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ROYCE
MICRO-CAP TRUST
1st QUARTER REPORT
MARCH 31, 1996
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Dear Stockholder:
It was a textbook case of supply and demand. Investors, euphoric over 1995's
spectacular returns, continued to push mutual fund assets and stock market
prices to unprecedented levels in 1996's first quarter. The demand side of the
equation has been strong and the supply side has not kept pace. However, we are
entering the prime selling season for IPOs (initial public offerings) and
secondary offerings, and it will be interesting to see just how long investor
demand can outstrip supply.
The first quarter's surge in demand for equity mutual funds occurred despite
a rise in long-term interest rates and a pickup in stock market volatility, two
phenomena generally perceived as negatively impacting stock market returns.
While the stock market was being driven to new highs in the first 90 days, bond
indices were going in the opposite direction. With long-term interest rates up
almost 100 basis points, total return for the long-term government bond was down
almost 8% for the quarter, quite a contrast to the 1995 record return of 30.7%.
Stock market volatility, which was virtually nonexistent in 1995, staged a
comeback and was especially evident in the more liquid, large-cap zone. Often a
change in volatility precedes a change in returns. One has to wonder if the
increase in long-term interest rates combined with the increase in market
volatility is presaging a shift in market direction.
1996's first quarter performance, like that of 1995, was led by the
large-cap sector of the market. Performance was especially strong for the Dow
Jones Industrial Average (+9.8%)* whose return was nearly double that of the
broader based S&P 500 (+5.5%)*. This performance divergence within large-cap is
reminiscent of the 'Nifty 50' in the early 1970s, when a handful of stocks
dominated returns. Although small-cap stocks lagged when compared to their large
company counterparts, returns for the sector were still attractive. The Russell
2000* index of small-cap issues finished the quarter up 5.1%. ROYCE MICRO-CAP
TRUST, INC. ('OTCM') provided a return that was below market, but decent
nevertheless, up 3.7% on an NAV basis. Since its inception (12/14/93), the Fund
has provided a cumulative NAV total return of 35.0%, or 14.0% on an average
annual total return basis. OTCM remains the only closed-end domestic micro-cap
fund and as of March 31, its market price was trading at a double digit discount
to its NAV. We view this as an attractive investment opportunity for existing
and potential shareholders.
As we look out into the remainder of the year, we are reminded of historical
performance patterns where rising interest rates and higher market volatility
usually translate into lower market returns. Traditionally, value investing has
provided an edge during these periods. At OTCM, we are committed to an approach
which emphasizes patience and value, one which is applied in a disciplined
manner on a daily basis, regardless of market conditions or outlook. Comments or
questions are always welcome and your continued confidence is appreciated.
Yours faithfully,
Charles M. Royce
Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
April 4, 1996
* The Dow Jones Industrial Average, S&P 500 and Russell 2000 are unmanaged
indices and include the reinvestment of dividends.
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FUND HIGHLIGHTS
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<CAPTION>
March 31, 1996
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<S> <C>
Net Asset Value Per Share.......................... $9.22
Market Price Per Share............................. $7.75
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<CAPTION>
TOTAL RETURN PERFORMANCE
NAV Market Value S&P
Total Total S&P Russell SmallCap Nasdaq
Period Ended March 31, 1996 Return Return 500 2000 600 Composite
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<S> <C> <C> <C> <C> <C> <C>
3 Months.................................................... 3.7% (3.1)% 5.5 % 5.1% 5.7% 4.8%
1 Year...................................................... 21.7 18.1 32.1 29.1 31.2 34.8
Average Annual Total Return From Inception*................. 14.0 4.3 18.6 14.8 14.3 18.1
</TABLE>
* Inception date -- 12/14/93
The above indices are unmanaged and include the reinvestment of dividends.
Sources: Frank Russell Co. and Wilshire Associates Incorporated.
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<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS Three Months Ended
March 31, 1996 Year Ended
(unaudited) December 31, 1995
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<S> <C> <C>
INVESTMENT ACTIVITIES:
Net investment income................................................. $ 107,481 $ 243,167
Net realized gain on investments...................................... 3,273,600 4,317,779
Net unrealized appreciation on investments............................ 301,446 14,101,960
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Total from investment activities.................................... 3,682,527 18,662,906
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DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................................................. -- (217,726)
Net realized gain..................................................... -- (3,701,343)
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Total from dividends and distributions.............................. -- (3,919,069)
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CAPITAL STOCK TRANSACTIONS:
Dividend and distribution reinvestment................................ -- 2,787,701
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NET INCREASE IN NET ASSETS.............................................. 3,682,527 17,531,538
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NET ASSETS:
Beginning of period................................................... 100,065,366 82,533,828
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End of period......................................................... $103,747,893 $ 100,065,366
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<TABLE>
<CAPTION>
COMPOSITION OF NET ASSETS % of Net
March 31, 1996 Assets
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<S> <C> <C>
Common Stocks........................................................... $ 96,960,861 93.5%
Preferred Stocks........................................................ 635,375 0.6
Cash and Other Assets Less Liabilities.................................. 6,151,657 5.9
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TOTAL NET ASSETS...................................................... $103,747,893 100.0%
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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.
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the OTCM
portfolio at March 31, 1996.
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WEIGHTED AVERAGES
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<S> <C>
Market Capitalization (Total Portfolio) $158 Million
Median Market Capitalization (Total
Portfolio) $119 Million
P/E Ratio (100 Largest Positions) 13.7x
P/B Ratio (100 Largest Positions) 1.6x
Portfolio Yield (100 Largest Positions) 1.3%
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TOP TWENTY POSITIONS
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Market
Value
<C> <S> <C>
1. The Dress Barn, Inc. ..................... $1,596,825
Matthews International Corporation Cl.
2. A......................................... 1,417,750
3. Tide West Oil Company..................... 1,411,595
4. Frozen Food Express Industries. Inc. ..... 1,372,338
5. Duff & Phelps Credit Rating Co. .......... 1,225,600
6. Ash Grove Cement Company.................. 1,220,000
7. Richardson Electronics, Ltd. ............. 1,196,650
8. Tom Brown, Inc. .......................... 1,175,200
9. Catherines Stores Corporation............. 1,128,000
10. Gulfmark International Inc. .............. 1,089,000
11. Vallen Corporation........................ 1,087,500
12. Florida Rock Industries, Inc. ............ 1,081,600
13. Dreco Energy Services Ltd. ............... 1,080,000
14. Cato Corporation Cl. A.................... 1,029,713
15. Pennsylvania Manufacturers Corporation.... 1,022,200
16. Nobel Insurance Limited................... 1,019,513
17. Juno Lighting, Inc. ...................... 1,017,500
18. Stein Mart, Inc. ......................... 991,250
19. Oshkosh Truck Corporation Cl. B........... 980,100
20. Highlands Insurance Group................. 979,600
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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 6,000 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 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 transactions through December 31, 1996. 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
