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ROYCE
MICRO-CAP TRUST
3rd QUARTER REPORT
SEPTEMBER 30, 1995
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Dear Stockholder:
New record highs in all major equity averages, mega mergers and hot new
issues were all abundant in the third quarter of 1995. Interest rates went
lower, the economy grew slowly, inflation remained moderate, and even the
weather cooperated to produce one of the best summers ever. Clearly, it doesn't
get any better than this!
After lagging behind their larger brethren for the first six months, small
and micro-cap stocks assumed a leadership role in the third quarter. During this
quarter, the Russell 2000* gained 9.9% versus 8.0% for the S&P 500*.
Year-to-date, both indices have posted considerable gains - a 25.7% advance for
the Russell 2000 and a 29.8% return for the S&P 500. ROYCE MICRO-CAP TRUST, INC.
('OTCM') has participated in kind, with gains of 8.6% and 22.3% on an NAV basis
for the quarter and year-to-date periods. Most importantly, OTCM continues to
build wealth for its shareholders. One year and since inception (12/14/93)
average annual NAV returns for the Fund were 22.1% and 15.7%, respectively.
The equity markets have enjoyed an unusual combination of generally rising
valuations and heavy merger and acquisition activity in 1995. Merger trends have
favored the building of large scale entities under the theory that bigger is
better particularly for entertainment companies and banks; while other companies
such as AT&T are continuing to divest and restructure. Both trends are occurring
simultaneously and it is these cross currents that are changing the supply and
demand features of the market. Demand for equities has been fierce as a result
of money flows into mutual funds, corporate repurchases and cash tenders.
However, the supply side activity is just beginning to influence the balance.
Insider selling, IPO's and secondary offerings are bringing an equilibrium to
the market.
As we begin the final quarter of this terrific year, we find ourselves most
distinctly out of fashion with one industry group - technology. Because this
area has the most valuation risk as well as significant corporate risk, we have
not participated. This sector has however, been a substantial market leader and
when its momentum falters, there will be an overall market impact.
Market conditions over the last five years have been exceptional in terms of
both duration and distance. The Russell 2000 index has appreciated 167% without
one 'normal' (15% or more) correction. The next four quarters are likely to have
lower returns with more volatility.
We remain committed to our low risk, long-term approach to micro-cap company
investing.
Sincerely,
<TABLE>
<S> <C>
CHARLES M. ROYCE Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
</TABLE>
September 29, 1995
* The Russell 2000 and S&P 500 are unmanaged indices and include the
reinvestment of dividends.
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FUND HIGHLIGHTS
<TABLE>
<CAPTION>
September 30, 1995
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<S> <C>
Net Assets......................................... $100,889,890
Net Asset Value Per Share.......................... $9.27
Market Price Per Share............................. $8.375
Shares Outstanding................................. 10,886,317
</TABLE>
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<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
NAV Market Value S&P
Total Total S&P Russell SmallCap Nasdaq
Period Ended September 30, 1995 Return Return 500 2000 600 Composite
- ------------------------------------------------------------ ------ ------------ ---- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
3 Months.................................................... 8.6% 13.6% 8.0% 9.9% 12.8% 11.8%
9 Months.................................................... 22.3 19.6 29.8 25.7 29.4 38.8
1 Year...................................................... 22.1 21.5 29.8 23.4 26.2 36.6
Average Annual Total Return From Inception*................. 15.7 7.3 17.0 14.6 14.7 20.1
</TABLE>
* Inception date -- 12/14/93
The above indices are unmanaged and include the reinvestment of all dividends.
Sources: Frank Russell Co. and Wilshire Associates Incorporated.
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<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
(unaudited) (unaudited)
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<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income................................................ $ 119,323 $ 81,187
Net realized gain on investments..................................... 3,861,577 7,308,836
Net unrealized appreciation on investments........................... 3,955,300 10,966,039
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Increase in net assets resulting from operations..................... 7,936,200 18,356,062
FROM CAPITAL STOCK TRANSACTIONS:
Increase in net assets from capital stock transactions............... -- --
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INCREASE IN NET ASSETS................................................. 7,936,200 18,356,062
NET ASSETS:
Beginning of period.................................................. 92,953,690 82,533,828
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End of period........................................................ $100,889,890 $100,889,890
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</TABLE>
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<TABLE>
<CAPTION>
% of Net
COMPOSITION OF NET ASSETS September 30, 1995 Assets
(unaudited) -----------
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<S> <C> <C>
Common Stocks........................................................... $ 93,498,100 92.7%
Preferred Stocks........................................................ 901,875 0.9
Cash and Other Assets Less Liabilities.................................. 6,489,915 6.4
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TOTAL NET ASSETS...................................................... $100,889,890 100.0%
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</TABLE>
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the OTCM
portfolio.
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WEIGHTED AVERAGES
<TABLE>
<S> <C>
Market Capitalization (Total Portfolio) $153 Million
Median Market Capitalization (Total
Portfolio) $105 Million
P/E Ratio (100 Largest Positions) 13.7x
P/B Ratio (100 Largest Positions) 1.6x
Portfolio Yield (100 Largest Positions) 1.4%
</TABLE>
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TOP TWENTY POSITIONS
<TABLE>
<CAPTION>
Market
Value
<C> <S> <C>
1. Trenwick Group Inc........................ $1,303,800
2. DUFF & PHELPS CREDIT RATING CO. .......... 1,206,450
3. Florida Rock Industries, Inc. ............ 1,164,800
4. CATHERINES STORES CORPORATION............. 1,102,150
5. The Rival Company......................... 1,075,275
6. Chemfab Corporation....................... 1,035,650
7. Life Technologies, Inc. .................. 1,022,900
8. The Dress Barn, Inc. ..................... 1,019,863
9. Matthews International Corporation Cl. A.. 1,018,325
10. Vallen Corporation........................ 1,006,250
11. Thomaston Mills, Inc. Cl. A............... 985,500
12. Belden & Blake Corporation................ 950,000
13. Transnational Re Corporation Cl. A........ 943,000
14. Ash Grove Cement Company.................. 950,000
15. Lufkin Industries, Inc. .................. 940,000
16. Cliffs Drilling Company................... 926,300
17. Conso Products Co. ....................... 925,650
18. Penn Engineering and Manufacturing Corp. . 920,000
19. Thor Industries, Inc. .................... 918,750
20. Lifetime Hoan Corporation................. 902,825
</TABLE>
<PAGE>
ROYCE MICRO-CAP TRUST PHILOSOPHY
Royce Micro-Cap Trust, Inc. ('OTCM') seeks long-term capital appreciation by
investing primarily in micro-capitalization companies.
OTCM focuses on micro-cap companies (those with market caps of $300 million or
less) that meet our valuation and pricing standards. Due to the sector's size
(over 5,600 companies) and liquidity considerations, very few institutions make
the universe a primary area of focus. Limited research and limited institutional
competition mean that micro-cap stocks are less well known and, therefore, less
likely to be understood and properly priced by investors. We believe that
micro-cap stocks today are what small-cap stocks were 10-15 years ago in terms
of return opportunity.
OTCM uses a strict fundamental approach and attempts to understand the private
worth of a business. We believe that we are buying part of a business, not just
a stock. The Fund has a preference for companies which provide high internal
rates of return, generate excess cash flow and have very little debt, if any.
OTCM attempts to purchase only the securities of those firms where price is
significantly under our appraisal of worth.
OTCM attempts to reduce the risks associated with micro-cap company ownership.
Company risk is lowered by investing in low leverage firms which generate excess
cash flow. Valuation risk is lowered by using strict pricing standards and
portfolio risk by investing in a wide range of companies and industries.
We believe that OTCM's emphasis on micro-cap companies, selected using a
disciplined value approach, results in a unique combination capable of providing
above average long-term results.
NOTE:
The Board of Directors of the Fund has authorized the Fund to repurchase up to
300,000 shares of its common stock in transactions through December 31, 1995.
Such repurchases would be effected at a price per share which is less than the
then current net asset value, but not in excess of the then prevailing market
price.
The Board of Directors of the Fund is authorized to offer stockholders an
opportunity to subscribe for additional shares of common stock of the Fund
through rights offerings at a price per share that may be less than the then
current net asset value of the Fund's common stock. The timing and terms of any
such offerings are left to the Board's discretion.
Royce Micro-Cap Trust, Inc.
1414 Avenue of the Americas
New York, N.Y. 10019
800-221-4268
