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ROYCE
MICRO-CAP TRUST
3rd QUARTER REPORT
SEPTEMBER 30, 1996
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Dear Stockholder:
After declining 15.5% from May 22 through July 24, small-cap stocks, as
measured by the Russell 2000*, staged a comeback, rallying 12.3% through quarter
end. However, unlike the large-cap oriented S&P 500* which made new highs near
the end of the third quarter, the Russell 2000 failed to reach the peak
established in the second quarter and now trails the large-cap index on a
year-to-date performance basis. For the quarter, the S&P 500 was up 3.1% versus
a 0.3% gain for the Russell 2000; year-to-date the S&P 500 is up 13.6% and the
Russell 2000 is up 10.7%. The Nasdaq Composite*, the Fund's current relative
performance benchmark, had a strong third quarter, up 3.5%; year-to-date the
index was up 16.6%. The Nasdaq Composite's impressive third quarter and year-
to-date performance returns are attributable to the large-cap, technology bias
of its top holdings.
FOR THE THIRD QUARTER, ROYCE MICRO-CAP TRUST ('OTCM') WAS DOWN 2.9% ON AN
NAV BASIS, BUT REMAINED IN POSITIVE TERRITORY YEAR-TO-DATE THROUGH SEPTEMBER 30,
WITH A 7.8% NAV TOTAL RETURN. Average annual NAV total returns for the Fund for
the 1-year and since inception (12/14/93) periods were 8.3% and 13.0%,
respectively. In spite of the slow third quarter showing, we believe that
relative valuations favor micro-cap companies as the upper end of the small-cap
sector becomes more like 'large-cap' in its return characteristics. Lipper's
development of a 'micro-cap' investment category and Morningstar's broadening of
its capitalization classifications to include a micro-cap designation should
result in additional sponsorship for the investment sector.
DECEMBER WILL MARK OTCM'S 3-YEAR ANNIVERSARY. The Fund began with
approximately $70 million in net assets, and through appreciation and a rights
offering, net assets now exceed $107 million. The Fund remains the only
domestic, closed-end micro-cap offering and one of only three, domestic equity
closed-end funds with a fulcrum (performance-based) management fee instead of a
traditional fixed fee structure.
We appreciate your continued support of the Fund and look forward to another
three years together.
Sincerely,
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<S> <C>
Charles M. Royce Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
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October 15, 1996
* The Russell 2000 and S&P 500 are unmanaged indices and include the
reinvestment of dividends. The Nasdaq Composite is an unmanaged index.
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the OTCM
portfolio at September 30, 1996.
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WEIGHTED AVERAGES
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<S> <C>
Market Capitalization (Total Portfolio) $ 162 Million
Median Market Capitalization (Total
Portfolio) $ 142 Million
P/E Ratio (100 Largest Positions) 12.5x
P/B Ratio (100 Largest Positions) 1.5x
Portfolio Yield (100 Largest Positions) 1.6%
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TOP TWENTY POSITIONS
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<CAPTION>
Market
Value
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<C> <S> <C>
Matthews International Corporation Cl.
1. A......................................... $1,497,250
2. New England Business Service, Inc......... 1,364,813
3. Florida Rock Industries, Inc.............. 1,357,125
4. Juno Lighting, Inc........................ 1,230,250
5. Simpson Manufacturing Co., Inc............ 1,206,000
6. Penn Engineering and Manufacturing Inc.... 1,168,475
7. DUFF & PHELPS CREDIT RATING CO............ 1,141,650
8. Ash Grove Cement Company.................. 1,135,000
9. Chemfab Corporation....................... 1,089,450
10. Lifetime Hoan Corporation................. 1,087,935
11. Frozen Food Express Industries, Inc....... 1,078,650
12. Lilly Industries, Inc. Cl. A.............. 1,059,013
13. Thermal Industries, Inc................... 1,050,700
14. Trenwick Group Inc........................ 1,029,825
15. Sevenson Environmental Services Inc....... 1,008,025
16. Nobel Insurance Limited................... 1,003,069
17. Velcro Industries N.V..................... 994,500
18. Pennsylvania Manufacturers Corporation.... 990,658
19. Baldwin & Lyons, Inc. Cl. B............... 974,316
20. BGS Systems, Inc.......................... 970,188
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FUND HIGHLIGHTS
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<CAPTION>
September 30, 1996
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<S> <C>
Net Asset Value Per Share.......................... $9.58
Market Price Per Share............................. $8.00
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TOTAL RETURN PERFORMANCE
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<CAPTION>
NAV Market Value
Total Total S&P Russell Nasdaq
Return Return 500`D' 2000`D' Composite`D'
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<S> <C> <C> <C> <C> <C>
3 months ended 9/30/96.................................... - 2.9 % - 7.2 % 3.1% 0.3 % 3.5 %
9 months ended 9/30/96.................................... 7.8 0.0 13.6 10.7 16.6
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 September 30, 1996)
1 Year.................................................... 8.3 0.1 20.4 13.1 17.6
Since Inception*.......................................... 13.0 4.7 18.2 14.1 19.2
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* Inception date -- 12/14/93
`D' The S&P 500 and Russell 2000 are unmanaged indices and include the
reinvestment of dividends. The Nasdaq Composite is an unmanaged index.
Source: Frank Russell Co.
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STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
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<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income................................................ $ 301,718 $ 610,679
Net realized gain (loss) on investments.............................. (3,565,972) 7,454,864
Net change in unrealized appreciation on investments................. 21,696 (279,160)
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Net increase (decrease) in net assets resulting from investment
operations...................................................... (3,242,558) 7,786,383
DIVIDENDS AND DISTRIBUTIONS:
Total dividends and distributions.................................... -- --
CAPITAL STOCK TRANSACTIONS:
Dividend and distribution reinvestment............................... -- --
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NET INCREASE (DECREASE) IN NET ASSETS.................................. (3,242,558) 7,786,383
NET ASSETS:
Beginning of period.................................................. 111,094,307 100,065,366
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End of period........................................................ $107,851,749 $107,851,749
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COMPOSITION OF NET ASSETS
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<CAPTION>
September 30, 1996 % of
(unaudited) Net Assets
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<S> <C> <C>
Common Stocks....................................................... $ 91,782,912 85.1%
Preferred Stock..................................................... 378,125 0.4
Cash and Other Assets, Less Liabilities............................. 15,690,712 14.5
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TOTAL NET ASSETS.................................................. $107,851,749 100.0%
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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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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 micro-cap securities 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 value 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 private 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 open market and other 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
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as 'D'
