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ROYCE
MICRO-CAP
TRUST
SEMI-ANNUAL REPORT
June 30, 1996
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The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Stockholder:
After a left foot start in January, small company stocks, as measured by the
Russell 2000 index, outperformed their large company brethren (S&P 500) in
February, March, April and May (15.2% versus 6.2%), but were unable to continue
their winning ways in June (-4.1% versus 0.4%). June's downturn in performance
was the first sign of potentially higher volatility for small-cap issues. In
fact, the Nasdaq Composite closed the second quarter off over 5% from the high
it established on June 5th, its largest decline since a 13.8% drop in the second
quarter of 1994. In spite of June's downturn, and because of the February-May
surge, the Russell 2000 index of small-cap stocks won the first half performance
derby with a 10.4% total return versus a 10.2% total return for the large-cap
oriented S&P 500. For the second quarter, the indices were up 5.0% and 4.5%,
respectively.
Within small-cap, 'growth' finished ahead of 'value' with the Russell 2000
Growth Index providing an 11.9% return versus an 8.7% gain for the Russell 2000
Value Index. A similar performance relationship, but with wider disparity, was
also present in the Wilshire Target Small Cap Index Funds, as the Small Cap
Growth Fund (+13.2%) handily outperformed the Small Cap Value Fund (+3.9%).
ROYCE MICRO-CAP TRUST, INC. ('OTCM') outperformed both small-cap value proxies
for the quarter and the six month period, posting NAV total returns of 7.1% and
11.0% respectively. Contributing to the Fund's performance were nice gains in
two sectors (retail and services) which had been mediocre performers in 1995.
The Fund, which has approximately $111 million in total assets, focuses on
the small end of small-cap, the sector known as micro-cap. To our knowledge,
OTCM is the only domestic closed-end micro-cap fund currently available.
Although the Fund's investment history is relatively short, its returns are
highly competitive on an absolute and relative basis. Average annual NAV total
returns for the Fund over the one year and since inception (December 14, 1993)
periods were 21.1% and 15.7%, respectively. WE BELIEVE THAT THE MICRO-CAP SECTOR
REMAINS THE MOST ATTRACTIVE SEGMENT OF THE DOMESTIC EQUITY UNIVERSE AND THAT OUR
RISK AVERSE APPROACH, WHICH USES ABSOLUTE VALUATION STANDARDS, IS AN APPROPRIATE
STRATEGY FOR GENERATING ABOVE AVERAGE RESULTS.
FIREWORKS IN JULY
[GRAPHIC]
Louis Pasteur once
said, 'Chance favors the prepared mind.' Although everyone was prepared for the
fireworks of July 4th, few were prepared for the market fireworks which began in
June and intensified throughout July. Double digit gains in small-cap indices
were erased and many investors now find themselves starting over at mid-year.
PERFORMANCE UPDATE THROUGH JULY 31
<TABLE>
<CAPTION>
% DECLINE JULY '96 YTD RETURN
FROM HIGH* RETURN THRU 7/31/96
--------- -------- ------------
<S> <C> <C> <C>
OTCM (NAV) -6.6% -5.6% +4.8%
Russell 2000 -13.1% -8.7% +0.7%
Nasdaq Comp. -13.4% -8.8% +2.7%
* Russell 2000 high was made on 5/22/96.
</TABLE>
We view the current pyrotechnics of July from the vantage point that these
fluctuations are inevitable and desirable, and part of the normal rhythm of the
market. We are prone to keep ourselves at a distance. This is largely common
sense -- no special preparation needed.
2
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WORTH REPEATING
To be quoted is flattering. To quote oneself presents the dual risk of boring
our readers and tooting our own horn. Nevertheless, we want to repeat some of
our comments from the 1995 Annual Report. (We promise we won't do this again.)
IN OUR LAST REPORT WE SAID:
'An interesting aspect of this five year rise in both stocks and bonds is the
ever increasing participation of individual investors....In fact, it is that
very same demand which is believed to ensure future success and prevent any
major reversal in market fortunes....The suggestion that continued success is
nearly guaranteed by demand is a scary proposition....We remain most astonished,
not with the magnitude of investor appetite for stocks, but the nearly universal
assumption of its permanence.'
WE NOW THINK:
In a perverse way, the least informed (the purchasing public) now appear to
be dictating investment policy to those presumed most knowledgeable (portfolio
managers). Normally prudent professionals have taken comfort in the fact that
the public is pouring money into equity mutual funds. As one of our shareholders
commented, 'The inmates are running the asylum.'
ALSO IN THE 1995 ANNUAL REPORT WE SAID:
'We are certain, particularly in a global economy, that an ample supply of
securities can be created to meet and even exceed investors' demands.'
AND NOW:
The $132 billion of new investments in equity mutual funds for the first half
of 1996 has eclipsed the prior annual record set in 1993 ($130 billion for the
full year). Yet, the dramatic upward progress that this commitment was expected
to produce has not materialized. A move up in long-term interest rates and
increased corporate insider selling activity are partly to blame, as well as a
surge in IPO activity. By late June, roughly 80 new offerings a week were
producing a fresh supply of securities at the rate of approximately $20 billion
a month.
[GRAPHIC]
One of the most instructive offerings of the recent IPO boom was the creation
and issuance of Berkshire Hathaway Inc. Class B shares. Berkshire Hathaway's
Chairman, Warren Buffett, is perhaps the best known investor of our time.
Multiple warnings on the front page of the prospectus included: 'Neither Mr.
Buffett nor Mr. Munger (Vice Chairman) would currently buy Berkshire shares (at
the current price), nor would they recommend that their families or friends do
so' and 'Berkshire has attempted to assess the current demand for Class B shares
and has tailored the size of this offering to fully satisfy that demand (and)
therefore, buyers hoping to capture quick profits are almost certain to be
disappointed.' Yet, despite the warnings, over $500 million was raised. WALL
STREET HAS BEEN SUCCESSFUL IN CREATING AN AMPLE SUPPLY OF NEW AND SECONDARY
OFFERINGS TO FULLY SATISFY DEMAND. HOWEVER, IT PROVIDES NO SIMILAR 'WARNING
LABELS.'
3
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ADDITIONALLY WE SAID:
'The magnitude of the decline in interest rates is virtually not repeatable.
Consequently, a further decline in interest rates will not have the same
favorable impact on stock prices, no matter how bullish one is on rates.'
AND NOW:
The consensus expectations of lower rates (then at 6%) in an election year
have proved to be wrong. Long-term government bond yields rose by over 20% in
the first half to a current yield of over 7.0%. While this surprise has not
ended the party, it's getting hard to find the punch bowl.
AND FINALLY WE SAID:
'THE NEXT FIVE YEARS WILL BE DIFFERENT! It's not likely that the next five years
will rival the previous five in terms of ideal wind conditions or spectacular
performance. History tells us that periods of high valuation and high return are
usually followed by periods of lower, less dynamic returns....We see no reason
why performance should not revert to the mean and, thus, a period of lower five
year returns is likely. Very simply, the last five years was a period in which
risk and reward were synonymous and one in which risk management provided
virtually no benefit. It's likely that we have completed the best five year
performance period for this decade.'
AND NOW?
Enough said.
THE VALUE IN VALUE INVESTING
A basic premise of value investing is that stocks, like other goods and
services, should be purchased at the most attractive prices possible, preferably
at a discount to their 'intrinsic worth.' The reality for most investors is just
the opposite. In other words, investor comfort levels and, therefore, demand
increase when prices rise, and diminish as prices decline. The higher a stock
rises, the greater the perceived opportunity.
Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION MAKING . . .
THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK. Its basic
premise is that the price one pays for an investment makes a significant
difference in the return one receives.
WHAT WE DO
[GRAPHIC] Royce Micro-Cap Trust uses a risk-averse approach to
invest in the securities of companies with market
capitalizations below $300 million, the sector known as
'micro-cap.' Experience tells us that paying attention to risk does not diminish
long-term results, although individual market phases may not necessarily confirm
this.
Our approach attempts to understand and value a company's private
worth -- what we believe an enterprise would sell for in a private transaction
between rational parties. The price we will pay for a security must be
significantly under our appraisal of its private worth. The consistent use of
this discipline, applied to less well-known securities, is the source of our
performance.
4
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NO OTHER PLACE WE WOULD RATHER BE
While the Fund focuses on companies with market caps below $300 million, our
weighted average and median market caps are actually much lower: $155 million
and $132 million, respectively, at June 30, 1996.
Although our orientation is micro-cap stocks, our picking universe is by no
means small with over 6,000 companies valued at more than $300 billion in total
market capitalization. It is both robust and perpetuating; IPO's, spin-offs and
reorganizations create hundreds of new prospects each year. The micro-cap sector
is rich in opportunity and easily accommodates our strategy given the size of
the investable universe.
From time to time we are criticized for the large number of securities that
we hold in the portfolio. In fact, given the size of our universe, we believe
our strategy is quite focused because total portfolio holdings represent fewer
than 3% of the available micro-cap universe. Not many large-cap managers would
be content with only 15 selections from the S&P 500.
Not long ago we had a conversation with a highly successful and respected
fund manager about diversification. His contention was that statistical
diversification could be achieved with just 13 holdings. His own portfolio was
concentrated in a mere 20 selections. We were impressed. Yet, upon further
examination, we discovered his 20 large-cap holdings were involved in 61
different businesses. As defined by Standard Industrial Classification codes
(SICs), Philip Morris has seven different business groups, Pepsi has six,
Johnson & Johnson has five and so on. In contrast, the vast majority of our
holdings have single lines of business. When one adds up the numbers, there's
really not much difference in terms of diversification between our approach and
that of 'focused' managers.
HOW IT WORKS
Our approach to investing in individual micro-cap [GRAPHIC]
companies has proven historical benefits, but can be both
unpredictable and frustrating in the near-term. We believe that the stock market
in the short-term is a polling place, and in the long-term, a highly efficient
weighing device. While our ultimate success will continue to be driven by the
process of 'weighing the true value' of the micro-cap companies in which we have
invested, the following provides a brief glimpse of some of this year's
'election results.'
FALLING IN LOVE
Despite a generally rising market, there were
[GRAPHIC] numerous opportunities for us to either add new
positions or increase our investment in some old
favorites. The following companies represent our most significant commitments in
1996's first half. More importantly, they represent examples of works in
progress which we hope will build future performance.
<TABLE>
<CAPTION>
SECURITY NET INVESTED
- -------------------------------------- ------------
<S> <C>
New England Business Service, Inc. $ 1,111,047
Midwest Grain Products, Inc. 993,525
Highlands Insurance Group, Inc. 993,203
Sevenson Environmental Services, Inc. 682,283
Skyline Corporation 589,756
</TABLE>
Our largest new purchase, New England Business Service, has been a leader in
the supply of business forms and related products for years. New England boasts
a solid balance sheet, achieves high internal rates of return on its capital,
and generates plenty of free cash from operations. Furthermore, New England has
new, talented management committed to enhancing shareholder value. We had the
opportunity to purchase Midwest Grain Products as the company suffered from the
squeeze of rising raw material costs
5
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and a temporary inability to raise prices. A low cost producer that has recently
finished upgrading its facilities, Midwest Grain generates free cash and should
show accelerating performance as grain prices stabilize. Highlands Insurance
Group is a recent spin-off with a new, widely respected C.E.O. Management is
well incentivized to turn Highlands around and grow its business. Sevenson
Environmental Services stumbled into its industry -- environmental cleanup
services -- while working on a construction project at Love Canal. Sevenson has
remained highly profitable during a difficult business cycle, and we purchased
the stock for less than two-thirds of its 1989 offering price. Finally, Skyline
Corp. is a financially strong company well positioned to benefit from
demographic trends that are fueling the growth in manufactured housing. With
over $5.00 per share in cash on the balance sheet, we see minimal downside risk
in this position.
HARVEST SEASON
Selling stocks is always difficult for the value [GRAPHIC]
investor for it requires either parting with success or
admitting mistakes. So far this year we have done plenty of both. The following
is a list of our five largest divestitures year to date.
<TABLE>
<CAPTION>
SECURITY NET PROCEEDS
- -------------------------------------- ------------
<S> <C>
Cliffs Drilling Company $1,573,331
Tide West Oil Company 1,532,479
The Wet Seal, Inc. (Class A) 1,351,030
The Buckle, Inc. 1,101,068
Life Technologies, Inc. 1,084,482
</TABLE>
Improving fortunes in energy, retailing resulted in full and fair valuations
for two of our retailing stocks, The Buckle and The Wet Seal, and two of our
energy companies, Cliffs Drilling and Tide West Oil. Having purchased these
companies when the conditions in their industries were more challenging, we
enjoyed some big winners. We reduced our position in Life Technologies as other
investors discovered this rapidly growing manufacturer of scientific and medical
supplies, awarding it with a higher multiple on expanding earnings per share.
VOLATILITY IS A FRIEND
Recently, stock market volatility has generated a great deal of attention
from the financial press. While large changes (100 point or greater moves) in
the Dow Jones Industrial Average make interesting reading in the morning papers,
their significance is exaggerated. The table below depicts the Russell 2000's
yearly price variation using the index's annual range as a percentage of the
beginning year's price.
[GRAPHIC]
It's interesting to note how tame the markets have remained in the last four
and a half years relative to the prior thirteen. TO US, VOLATILITY IS A FRIEND
IN THAT IT CREATES IRRATIONAL PRICING OF SECURITIES AND, THEREFORE,
OPPORTUNITIES FOR US TO CAPITALIZE ON OUR RISK MANAGEMENT SKILLS.
ARE THERE ANY REAL INVESTORS LEFT?
The term 'investor' denotes a long-term supplier of capital.
In contrast, a 'speculator' is one who takes opportunistic risk [GRAPHIC]
in hopes of generating quick profits. In essence, in-
vestors expect to get paid by the correct assessment of underlying business
fundamentals, whereas speculators count on others (often referred to as greater
fools) to buy them out profitably.
6
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In the current bull market, it has become very difficult to tell the
difference between investors and speculators. For example, what exactly is
'momentum investing?' The term seems oxymoronic. While equities represent a
permanent ownership position in an enterprise, in many fund portfolios, they are
reviewed and replaced more frequently than three month Treasury Bills. Wall
Street brokerage firms publish 'Buy' and 'Sell' recommendations based on a
company's quarterly progress down to the penny per share; and the country's
largest equity mutual fund lost its star manager after a short period of
underperformance, which may have contributed to the decision by that fund's
investors to withdraw in excess of $1 billion.
Only time and more difficult market conditions will separate the true
investors from disappointed speculators. GIVEN THAT WE BELIEVE THAT EQUITIES
REPRESENT LONG-TERM INTERESTS IN BUSINESSES, THE TERM 'INVESTOR' SUITS US JUST
FINE.
WHAT DO WE DO NOW?
Given our belief that the next phase of the market will include lower equity
returns and greater volatility -- the need for basic blocking and tackling, in
the form of commitment, focus and experience, is paramount. We remain committed
to investing in high quality, micro-cap companies using absolute valuation
standards; our focus remains sharp, and exclusively on small and micro-cap
companies; and our 20+ years of investment experience ensures that our vigilance
and discipline remain constant. Your continued confidence is appreciated.
Yours faithfully,
<TABLE>
<C> <S>
/s/ CHARLES M. ROYCE
Charles M. Royce Jack E. Fockler, Jr.
President W. Whitney George
Vice Presidents
</TABLE>
August 1, 1996
P.S. Our 'new era' fund will wait for the 'new era.'
The Russell 2000, Russell 2000 Growth, Russell 2000 Value and S&P 500 indices
are unmanaged and include the reinvestment of dividends. The Nasdaq Composite is
an unmanaged index. The Wilshire Target Small Company Value and Growth Funds
attempt to replicate the performance of the Wilshire Next 1750 Small Company
Value and Growth Indices, respectively.
At the Annual Meeting of Stockholders held on June 26, 1996, Fund
stockholders elected directors and ratified the Board's selection of the Fund's
independent public accountants for 1996, as follows:
<TABLE>
<CAPTION>
NAME OF DIRECTOR/RATIFICATION OF VOTES CAST VOTES VOTES CAST VOTES
INDEPENDENT PUBLIC ACCOUNTANTS FOR WITHHELD AGAINST ABSTAINED
- ------------------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Charles M. Royce..................... 9,221,560 82,856 N/A N/A
Thomas R. Ebright.................... 9,220,286 84,130 N/A N/A
Richard M. Galkin.................... 9,220,286 84,130 N/A N/A
Stephen L. Isaacs.................... 9,220,391 84,025 N/A N/A
David L. Meister..................... 9,220,391 84,025 N/A N/A
Ratification of independent public
accountants........................ 9,205,517 N/A 66,629 32,270
</TABLE>
7
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<TABLE>
<CAPTION>
FUND HIGHLIGHTS June 30, 1996
-------------
<S> <C> <C>
Net Assets $111,094,307
Net Asset Value Per Share $ 9.87
Market Price Per Share $8.625
Shares Outstanding 11,258,010
</TABLE>
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FINANCIAL REVIEW
The table below represents the total returns of the Fund on two separate bases.
NAV total return is the compound rate of return, using net asset values, on an
amount invested in the Fund throughout the stated period and assumes
reinvestment of dividend and capital gain distributions and primary
participation in the Fund's 1994 rights offering. Stockholders are able to
reinvest distributions, and purchase shares through the rights offering, at
prices which have historically been below NAV, and without commission costs. NAV
return is the most meaningful measurement of a continuous stockholder's
progress. Market Value total return presents similar information, but values the
Fund at market value rather than NAV and, therefore, reflects the actual
experience of a stockholder, before commission costs, who bought and sold shares
of the Fund at the beginning and ending dates.
<TABLE>
<CAPTION>
NAV Market Value S&P Russell NASDAQ
Total Returns Total Return Total Return 500`D' 2000`D' Composite`D'
- ---------------------------------------------- ------------ ------------ ----------- ------- -----------------
<S> <C> <C> <C> <C> <C>
3 Months ended 6/30/96 7.1% 11.3% 4.5% 5.0% 7.6%
6 Months ended 6/30/96 11.0 7.8 10.2 10.4 12.6
Annual Returns (ended December 31)
1995 22.9 19.8 37.5 28.4 39.9
1994 6.0 -5.1 1.3 -1.8 -3.2
Average Annual Total Returns (ended June 30, 1996)
1 Year 21.1 22.6 26.1 23.9 26.9
Since inception* 15.7 8.3 18.7 15.4 19.0
</TABLE>
`D' The S&P 500 and Russell 2000 are unmanaged indices and include the
reinvestment of dividends. The Nasdaq Composite is unmanaged. Source: Frank
Russell Co.
* Inception date - December 14, 1993
The results presented in this report represent past performance and should not
be considered representative of the 'total return' from an investment in the
Fund today. They are provided only to give an historical perspective of the
Fund. The investment return and net asset and market values of Fund shares will
fluctuate, so that the shares may be worth more or less than their original cost
when sold.
8
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HISTORY SINCE INCEPTION
The following table details the share accumulation history of an initial
investor in the Fund who reinvested all distributions and participated fully in
the primary subscription of the rights offering. By reinvesting all
distributions and fully participating in the rights offering, an investor
maximizes his returns. This table should be read in conjunction with the
Financial Review of the Fund (see page 8).
<TABLE>
<CAPTION>
Amount Purchase NAV MKT
History Invested Price Shares Value* Value*
----------------- -------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
12/14/93 Initial Purchase $7,500 $ 7.50 1,000 $ 7,250 $ 7,500
10/28/94 Rights Offering 1,400 7.00 200
12/19/94 Distribution $.05 6.75 9 9,163 8,462
12/07/95 Distribution $.36 7.50 58 11,264 10,136
- --------------------------------------------------------------------------------------------
06/30/96 $8,900 1,267 $12,505 $10,928
- --------------------------------------------------------------------------------------------
</TABLE>
* Other than for Initial Purchase and for the current period, values are stated
as of December 31 of the year indicated, after reinvestment of distributions.
The Board of Directors has given the Fund's management the discretionary
authority to cause the Fund to repurchase up to 300,000 shares of its common
stock in open market and other transactions through December 31, 1996. Such
repurchases would be effected at a price per share 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.
9
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DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN
WHAT IS THE DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN?
Distributions of net investment income and capital gains, if any, are
normally made in December. The Fund's Distribution Reinvestment and Cash
Purchase Plan (the 'Plan') offers you an automatic way to reinvest your
dividends and capital gains distributions in additional shares of the Fund,
increasing your holdings in the Fund. Reinvestment of the annual distribution is
done at market price, without commissions. The number of shares to be issued to
a stockholder will be determined by dividing the amount of the distribution
payable to the stockholder by the last reported sale price of a share of the
Fund's common stock on the valuation date, which follows the record date.
The Plan also allows registered stockholders to make optional cash
investments in shares of the Fund's common stock through the Plan Agent and to
deposit certificates representing Fund shares with the Plan Agent for
safekeeping. Stockholders should refer to the Plan document for information on
these options.
HOW DO REGISTERED STOCKHOLDERS PARTICIPATE IN THE PLAN?
If your shares are registered directly with the Fund, you are automatically
a participant in the Plan unless you have instructed the Plan Agent in writing
otherwise. The Plan Agent must receive the instructions not less than 10 days
prior to the record date for a distribution in order to be effective for that
distribution. A registered stockholder may also receive the distribution in the
form of a stock certificate for the full shares and a check for the fractional
share if the Plan Agent is properly notified. Stockholders who elect to not
participate in the Plan will receive all distributions in cash, paid by check
and mailed directly to the stockholder by State Street Bank and Trust Company,
dividend paying agent and Plan Agent.
WHAT IF MY SHARES ARE HELD BY A BROKERAGE FIRM, BANK OR OTHER NOMINEE?
If your shares are held in the name of a brokerage firm, bank, or other
nominee as the stockholder of record, we still expect them to automatically
reinvest distributions on your behalf. Please consult with your brokerage firm,
bank, or other nominee to be certain that it is reinvesting distributions on
your behalf. If your nominee is unable to reinvest distributions on your behalf,
you should instruct your nominee to have your shares registered in your name in
order to participate.
HOW WILL I KNOW HOW MANY SHARES I HAVE?
The Plan Agent maintains the account for registered stockholders in the
Plan and sends written confirmation of all transactions in the account,
including information needed by participants for personal and tax records.
Shares in the account of each participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each participant will
be able to vote those shares at a shareholder meeting or by proxy. A participant
may also send other stock certificates held by them to the Plan Agent to be held
in non-certificated form. There is no service fee charged to participants for
reinvesting distributions. The Plan Agent's fees for the processing of the
distribution reinvestment are paid for by the Fund. A participant may terminate
his account under the Plan by written notice to the Plan Agent. Termination will
be effective as described in the Plan. If a participant elects to sell his
shares before the Plan is terminated, the Plan will deduct a $2.50 fee plus
brokerage commissions from the sale transaction. If a nominee is the registered
owner of your shares, the nominee will maintain the accounts on your behalf.
WHAT IF I NEED MORE INFORMATION?
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: Royce Micro-Cap Trust, Inc. Distribution Reinvestment and Cash
Purchase Plan, c/o State Street Bank and Trust Company, PO Box 8200, Boston MA
02266-8200, (800) 426-5523.
10
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the Royce
Micro-Cap Trust portfolio. For a more complete picture, the full portfolio and
accompanying financial statements should be read in their entirety.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
Value % of Net Assets
--------------- ---------------
<S> <C> <C>
Common Stocks..................................................... $ 94,278,038 84.9%
Preferred Stocks.................................................. 564,938 0.5
Cash & Other Net Assets........................................... 16,251,331 14.6
--------------- -------
Total Net Assets.................................................. $ 111,094,307 100.0%
--------------- -------
--------------- -------
</TABLE>
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS
<TABLE>
<C> <S> <C>
Weighted Average Market Capitalization (Total Portfolio).......... $155Million
Median Market Capitalization (Total Portfolio).................... $132Million
Weighted Average P/E Ratio (100 Largest Positions)................ 14.1 x
Weighted Average P/B Ratio (100 Largest Positions)................ 1.5 x
Weighted Average Portfolio Yield (100 Largest Positions).......... 1.4%
</TABLE>
- --------------------------------------------------------------------------------
COMMON STOCK SECTORS
<TABLE>
<CAPTION>
% of Net Assets
---------------
<S> <C>
Industrial Cyclicals............................................... 19.2%
Financial.......................................................... 14.1
Services........................................................... 13.7
Consumer Durables.................................................. 11.6
Energy............................................................. 6.2
Retail............................................................. 5.8
Technology......................................................... 5.4
Miscellaneous...................................................... 4.9
Consumer Staples................................................... 3.5
Utilities.......................................................... 0.4
Health............................................................. 0.1
</TABLE>
- --------------------------------------------------------------------------------
TOP TWENTY POSITIONS
<TABLE>
<CAPTION>
Value % of Net Assets
--------------- ---------------
<C> <S> <C> <C>
1. Matthews International Corporation Cl. A..................... $ 1,457,500 1.3%
2. The Dress Barn, Inc. ........................................ 1,321,950 1.2
3. Penn Engineering and Manufacturing Inc. ..................... 1,275,850 1.1
4. New England Business Service, Inc. .......................... 1,273,350 1.1
5. Juno Lighting, Inc. ......................................... 1,258,000 1.1
6. Florida Rock Industries, Inc. ............................... 1,216,125 1.1
7. Simpson Manufacturing Co., Inc. ............................. 1,206,000 1.1
8. Lifetime Hoan Corporation.................................... 1,141,005 1.0
9. Chemfab Corporation.......................................... 1,129,800 1.0
10. Ash Grove Cement Company..................................... 1,115,000 1.0
11. CATHERINES STORES CORPORATION................................ 1,113,900 1.0
12. DUFF & PHELPS CREDIT RATING CO. ............................. 1,096,500 1.0
13. Jenny Craig, Inc. ........................................... 1,095,738 1.0
14. Baldwin & Lyons, Inc. Cl. B.................................. 1,093,620 1.0
15. Lilly Industries, Inc. Cl. A................................. 1,082,900 1.0
16. Richardson Electronics, Ltd. ................................ 1,052,000 0.9
17. Nobel Insurance Limited...................................... 1,019,513 0.9
18. Velcro Industries N.V. ...................................... 999,000 0.9
19. Frozen Food Express Industries, Inc. ........................ 997,875 0.9
20. Trenwick Group Inc. ......................................... 995,000 0.9
</TABLE>
11
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 84.9%
<TABLE>
<CAPTION>
Shares Value
------ -----
<C> <S> <C>
CONSUMER DURABLES -- 11.6%
137,100 *Aldila, Inc. ................ $ 574,106
21,625 Allen Organ Company Cl. B..... 846,078
42,150 *Conso Products Co. .......... 684,938
39,600 First Years Inc............... 544,500
53,200 Garan Incorporated............ 904,400
6,200 *Johnson Worldwide Associates,
Inc. Cl. A.................. 85,250
74,000 Juno Lighting, Inc. .......... 1,258,000
44,100 Justin Industries, Inc. ...... 578,812
15,000 K-Swiss Inc. Cl. A ........... 163,125
32,000 *Kit Manufacturing Co. ....... 392,000
10,500 *Kleinert's Inc. ............. 175,875
106,140 *Lifetime Hoan Corporation.... 1,141,005
26,700 *Marisa Christina,
Incorporated................ 534,000
53,000 Matthews International
Corporation Cl. A........... 1,457,500
3,400 McRae Industries, Inc. Cl.
A........................... 28,900
21,900 The Rival Company............. 503,700
88,300 *River Oaks Furniture......... 529,800
45,900 *The Sirena Apparel Group,
Inc. ....................... 143,437
28,700 Skyline Corporation........... 717,500
10,000 Thomaston Mills, Inc. Cl. A... 112,500
15,600 Thor Industries, Inc. ........ 319,800
25,000 *The Topps Company, Inc. ..... 140,625
10,000 Wellco Enterprises, Inc. ..... 215,000
19,600 Weyco Group, Inc. ............ 793,800
------------
12,844,651
------------
CONSUMER STAPLES -- 3.5%
5,200 Alico, Inc. .................. 101,400
2,000 Farmer Bros. Co. ............. 276,000
80,600 Golden Enterprises, Inc. ..... 649,837
22,500 *Jean-Philippe Fragrances,
Inc. ....................... 194,062
74,300 *Midwest Grain Products,
Inc. ....................... 965,900
39,200 The Smithfield Companies,
Inc. ....................... 441,000
18,000 Velcro Industries N.V. ....... 999,000
20,000 WLR Foods, Inc. .............. 280,000
------------
3,907,199
------------
ENERGY -- 6.2%
60,500 *Alamco, Inc. ................ 680,625
28,500 *American Oilfield Divers,
Inc. ....................... 256,500
40,000 *Belden & Blake Corporation... 830,000
28,000 Berry Petroleum Company....... 318,500
35,200 *Tom Brown, Inc. ............. 602,800
22,000 *Dreco Energy Services Ltd.
Cl. A....................... 605,000
123,000 *Equity Oil Company........... 591,937
10,200 *Global Industries, Ltd. ..... 303,450
16,000 *Gulfmark International
Inc. ....................... 556,000
40,000 Lufkin Industries, Inc. ...... 820,000
15,400 *McFarland Energy, Inc. ...... 138,600
36,200 *Offshore Logistics, Inc. .... 502,275
<PAGE>
<CAPTION>
Shares Value
------ -----
<C> <S> <C>
58,600 *Tucker Drilling Co., Inc. ... $ 673,900
------------
6,879,587
------------
FINANCIAL -- 14.1%
43,600 ALLIED Life Financial
Corporation................. 872,000
29,400 BHI Corporation............... 429,975
53,024 Baldwin & Lyons, Inc. Cl. B... 1,093,620
25,800 E.W. Blanch Holdings, Inc. ... 512,775
34,210 Capitol Transamerica
Corporation................. 658,542
10,000 *Danielson Holding
Corporation................. 66,875
26,300 *Desert Community Bank........ 401,075
18,600 Eaton Vance Corp. ............ 674,250
17,800 *Gryphon Holdings Inc. ....... 267,000
27,216 *Hanmi Bank................... 214,326
49,600 *Highlands Insurance Group,
Inc. ....................... 930,000
60,300 Hilb, Rogal & Hamilton
Company..................... 836,663
40,000 Independence Holding
Company..................... 187,500
46,200 Intercargo Corporation........ 398,475
11,045 Investors Financial Services
Corporation................. 256,796
22,000 Iron and Glass Bancorp,
Inc. ....................... 814,000
12,900 Lawyers Title Corporation..... 232,200
17,311 *MAIC Holdings, Inc. ......... 644,835
87,700 Nobel Insurance Limited....... 1,019,513
35,375 Oriental Federal Savings
Bank........................ 672,125
19,400 PXRE Corporation.............. 470,450
53,800 Pennsylvania Manufacturers
Corporation................. 914,600
5,000 *Philadelphia Consolidated
Holding Corp. .............. 97,500
30,200 Piper Jaffray Companies
Inc. ....................... 377,500
9,000 Poe & Brown, Inc. ............ 222,750
72,750 *Rand Capital Corporation..... 113,672
25,000 Southwest Securities Group,
Inc. ....................... 290,625
6,835 Titan Holdings, Inc. ......... 95,690
35,900 Transnational Re Corporation
Cl. A....................... 884,038
19,900 Trenwick Group Inc. .......... 995,000
------------
15,644,370
------------
HEALTH -- 0.1%
16,800 *Hauser Chemical Research,
Inc. ....................... 113,400
------------
INDUSTRIAL CYCLICALS -- 19.2%
24,600 American Filtrona
Corporation................. 787,200
23,200 *Art's-Way Manufacturing Co.,
Inc. ....................... 116,000
10,000 Ash Grove Cement Company...... 1,115,000
67,500 *Guy F. Atkinson Company of
California.................. 911,250
46,310 BHA Group, Inc. Cl. A......... 613,608
19,300 *Bird Corp. .................. 63,328
57,100 Blessings Corporation......... 585,275
80,700 *Chemfab Corporation.......... 1,129,800
12,500 Curtiss-Wright Corporation.... 675,000
40,100 *Devcon International
Corp. ...................... 370,925
239,900 *DeVlieg-Bullard, Inc. ....... 562,266
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------ -----
<C> <S> <C>
INDUSTRIAL CYCLICALS-(CONT'D)
14,600 *Figgie International Inc. Cl.
A........................... $ 220,825
21,300 *Figgie International Inc. Cl.
B........................... 303,525
47,000 Florida Rock Industries,
Inc. ....................... 1,216,125
70,455 Hawkins Chemical, Inc. ....... 546,026
42,000 *C. H. Heist Corp. ........... 283,500
16,325 *Hirsh International Corp. Cl.
A........................... 312,216
25,800 *Insituform Technologies,
Inc. ....................... 199,950
27,900 International Aluminum
Corporation................. 704,475
5,000 *International Imaging
Materials, Inc. ............ 118,750
19,400 Kaman Corporation Cl. A....... 196,425
63,700 Lilly Industries, Inc. Cl.
A........................... 1,082,900
170,000 *MK Gold Company.............. 255,000
9,859 MacDermid, Incorporated....... 690,130
7,700 Paul Mueller Company.......... 261,800
7,000 NN Ball and Roller, Inc. ..... 145,250
64,800 Oshkosh Truck Corporation Cl.
B........................... 915,300
21,600 Peerless Mfg. Co. ............ 232,200
15,000 *Pegasus Gold Inc. ........... 183,750
52,700 *Penn Engineering and
Manufacturing Inc. ......... 994,713
11,900 Penn Engineering and
Manufacturing Corp. Cl. A... 281,137
31,100 *Perini Corporation........... 373,200
570 *Pioneer Metals, Inc. ........ 114,000
20,700 Puerto Rican Cement Company,
Inc. ....................... 644,288
60,300 *Simpson Manufacturing Co.,
Inc. ....................... 1,206,000
5,000 The L. S. Starrett Company Cl.
A........................... 130,000
98,500 *Steel of West Virginia,
Inc. ....................... 886,500
65,000 *Thermal Industries, Inc. .... 580,938
31,800 *Todd Shipyards
Corporation ................ 238,500
16,000 *The Turner Corporation....... 184,000
4,700 Tuscarora Incorporated........ 99,287
17,900 *UNC, Inc. ................... 149,913
37,900 Versa Technologies, Inc. ..... 511,650
10,000 *Vertex Communications
Corporation................. 186,250
------------
21,378,175
------------
RETAIL -- 5.8%
33,000 *Brookstone, Inc. ............ 371,250
9,100 *The Buckle, Inc. ............ 311,675
112,800 *CATHERINES STORES
CORPORATION................. 1,113,900
101,700 Cato Corporation Cl. A........ 610,200
5,000 *Crown Books Corporation...... 67,500
2,500 Dart Group Corporation Cl.
A........................... 222,500
125,900 *The Dress Barn, Inc. ........ 1,321,950
46,500 *Mikasa, Inc. ................ 511,500
41,400 Oshkosh B'Gosh, Inc. Cl. A.... 745,200
14,000 *Stein Mart, Inc. ............ 255,500
<PAGE>
<CAPTION>
Shares Value
------ -----
<C> <S> <C>
156,800 *Suzy Shier Ltd. ............. $ 855,406
------------
6,386,581
------------
SERVICES -- 13.7%
7,000 ABM Industries Incorporated... 273,875
25,300 Aceto Corporation............. 398,475
18,350 Air Express International
Corporation................. 518,387
56,500 *Allwaste, Inc. .............. 261,312
27,097 *Bell Industries, Inc. ....... 453,875
61,300 *Jenny Craig, Inc. ........... 1,095,738
28,200 Dames & Moore................. 341,925
51,600 DUFF & PHELPS CREDIT RATING
CO. ........................ 1,096,500
42,900 Ennis Business Forms, Inc..... 487,987
32,700 *FRP Properties, Inc. ........ 670,350
180,900 *FCA International Ltd. ...... 307,324
88,700 Frozen Food Express
Industries, Inc. ........... 997,875
17,337 Gilbert Associates, Inc. Cl.
A........................... 221,047
3,500 Grey Advertising Inc. ........ 773,500
34,400 Jackpot Enterprises, Inc. .... 438,600
11,000 Kenan Transport Company....... 228,250
31,300 Merrill Corporation........... 782,500
65,300 New England Business Service,
Inc. ....................... 1,273,350
11,800 *Nichols Research
Corporation................. 368,750
18,500 Plenum Publishing
Corporation................. 647,500
3,500 REFAC Technology Development
Corporation................. 26,688
105,200 Richardson Electronics,
Ltd. ....................... 1,052,000
5,500 Roto-Rooter, Inc. ............ 189,750
39,800 *Steck-Vaughn Publishing
Corporation................. 497,500
84,000 *TBC Corporation.............. 724,500
31,000 Treadco, Inc. ................ 263,500
50,000 *Vallen Corporation........... 875,000
------------
15,266,058
------------
TECHNOLOGY -- 5.4%
21,500 BGS Systems, Inc. ............ 838,500
21,000 *CSP Inc. .................... 173,250
14,300 *Comptek Research, Inc. ...... 78,650
16,600 *Dionex Corporation........... 535,350
45,100 *Exar Corporation............. 586,300
40,482 *Giga-tronics Incorporated.... 455,422
18,750 Hach Company.................. 300,000
56,000 *ILC Technology, Inc. ........ 651,000
15,400 *Integral Systems, Inc. ...... 415,800
47,000 Landauer Inc.................. 992,875
15,700 MacNeal-Schwendler
Corporation................. 117,750
60,300 Newport Corporation........... 595,463
14,500 Sage Laboratories, Inc. ...... 232,000
------------
5,972,360
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------ -----
<C> <S> <C>
UTILITIES -- 0.4%
34,860 Southwest Water Company....... $ 400,890
------------
MISCELLANEOUS -- 4.9%..................... 5,484,767
------------
Total Common Stocks
(Cost $76,345,520).......... 94,278,038
------------
PREFERRED STOCKS -- 0.5%
12,250 Bird Corp. $1.85 Conv. ....... 186,813
12,500 Sterling Financial Corporation
$1.8125 Conv. Cum. ......... 378,125
------------
Total Preferred Stocks
(Cost $514,977)............. 564,938
------------
<CAPTION>
Value
-----
<S> <C>
REPURCHASE AGREEMENT -- 14.7%
State Street Bank and Trust Company,
4.90%, due 7/01/96, collateralized by
U.S. Treasury Notes, 5.25% due 12/31/97,
valued at
$16,630,961 (Cost $ 16,300,000)......... $ 16,300,000
------------
TOTAL INVESTMENTS -- 100.1%
(COST $93,160,497)...................... 111,142,976
------------
LIABILITIES LESS CASH AND OTHER
ASSETS -- (0.1) %....................... (48,669)
------------
NET ASSETS -- 100.0%...................... $111,094,307
------------
------------
</TABLE>
* Non-income producing.
INCOME TAX INFORMATION -- The cost of total investments for federal income tax
purposes was $93,160,497. At June 30, 1996, net unrealized appreciation for all
securities was $17,982,479, consisting of aggregate gross unrealized
appreciation of $20,536,676 and aggregate gross unrealized depreciation of
$2,554,197.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $76,860,497)......................... $ 94,842,976
Repurchase agreement...................................................................... 16,300,000
Cash...................................................................................... 86,945
Receivable for investments sold........................................................... 180,750
Receivable for dividends and interest..................................................... 101,575
Deferred organizational costs and other assets............................................ 65,688
-------------
Total Assets......................................................................... 111,577,934
-------------
LIABILITIES:
Payable for investments purchased......................................................... 322,839
Payable for investment advisory fees...................................................... 44,124
Payable for administration fees........................................................... 8,759
Accrued expenses.......................................................................... 107,905
-------------
Total Liabilities.................................................................... 483,627
-------------
Net Assets........................................................................... $ 111,094,307
-------------
-------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income....................................................... $ 334,402
Accumulated net realized gain on investments.............................................. 11,482,453
Net unrealized appreciation on investments................................................ 17,982,479
Capital stock............................................................................. 11,258
Additional paid-in capital................................................................ 81,283,715
-------------
Net Assets........................................................................... $ 111,094,307
-------------
-------------
PRICING OF SHARES:
Net asset value per share
($111,094,307[div]11,258,010 shares outstanding)........................................ $9.87
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
---------------- -----------------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income......................................... $ 308,961 $ 243,167
Net realized gain on investments.............................. 11,020,836 4,317,779
Net change in unrealized appreciation on investments.......... (300,856) 14,101,960
---------------- -----------------
Net increase in net assets resulting from investment
operations............................................. 11,028,941 18,662,906
---------------- -----------------
DIVIDENDS AND DISTRIBUTIONS:
From net investment income.................................... -- (217,726)
From net realized gain on investments......................... -- (3,701,343)
---------------- -----------------
Total dividends and distributions........................ -- (3,919,069)
---------------- -----------------
CAPITAL STOCK TRANSACTIONS:
Dividend and distribution reinvestment........................ -- 2,787,701
---------------- -----------------
NET INCREASE IN NET ASSETS......................................... 11,028,941 17,531,538
NET ASSETS:
Beginning of period........................................... 100,065,366 82,533,828
---------------- -----------------
End of period (including undistributed net investment income
of $334,402 and $25,441, respectively)...................... $111,094,307 $ 100,065,366
---------------- -----------------
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
STATEMENT OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996
----------------
<S> <C>
INVESTMENT INCOME:
Dividends........................................................................... $ 572,097
Interest............................................................................ 188,736
----------------
Total Income................................................................... 760,833
----------------
EXPENSES:
Investment advisory fees............................................................ 240,682
Administration fees................................................................. 67,158
Custodian and transfer agent fees................................................... 36,400
Administrative and office facilities expense........................................ 27,704
Professional fees................................................................... 12,740
Directors' fees..................................................................... 11,830
Other expenses...................................................................... 55,358
----------------
Total Expenses................................................................. 451,872
----------------
Net Investment Income.......................................................... 308,961
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.................................................... 11,020,836
Net change in unrealized appreciation on investments................................ (300,856)
----------------
Net realized and unrealized gain on investments................................ 10,719,980
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... $ 11,028,941
----------------
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist stockholders in evaluating the Fund's
performance for the periods presented.
<TABLE>
<CAPTION>
Six Months Year ended For the Period
ended December 31, December 14, 1993*
June 30, 1996 ------------------- through
(unaudited) 1995 1994 December 31, 1993
------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 8.89 $ 7.58 $ 7.27 $ 7.25
------------- -------- ------- ------------------
INVESTMENT OPERATIONS:
Net investment income...................... 0.03 0.02 0.01 --
Net realized and unrealized gain on
investments............................. 0.95 1.69 0.41 0.02
------------- -------- ------- ------------------
Total from investment operations........ 0.98 1.71 0.42 0.02
------------- -------- ------- ------------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income...................... -- (0.02) (0.02) --
Net realized gain on investments........... -- (0.34) (0.03) --
------------- -------- ------- ------------------
Total dividends and distributions....... -- (0.36) (0.05) --
------------- -------- ------- ------------------
CAPITAL STOCK TRANSACTIONS:
Effect of rights offering.................. -- -- (0.06) --
Effect of reinvestment of distributions.... -- (0.04) -- --
------------- -------- ------- ------------------
Total capital stock transactions........ -- (0.04) (0.06) --
------------- -------- ------- ------------------
NET ASSET VALUE, END OF PERIOD............... $ 9.87 $ 8.89 $ 7.58 $ 7.27
------------- -------- ------- ------------------
------------- -------- ------- ------------------
MARKET VALUE, END OF PERIOD.................. $ 8.625 $ 8.00 $ 7.00 $ 7.50
------------- -------- ------- ------------------
------------- -------- ------- ------------------
TOTAL RETURN:(A)
Net Asset Value............................ 11.0% 22.9% 6.0% 0.3%
Market Value............................... 7.8% 19.8% (5.1)% 0.0%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)..... $ 111,094 $100,065 $82,534 $ 71,126
Ratio of Expenses to Average Net Assets
(including management fee)................. 0.86%** 1.36% 1.88% 1.92%(b)**
Ratio of Management Fee to Average Net
Assets..................................... 0.49%** 0.77% 1.20% 0.0%
Ratio of Net Investment Income (Loss) to
Average Net Assets......................... 0.59%** 0.26% 0.21% (0.06)%(b)**
Portfolio Turnover Rate...................... 16% 51% 23% 0%
Average Commission Rate Paid`D'.............. $ 0.0455 -- -- --
</TABLE>
- ------------
* Commencement of operations.
** Annualized.
(a) The Net Asset Value and Market Value Total Returns assume a continuous
stockholder who reinvested all net investment income dividends and capital
gain distributions and fully participated in primary rights offerings.
(b) Presented after waiver by the Investment Adviser and Administrator. For the
period ended December 31, 1993, the ratios of expenses and net investment
loss to average net assets would have been 2.12% and (.26)%, respectively,
absent such waivers.
`D' For fiscal years beginning after October 1, 1995, the Fund is required to
disclose its average commission rate paid per share for purchases and sales
of investments.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Micro-Cap Trust, Inc. (the 'Fund'), is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940 and was incorporated under the laws of the State of Maryland on September
9, 1993. The Fund commenced operations on December 14, 1993.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. 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 last reported sale prior to the time the valuation is
made or, if no sale is reported for such day, at their bid price for
exchange-listed securities and at the average of their bid and asked prices for
Nasdaq securities. Quotations are taken from the market where the security is
primarily traded. Other over-the-counter securities for which market quotations
are readily available are valued at their bid price. Securities for which market
quotations are not readily available are valued at their fair value under
procedures established and supervised by the Fund's Board of Directors. 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. Interest income is recorded on an
accrual basis. Realized gains and losses from investment transactions are
determined on the basis of identified cost for both book and tax purposes.
Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal year.
The Schedule of Investments includes information regarding income taxes under
the caption 'Income Tax Information'.
Dividends and Distributions:
Dividends and capital gains distributions are recorded on the ex-dividend
date and paid annually in December. These distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to additional paid-in
capital and may affect net investment income per share. Undistributed net
investment income may include temporary book and tax basis differences which
will reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end will be distributed in the following year.
Repurchase Agreements:
The Fund enters into repurchase agreements with respect to its portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of its assets. The Fund restricts repurchase agreements to maturities
of no more than seven days. Securities pledged as collateral for repurchase
agreements are held by SSB&T until maturity of the repurchase agreement.
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 the Fund to dispose of the underlying securities.
18
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
Organizational Expenses:
Costs of $70,000 incurred by the Fund in connection with its organization
have been deferred and are being amortized on a straight line basis over a five
year period from the date the Fund commenced operations.
NOTE 2. INVESTMENT ADVISORY AGREEMENT:
Under the Investment Advisory Agreement between Quest Advisory Corp.
('Quest') and the Fund, the Basic Fee is a monthly fee equal to 1/12 of 1% (1%
on an annualized basis) of the average of the net assets of the Fund at the end
of each month included in the applicable performance period, which is a rolling
period of up to 36 months, beginning January 1, 1994 and ending with the most
recent calendar month.
The Basic Fee for such monthly period may be increased or decreased,
depending on the extent, if any, by which the investment performance of the Fund
exceeds by more than 2 percentage points, or is exceeded by more than 2
percentage points by, the percentage change in the investment record of the
Nasdaq Composite Index (the 'Index') for the performance period.
The maximum increase or decrease in the Basic Fee for any month may not
exceed 1/12 of 0.5%. Accordingly, for each month, the maximum fee rate as
adjusted for performance is 1/12 of 1.5% and would be payable if the investment
performance of the Fund exceeds the percentage change in the investment record
of the Index by 12 or more percentage points for the performance period. The
minimum fee rate as adjusted for performance is 1/12 of 0.5% and would be
payable if the percentage change in the investment record of the Index exceeds
the investment performance of the Fund by 12 or more percentage points for the
performance period.
For the six months ended June 30, 1996, the Fund paid Quest advisory fees
totaling $240,682.
NOTE 3. ADMINISTRATION AGREEMENT:
Effective March 1, 1996, Mitchell Hutchins Asset Management Inc. (the
'Administrator') entered into an amended Administration Agreement with the Fund.
In accordance with the Administration Agreement, the Administrator performs or
assists in certain aspects of the Fund's operations. As compensation for its
services, the Administrator is paid an annual fee, payable monthly, of $50,000
plus 0.05% on the first $125 million of the Fund's average daily net assets, and
0.03% of average daily net assets exceeding $125 million.
NOTE 4. CAPITAL STOCK:
At June 30, 1996, there were 150,000,000 shares of common stock, $0.001 par
value, authorized. There were no capital stock transactions for the six months
ended June 30, 1996. Capital stock transactions for the year ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1995
---------------------
Shares Amount
------- ----------
<S> <C> <C>
Dividend and distribution reinvestment........................................... 371,693 $2,787,701
</TABLE>
NOTE 5. PURCHASES AND SALES OF SECURITIES:
For the six months ended June 30, 1996, the cost of purchases and the
proceeds from the sales of investment securities, excluding short-term
securities, amounted to $15,927,025 and $26,933,190, respectively.
19
<PAGE>
<PAGE>
OFFICERS
Charles M. Royce, President and Treasurer
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and
Assistant Secretary
John E. Denneen, Secretary
INVESTMENT ADVISER
Quest Advisory Corp.
1414 Avenue of the Americas
New York, NY 10019
ADMINISTRATOR
Mitchell Hutchins Asset Management
1285 Avenue of the Americas
New York, NY 10019
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
CUSTODIAN, TRANSFER AGENT
AND REGISTRAR
State Street Bank and Trust Company
DIRECTORS
Thomas R. Ebright
Quest Advisory Corp., Vice President
Royce, Ebright & Associates, Inc., President
Richard M. Galkin
Richard M. Galkin Associates Inc.,
President
Stephen L. Isaacs
Columbia University Development Law and
Policy Program, Director; Attorney
David L. Meister
Communications Industry, Consultant
Charles M. Royce
Quest Advisory Corp., President
Royce Micro-Cap Trust, Inc.
Semi-Annual Report 1996
1414 Avenue of the Americas
New York, New York 10019
(800) 221-4268
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as..... `D'
The division sign shall be expressed as..... [div]
GRAPHIC APPENDIX
On page 2 of the paper format Royce Micro-Cap Trust report:
Picture of firecracker exploding
On page 3 of the paper format Royce Micro-Cap Trust report:
A picture of a Prospectus cover of Berkshire Hathaway Inc.
On page 4 of the paper format Royce Micro-Cap Trust report:
A picture of a scale balancing a dollar sign and a factory.
On page 5 of the paper format Royce Micro-Cap Trust report:
A picture of a man in long white coat pointing with a pointer.
A picture of Cupid shooting an arrow with two hearts around him.
On page 6 of the paper format Royce Micro-Cap Trust report:
A picture of a basket of fruit at harvest time.
A bar graph of the Russell 2000 price variations from 1979 to 1996.
A picture of a ticker tape machine.
