Annual Report Perritt MicroCap Opportunities Fund
Annual Report
PERRITT MICROCAP OPPORTUNITIES FUND, INC.
A No-load mutual fund
that invests in the
stocks of rapidly
growing companies
that at the time
of purchase have
equity market values
below $300 million.
Formerly Perritt Capital Growth Fund, Inc.
October 31, 1998
PERRITT
MICROCAP OPPORTUNITIES FUND, INC.
No Sales Charges*
No Redemption Charges
No 12b-1 Fees
Minimum Initial Investment $1,000
IRA Minimum Initial Investment $250
<PAGE>
Dividend Reinvestment Plan
Systematic Withdrawal Plan
Automatic Investment Plan
Retirement Plans Including:
IRA Keogh
SEP Roth IRA
403(b) Education IRA
*- 2% percent redemption fee for shares held
less than 90 days
President's Message
After three consecutive years, during which the return of the Perritt MicroCap
Opportunities Fund topped that of the Russell 2000 Index, the Fund took a
breather in fiscal 1998. During the twelve months ending October 31, 1998, the
Fund posted a loss of 23.8% versus a 19.0% decline in the Russell 2000 Index.
Thus, the Fund's return failed to top that of the Russell 2000 Index for the
first time in the last five fiscal years. The underperformance was the result of
several variables. First, the composition of the Fund's portfolio was
significantly different from that of the Russell 2000 Index. The companies in
which the Fund invests are significantly smaller than Russell 2000 companies,
and the industry allocations of the fund differed markedly from those in the
Russell 2000 Index. Second, the Russell 2000 Index is an unmanaged portfolio and
its returns do not include transactions costs, management fees, and operating
expenses. Finally, the Fund experienced significant shareholder redemptions
during the year. These outflows followed significant cash inflows late in fiscal
1997. As a result of the significant cash outflows, management was forced to
liquidate investments made only a few months earlier. Although difficult to
quantify, the purchase and subsequent sale of securities assuredly increased
transactions costs, which reduced the Fund's total annual return.
At a special meeting of shareholders held in Chicago, Illinois, on April 20, the
Fund's shareholders overwhelmingly approved the imposition of a 2% redemption
fee on shareholders who redeem shares within 90 days of purchase. The proceeds
from this fee are returned to the Fund and thus are shared by the Fund's
long-term shareholders. The purpose of the redemption fee is not only to offset
the additional trading costs that might be incurred when investors purchase and
redeem shares during a short period of time, but it is a message to investors
who hop from one "hot" fund to another that they are not welcome at the Perritt
MicroCap Opportunities Fund.
At fiscal year-end, the portfolio contained the common stocks of 49 companies,
down from 54 a year earlier. (The Fund's 10 largest holdings are described later
in this report.) During the year, we liquidated investments in 22 companies
(five of which were acquired by or merged into other companies) and made new
investments in 17 companies.
The Fund's portfolio turnover rate declined to 24.0% from 83.1% the previous
fiscal year and the annual expense ratio increased from 1.52% to 1.81%. The
increase in the annual expense ratio can be largely attributed to the decline in
the total net assets of the fund from $24.8 million at the
<PAGE>
beginning of the fiscal year to $10.2 million at fiscal year end. Approximately
$5 million of the decline in net assets can be attributed to a decline in prices
of the Fund's common stock holdings. The balance, about $9 million, resulted
from net shareholder redemptions.
The fiscal year was a big disappointment for me, and I am sure it was for the
Fund's long-term shareholders. First, the flood of new cash the Fund received
from share purchases that occurred in September and October 1997 quickly flowed
out of the Fund during the next three months, causing a significant increase in
Fund purchase and sale transactions, and increased transactions costs. Second,
small company stocks, and micro-cap stocks in particular, returned significantly
less than large-cap stocks. Although export sales account for a much smaller
percentage of total revenues of tiny companies than is the case for America's
giant multi-national firms, the prices of small company stocks plummeted along
with those of large companies after the financial and economic crises in Asia,
Latin America, and Eastern Europe became apparent.
As a result of the sharp decline in the prices of small- and micro-cap stocks,
traditional valuation measures such as price-earnings multiples and
price-to-sales ratios are the lowest I have seen in many years. On a relative
valuation basis (to large-cap stocks) small company stocks are as cheap as they
have been in the last quarter-century. Thus, I believe that small company stocks
are poised for a significant rebound. However, the future is far from certain.
There are many clouds overhanging the world's financial markets, and a financial
or economic storm could once again send stock prices reeling. This said, I have
always been bullish on America, the American capitalistic system and small firm
entrepreneurs.
Gerald W. Perritt
Portfolio Managers
The Fund is managed by Dr. Gerald W. Perritt (since inception in 1988) and
Michael Corbett (since 1996). Dr. Perritt received a doctorate in finance and
economics from the University of Kentucky. He has taught investments and finance
at a number of colleges and universities and has authored several books on
investing. Mr. Corbett joined the firm in 1990 as a research analyst, and is
currently vice-president of Perritt Capital Management. He has been a
contributor to several investment newsletters and is currently working toward a
Chartered Financial Analyst (CFA) designation.
Performance
Perritt MicroCap Opportunities Fund, Inc.
Versus Russell 2000 Index
Date Perritt Russell
10/31/88 10000 10000
10/31/89 10375 11487
<PAGE>
10/32/90 8189 8233
10/31/91 11469 12942
10/31/92 11664 14056
10/31/93 13177 18499
10/31/94 13039 18384
10/31/95 16377 21570
10/31/96 19416 25045
10/31/97 26395 32173
10/31/98 20107 28368
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change,
or the growth of a hypothetical $10,000 investment. Each performance figure
includes charges in a fund's share price, plus reinvestment of any dividends (or
income) and capital gains (the profits the fund earns when it sells stocks that
have grown in value.)
Cumulative Total Returns
Periods ended October 31, 1998
Past 1 Past 3 Past 5 Past 10
Year Years Years Years
Perritt MicroCap Opportunities Fund, Inc. -23.83% 22.77% 52.58% 101.06%
Russell 2000 Index -19.02% 22.02% 54.57% 187.80%
DFA US 9/10 Small Company -18.70% 26.71% 68.49% 210.61%
CPI 1.49% 6.70% 12.58% 36.33%
Cumulative total returns reflect the Fund's actual performance over a set time
period. For example, if you invested $1,000 in a fund that had a 5% return over
one year, you would end up with $1,050. You can compare the Fund's returns to
the Russell 2000 Index, which currently reflects a popular measure of the stock
performance of small companies. You can also compare them to the DFA US 9/10
Small Company Fund, which is a small company index fund that is also used as a
common proxy for small company performance. Ibbotson Associates, a Chicago-based
research firm, uses this Index Fund as the best benchmark for small company
performance.
Average Annual Total Returns
Periods ended October 31, 1998
Past 1 Past 3 Past 5 Past 10
Year Years Years Years
Perritt MicroCap Opportunities Fund, Inc. -23.83% 7.08% 8.82% 7.23%
Russell 2000 Index -19.02% 6.86% 9.10% 11.15%
DFA US 9/10 Small Company -18.70% 8.22% 11.01% 12.02%
CPI 1.49% 2.19% 2.39% 3.15%
Average annual total returns take the Fund's actual (or cumulative) return and
show you what
<PAGE>
would have happened if the Fund had performed at a constant rate each year.
Total returns and yields are based on past results and are not an indication of
future performance.
What is a Micro-Cap Fund?
A micro-cap fund is one that invests at least 65% of its assets in micro-cap
stocks. But, what is a micro-cap stock? This question has a much longer answer.
The definition of micro-cap stock has its roots in the Ph.D. dissertation
published by Rolf Banz in 1978. This University of Chicago graduate student
found that the stocks of the smallest New York Stock Exchange traded companies
had been providing investors with excess risk-adjusted returns (returns greater
than could be accounted for by risk alone) averaging nearly 6% annually for more
than a half century. Small company stocks were defined by Mr. Banz as those with
market capitalizations (i.e., share price multiplied by number of shares
outstanding) below that of the company that separated the top 80% of New York
Stock Exchange companies from the bottom 20%, when ranked from largest to
smallest based on equity market value. In the late 1970s, that firm had an
equity market value of about $60 million.
A host of other researchers found that stocks with similar equity market values
that were traded over-the-counter and on the American Stock Exchange also were
providing extra risk-adjusted returns. This anomaly was ultimately dubbed "the
small firm effect."
The extra risk-adjusted returns uncovered by Mr. Banz and other researchers were
apparently viewed as "just too good to pass up." During the decade of the 1980s
and early 1990s, hundreds of small company mutual funds began offering their
shares to the investing public. However, not all of these so-called "small firm
funds" were investing in "small" companies encompassed by Mr. Banz's definition,
and for good reason. The "true" small firm segment of the stock market proved to
be much too small to accommodate the appetites of small company funds. For
example, in the early 1980s, the stocks of about 2,000 public companies
conformed to the original definition of small firm stock (i.e., companies with
equity market values below that of the firm that separated the top 80% from the
bottom 20% of New York Stock Exchange stocks when ranked from largest to
smallest). In the early 1980s, the aggregate market value of these 2,000 stocks
was approximately $100 billion, and about one-third of the outstanding shares
were "closely held" (i.e., in the hands of company founders, their families and
operating management). That left only about $67 billion for everyone else. To
put this number in perspective, the equity market value of Microsoft in October
1998 was approximately $290 billion.
In addition to the size of market problem, mutual funds faced their own size
problem. As investors poured billions of dollars into equity mutual funds, small
company funds found themselves squeezed out of the segment of the market
containing the stocks of the smallest companies. That's because of a rule that
limits a mutual fund's investment in a single company to no more than 5% of that
company's outstanding shares. For example, mutual funds could invest a maximum
of $2 million in a company with an equity market value of $40 million. Thus, a
mutual fund with $500 million in assets would have to spread its investments
across at least
<PAGE>
250 companies of this size. Thus, as assets grew, many small company mutual
funds began to invest the stocks of larger and larger companies.
The disparity in the size of companies in which small company mutual funds were
investing became so large, that it became difficult to make meaningful
investment return comparisons among "small company" funds. Thus, some mutual
fund trackers began to separate the universe of small company funds into three
categories based on the size of the company in which they were investing.
Generally, these categories include mid-cap, small-cap, and micro-cap funds.
Although there is no widely accepted definition of each of these three
categories, generally funds that invest in the stocks of companies with equity
market values between $1 billion and $3 billion get the mid-cap fund
designation. Those that invest in companies with equity market values between
$300 million and $1 billion fall into the small-cap fund category. Those that
invest in the smallest companies (equity market values below $300 million)
usually find themselves placed into the micro-cap category. With its holdings
possessing a median market cap of under $100 million, the Perritt MicroCap
Opportunities Fund falls squarely in micro-cap category.
www.perrittcap.com
Fund Updates on the Worldwide Web
A portion of the Perritt Capital Management, Inc. website is devoted to the
Perritt MicroCap Opportunities Fund, Inc. Every month, the Fund's portfolio
holdings are updated and portfolio managers Dr. Gerald W. Perritt and Michael
Corbett comment on the financial markets and on changes in the Fund's portfolio.
In addition, news and notes regarding the Fund's current holdings are posted
every week so that Fund shareholders can keep abreast of the factors affecting
the Fund's performance. Also included are the Fund's annual and quarterly
financial reports and an updated Fund prospectus.
Ten Largest Holdings
Barra (BARZ) develops, markets, and supports software and information services
that analyze, manage, and trade portfolios of equity, fixed income, and
derivatives. Its software and services are provided on a subscription basis to
more than 1,400 clients in more than 33 countries, including portfolio managers,
fund sponsors, and pension consultants. Its Symphony Asset Management unit
manages about $2.4 billion and has been a significant contributor to the
company's growth over the past two years.
Boston Acoustics (BOSA) is a manufacturer of high performance speaker systems
for home, car and computer environments. Founded in 1979, the company recorded
its nineteenth consecutive fiscal year of record sales in 1998. An industry
innovator, the company began supplying high performance speaker systems to
computer manufacturer Gateway 2000 in May 1997. Co-founder and CEO Andrew
Kotsatos owns 29% of the company's 5.3 million common shares.
<PAGE>
Craftmade International (CRFT) is a Texas-based distributor and marketer of
ceiling fans and related products. The company's national sales organization
markets its products to more than 1,500 lighting showroom and electrical
wholesalers, which sell to the new home construction, remodeling and replacement
markets. The company's ceiling fans, bathstrip lighting and light kits are
manufactured in Taiwan.
Interstate National Dealer (ISTN) designs, markets and administers service
contracts and warranties for new and used motor vehicles, recreational vehicles,
watercraft and motorcycles. The company offers a variety of service contract and
warranty programs through its nationwide sales force of approximately 100
independent sales agents, and to a lesser extent on the Internet. The service
contracts supplement manufacturers' warranties and usually range from three
months to seven years.
J&J Snack Foods (JJSF) makes and distributes snack foods for the grocery and
food service markets. Principal products are soft pretzels (Superpretzel) and
frozen carbonated beverages (Icee and Arctic Blast). Other lines include frozen
deserts and juice treats, churros, funnel cakes, and cookies. J&J also operates
80 mall-based Bavarian Pretzel Bakery and Pretzel Gourmet retail shops. Chairman
and CEO Gerald Shreiber owns 34% of the company's outstanding common stock.
McGrath Rentcorp (MGRC) rents and sells movable modular units in California and
Texas, and nationally distributes electronic test and measurement instruments.
Modular units are used as classrooms, sales offices, construction field offices,
and temporary offices adjacent to existing facilities. McGrath's largest market
is for temporary classrooms, primarily in California. Founded in 1979, the
company expanded into the rental of electronic test and measurement instruments
in 1985.
Petroleum Helicopters (PHEL/PHELK) provides transportation services to the oil
and gas, and aeromedical industries. It maintains a fleet of more than 310
aircraft (primarily helicopters), which operate from 45 domestic and 11 foreign
bases. About two-thirds of revenues are derived from services in the Gulf of
Mexico, and offshore New Jersey and California. The company was incorporated in
1949 by Robert Suggs, whose family holds 51% of its voting stock.
RCM Technologies (RCMT), founded in 1968 and based in Pennsauken, New Jersey, is
a provider of specialty professional staffing services to U.S. businesses. The
company's 52 branch offices in 23 states focus staffing services in the
information technology, professional engineering, specialty healthcare and
general support business sectors.
TBC Corp (TBCC) is the nation's leading independent distributor of private brand
tires for the replacement market. The company's customers include more than 200
regional distribution centers which serve independent dealers throughout the
U.S., Canada and Mexico. Its Big O subsidiary acts as a franchisor of
independent retail tire and automotive service stores. Kelly-Springfield, a
division of Goodyear Tire and Rubber, supplies more than half of the tires sold
by TBC.
Tarrant Apparel Group (TAGS) designs, contracts for the manufacture of, and
sells
<PAGE>
moderately priced apparel for men and women, under private label to specialty
retailers such as Abercrombie & Fitch, Lerner, Limited, Lane Bryant, Express and
mass merchandiser Target. It acquired Rocky Apparel, a manufacturer of denim
apparel for men and women, July, 1998. The company imports approximately 85% of
its products from, China, Mexico and Central America.
Statement of Net Assets
October 31, 1998
COMMON STOCKS - 98.1% (a)
BioTechnology-1.9%
30,000 Cytoclonal* $195,000
Business Services-22.3%
4,000 Analytical Surveys, Inc.* 99,000
10,000 Barra* 263,750
9,000 Correctional Services* 106,312
17,000 Dynamex, Inc.* 117,938
10,000 EMCOR Group* 159,375
5,000 Kellstrom Industries* 112,500
11,500 LCS Industries 140,875
8,000 MapInfo Corp.* 99,000
16,000 McGrath Rentcorp 334,000
2,000 Mobile Mini, Inc.* 20,000
13,000 Pomeroy Computer Resources* 218,562
29,000 RCM Technologies* 436,813
16,000 Thomas Group, Inc.* 156,000
---------
2,264,125
Capital Goods-0.8%
4,000 ASV, Inc.* 79,500
Chemicals and Related Products-2.3%
10,700 AEP Industries* 230,050
Consumer Products - Manufacturing-18.5%
30,000 Boston Acoustics 720,000
20,500 Craftmade Int'l 297,250
6,000 Day Runner, Inc.* 120,000
5,000 Recoton Corp.* 111,250
28,000 Tarrant Apparel Group* 528,500
--------
1,884,625
<PAGE>
Consumer Services-8.4%
9,000 Automobile Protection Corp.* 77,625
19,500 Gilman & Ciocia* 174,281
37,000 Interstate National Dealer* 256,688
6,600 Lesco, Inc. 84,975
37,000 TBC Corp.* 256,687
-------
850,256
Environmental Services-3.0%
26,500 Harding Lawson Assoc.* 212,000
50,000 Versar* 93,750
--------
305,750
Food-7.6%
18,000 J&J Snack Foods* 405,000
12,000 Tasty Baking 172,500
11,100 Worthington Foods 197,025
-------
774,525
Land Development-1.8%
8,000 Tejon Ranch 188,000
Leisure-3.1%
33,000 Aldila* 117,562
21,500 Sport-Haley* 201,563
-------
319,125
Medical Supplies & Services-6.7%
38,000 Intensiva Healthcare* 213,750
14,000 Rehabcare Group* 253,750
24,500 U S Physical Therapy* 217,438
-------
684,938
Oil Services-9.6%
17,000 Aztec Manufacturing 160,437
14,000 Petroleum Helicopters Non-Vtg 227,500
16,000 Petroleum Helicopters Vtg 248,000
48,000 Remington Oil & Gas Class B* 174,000
8,000 Saint Mary Land & Exploration 168,000
-------
977,937
<PAGE>
Printing & Publishing-2.0%
16,000 Thomas Nelson 205,000
Retail-2.0%
20,000 S & K Famous Brands* 205,000
Software
8,000 Brooktrout Technology, Inc.* 117,500
13,000 Data Research Associates 173,875
25,000 Programmer's Paradise* 167,750
15,000 Rainbow Technologies* 211,875
-------
672,000
Specialty Manufacturing-1.5%
20,000 Barringer Tech 148,750
---------
Total Common Stocks (Cost $11,409,660) 9,984,581
Demand Notes-2.1% (a)
$212,474 Firstar Bank 4.97 due 11/16/98 212,474
-------
Total Demand Notes (Cost $212,474) 212,474
Total Investments (Cost $11,622,134) 10,197,055
----------
Liabilities Net of Cash and Receivables-(0.2)% (a) (23,666)
-----------
Total Net Assets-100.0% $10,173,389
(Equivalent to $11.77 per share based on 864,533 shares of capital stock
outstanding.)
* Non - income producing security
(a) Percentages for various classifications relate to total net assets.
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENT OF CHANGES IN NET ASSETS
For the For the
Year Ended Year Ended
OPERATIONS: October 31, 1998 October 31, 1997
Net investment loss.................... $ (161,528) $ (74,105)
Net realized (loss) gain on investments (137,060) 2,892,339
Net (decrease) increase in unrealized
appreciation of investments.......... (3,145,872) 76,761
<PAGE>
Net (decrease) increase in net assets
resulting from operations............ (3,444,460) 2,894,995
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment
income.............................. (321,816) (21,777)
Distributions from net realized gains
from investment transactions........ (2,496,446) (724,922)
Decrease in net assets resulting from
distributions....................... (2,818,262) (746,699)
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (391,276
and 1,708,342) shares, respectively) 5,624,993 30,622,392
Cost of shares redeemed (1,067,047 and
930,469 shares, respectively)....... (16,162,279) (16,789,699)
Reinvested dividends (141,068 and
53,851 shares, respectively)........ 2,142,829 719,992
(Decrease) Increase in net assets
derived from capital share
transactions........................ (8,394,457) 14,552,685
Total (Decrease) Increase ............ (14,657,179) 16,700,981
NET ASSETS AT THE BEGINNING
OF THE PERIOD....................... 24,830,568 8,129,587
NET ASSETS AT THE END OF THE PERIOD
(Including undistributed net
investment loss of ($396,182) and
($308,759) respectively)........... $10,173,389 $24,830,568
===========================
The accompanying notes to financial statements are an
integral part of this statement.
FINANCIAL HIGHLIGHTS
<TABLE>
Years ended October 31
<CAPTION>
1998 1997 1996 1995 1994 1993
Selected Per-Share Data
Net asset value,
<S> <C> <C> <C> <C> <C> <C>
beginning of period ........................ $ 17.75 $ 14.33 $ 14.17 $ 11.89 $ 12.54 $ 11.43
Net investment income (loss) (0.17)a (0.05) (0.16) (0.13) (0.13 (0.14)
Net realized and unrealized
gain on investments ........................ (3.55) 4.78 2.42 3.01 0.02 1.61
Total from Investment
Operations ................................. (3.72) 4.73 2.26 2.88 (0.11) 1.47
Less Distributions:
From net investment income .................. (0.26) (0.04) (0.90) -- -- (0.08)
From net realized gains .................... (2.00) (1.27) (1.20) (0.60) (0.54) (0.28)
Total Distributions .......................... (2.26) (1.31) (2.10) (0.60) (0.54) (0.36)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net asset value,
<S> <C> <C> <C> <C> <C> <C>
end of period............. $11.77 $17.75 $14.33 $14.17 $11.89 $12.54
====== ====== ====== ====== ====== ======
Total Return................ (23.83%) 35.95% 18.56% 25.60% (1.05%) 12.97%
Ratios and Supplemental Data
Net assets, end of period
(in thousands)........... $10,173 $24,831 $8,130 $6,729 $6,279 $7,208
Ratio of expenses to
average net assets....... 1.81% 1.52% 1.92% 2.07% 2.00% 1.96%
Ratio of net investment income
to average net assets..... (1.1%) (0.6%) (1.2%) (1.0%) (1.0%) (1.1%)
Portfolio turnover rate 24.0% 83.1% 58.0% 67.4% 39.2% 34.6%
Average Commission Rate per
equity stock traded....... $0.0247 $0.0270 $0.0363
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
Years ended October 31
<CAPTION>
1992 1991 1990 1989
Selected Per-Share
Data
Net asset value,
<S> <C> <C> <C> <C> <C>
beginning of period....... $11.36 $ 8.17 $10.52 $10.22
Income from investment
operations:
Net investment income (loss) (0.12) (0.02) 0.09 0.16
Net realized and unrealized
gain (loss) on investments 0.31 3.27 (2.27) 0.22
Total from Investment
Operations................ 0.19 3.25 (2.18) 0.38
Less Distributions:
From net investment income - (0.06) (0.17) (0.08)
From net realized gains... (0.12) - - -
Total Distributions....... (0.12) (0.06) (0.17) (0.08)
Net asset value,
end of period............. $11.43 $11.36 $ 8.17 $10.52
====== ====== ====== ======
Total Return................ 1.70% 40.06 (21.07%) 3.75% 2.20%
Ratios and Supplemental Data
Net assets, end of period
(in thousands)............ $6,942 $6,183 $4,265 $5,573 $3,020
Ratio of expenses to
average net assets........ 2.30% 2.50% 2.50% 2.50% 2.70%
Ratio of net investment
income to average net
assets.................... (1.1%) (0.2%) 0.9% 1.8% 1.6%
<PAGE>
Portfolio turnover rate 24.4% 37.4% 23.6% 22.6% 3.5%
Average Commission Rate per
equity stock traded.......
</TABLE>
a - Net investment income per share has been calculated on average shares
outstanding during the period.
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the Year Ended October 31, 1998
Income:
Dividends $ 54,519
Interest 16,127
Other 17,475
-----------
88,121
Expenses
Advisory Fees 115,147
Fund Accounting Expense 24,544
Transfer Agent Fees 23,344
Custodian Fees 8,301
Legal Fees 20,568
Auditing & Tax Fees 11,000
Printing & Postage 19,468
State Registration Fees 19,639
Directors and Annual Meeting 5,061
Insurance 1,758
Other Expenses 819
-----------
Total Expenses 249,649
Net investment loss (161,528)
-----------
Net Realized Loss on Investments (137,060)
Net Decrease in Unrealized Appreciation of Investments (3,145,872)
Net Loss on Investments (3,282,932)
Net Decrease in Net Assets Resulting from Operations $(3,444,460)
The accompanying notes to financial statements are an integral part of this
statement.
Notes to Financial Statements
October 31, 1998
<PAGE>
The Perritt MicroCap Opportunities Fund, Inc. ("the Fund," formerly Perritt
Capital Growth Fund, Inc.) is registered under the Investment Act of 1940 as an
open-end Diversified Management Investment Company.
1. Summary of Significant Accounting Policies - The following is a summary of
significant policies of the Fund:
a. Each security, excluding demand notes and commercial paper, is valued
at the last sale price reported by the principal security exchange on
which the issue is traded, or if no sale is reported, the mean between
the latest bid and ask price. Securities which are traded
over-the-counter are valued at the mean between the latest bid and ask
price if no sale was effected. Demand notes and commercial paper are
valued at cost which approximates quoted market value. Investment
transactions are recorded no later than the first business day after
the trade date. Cost amounts, as reported on the statement of net
assets, are the same for federal income tax purposes. For the year
ended October 31, 1998, purchases and sales of investment securities
(excluding demand notes and commercial paper) were $3,435,894 and
$15,790,324 respectively.
b. Net realized gains and losses on securities were computed using
first-in, first-out basis.
c. Provision has not been made for federal income tax since the Fund has
elected to be taxed as a "regulated investment company" and intends to
distribute substantially all income to its shareholders and otherwise
comply with the provisions of the Internal Revenue Code applicable to
regulated investment companies. Ordinary income and capital gain
dividend distributions are not required for the year ended October 31,
1998. The Fund has a capital loss carryover of approximately $137,000
expiring in 2006.
d. Dividends to shareholders are recorded on the ex-dividend date.
e. Dividend income is recognized on the ex-dividend date, and interest
income is recognized on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective
securities.
f. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
2. Investment Advisory Agreement, Custodial Agreement, and Transactions
With Related Parties:
The Fund has an investment advisory agreement with Perritt Capital
Management, Inc. ("PCM), with whom certain officers of the Fund are
affiliated. Effective May 1, 1998, under the terms of the agreement, the
Fund pays PCM a monthly advisory fee at the annual rate of 1% of the daily
net assets of the Fund. The annual rate was 0.7% prior to May 1, 1998. As
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of October 31, 1998, liabilities of the Fund include $7,967 payable to PCM.
The investment advisory agreement requires PCM to reimburse the Fund in the
event that the Fund's expenses, as a percentage of the average net asset
value, exceeds the most restrictive percentage as these terms are defined.
Effective May 1, 1998, the most restrictive percentage is 1.75%. The rate
was 2% prior to May 1, 1998. The effective rate for all of fiscal year 1998
is 1.875%.
During the year, the Fund was advanced monies to meet redemption payment
requirements by the bank that acts as the Fund's custodian, transfer agent
and dividend disbursing agent. The bank did not charge interest on the
advanced monies. The average amount of overdraft outstanding during the
period was$766,462. The maximum amount of overdraft outstanding during the
period $4,906,896.
3. Sources of Net Assets:
As of October 31, 1998, the sources of net assets are as follows:
Fund shares issued and outstanding $ 12,004,990
Unrealized depreciation of investments (1,425,079)
Accumulated net realized loss on investments (10,340)
Undistributed net investment loss (396,182)
------------
Total $ 10,173,389
Aggregate net unrealized depreciation as of October 31, 1998 consist of the
following:
Aggregate gross unrealized appreciation $ 1,000,594
Aggregate gross unrealized depreciation (2,425,673)
------------
Net unrealized depreciation $(1,425,079)
As of October 31, 1998, there were 20,000,000 shares of $0.01 par value
capital stock authorized.
Independent Auditor's Report
To the Shareholders and Board of Directors of the Perritt MicroCap Opportunities
Fund, Inc.:
We have audited the accompanying statement of net assets of the Perritt MicroCap
Opportunities Fund, Inc. (a Maryland corporation) as of October 31, 1998, the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the eight years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to
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express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the years ended October 31, 1989
were audited by other auditors whose opinion dated November 17, 1989 was
unqualified.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Perritt MicroCap Opportunities Fund, Inc. as of October 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the nine years in the period then ended in conformity with generally accepted
accounting principles.
CHECKERS, SIMON & ROSNER LLP
Chicago, Illinois
December 10, 1998
For assistance with your existing account, call our
Shareholder Service Center at: 1-800-332-3133
Board of Directors
David Maglich
Gerald W. Perritt
Dianne C. Click
Investment Advisor
Perritt Capital Management, Inc.
120 S. Riverside Plaza
Suite 1745
Chicago, IL 60606
(800) 331(C)8936
Independent Accountants
Checkers, Simon & Rosner LLP
One South Wacker Drive
Chicago, IL 60606
Legal Counsel
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202
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Custodian, Transfer Agent and
Dividend Disbursing Agent
Firstar Trust Company
PO Box 701
Milwaukee, WI 53201(C)0701
Brokerage Firm Availability
Charles Schwab & Company
Jack White & Company
Waterhouse Securities
This report is authorized for distribution only to shareholders and others who
have received a copy of the prospectus of the Perritt Capital MicroCap
Opportunities Fund, Inc.
