 $344,637
Repurchase agreement (at cost and value) 1,807,000 -
Cash 501 83,035
Receivable for capital shares sold 598,818 -
Receivable for investments sold 140,402 -
Receivable for dividends and interest 4,094 776
Prepaid expenses and other assets 4,190 4,085
- ----------------------------------------------------------------------------------
Total Assets 8,803,400 432,533
- ----------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 1,322,274 -
Payable for capital shares redeemed 171 -
Payable for investment advisory fees 1,410 -
Accrued expenses 11,388 4,313
- ----------------------------------------------------------------------------------
Total Liabilities 1,335,243 4,313
- ----------------------------------------------------------------------------------
Net Assets $ 7,468,157 $428,220
==================================================================================
ANALYSIS OF NET ASSETS:
Accumulated net realized gain on investments $ 183,542 $10,691
Net unrealized appreciation on investments 157,858 2,161
Capital shares 1,219 82
Additional paid-in capital 7,125,538 415,286
- ----------------------------------------------------------------------------------
Net Assets $ 7,468,157 $ 428,220
==================================================================================
SHARES OUTSTANDING:
(unlimited number of $.001 par value
shares authorized for each Fund) 1,218,908 81,827
==================================================================================
NET ASSET VALUES (Net Assets/Shares Outstanding):
(offering and redemption price per share) $6.13 $5.23
==================================================================================
*Investments at identified cost $ 6,090,537 $ 342,476
- ----------------------------------------------------------------------------------
</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
---------------------------- ----------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment loss $ (18,741) $ (17,548) $ (254) $ (260)
Net realized gain on investments 757,444 434,110 58,985 23,777
Net change in unrealized appreciation
(depreciation) on investments 394,456 (268,413) (19,262) 3,045
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets
from investment operations 1,133,159 148,149 39,469 26,562
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net investment income - - - -
Net realized gain on investments (555,466) (417,977) (48,441) (23,389)
- ------------------------------------------------------------------------------------------------------------
Total distributions (555,466) (417,977) (48,441) (23,389)
- ------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Value of shares sold 4,459,582 2,647,803 88,432 52,281
Distributions reinvested 555,464 417,974 48,439 23,387
Value of shares redeemed (1,461,962) (522,951) (74,096) (47)
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets
from capital share transactions 3,553,084 2,542,826 62,775 75,621
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 4,130,777 2,272,998 53,803 78,794
NET ASSETS:
Beginning of period 3,337,380 1,064,382 374,417 295,623
- ------------------------------------------------------------------------------------------------------------
End of period $ 7,468,157 $ 3,337,380 $ 428,220 $ 374,417
============================================================================================================
CAPITAL SHARE TRANSACTIONS (in shares):
Shares sold 760,475 460,617 16,807 9,013
Shares issued for reinvestment
of distributions 96,268 84,099 9,535 4,438
Shares redeemed (274,513) (91,527) (13,020) (9)
- ------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 582,230 453,189 13,322 13,442
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE CAPITAL FUND
STATEMENTS OF OPERATIONS Year ended December 31, 1999
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Micro-Cap Premier
Portfolio Portfolio
--------- ---------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 22,940 $ 5,232
Interest 6,000 -
- ----------------------------------------------------------------------------------------
Total Income 28,940 5,232
- ----------------------------------------------------------------------------------------
Expenses:
Investment advisory fees 44,149 4,064
Custodian 10,610 5,127
Shareholder servicing 7,804 7,804
Audit 6,960 2,335
Organizational expenses 2,124 2,124
Trustees' fees 1,793 19
Administrative and office facilities expenses 1,441 176
Legal 1,274 147
Other expenses 2,950 893
- ----------------------------------------------------------------------------------------
Total Expenses 79,105 22,889
Fees Waived by Investment Adviser (31,424) (4,064)
Expenses Reimbursed by Investment Adviser - (13,339)
- ----------------------------------------------------------------------------------------
Net Expenses 47,681 5,486
- ----------------------------------------------------------------------------------------
Net Investment Loss (18,741) (254)
- ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 757,444 58,985
Net change in unrealized appreciation
(depreciation) on investments 394,456 (19,262)
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 1,151,900 39,723
- ----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS $ 1,133,159 $ 39,469
- ----------------------------------------------------------------------------------------
</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 Realized Distributions
Net Asset and Distributions From Net Net Asset
Value, Net Unrealized From Net Realized Value,
Beginning Investment 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)
- -----------------------
1999 $5.24 ($0.02) $1.46 - ($0.55) $6.13
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)
- ---------------------
1999 $5.47 ($0.00) $0.43 - ($0.67) $5.23
1998 5.37 - 0.47 - (0.37) 5.47
1997 5.05 (0.01) 0.87 - (0.54) 5.37
1996 5.00 - 0.05 - - 5.05
<CAPTION>
Ratio of Net
Ratio of Investment
Net Assets, Expenses Loss
Total End of Period to Average to Average Portfolio
Return (in thousands) Net Assets Net Assets Turnover Rate
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Micro-Cap Portfolio (a)
- -----------------------
1999 28.1% $7,468 1.35% -0.53% 102%
1998 4.1% 3,337 1.35% -0.79% 88%
1997 21.2% 1,064 1.35% -0.96% 132%
1996 0.2% 250 1.99%* -1.99% 0%
Premier Portfolio (b)
- ---------------------
1999 8.2% $428 1.35% -0.06% 70%
1998 8.9% 374 1.35% -0.08% 109%
1997 17.1% 296 1.35% -0.18% 79%
1996 1.0% 252 1.99% * -1.99% 0%
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Expense ratios are shown after fee waivers and expense reimbursements
by the investment adviser. For the periods ended December 31, 1999, 1998,
1997 and 1996, the expense ratios before the waivers and reimbursements would
have been 2.24%, 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, 1999, 1998,
1997 and 1996, the expense ratios before the waivers and reimbursements would
have been 5.63%, 7.05%, 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 the two series of Royce Capital Fund (the "Trust"), a
diversified open-end management investment company organized as a Delaware
business trust. Shares of the Funds are offered to life insurance companies
for allocation to certain separate accounts established for the purpose of
funding qualified and non-qualified variable annuity contracts and variable
life insurance contracts, and may also be offered directly to certain pension
plans and retirement plans and accounts permitting accumulation of assets on
a tax-deferred basis. Micro-Cap Portfolio and Premier Portfolio 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
the 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 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 Funds incur direct and indirect expenses. Expenses directly
attributable to a Fund are charged to the Fund's operations, while expenses
applicable to more than one series of the Trust are allocated in an equitable
manner. Allocated personnel and occupancy costs related to 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 (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 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, 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
that are computed daily and payable monthly, at an annual rate of 1.25% and
1.0% of the average net assets of Micro-Cap Portfolio and Premier Portfolio,
respectively. Royce contractually committed to waive its fees and reimburse
expenses to the extent necessary to maintain a net annual operating expense
ratio of expenses to average net assets at or below 1.35% for each Fund
through December 31, 1999. For the year ended December 31, 1999, Micro-Cap
Portfolio recorded advisory fees of $12,725 (net of waivers of $31,424).
Royce waived advisory fees of $4,064 for Premier Portfolio.
Purchases and Sales of Investment Securities:
For the year ended December 31, 1999, 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 $5,286,757 $237,799
Sales $3,340,137 $249,944
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Royce Capital Fund
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 position of Royce Capital
Fund-Micro-Cap Portfolio and Royce Capital Fund-Premier Portfolio
(constituting Royce Capital Fund, hereafter referred to as the "Fund") at
December 31, 1999, the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted
in the United States, 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 securities at
December 31, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 2000
