N-30D 1 n-30d.txt N-30D 2000 SEMI-ANNUAL REPORT ===================================== THE ROYCE FUNDS VALUE INVESTING IN SMALL COMPANIES FOR MORE THAN 25 YEARS ROYCE VALUE TRUST ROYCE MICRO-CAP TRUST ROYCE FOCUS TRUST ===================================== www.roycefunds.com A FEW WORDS ON CLOSED-END FUNDS ------------------------------------------------------------------------------- ROYCE & ASSOCIATES, INC. MANAGES THREE CLOSED-END FUNDS: ROYCE VALUE TRUST, THE FIRST SMALL-CAP VALUE CLOSED-END FUND OFFERING; ROYCE MICRO-CAP TRUST, THE ONLY MICRO-CAP CLOSED-END FUND; AND ROYCE FOCUS TRUST, A CLOSED-END FUND THAT INVESTS IN A LIMITED NUMBER OF DOMESTIC AND FOREIGN COMPANIES. A closed-end fund is an investment company whose shares are listed on a stock exchange or are traded in the over-the-counter market. Like all investment companies, including open-end mutual funds, the assets of a closed-end fund are professionally managed in accordance with the investment objectives and policies approved by the fund's Board of Directors. A closed-end fund raises cash for investment by issuing a fixed number of shares through initial and other public offerings which may include periodic rights offerings. Proceeds from the offerings are invested in an actively managed portfolio of securities. Investors wanting to buy or sell shares of a publicly traded closed-end fund after the offerings must do so on a stock exchange or the Nasdaq market, as with any publicly traded stock. This is in contrast to open-end mutual funds where the fund sells and redeems its shares on a continuous basis. A CLOSED-END FUND OFFERS SEVERAL DISTINCT ADVANTAGES NOT AVAILABLE FROM AN OPEN-END FUND STRUCTURE - Since a closed-end fund does not issue redeemable securities or offer its securities on a continuous basis, it does not need to liquidate securities or hold uninvested assets to meet investor demands for cash redemptions, as an open-end fund must. - In a closed-end fund, not having to meet investor redemption requests or invest at inopportune times is ideal for value managers who attempt to buy stocks when prices are depressed and sell securities when prices are high. - A closed-end fund may invest more freely in less liquid portfolio securities because it is not subject to potential stockholder redemption demands. This is particularly beneficial for Royce-managed closed-end funds, which invest in small- and micro-cap securities. - The fixed capital structure allows permanent leverage to be employed as a means to enhance capital appreciation potential. - Unlike open-end funds, our closed-end funds are able to distribute capital gains on a quarterly basis. Royce Value Trust has adopted a quarterly distribution policy. WE BELIEVE THAT THE CLOSED-END FUND STRUCTURE IS VERY SUITABLE FOR THE LONG-TERM INVESTOR WHO UNDERSTANDS THE BENEFITS OF A STABLE POOL OF CAPITAL. WHY DIVIDEND REINVESTMENT IS IMPORTANT A very important component of an investor's total return comes from the reinvestment of distributions. By reinvesting distributions, our investors can maintain an undiluted investment in a Fund. To get a fair idea of the impact of reinvested distributions, please see the charts on pages 13, 15 and 17. For additional information on the Funds' Distribution Reinvestment and Cash Purchase Options and the benefits for stockholders, see page 18. THE ROYCE FUNDS ------------------------------------------------------------------------------- SEMI-ANNUAL REPORT REFERENCE GUIDE ------------------------------------------------------------------------------- [GRAPHIC: Looking through magnifying glass at The Royce Funds newspaper listing] FOR MORE THAN 25 YEARS, OUR APPROACH HAS FOCUSED ON EVALUATING A COMPANY'S CURRENT WORTH -- OUR ASSESSMENT OF WHAT WE BELIEVE A KNOWLEDGEABLE BUYER MIGHT PAY TO ACQUIRE THE ENTIRE COMPANY, OR WHAT WE THINK THE VALUE OF THE COMPANY SHOULD BE IN THE STOCK MARKET. THIS ANALYSIS TAKES INTO CONSIDERATION A NUMBER OF RELEVANT FACTORS, INCLUDING THE COMPANY'S FUTURE PROSPECTS. WE SELECT THESE SECURITIES USING A RISK-AVERSE VALUE APPROACH, WITH THE EXPECTATION THAT THEIR MARKET PRICES SHOULD INCREASE TOWARD OUR ESTIMATE OF THEIR CURRENT WORTH, RESULTING IN CAPITAL APPRECIATION FOR FUND INVESTORS. LETTER TO OUR STOCKHOLDERS: WHO WANTS TO BE A MILLIONAIRE...WHO WANTS TO BE A SURVIVOR? 2 THROUGH THEIR EYES: PROFILES OF TWO ROYCE EMPLOYEES 8 SMALL-CAP MARKET CYCLE PERFORMANCE 10 HISTORY SINCE INCEPTION 11 PERFORMANCE AND PORTFOLIO REVIEW: ROYCE VALUE TRUST, ROYCE MICRO-CAP TRUST, ROYCE FOCUS TRUST 12 DISTRIBUTION REINVESTMENT AND CASH PURCHASE OPTIONS 18 UPDATES AND NOTES: WHAT'S NEW AT www.roycefunds.com 19 SCHEDULES OF INVESTMENTS AND OTHER FINANCIAL STATEMENTS 20 POSTSCRIPT: REMEMBER Y2K? INSIDE BACK COVER
------------------------------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through June 30, 2000 ------------------------------------------------------------------------------- 2ND QUARTER JAN-JUNE FROM INCEPTION FUND 2000* 2000* 1-YEAR 3-YEAR 5-YEAR INCEPTION DATE ------------------------------------------------------------------------------------------------------------------------ ROYCE VALUE TRUST 1.82% 7.77% 14.75% 11.94% 14.74% 12.97% 11/26/86 ROYCE MICRO-CAP TRUST 2.09 11.18 22.39 10.93 14.21 13.75 12/14/93 ROYCE FOCUS TRUST -0.83 0.84 -0.44 2.23 n/a 7.13 11/1/96** Russell 2000 -3.78 3.04 14.33 10.57 14.27 n/a
Royce Value Trust's 10-year NAV average annual total return for the period ended 6/30/00 was 14.17%. * Not annualized. ** Date Royce & Associates, Inc. assumed investment management responsibility. LETTER TO OUR STOCKHOLDERS ------------------------------------------------------------------------------- [GRAPHIC: The Royce Funds portfolio managers on desert island Blaustein 2000] SURVIVORS ON VALUE ISLAND WHO WANTS TO BE A MILLIONAIRE... WHO WANTS TO BE A SURVIVOR? What a difference the turn of a century makes! Just six months ago, the world seemed like a very different place, dominated by large-cap companies, Internet IPOs (Initial Public Offerings) and growth-stock investing. Market savvy was the province of those who ignored traditional valuation yardsticks and breezily asserted, "This time it's different." For one brief, heady moment, it seemed as if anyone who wanted to be a millionaire could be, and it did not require sweating it out with Regis Philbin. All it took was a hot stock tip or two and the click of a mouse. Today, thanks to a once unthinkable bear market in the Nasdaq Composite and a bursting bubble in Internet (particularly e-commerce) stock performance, we are in a market in which the discarded investment ideas of the past -- small-cap companies, energy stocks and value investing -- now look like great finds at an eBay auction. In fact, swashbuckling, multi-millionaire hedge fund managers, once the toast of the investment world, now look like the exiled participants on the hit series, SURVIVOR. Whoever said life imitates art (or at least television) must have known something about the stock market. The changes involve not just a shift in market psychology, but perhaps in market leadership as well. Small-cap stocks arrived late to the high-return party, finally showing up in 2000's opening quarter, just before the Federal Reserve helped break up the celebration by once again raising interest rates. THE ARRIVAL OF SMALL-CAPS WAS WELCOME NEWS FOR THOSE OF US WHO WATCHED THE SMALL-CAP RUSSELL 2000 FINISH THIRD IN A THREE-INDEX RACE BEHIND THE NASDAQ COMPOSITE AND S&P 500 FOR MUCH OF THE LATE `90S. Yet, after starting the new year in fine fashion - [SIDEBAR] [PHOTO] CHARLES M. ROYCE, PRESIDENT WHILE MOST INVESTORS KNOW THAT THE RUSSELL 2000 IS AN INDEX OF SMALL-CAP COMPANIES, VERY FEW KNOW MUCH ABOUT WHAT COMPRISES THE INDEX OR ITS HISTORY. FRANK RUSSELL CO., A PENSION-CONSULTING FIRM BASED IN TACOMA, WASHINGTON, CREATED THE INDEX ON JANUARY 1, 1979. IT ACTUALLY REPRESENTS THE 2000 SMALLEST COMPANIES IN THE RUSSELL 3000 INDEX, WHICH IS MADE UP OF THE LARGEST 3000 PUBLICLY TRADED DOMESTIC COMPANIES. THE RUSSELL 1000 COMPRISES THE LARGEST 1000 COMPANIES. ALTHOUGH THE SMALL-CAP RUSSELL 2000 INCLUDES TWICE AS MANY COMPANIES AS THE RUSSELL 1000, IT ACCOUNTS FOR LESS THAN 10% OF THE TOTAL MARKET CAPITALIZATION OF THE RUSSELL 3000. UNLIKE THE S&P INDICES, WHICH ARE REBALANCED AS MEMBERSHIP CRITERIA DICTATE, THE RUSSELL INDICES ARE REBALANCED ANNUALLY IN JUNE. THIS ONCE-A-YEAR EXERCISE CAN OFTEN MEAN HUGE SWINGS IN INDIVIDUAL SECURITIES' PRICES AS NAMES ENTER OR FALL OUT OF THE REBALANCED INDEX. RUMORS OF PROSPECTIVE INCLUSION (OR EXCLUSION) PRIOR TO THE (cont'd on page 4) 2 |THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 all three indices were up in the first quarter -- the trio posted negative second-quarter returns. As befits latecomers, small-caps endured the post-boom hangover with more grace than their large-cap counterparts. The Russell 2000 (+3.0% year-to-date) was the only one of the three indices to finish the six months in positive territory (S&P 500: -0.4% YTD; Nasdaq Composite: -2.5% YTD). The Russell 2000 managed to outperform the other indices year-to-date despite suffering a 25% decline from March 9, 2000 through April 14, 2000. This took place against a backdrop of rising interest rates, lower overall equity returns (the S&P 500's one-year trailing total return dropped to 7.3% from 21.1% at 12/31/99) and higher market volatility. According to THE NEW YORK TIMES, the Nasdaq Composite rose or fell 3% or more in a single trading session on only 40 occasions from 1971 to 1997. Between 1998 and 1999, there were 35 such occasions. Through the first six months of 2000, there were 41, or roughly one out of every three trading sessions year-to-date. HISTORICALLY, A MORE VOLATILE, LOWER RETURN ENVIRONMENT HAS GENERALLY BEEN POSITIVE FOR SMALL-CAP VALUE INVESTING, YET IT'S STILL TOO EARLY TO GAUGE WHETHER SMALL-CAPS CAN DEVELOP AND EXTEND MARKET LEADERSHIP. IT'S A SMALL WORLD Although small-caps had a strong opening quarter, they actually began to show some life late in 1999, with the Russell 2000 edging past the S&P 500 for the calendar year (21.3% versus 21.1%). Nevertheless, expectations for our asset class were low entering the current year, and the considerable downturn from 3/9/00 - 4/14/00 probably did little to raise many investors' hopes. INTERMEDIATE-TERM PERFORMANCE, HOWEVER, HAS BEEN STRONG. AS SHOWN BELOW, THE RUSSELL 2000 HELD A ONE-YEAR TRAILING RETURN ADVANTAGE AT 6/30/00 VERSUS THE S&P 500 AND AN EDGE FROM THE 10/8/98 SMALL-CAP MARKET TROUGH. In addition, the Russell 2000 held a slight advantage from the S&P 500's market cycle low on 8/31/98 through 6/30/00 (+56.7% versus +55.6%). [BARCHART] RUSSELL 2000 VS. S&P 500: CUMULATIVE TOTAL RETURNS
Russell 2000 S&P 500 2000 YTD 3.0% -0.4% 1-YR ENDED 6/30/00 14.3% 7.3% 10/8/98 - 6/30/00 70.3% 54.9%
[SIDENOTE] Today, thanks to a once unthinkable bear market in the Nasdaq Composite and a bursting bubble in Internet (particularly e-commerce) stock performance, we are in a market in which the discarded investment ideas of the past -- small-cap companies, energy stocks and value investing -- now look like great finds at an eBay auction. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 3 LETTER TO OUR STOCKHOLDERS ------------------------------------------------------------------------------- After dominating performance within small-cap in late 1998, all of 1999 and early 2000, Technology stocks tumbled, losing 16% in the second quarter and down 1% year-to-date. Timely first-quarter selling enabled all three portfolios to avoid losing much of what we had gained in Technology before the small-cap correction hit. In fact, the correction led us to re-purchase several Technology issues in April and May after we had sold them earlier in the year. Energy and Healthcare stepped in to take the lead as the Russell 2000's best-performing sectors through 6/30/00. Energy stocks rallied following a mostly disappointing 1999 and Healthcare drew most of its performance from red-hot biotechnology stocks in this year's first quarter. Depressed energy stock prices during 1999's first quarter gave us the opportunity to increase our exposure to this sector in each Fund's portfolio. VALUE ADDED Value began the year looking like the losing tribe on SURVIVOR, unable to catch a fish or even start a fire. BUT AFTER FALLING BEHIND IN JANUARY AND FEBRUARY, VALUE PROVED THAT IT COULD SURVIVE SOME PRETTY TOUGH CONDITIONS, AS THE RUSSELL 2000 VALUE INDEX OUTPERFORMED THE RUSSELL 2000 GROWTH INDEX IN MARCH, APRIL AND MAY, AND FOR THE YEAR-TO-DATE PERIOD AS WELL. As we would expect, the performance edge from March through May occurred during an overall small-cap decline of 17.3% (as measured by the Russell 2000). The Russell 2000 Value index was down 0.5% versus a loss of 26.6% for the Russell 2000 Growth index. While the virtues of GROWTH may be alluring, inside small-cap, we think that VALUE'S virtues are more lasting, and better suited for a long-term investment horizon. [LINE GRAPH]
VALUE LED DURING THE DECLINE, OUTPERFORMING GROWTH FROM 3/9/00 PEAK AND YEAR-TO-DATE Russell 2000 Russell 2000 Value Growth 12/31/99 0.00% 0.00% 1/3/00 -1.83% -1.18% 1/4/00 -3.93% -6.07% 1/5/00 -3.45% -6.24% 1/6/00 -2.98% -7.72% 1/7/00 -1.11% -4.64% 1/10/00 -0.10% -0.84% 1/11/00 -1.06% -3.27% 1/12/00 -1.30% -3.96% 1/13/00 0.06% -1.15% 1/14/00 0.78% 0.49% 1/18/00 1.08% 2.21% 1/19/00 1.52% 4.09% 1/20/00 1.82% 6.31% 1/21/00 2.31% 8.18% 1/24/00 0.74% 5.66% 1/25/00 0.29% 5.47% 1/26/00 0.17% 5.39% 1/27/00 -0.57% 4.54% 1/28/00 -1.85% 1.31% 1/31/00 -2.62% -0.93% 2/1/00 -1.55% 0.86% 2/2/00 -0.96% 2.49% 2/3/00 0.21% 5.56% 2/4/00 0.22% 6.85% 2/7/00 0.68% 8.81% 2/8/00 0.59% 10.55% 2/9/00 0.10% 10.39% 2/10/00 0.15% 12.43% 2/11/00 -0.81% 11.41% 2/14/00 -0.71% 12.27% 2/15/00 -0.11% 11.97% 2/16/00 0.23% 14.24% 2/17/00 1.07% 17.20% 2/18/00 -0.60% 14.13% 2/22/00 -0.87% 12.77% 2/23/00 -0.40% 15.37% 2/24/00 -0.15% 16.61% 2/25/00 0.13% 17.29% 2/28/00 0.17% 17.58% 2/29/00 3.34% 22.12% 3/1/00 3.75% 25.35% 3/2/00 3.48% 24.11% 3/3/00 4.81% 27.91% 3/6/00 5.14% 28.86% 3/7/00 3.65% 27.72% 3/8/00 3.30% 27.77% 3/9/00 4.62% 30.65% 3/10/00 3.92% 30.36% 3/13/00 2.50% 26.81% 3/14/00 0.32% 22.56% 3/15/00 0.45% 17.97% 3/16/00 4.23% 20.44% 3/17/00 4.26% 20.61% 3/20/00 2.57% 13.31% 3/21/00 3.12% 14.17% 3/22/00 4.94% 19.08% 3/23/00 5.04% 19.84% 3/24/00 5.03% 19.96% 3/27/00 4.67% 20.03% 3/28/00 3.03% 16.31% 3/29/00 2.71% 11.28% 3/30/00 2.36% 7.78% 3/31/00 3.82% 9.28% 4/3/00 2.17% 2.82% 4/4/00 0.85% 0.40% 4/5/00 2.39% 3.33% 4/6/00 4.12% 7.03% 4/7/00 5.30% 9.65% 4/10/00 2.64% 3.44% 4/11/00 2.58% 0.69% 4/12/00 1.93% -4.37% 4/13/00 1.59% -5.51% 4/14/00 -2.66% -14.36% 4/17/00 -2.02% -13.03% 4/18/00 0.62% -5.92% 4/19/00 0.60% -5.82% 4/20/00 0.68% -7.35% 4/24/00 -0.69% -10.80% 4/25/00 2.27% -6.00% 4/26/00 2.05% -7.41% 4/27/00 3.07% -4.70% 4/28/00 4.44% -1.75% 5/1/00 5.87% 1.49% 5/2/00 4.21% -1.90% 5/3/00 2.56% -4.00% 5/4/00 3.63% -2.62% 5/5/00 5.19% -0.04% 5/8/00 4.05% -3.46% 5/9/00 3.12% -5.88% 5/10/00 1.29% -10.07% 5/11/00 3.79% -6.72% 5/12/00 4.10% -6.43% 5/15/00 5.33% -5.00% 5/16/00 6.15% -2.84% 5/17/00 5.04% -4.17% 5/18/00 3.96% -6.31% 5/19/00 2.51% -9.07% 5/22/00 1.64% -11.13% 5/23/00 0.50% -14.52% 5/24/00 1.04% -13.91% 5/25/00 0.18% -15.22% 5/26/00 0.67% -15.12% 5/30/00 2.71% -10.12% 5/31/00 2.84% -10.35% 6/1/00 4.51% -6.10% 6/2/00 6.25% -0.57% 6/5/00 5.57% -0.01% 6/6/00 5.64% -0.60% 6/7/00 6.08% 0.73% 6/8/00 5.53% 0.45% 6/9/00 6.33% 2.73% 6/12/00 5.23% -1.28% 6/13/00 6.40% -0.30% 6/14/00 6.13% -1.37% 6/15/00 6.34% -0.65% 6/16/00 6.02% 0.01% 6/19/00 7.20% 2.23% 6/20/00 7.02% 3.30% 6/21/00 6.95% 3.99% 6/22/00 4.76% 1.32% 6/23/00 4.52% -0.06% 6/26/00 5.20% 1.44% 6/27/00 4.65% -0.87% 6/28/00 6.40% 2.24% 6/29/00 5.52% 0.08% 6/30/00 5.85% 1.23%
Prior to the current period, it had been more than two years since anyone used the words "value" and "outperformance" together in the same sentence. INTERESTINGLY, VALUE HAD OUTPERFORMED GROWTH IN EVERY RUSSELL 2000 FULL-MARKET CYCLE SINCE THE INDEX'S INCEPTION IN 1979 EXCEPT THE MOST RECENT ONE THAT RAN FROM 4/21/98 THROUGH 3/9/00. NOT ONLY DID VALUE [SIDEBAR (continued)] ANNUAL REBALANCING, AND THE SUBSEQUENT EFFECT ON A STOCK'S PRICE, FREQUENTLY LEAD TO A FLURRY OF TRADING. INVESTORS SEEK TO ANTICIPATE THE NEW COMPOSITION, KNOWING THAT MUTUAL FUNDS THAT MIMIC THE INDEX WILL NEED TO BUY LARGE AMOUNTS OF THE NEW MEMBERS AND SELL OFF SHARES OF THE DISPLACED. THE LARGEST COMPANY IN THE RUSSELL 2000 PRIOR TO THE JUNE 30 REBALANCING WAS BROADVISION, WHICH SPORTED A MARKET CAPITALIZATION OF APPROXIMATELY $10 BILLION - HARDLY A SMALL-CAP COMPANY. IN CONTRAST, THE LARGEST COMPANY IN THE NEW, REBALANCED INDEX HAS A MARKET CAP OF APPROXIMATELY $3.9 BILLION. THE SMALLEST COMPANY'S MARKET CAP IS APPROXIMATELY $80 MILLION. THERE ARE PLENTY OF NEW NAMES IN THE REBALANCED RUSSELL 2000. APPROXIMATELY 500 COMPANIES, ABOUT 26% OF THE INDEX, WERE ADDED TO REPLACE THOSE THAT DROPPED OUT DUE TO CAPITALIZATION CUTOFFS OR MERGERS. IN TERMS OF INDUSTRY SECTORS, TECHNOLOGY REMAINS THE LARGEST, BUT ITS WEIGHTING HAS BEEN REDUCED FROM APPROXIMATELY 23% TO 20%. INSIDE THE TECHNOLOGY SECTOR, THE NUMBER OF INTERNET COMPANIES INCREASED FROM 65 TO APPROXIMATELY 160 AND THEIR TOTAL WEIGHTING MORE THAN DOUBLED FROM 4.0% TO 8.5%. (cont'd on page 6) 4 |THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 UNDERPERFORM IN THAT CYCLE, BUT IT ALSO POSTED A NEGATIVE RETURN OVER A FULL CYCLE, FOR THE FIRST TIME SINCE THE INDEX'S INCEPTION. In the current cycle that began on March 9, 2000, value has performed more in line with its historical norm, providing substantially better down market performance. As value managers, maybe we should be careful what we wish for -- better performance from small-cap value may correspond with more difficult equity market conditions overall. THE ENVELOPE, PLEASE In the more dynamic first quarter, Royce Micro-Cap Trust outperformed the Russell 2000 on a net asset value (NAV) basis, while the more conservatively managed Royce Value Trust and Royce Focus Trust lagged in what was the best first-quarter start for small-cap companies since 1991. In the more difficult second quarter, however, all three closed-end offerings outperformed the small-cap index on an NAV basis. In addition, both Royce Value Trust and Royce Micro-Cap Trust were ahead of the Russell 2000 on an NAV basis year-to-date through June 30, 2000. [BAR CHART] 2000 YEAR-TO-DATE NAV RESULTS FOR THE ROYCE FUNDS VS. RUSSELL 2000
Royce Value Royce Micro-Cap Royce Focus Russell Trust Trust Trust 2000 7.77% 11.18% 0.84% 3.04%
Performance in the new small-cap market cycle that began on March 9 struck a relatively more encouraging note -- all three funds were ahead of the small-cap benchmark, with Royce Value Trust and Royce Focus Trust off less than 1%. In contrast, the Russell 2000 was off 14.4% from the March 9, 2000 peak through June 30. Noteworthy performance was turned in by Royce Micro-Cap Trust, our best closed-end year-to-date performer, +11.2% year-to-date through 6/30/00. While we are pleased with recent relative performance, we know that we have to maintain some perspective on what has so far been a near-term recovery for small-cap value (for more complete performance information, see pages 10-17). [SIDENOTE] Prior to the current period, it had been more than two years since anyone used the words "value" and "outperformance" together in the same sentence. 5 |THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 LETTER TO OUR STOCKHOLDERS ------------------------------------------------------------------------------- [GRAPHIC: The Royce Funds baseball team Blaustein 2000] CYCLICAL MARKETS, EMOTIONAL INVESTORS Many investors simply go where the action is, or where they think it is. Media stories focusing on the return to traditional measures of valuation may not represent anything more than the fact that value is what seems to be working right now. Unless they are avowed value investors like ourselves, most people are not terribly philosophical about investing, they simply want the best returns. If better returns seem to be coming from stocks with attractive valuations, then that is where the money will flow. While this may appear to be cynicism on our part, it actually represents our ongoing faith both in cyclical markets and emotional investors. While momentum and emotion will remain potent motivators, most investors now seem to realize that millions are not easily made by answering trivial questions on a one-hour game show or by investing in every stock whose name begins with a small "e" or "i." Throughout the euphoria of the previous cycle, we resisted the siren song of what looked like easy, short-term gains. Instead, we chose to concentrate on a [SIDENOTE] Throughout the euphoria of the previous cycle, we resisted the siren song of what looked like easy, short-term gains. Instead, we chose to concentrate on a long-term time frame and continued to select securities using the same criteria that we always have, even though our methods looked antiquated to some observers at the time. [SIDEBAR] Financial Services remains the second largest sector, followed by Consumer Services, Healthcare and Capital Goods. The new, rebalanced Russell 2000 contains more companies with no expected earnings - according to data from First Call and I/B/E/S, approximately 20% are expected to lose money, versus 14% from the previously constructed small-cap index. The newly constructed Russell 2000 is cheaper in terms of valuation as measured by both P/E (Price Earnings) and PEG (P/E-to-Growth) ratios. Despite a rebalancing policy that generally results in substantial annual changes, as well as significant competition from other vendors (S&P, Wilshire, Callan, Lipper and soon, Dow Jones), Russell remains the oldest and probably the most recognizable small-cap index. Reconstituted Index data provided by Frank Russell Co. and Morgan Stanley Dean Witter. 6 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 [PHOTO] (L-R) CHARLIE DREIFUS, JACK FOCKLER, BUZZ ZAINO, WHITNEY GEORGE, CHUCK ROYCE long-term time frame and continued to select securities using the same criteria that we always have, even though our methods looked antiquated to some observers at the time. Today, this same approach may look like the next big thing to some of those same people. REGARDLESS OF WHAT'S TRENDY, WE STILL BELIEVE THAT PORTFOLIO DIVERSIFICATION, ATTRACTIVE VALUATIONS AND LONG-TERM INVESTING CAN CONTINUE TO HELP PEOPLE MEET THEIR FINANCIAL GOALS, REGARDLESS OF WHETHER THEY WANT TO BE "MILLIONAIRES" OR JUST "SURVIVORS." LOWER OVERALL RETURNS, BETTER SMALL-CAP VALUE PERFORMANCE? We have been claiming that the market's high returns were too good to last (our own take on "irrational exuberance") since 1997. However poor or premature our forecasting has been, our guess is that equity returns going forward will be closer to their historical norms than they were through the late `90s, and that this would be a positive development for small-cap value investors. More historically typical equity returns do not necessarily mean lower, or negative, small-cap returns. WHILE HISTORICAL MARKET PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, OUR RESEARCH INDICATES THAT WHEN THE S&P 500 HAS PROVIDED WHAT WE VIEW AS A MORE NORMAL LEVEL OF RETURN (13.8% OR LOWER ON A ROLLING 10-YEAR BASIS), SMALL-CAPS TENDED TO OUTPERFORM LARGE-CAPS ON AVERAGE ABOUT 80% OF THE TIME.* We believe that small-caps are finally reversing the significant performance divergence that previously plagued the asset class. IN FACT, WE THINK THAT THE MAJOR MARKET PEAKS IN MARCH COINCIDED WITH A LEADERSHIP SHIFT FAVORING SMALL-CAPS IN GENERAL AND SMALL-CAP VALUE IN PARTICULAR. At a minimum, we think we are in the early innings of a new game, prepared as always to play every inning with the same consistent approach. Finally, we invite you to visit our continually evolving website at www.roycefunds.com and to meet on page 8 of this report two of our valued team members, Espie Spaulding and Dan O'Byrne, who make it a pleasure to work at Royce & Associates. Sincerely, /s/ Charles M. Royce /s/ W. Whitney George /s/ Jack E. Fockler, Jr. Charles M. Royce W. Whitney George Jack E. Fockler, Jr. PRESIDENT VICE PRESIDENT VICE PRESIDENT July 31, 2000 * Our examination of 10-year rolling return periods from 1936 - 1999, including what we designated as above-average, average and below-average returns, showed that small-cap stocks outperformed large-cap stocks in 82% of the average and below-average S&P 500 10-year return periods and underperformed in 75% of the above-average S&P 500 10-year return periods. For small-cap stocks, we used the Center for Research in Security Prices 6-10 index, an unmanaged composite of the bottom five deciles of stocks listed on the New York Stock Exchange, the American Stock Exchange and the Nasdaq National Market. For large-cap stocks, we used the S&P 500, an unmanaged index of domestic large-cap stocks. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 7 THROUGH THEIR EYES ------------------------------------------------------------------------------- IN A BUSINESS CHARACTERIZED BY HIGH EMPLOYEE TURNOVER IN A CITY WHERE PEOPLE COME AND GO WITH ALARMING SPEED, WE ARE PROUD TO COUNT MANY LONG-TERM STAFF MEMBERS. IN FACT, AS OF JUNE 30, 2000, 44% OF ROYCE EMPLOYEES HAVE BEEN WITH THE FIRM MORE THAN FIVE YEARS. THE EVOLUTION OF THE FIRM IS CHARTED BELOW THROUGH THE EYES OF TWO PEOPLE WHO CONTINUE TO MAKE SIGNIFICANT CONTRIBUTIONS, AND WHO MAKE WORKING AT ROYCE THE SPECIAL EXPERIENCE THAT IT IS. [PHOTO] ESPIE SPAULDING ESPIE IS CHUCK ROYCE'S ADMINISTRATIVE ASSISTANT. How did a chance meeting at a Manhattan jeweler result in one of our longest-term employees getting her job in 1984? The answer takes us back to 1969, when Chuck Royce was providing outside research information to the manager of Pennsylvania Mutual Fund. Esperanza Spaulding was working as a Client Service Representative for the Fund. In June 1973, Chuck became the portfolio manager of the Fund and President and Chief Investment Officer of Quest Advisory Corp. Earlier that year, however, Espie had left her job on maternity leave, devoting most of the next 11 years to being a full-time mother to her son. Fast-forward to 1984, when a small-cap value fund manager strolls into a well-known Manhattan jeweler looking for a gift and chats with a salesman named Tommy Spaulding (Espie's husband). Soon into their conversation, their connection dawned on them. Chuck asked Tommy to have Espie call him if she were interested in working in the mutual fund business again. So in September 1984, Espie found herself working directly for Chuck. Espie's proximity to the reception area and her excellent interpersonal skills soon led to increased receptionist and administrative responsibilities as well. She remembers the fall of 1986 as perhaps the most memorable of these times. The firm was preparing to go public with the first small-cap value closed-end fund, Royce Value Trust. "To this day, I've never seen anything quite like Chuck, Tom Ebright and Joanne Newgard working day and night for two straight weeks, trying to raise the money for the $100 million offering." While the three of them were out on the road, Espie played a crucial part in keeping business running smoothly at the firm's office. She even saved RVT's first order ticket as a souvenir. Espie enjoys her work at Royce and the opportunity to continue learning. She says that she feels more like "Chuck's time management consultant" than his assistant, as she organizes his schedule, offers regular reminders as to what's happening next and keeps the rest of us apprised of his agenda. Espie also believes that her 20-plus years at Royce have given her the chance to grow and mature personally and professionally. [SIDENOTE] How did a chance meeting at a Manhattan jeweler result in one of our longest-term employees getting her job in 1984? The answer takes us back to 1969. 8 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ------------------------------------------------------------------------------- [PHOTO] DAN O'BYRNE DAN IS CURRENTLY VICE PRESIDENT AND A PRINCIPAL OF ROYCE & ASSOCIATES (THE ROYCE FUNDS' INVESTMENT ADVISER) AND VICE PRESIDENT AND ASSISTANT SECRETARY OF THE ROYCE FUNDS. HE PLAYS AN IMPORTANT ROLE IN OFFICE MANAGEMENT AND TRADING. In 1986, Dan O'Byrne was tending bar at one of the many Irish pubs that populate Manhattan's East Side. Having graduated from University College, Dublin in 1983, he had tried his hand at various far-flung sales jobs in his native Ireland, selling everything from insurance to hardware to men's clothing. Wanting a change, he had come to New York City in 1985. Tending bar was lucrative, but the nights were long and the work was often draining. Too many shifts ended with Dan "arriving home at 6 a.m. just in time to see my wife off to work at 7." Dan's wife, Mary, then herself a Royce employee, told him that a part-time position was available as a mutual fund Client Service Representative for Pennsylvania Mutual Fund, our sole offering at the time. Dan accepted the job, but also hung on to a few shifts at the bar. "A wise move," he says, "since taking the position at Royce initially meant a 75% pay cut. But the opportunity was too good to turn down." His first important assignment at Royce was researching series funds and multiple class funds, a new trend in the mutual fund business back in 1986. In 1988, he moved from the mutual fund area to a position with the investment adviser. He continued to work in multiple capacities, including helping to set up appointments for company visits, answering the phone, and doing some "back office" work settling trades. As it happened, his desk in the reception area was next to the trading area. Soon, he was helping out as a trader, virtually full time. "I really enjoyed trading. I loved the quick, instant gratification you get from doing a trade. What I didn't like about it," Dan says, "was that you couldn't get away from the desk during the trading day and leave the phone. So there was little time for other projects." By 1994, Dan's contributions to several other projects, including the design of our internal Portfolio Management System software, resulted in less time at the trading desk and more attention to managerial and administrative duties. These changes coincided with the expansion of Royce & Associates, as we added more funds, services and employees throughout the `90s. Dan credits his skills as a bartender in helping him become an effective trader. He developed the ability to listen to several people at once while still working and remaining "effective amidst the chaos." He sees the advent of electronic trading systems and the attendant technological innovations that have followed as critical developments for the industry, resulting in "a more transparent market, which has been good for everyone." Having Dan around has certainly been good for us. [SIDENOTE] Dan credits his ability to listen to several people at once in helping him become an effective trader. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 |9 SMALL-CAP MARKET CYCLE PERFORMANCE ------------------------------------------------------------------------------- The last full market cycle for small-caps included a long up phase, punctuated by a recent downturn. This cycle, which ended with a peak on March 9, 2000, marked the first time that VALUE underperformed GROWTH over a full market cycle since the Russell 2000's 1979 inception. It was also the first time that VALUE posted a negative return for a full market cycle. Since then, the small-cap index has endured a major correction, losing 25.1% through its recent trough on April 14, 2000. Although the index has rallied 14.2% from this trough through 6/30/00, it remains almost 15% below its historical peak. [LINE CHART]
1998 - 2000 SMALL-CAP MARKET CYCLE: RUSSELL 2000 INDICES TOTAL RETURNS Russell Russell 2000 Russell 2000 2000 Value Growth Dec-97 0.00% 0.00% 0.00% -0.13% 0.04% -0.30% -0.01% -0.09% 0.07% -0.91% -0.95% -0.87% -1.65% -1.70% -1.60% -2.57% -2.49% -2.66% -5.47% -4.87% -6.12% -5.95% -5.08% -6.88% -4.21% -4.06% -4.37% -3.41% -3.21% -3.62% -3.44% -3.29% -3.60% -2.39% -2.26% -2.53% -1.25% -1.46% -1.02% -1.59% -1.92% -1.25% -2.43% -2.50% -2.35% -2.76% -2.92% -2.59% -3.64% -3.39% -3.89% -3.29% -3.05% -3.55% -1.92% -1.99% -1.84% -1.14% -1.51% -0.74% -1.58% -1.81% -1.33% -1.58% -1.81% -1.33% -0.60% -1.12% -0.04% 0.15% -0.63% 0.99% 1.10% -0.04% 2.32% 1.61% 0.42% 2.88% 1.95% 0.79% 3.19% 2.37% 1.03% 3.79% 3.26% 1.83% 4.78% 3.47% 2.02% 5.01% 3.56% 2.16% 5.05% 4.00% 2.42% 5.69% 3.71% 2.36% 5.14% 4.06% 2.65% 5.56% 3.96% 2.43% 5.59% 3.91% 2.44% 5.48% 4.43% 2.99% 5.97% 3.98% 2.86% 5.18% 4.94% 3.60% 6.37% 5.65% 4.13% 7.27% 5.70% 4.13% 7.38% 5.70% 4.13% 7.38% 5.62% 4.19% 7.14% 5.84% 4.63% 7.13% 5.77% 4.41% 7.22% 4.55% 3.40% 5.78% 6.12% 4.63% 7.70% 5.51% 4.42% 6.68% 6.30% 4.97% 7.72% 6.88% 5.48% 8.38% 7.04% 5.53% 8.66% 7.27% 5.64% 9.01% 7.95% 6.19% 9.82% 7.78% 6.47% 9.19% 8.07% 6.64% 9.59% 8.56% 6.93% 10.31% 8.56% 7.05% 10.17% 8.51% 6.86% 10.26% 9.04% 7.38% 10.81% 9.20% 7.55% 10.96% 9.37% 7.73% 11.12% 9.25% 7.57% 11.04% 9.06% 7.38% 10.85% 10.06% 8.35% 11.88% 11.04% 9.07% 13.13% 11.36% 9.48% 13.36% 11.22% 9.45% 13.11% 10.33% 8.93% 11.83% 8.83% 7.97% 9.76% 8.87% 7.69% 10.13% 9.95% 8.55% 11.44% 9.84% 8.66% 11.09% 11.04% 9.61% 12.58% 11.59% 9.90% 13.39% 10.96% 9.12% 12.92% 11.56% 9.80% 13.44% 11.95% 9.96% 14.08% 12.55% 10.43% 14.81% 12.50% 10.71% 14.41% 11.09% 9.65% 12.64% 10.03% 8.65% 11.50% 7.35% 6.30% 8.48% 8.27% 6.84% 9.79% 9.30% 7.52% 11.20% 10.67% 8.89% 12.57% 11.15% 9.49% 12.92% 11.26% 9.64% 12.98% 10.42% 8.89% 12.04% 9.90% 8.46% 11.44% 9.14% 7.91% 10.45% 9.94% 8.43% 11.55% 9.35% 8.16% 10.63% 9.17% 7.98% 10.43% 9.48% 8.23% 10.81% 9.03% 7.90% 10.23% 8.31% 7.33% 9.37% 7.19% 6.59% 7.85% 7.94% 7.24% 8.70% 7.41% 6.92% 7.95% 7.11% 6.76% 7.50% 6.15% 5.99% 6.35% 4.35% 4.64% 4.07% 3.26% 3.53% 2.99% 4.55% 4.63% 4.49% 4.71% 5.03% 4.39% 4.71% 5.03% 4.39% 3.47% 4.41% 2.50% 3.15% 4.15% 2.13% 3.03% 4.17% 1.86% 3.63% 4.57% 2.66% 4.20% 4.98% 3.41% 4.68% 5.30% 4.04% 4.75% 5.21% 4.29% 3.47% 4.33% 2.60% 1.94% 2.96% 0.89% 1.35% 2.25% 0.42% -0.42% 0.79% -1.66% 0.62% 1.31% -0.09% 1.93% 2.40% 1.46% 0.92% 1.39% 0.45% 0.61% 0.96% 0.26% 1.34% 1.52% 1.17% 2.66% 2.38% 2.97% 3.61% 3.07% 4.19% 3.31% 2.85% 3.81% 3.37% 3.09% 3.68% 4.14% 3.74% 4.58% Jun-98 4.93% 4.44% 5.46% 5.50% 5.25% 5.80% 5.16% 5.13% 5.23% 5.56% 5.36% 5.80% 5.35% 5.40% 5.35% 5.55% 5.40% 5.75% 5.56% 5.48% 5.70% 5.21% 5.01% 5.45% 5.29% 4.84% 5.78% 5.44% 4.98% 5.93% 6.04% 5.24% 6.87% 6.43% 5.45% 7.43% 6.14% 5.20% 7.10% 6.05% 4.79% 7.34% 4.75% 3.68% 5.85% 3.55% 2.57% 4.54% 1.58% 1.00% 2.19% 0.71% 0.13% 1.31% -0.54% -1.00% -0.05% -1.84% -2.19% -1.46% -2.15% -2.34% -1.92% -1.37% -1.77% -0.93% -3.57% -3.74% -3.35% -5.04% -4.71% -5.33% -7.73% -7.14% -8.27% -8.40% -7.56% -9.19% -6.58% -6.05% -7.05% -4.47% -4.30% -4.58% -5.43% -5.24% -5.56% -7.96% -7.50% -8.37% -6.11% -5.87% -6.31% -7.19% -6.68% -7.66% -7.45% -6.69% -8.14% -7.18% -6.52% -7.79% -5.50% -5.09% -5.86% -6.74% -6.16% -7.27% -7.67% -6.91% -8.37% -9.05% -8.08% -9.96% -9.51% -8.37% -10.57% -10.42% -9.22% -11.55% -12.55% -11.06% -13.97% -15.86% -13.93% -17.70% -17.58% -15.17% -19.89% -22.29% -18.82% -25.66% -19.96% -17.23% -22.59% -18.91% -16.46% -21.28% -20.38% -17.83% -22.86% -20.20% -17.62% -22.71% -16.77% -15.07% -18.40% -18.89% -16.83% -20.89% -20.67% -18.44% -22.82% -18.67% -16.77% -20.51% -17.71% -16.05% -19.31% -17.70% -15.76% -19.59% -17.17% -15.47% -18.82% -18.23% -16.29% -20.09% -16.40% -14.41% -18.32% -16.54% -14.51% -18.50% -15.25% -13.43% -17.01% -13.44% -12.01% -14.83% -14.77% -13.12% -16.36% -15.04% -13.54% -16.50% -15.22% -13.57% -16.82% -15.73% -13.90% -17.50% -16.21% -14.23% -18.12% -19.31% -16.52% -22.01% -19.36% -16.15% -22.46% -22.34% -18.39% -26.16% -23.33% -19.25% -27.28% -25.71% -21.01% -30.25% -28.48% -23.56% -33.25% -26.62% -22.48% -30.63% -24.95% -21.65% -28.15% -26.15% -22.64% -29.53% -25.07% -21.85% -28.19% -22.79% -20.21% -25.28% -20.91% -18.50% -23.23% -18.71% -16.59% -20.75% -17.37% -15.13% -19.54% -16.99% -14.84% -19.06% -15.50% -13.61% -17.32% -15.36% -13.63% -17.03% -14.22% -12.61% -15.77% -14.36% -12.95% -15.72% -14.35% -13.01% -15.64% -13.66% -12.41% -14.86% -12.79% -11.69% -13.85% -10.82% -10.14% -11.47% -10.66% -9.96% -11.32% -9.40% -8.84% -9.92% -8.51% -7.87% -9.12% -7.70% -7.27% -8.11% -8.15% -8.01% -8.27% -8.49% -8.44% -8.53% -9.26% -9.15% -9.36% -9.55% -9.45% -9.63% -10.19% -9.91% -10.45% -9.93% -10.02% -9.83% -10.17% -10.38% -9.95% -9.56% -10.13% -9.00% -9.04% -9.74% -8.35% -9.04% -9.78% -8.30% -8.16% -9.46% -6.89% -8.51% -9.53% -7.50% -7.88% -9.05% -6.72% -7.25% -8.89% -5.65% -8.22% -9.30% -7.17% -8.00% -9.04% -6.97% -8.27% -9.36% -7.20% -8.85% -9.80% -7.91% -8.07% -9.23% -6.93% -7.41% -8.68% -6.16% -7.33% -8.92% -5.79% -7.21% -9.03% -5.43% -8.47% -10.04% -6.94% -8.73% -10.34% -7.16% -10.45% -11.56% -9.36% -10.07% -11.40% -8.77% -10.00% -11.42% -8.61% -9.08% -10.90% -7.31% -8.24% -10.51% -6.04% -7.25% -9.98% -4.61% -7.62% -10.36% -4.97% -6.57% -9.71% -3.53% -6.39% -9.64% -3.24% -5.78% -9.45% -2.22% -5.24% -8.99% -1.61% -4.87% -8.42% -1.44% Dec-98 -2.55% -6.45% 1.23% -2.69% -6.07% 0.57% -2.50% -5.85% 0.75% -1.18% -5.14% 2.65% -1.14% -5.59% 3.17% -0.35% -5.22% 4.35% 0.13% -5.77% 5.80% -1.20% -6.85% 4.23% -1.79% -7.09% 3.31% -2.90% -8.19% 2.19% -1.32% -6.97% 4.11% -0.40% -6.86% 5.81% -0.47% -6.99% 5.80% -1.99% -7.98% 3.77% -2.36% -8.16% 3.22% -2.45% -8.19% 3.07% -1.71% -7.86% 4.20% -2.68% -9.06% 3.46% -2.01% -9.03% 4.74% -1.25% -8.57% 5.78% -1.51% -9.04% 5.72% -2.50% -9.74% 4.45% -2.04% -9.68% 5.29% -3.40% -10.68% 3.59% -4.54% -11.34% 1.98% -4.88% -11.27% 1.26% -6.78% -12.09% -1.67% -7.94% -13.17% -2.91% -6.05% -12.53% 0.17% -7.86% -13.94% -2.02% -8.29% -14.24% -2.58% -9.86% -15.20% -4.73% -9.52% -14.62% -4.61% -9.23% -14.56% -4.10% -7.97% -13.70% -2.45% -7.70% -13.74% -1.89% -8.57% -14.55% -2.83% -9.14% -14.94% -3.57% -9.25% -14.82% -3.89% -8.76% -14.50% -3.23% -8.75% -14.76% -2.97% -9.31% -15.03% -3.81% -8.82% -14.66% -3.21% -7.90% -14.08% -1.98% -7.43% -14.35% -0.81% -7.61% -14.58% -0.92% -7.15% -14.25% -0.34% -7.14% -14.19% -0.39% -7.76% -14.41% -1.38% -7.19% -14.15% -0.52% -7.58% -14.79% -0.66% -7.74% -14.90% -0.88% -7.48% -14.92% -0.35% -8.17% -15.43% -1.21% -8.96% -15.99% -2.21% -11.22% -17.37% -5.31% -10.96% -17.19% -4.98% -8.97% -16.05% -2.18% -8.75% -15.93% -1.87% -7.36% -15.04% 0.00% -7.57% -15.22% -0.25% -7.83% -15.52% -0.47% -7.57% -15.36% -0.12% -6.75% -14.99% 1.12% -7.03% -15.56% 1.11% -7.79% -16.09% 0.15% -7.29% -15.85% 0.89% -5.91% -14.82% 2.60% -4.41% -13.97% 4.70% -3.26% -13.63% 6.62% -3.21% -12.21% 5.38% -3.14% -11.50% 4.87% -2.23% -10.00% 5.22% -4.35% -9.39% 0.55% -3.67% -9.90% 2.34% -1.07% -8.75% 6.29% -0.55% -8.65% 7.21% 0.13% -8.30% 8.19% 0.88% -8.72% 10.05% 0.93% -8.33% 9.77% 0.57% -7.64% 8.44% 0.45% -7.41% 7.98% 0.43% -7.81% 8.32% 0.54% -7.26% 8.02% 0.38% -6.92% 7.39% 0.78% -6.91% 8.15% 0.57% -6.47% 7.34% 1.21% -6.11% 8.24% 2.55% -5.07% 9.87% 3.70% -4.46% 11.53% 4.28% -4.44% 12.64% 4.67% -3.85% 12.83% 2.88% -5.09% 10.53% 2.46% -5.75% 10.33% 2.74% -5.69% 10.81% 3.60% -5.05% 11.89% 4.04% -4.39% 12.12% 4.29% -3.76% 12.01% 2.27% -4.87% 9.11% 0.89% -5.40% 6.93% 1.11% -5.47% 7.43% 0.55% -5.83% 6.68% 1.89% -4.97% 8.49% 1.61% -4.69% 7.67% 1.45% -4.82% 7.49% 1.28% -4.76% 7.10% 2.76% -4.10% 9.34% 3.81% -3.66% 10.98% 3.13% -4.04% 10.02% 3.44% -4.05% 10.62% 2.75% -4.54% 9.75% 1.79% -5.08% 8.39% 0.28% -5.46% 5.82% 0.83% -4.87% 6.33% 2.54% -4.04% 8.87% 3.05% -3.62% 9.47% 3.44% -3.38% 10.00% 4.46% -2.85% 11.49% 3.97% -2.93% 10.62% 3.92% -3.11% 10.67% 3.02% -3.71% 9.50% 3.02% -3.54% 9.33% 4.32% -2.49% 10.87% 5.61% -1.81% 12.73% Jun-99 6.50% -1.53% 14.21% 5.74% -1.98% 13.10% 6.22% -1.81% 13.92% 6.22% -2.01% 14.15% 5.34% -2.60% 12.95% 5.82% -2.29% 13.62% 6.58% -1.68% 14.53% 6.89% -1.45% 14.92% 6.62% -1.67% 14.59% 7.41% -1.49% 16.04% 8.41% -0.89% 17.48% 8.28% -0.91% 17.23% 7.39% -1.38% 15.88% 5.57% -2.44% 13.25% 5.82% -2.25% 13.58% 5.10% -2.53% 12.37% 4.38% -3.18% 11.58% 3.10% -3.86% 9.67% 3.95% -3.48% 11.01% 3.98% -3.62% 11.24% 2.83% -4.47% 9.77% 3.58% -3.87% 10.67% 3.08% -4.00% 9.77% 1.61% -4.79% 7.58% 0.08% -5.70% 5.38% 0.09% -5.84% 5.57% -0.29% -6.16% 5.11% -0.79% -6.33% 4.27% -1.50% -6.89% 3.39% -0.23% -6.04% 5.12% -0.08% -6.23% 5.62% 1.13% -5.68% 7.55% 1.09% -5.85% 7.66% 1.60% -5.51% 8.34% 0.94% -5.99% 7.49% 0.86% -5.81% 7.12% 1.24% -5.45% 7.53% 1.90% -5.15% 8.58% 1.88% -5.32% 8.72% 2.06% -5.47% 9.27% 1.63% -5.78% 8.71% 0.81% -6.42% 7.69% -0.36% -7.42% 6.34% -0.25% -7.38% 6.53% 0.50% -6.91% 7.58% -0.33% -7.52% 6.53% 1.65% -6.24% 9.24% 2.19% -6.00% 10.11% 1.66% -6.45% 9.50% 2.09% -6.29% 10.22% 2.88% -5.96% 11.51% 2.55% -6.19% 11.06% 2.22% -6.74% 10.97% 1.79% -6.71% 10.04% 0.38% -7.91% 8.42% 1.36% -7.43% 9.93% 1.06% -7.86% 9.78% -0.50% -9.02% 7.81% -0.24% -9.24% 8.57% -1.95% -10.48% 6.38% -2.67% -10.98% 5.41% -1.56% -10.20% 6.88% -2.31% -10.79% 5.97% -1.60% -10.35% 6.97% -0.23% -9.24% 8.59% -1.12% -9.90% 7.48% -0.40% -9.50% 8.53% -0.54% -9.74% 8.49% 0.36% -9.39% 9.97% -0.03% -9.84% 9.66% -0.12% -10.04% 9.68% 0.46% -9.84% 10.67% -0.82% -10.96% 9.24% -2.06% -11.60% 7.37% -2.05% -11.93% 7.73% -3.14% -12.45% 6.04% -4.49% -13.19% 4.05% -4.01% -13.39% 5.26% -3.31% -13.43% 6.74% -3.22% -13.61% 7.11% -2.19% -12.54% 8.10% -2.40% -12.70% 7.82% -2.87% -13.09% 7.28% -2.62% -12.67% 7.35% -1.21% -11.69% 9.21% 0.17% -11.05% 11.37% 0.90% -10.67% 12.47% 1.04% -10.31% 12.36% 2.48% -9.65% 14.62% 2.82% -9.83% 15.50% 3.40% -9.72% 16.59% 4.03% -9.65% 17.80% 4.32% -9.68% 18.43% 4.91% -9.64% 19.59% 4.62% -10.01% 19.40% 5.13% -9.68% 20.09% 5.90% -9.19% 21.14% 6.82% -8.77% 22.60% 6.83% -8.97% 22.82% 7.99% -8.42% 24.61% 7.80% -8.83% 24.67% 7.69% -9.57% 25.23% 6.22% -10.54% 23.22% 6.57% -10.64% 24.05% 7.26% -10.37% 25.19% 6.83% -10.86% 24.82% 6.15% -10.59% 23.15% 6.07% -10.68% 23.06% 7.65% -10.23% 25.82% 8.62% -9.93% 27.50% 8.90% -10.43% 28.60% 8.90% -10.92% 29.11% 9.63% -11.33% 31.04% 8.71% -12.09% 29.97% 9.13% -12.09% 30.83% 10.02% -11.88% 32.42% 8.22% -12.56% 29.46% 7.93% -12.51% 28.80% 8.86% -12.22% 30.41% 9.09% -12.07% 30.70% 9.32% -12.09% 31.20% 11.32% -11.28% 34.46% 11.83% -11.17% 35.39% 12.88% -10.41% 36.72% 13.34% -10.41% 37.67% 14.31% -10.23% 39.46% 16.40% -8.85% 42.29% 16.26% -9.02% 42.19% Dec-99 18.17% -7.84% 44.85% 16.47% -9.53% 43.15% 12.01% -11.47% 36.06% 12.11% -11.02% 35.81% 11.29% -10.59% 33.67% 14.36% -8.87% 38.13% 17.53% -7.93% 43.63% 15.35% -8.82% 40.11% 14.75% -9.04% 39.12% 17.38% -7.79% 43.18% 18.89% -7.12% 45.56% 20.25% -6.85% 48.06% 21.78% -6.44% 50.77% 23.50% -6.17% 53.99% 25.06% -5.72% 56.71% 22.53% -7.16% 53.05% 22.18% -7.58% 52.77% 22.07% -7.69% 52.66% 21.12% -8.37% 51.43% 18.22% -9.55% 46.75% 16.27% -10.25% 43.50% 18.05% -9.27% 46.09% 19.49% -8.73% 48.46% 22.22% -7.65% 52.90% 23.14% -7.64% 54.78% 24.76% -7.22% 57.61% 25.95% -7.30% 60.13% 25.61% -7.75% 59.90% 27.08% -7.70% 62.86% 25.91% -8.59% 61.38% 26.57% -8.50% 62.63% 26.63% -7.95% 62.19% 28.40% -7.63% 65.47% 30.91% -6.86% 69.76% 27.94% -8.40% 65.32% 26.84% -8.64% 63.35% 28.91% -8.22% 67.12% 29.92% -7.98% 68.91% 30.53% -7.73% 69.90% 30.76% -7.68% 70.32% 35.47% -4.77% 76.89% 37.96% -4.38% 81.57% 36.95% -4.64% 79.77% 40.29% -3.41% 85.28% 41.11% -3.11% 86.65% 39.60% -4.48% 85.00% 39.48% -4.80% 85.07% 42.15% -3.58% 89.25% 41.62% -4.23% 88.83% 38.42% -5.54% 83.69% 34.37% -7.55% 77.53% 31.16% -7.43% 70.89% 34.69% -3.94% 74.45% 34.82% -3.92% 74.70% 28.83% -5.47% 64.13% 29.70% -4.97% 65.38% 34.05% -3.30% 72.49% 34.64% -3.19% 73.59% 34.72% -3.21% 73.77% 34.61% -3.54% 73.87% 31.18% -5.05% 68.47% 27.45% -5.34% 61.19% 24.78% -5.67% 56.12% 26.54% -4.32% 58.30% 21.14% -5.85% 48.94% 18.79% -7.06% 45.43% 21.61% -5.64% 49.68% 25.06% -4.05% 55.04% 27.48% -2.96% 58.83% 21.81% -5.41% 49.84% 19.81% -5.47% 45.85% 15.89% -6.06% 38.53% 14.91% -6.38% 36.87% 6.59% -10.29% 24.05% 7.84% -9.71% 25.97% 14.16% -7.27% 36.27% 14.23% -7.29% 36.42% 13.17% -7.21% 34.20% 10.06% -8.48% 29.21% 14.88% -5.75% 36.16% 13.76% -5.95% 34.11% 16.18% -5.01% 38.04% 18.93% -3.76% 42.31% 21.92% -2.44% 47.01% 18.71% -3.97% 42.10% 16.44% -5.48% 39.06% 17.93% -4.50% 41.06% 20.50% -3.06% 44.79% 17.51% -4.11% 39.83% 15.35% -4.97% 36.34% 11.48% -6.66% 30.26% 15.05% -4.35% 35.12% 15.40% -4.07% 35.54% 17.00% -2.93% 37.62% 18.93% -2.18% 40.74% 17.46% -3.20% 38.81% 15.42% -4.20% 35.71% 12.77% -5.53% 31.71% 10.88% -6.33% 28.73% 7.91% -7.38% 23.82% 8.60% -6.89% 24.71% 7.26% -7.68% 22.80% 7.56% -7.22% 22.95% 12.10% -5.35% 30.19% Jun-00 11.99% -5.22% 29.85% 15.84% -3.69% 36.01% 20.65% -2.08% 44.03% 20.74% -2.71% 44.83% 20.34% -2.65% 43.98% 21.51% -2.24% 45.92% 21.06% -2.75% 45.51% 23.07% -2.01% 48.80% 19.66% -3.03% 43.00% 20.91% -1.95% 44.42% 20.01% -2.20% 42.87% 20.63% -2.00% 43.91% 20.96% -2.30% 44.87% 23.10% -1.21% 48.07% 23.79% -1.38% 49.63% 24.26% -1.44% 50.63% 21.33% -3.46% 46.76% 20.22% -3.68% 44.76% 21.62% -3.05% 46.94%
PEAK TO PEAK PEAK TO TROUGH PEAK TO CURRENT 4/21/98 - 3/9/00 3/9/00 - 4/14/00 3/9/00 - 6/30/00 Russell 2000 26.3% -25.1% -14.4% Russell 2000 Value -12.7 -7.0 1.2 Russell 2000 Growth 64.8 -34.5 -22.5 NAV CUMULATIVE TOTAL RETURN Royce Value Trust 10.0 -8.8 -0.7 Royce Micro-Cap Trust 10.6 -13.4 -3.5 Royce Focus Trust -10.7 -4.1 -1.0
1998 - 2000 SMALL-CAP MARKET CYCLE: GROWTH outperformed VALUE over the full market cycle for the first time in the history of the Russell 2000. In fact, VALUE generated a negative return for the period. ROYCE PERFORMANCE WAS MIXED -- ALL THREE FUNDS TRAILED THE RUSSELL 2000, BUT OUTPERFORMED THE RUSSELL 2000 VALUE INDEX. 2000 SMALL-CAP PEAK-TO-CURRENT PERIOD: Since the new small-cap peak, VALUE has returned to form, providing a positive return while GROWTH and the general small-cap index suffered double-digit declines. ALL THREE FUNDS HAVE OUTPERFORMED THE RUSSELL 2000 OVER THIS PERIOD. 10 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 HISTORY SINCE INCEPTION ------------------------------------------------------------------------------- The following table details the share accumulations by an initial investor in the Funds who reinvested all distributions (including fractional shares) and participated fully in primary subscriptions for each of the rights offerings. Full participation in distribution reinvestments and rights offerings maximizes the returns available to a long-term investor. This table should be read in conjunction with the Performance and Portfolio Reviews of the Funds.
AMOUNT PURCHASE NAV MARKET HISTORY INVESTED PRICE SHARES VALUE* VALUE* ROYCE VALUE TRUST 11/26/86 Initial Purchase $ 10,000 $ 10.000 1,000 $ 9,280 $ 10,000 10/15/87 Distribution $0.30 7.000 42 12/31/87 Distribution $0.22 7.125 32 8,578 7,250 12/27/88 Distribution $0.51 8.625 63 10,529 9,238 9/22/89 Rights Offering 405 9.000 45 12/29/89 Distribution $0.52 9.125 67 12,942 11,866 9/24/90 Rights Offering 457 7.375 62 12/31/90 Distribution $0.32 8.000 52 11,713 11,074 9/23/91 Rights Offering 638 9.375 68 12/31/91 Distribution $0.61 10.625 82 17,919 15,697 9/25/92 Rights Offering 825 11.000 75 12/31/92 Distribution $0.90 12.500 114 21,999 20,874 9/27/93 Rights Offering 1,469 13.000 113 12/31/93 Distribution $1.15 13.000 160 26,603 25,428 10/28/94 Rights Offering 1,103 11.250 98 12/19/94 Distribution $1.05 11.375 191 27,939 24,905 11/3/95 Rights Offering 1,425 12.500 114 12/7/95 Distribution $1.29 12.125 253 35,676 31,243 12/6/96 Distribution $1.15 12.250 247 41,213 36,335 9/8/97 Distribution $0.33 15.625 61 12/5/97 Distribution $0.88 15.313 169 52,556 46,814 3/6/98 Distribution $0.37 16.688 69 6/5/98 Distribution $0.39 16.250 76 9/8/98 Distribution $0.40 12.563 104 12/7/98 Distribution $0.38 13.000 98 54,313 47,506 3/8/99 Distribution $0.37 11.875 108 6/7/99 Distribution $0.34 13.313 91 9/7/99 Distribution $0.33 12.688 95 12/6/99 Distribution $0.33 12.750 97 60,653 50,239 3/6/00 Distribution $0.33 13.750 92 6/6/00 Distribution $0.35 13.250 104 ----------------------------------------------------------------------------------------------------------------------------------- 6/30/00 $ 16,322 4,042 $ 65,359 $ 55,072 ----------------------------------------------------------------------------------------------------------------------------------- ROYCE MICRO-CAP TRUST 12/14/93 Initial Purchase $ 7,500 $ 7.500 1,000 $ 7,250 $ 7,500 10/28/94 Rights Offering 1,400 7.000 200 12/19/94 Distribution $0.05 6.750 9 9,163 8,462 12/7/95 Distribution $0.36 7.500 58 11,264 10,136 12/6/96 Distribution $0.80 7.625 133 13,132 11,550 12/5/97 Distribution $1.00 10.000 140 16,694 15,593 12/7/98 Distribution $0.29 8.625 52 16,016 14,129 12/6/99 Distribution $0.27 8.781 49 18,051 14,769 ----------------------------------------------------------------------------------------------------------------------------------- 6/30/00 $ 8,900 1,641 $ 20,069 $ 16,513 ----------------------------------------------------------------------------------------------------------------------------------- ROYCE FOCUS TRUST 10/31/96 Initial Purchase $ 4,375 $ 4.375 1,000 $ 5,280 $ 4,375 12/31/96 5,520 4,594 12/5/97 Distribution $0.53 5.250 101 6,650 5,574 12/31/98 6,199 5,367 12/6/99 Distribution $0.145 4.750 34 6,742 5,356 ----------------------------------------------------------------------------------------------------------------------------------- 6/30/00 $ 4,375 1,135 $ 6,799 $ 5,569 -----------------------------------------------------------------------------------------------------------------------------------
* Other than for initial purchase, values are stated as of December 31 of the year indicated, after reinvestment of distributions. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 11 ROYCE VALUE TRUST ------------------------------------------------------------------------------- MANAGER'S DISCUSSION There was good news all around for ROYCE VALUE TRUST (RVT) in the first half, as the Fund's diversified portfolio of small- and micro-cap stocks outperformed both of its small-cap benchmarks, the Russell 2000 and the S&P 600, year-to-date through June 30. RVT was up 7.77% on a net asset value (NAV) basis versus 3.04% for the Russell 2000 and 6.86% for the S&P 600. In addition, the Fund was up 1.82% on an NAV basis in the more difficult second quarter, compared to a loss of 3.78% for the Russell 2000, and a gain of 1.00% for the S&P 600. THE FUND'S AVERAGE ANNUAL NAV TOTAL RETURN SINCE INCEPTION (11/26/86) WAS 12.97%. Holding back first-half performance were stocks in the Industrial Services, Consumer Products and Consumer Services sectors. Some losses occurred in companies that we like, but whose apparent merits have so far not impressed other investors. For example, Interim Services (now Spherion) is a workforce management company with an expanding business in technology consulting that suffered a post-Y2K slowdown as companies cut back on technology and computer staffing. The prices of retail stocks were generally depressed in the first half, due to rising interest rates, increased energy prices and rumors of an economic slowdown. We are holding on to what we think are strong companies that are enduring a cyclical slump. For example, Charming Shoppes operates women's specialty apparel stores under names such as Fashion Bug and Catherine's Stores. The company made acquisitions in 1999 and posted robust sales in April and May, 2000, but experienced skittish stock performance in the first half. While we first began to buy Urban Outfitters in 1998, its backsliding price throughout 2000 has led us to more than double our position. We believe that, in spite of some recent earnings woes, the company is a disciplined franchiser with terrific upside. Portfolio gains came from companies in several sectors. The price of Coherent, a designer and manufacturer of laser systems and precision optics, soared in the first quarter, then cooled in the second, before rising again in late June. We retain a good-sized position, but sold shares at a profit in February, March and April. Exar, a manufacturer of analog semiconductors, avoided some of the extremes of the second-quarter Technology sell-off. Natural Resources companies, especially those in energy services and oil and gas industries, made a significant positive impact. Helmerich & Payne, a contract driller for oil and gas, and Carbo Ceramics, a manufacturer of proppants, an important ingredient in the hydraulic fracturing of natural gas and oil wells, both took off in the second quarter. Oil and gas producers, such as Tom Brown, Denbury Resources and Devon Energy, also came back strongly. Looking ahead, we are excited about the Fund's long-term growth potential. We would view the beginning of a new stock market cycle characterized by increased volatility and more historically typical rates of return as good news for our investment approach.
------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 6/30/00 ------------------------------------------------------- Second Quarter 2000* 1.82% Jan-June 2000* 7.77 1-Year 14.75 3-Year 11.94 5-Year 14.74 10-year 14.17 Since Inception (11/26/86) 12.97 * Not annualized.
------------------------------------------------------- RISK/RETURN COMPARISON 3-Year Period ended 6/30/00 ------------------------------------------------------- AVERAGE ANNUAL STANDARD TOTAL RETURN DEVIATION RUR* ------------------------------------------------------- ROYCE VALUE TRUST (NAV) 11.9 17.7 0.67 S&P 600 10.1 21.0 0.48 Russell 2000 10.6 23.2 0.46
*Return per Unit of Risk (RUR) is the average annual total return divided by the annualized standard deviation over a designated time period. OVER THE LAST THREE YEARS, ROYCE VALUE TRUST HAS OUTPERFORMED THE S&P 600 AND THE RUSSELL 2000 ON BOTH AN ABSOLUTE AND A RISK-ADJUSTED BASIS. [BAR CHART]
------------------------------------------------------- DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater in Percentages (%) ------------------------------------------------------- 8/25/87- 10/9/89- 2/12/92- 3/18/94- 5/22/96- 1/22/97- 10/13/97- 4/21/98- 3/9/00- 10/28/87 10/31/90 7/8/92 12/9/94 7/24/96 4/25/97 1/12/98 10/8/98 4/14/00 RVT (NAV) -26.4 -22.1 -2.1 -5.3 -6.3 -3.1 -8.1 -31.3 -8.8 RUSSELL 2000 -38.9 -32.5 -12.0 -12.3 -15.4 -9.0 -11.3 -36.5 -25.1
--------------------------------------- CALENDAR YEAR NAV TOTAL RETURNS --------------------------------------- YEAR RVT YEAR RVT --------------------------------------- 1999 11.7% 1992 19.9% 1998 3.3 1991 39.5 1997 27.5 1990 -13.1 1996 15.5 1989 19.2 1995 22.6 1988 22.8 1994 1.1 1987 -7.7 1993 17.9
12 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 PERFORMANCE AND PORTFOLIO REVIEW ------------------------------------------------------------------------------- LILLY INDUSTRIES -- A classic value scenario played out for this manufacturer of industrial coatings and other chemical products. Its strong business seemed unable to help its market performance until a larger company offered a substantial premium for the business in June. The buyout prompted the sale of a large number of shares at a considerable premium. NVEST LP -- A long-time holding, shares of this investment advisory firm sky-rocketed on news of a takeover by a large French money management company in early June. A classic case of market value finally (and quickly) catching up with business value. STONE & WEBSTER -- Any hopes that we had for this engineering and construction firm were dashed by bankruptcy. We thought that the new management that came aboard in 1999 might steady a declining business, but the sudden disclosure of massive overruns on existing projects sounded the death knell. INTEGRAL SYSTEMS -- The price of this builder of satellite ground systems crashed in May when the announcement of lower-than-expected earnings due to contract award delays drove institutional investors away. We like the company's potential to get back on track based on its solid core business.
------------------------------------------ GOOD IDEAS THAT WORKED Net Realized and Unrealized Gain Year-to-Date Through 6/30/00 ------------------------------------------ Lilly Industries Cl. A $6,886,989 Nvest LP 4,577,525 Coherent 3,669,704 Exar 3,116,445 Pioneer Group (The) 2,758,350
------------------------------------------ GOOD IDEAS AT THE TIME Net Realized and Unrealized Loss Year-to-Date Through 6/30/00 ------------------------------------------ Stone & Webster $3,514,568 Integral Systems 2,738,612 Blanch (E.W.) Holdings 2,376,014 Urban Outfitters 1,986,083 Medical Assurance 1,794,645
[LINE CHART] ---------------------------------------------------------- ROYCE VALUE TRUST MARKET PRICE -- ACTUAL VS. ADJUSTED* ----------------------------------------------------------
MARKET PRICE TOTAL RETURNS Since Inception = 303.7% 10 Years = 247.7 5 Years = 94.7 3 Years = 39.2 1 Year = 13.8
ADJUSTED ACTUAL MARKET MARKET PRICE PRICE ----- ----- 10.00 10.00 1986 9.88 9.88 10.75 10.75 9.75 9.75 9.63 9.63 8.63 8.63 9.50 9.50 9.37 9.38 9.12 9.13 9.50 9.50 9.25 9.25 7.30 7.00 6.91 6.63 1987 7.26 6.75 7.53 7.00 8.60 8.00 8.73 8.13 8.60 8.00 8.46 7.88 9.27 8.63 9.14 8.50 9.00 8.38 9.54 8.88 9.27 8.63 8.87 8.25 1988 9.25 8.13 9.96 8.75 9.68 8.50 10.10 8.88 10.39 9.13 10.67 9.38 10.53 9.25 10.96 9.63 11.10 9.75 10.99 9.63 10.84 9.50 10.84 9.50 1989 11.46 9.50 10.71 8.88 10.56 8.75 11.16 9.25 11.16 9.25 11.46 9.50 11.61 9.63 11.31 9.50 10.26 8.25 9.53 7.88 8.78 7.25 9.38 7.75 1990 10.23 8.13 10.85 8.75 12.43 9.88 13.05 10.38 13.53 10.75 12.90 10.25 12.58 10.00 12.74 10.13 12.42 9.88 12.46 9.88 12.93 10.25 12.61 10.00 1991 13.83 10.38 14.67 11.00 15.67 11.75 15.33 11.50 15.50 11.63 15.33 11.38 15.00 11.25 15.00 11.25 14.83 11.13 15.19 11.38 15.36 11.50 16.86 12.63 1992 17.54 12.25 18.25 12.75 18.25 12.88 18.61 13.00 18.43 12.88 18.43 12.88 18.79 13.13 19.33 13.38 19.50 13.63 19.75 13.75 20.47 14.25 19.94 13.88 1993 20.13 12.88 20.72 13.25 20.33 13.00 19.16 12.25 19.55 12.50 19.35 12.38 19.16 12.25 19.35 12.38 19.74 12.63 18.76 12.00 18.18 11.63 19.18 12.13 1994 19.00 11.00 20.08 11.63 20.30 11.75 19.65 11.38 20.52 11.88 20.73 12.13 20.73 12.00 21.81 12.63 22.68 13.13 23.33 13.50 22.25 12.88 23.10 13.25 1995 22.91 11.88 23.87 12.38 23.39 12.13 23.63 12.25 23.63 12.25 24.35 12.63 23.87 12.38 22.42 11.63 23.63 12.25 24.35 12.63 23.87 12.38 24.84 12.88 1996 26.64 12.63 26.11 12.38 26.37 12.50 24.79 11.75 25.06 11.88 26.90 12.75 29.01 13.75 30.07 14.25 32.31 15.31 35.01 16.25 33.39 15.50 35.41 16.44 1997 34.32 15.06 34.03 14.94 36.74 16.13 39.88 17.13 39.45 16.94 39.01 16.75 39.35 16.50 36.07 15.13 28.02 11.75 31.68 12.88 33.68 13.69 34.45 14.00 1998 34.82 13.75 34.03 13.44 31.97 12.63 29.54 11.31 33.95 13.00 34.76 13.31 35.48 13.25 35.15 13.13 34.48 12.88 34.00 12.38 33.31 12.13 35.54 12.94 1999 36.82 13.06 39.29 13.94 38.93 13.81 39.87 13.81 38.07 13.19 38.07 13.19 2000 40.37 13.63
Annual distribution totals as indicated * Reflects market price total return experience of a continuous stockholder who reinvested all distributions and fully participated in primary subscriptions of rights offerings. This graph illustrates the market price change from IPO of $10 per share on 11/26/86.
------------------------------------------------------- PORTFOLIO DIAGNOSTICS ------------------------------------------------------- Median Market Cap. $548 million Weighted Average P/E Ratio 14.2x Weighted Average P/B Ratio 1.6x Weighted Average Yield 1.5% Fund Net Assets $748 million Turnover Rate 22% Net Leverage+ 18% Symbol - Market Price RVT - NAV XRVTX
+Net leverage is the percentage, in excess of 100%, of the total value of equity type investments divided by net assets, excluding preferred stock.
------------------------------------------------------- TOP 10 POSITIONS % of Net Assets ------------------------------------------------------- Lilly Industries Cl. A 1.4% Gallagher (Arthur J.) & Company 1.2 Nvest LP 1.1 Charming Shoppes 1.0 Buffets 0.9 Circle International Group 0.9 Penn Engineering & Manufacturing 0.9 Avnet 0.8 Simpson Manufacturing 0.8 Denbury Resources 0.8
------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN % of Net Assets ------------------------------------------------------- Technology 17.1% Industrial Products 14.7 Industrial Services 11.9 Financial Intermediaries 10.1 Financial Services 8.1 Consumer Products 7.5 Natural Resources 7.1 Health 6.7 Consumer Services 3.1 Miscellaneous 4.8 Bonds & Preferred Stocks 1.9 Treasuries, Cash & Cash Equivalents 7.0
------------------------------------------------------- CAPITAL STRUCTURE Publicly Traded Securities Outstanding at 6/30/00 at NAV or Liquidation Value ------------------------------------------------------- 36.3 million shares of Common Stock $588 million 2.4 million shares of 7.80% Cumulative Preferred Stock $60 million 4.0 million shares of 7.30% Tax-Advantaged Cumulative Preferred Stock $100 million
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 13 ROYCE MICRO-CAP TRUST ------------------------------------------------------------------------------- MANAGER'S DISCUSSION Nothing was micro-sized about ROYCE MICRO-CAP TRUST'S (OTCM) first-half performance, as it led our three closed-end offerings on both a net asset value (NAV) and market price basis. More importantly, the Fund's strong year-to-date NAV return of 11.18% more than doubled that of its small-cap benchmark, the Russell 2000, which was up 3.04% for the same period. In addition, OTCM performed well in the bearish second quarter, up 2.09% on an NAV basis. The Fund's average annual NAV total return since inception (12/14/93) was 13.75%. The Health sector, a relatively small part of the Fund's portfolio, made the largest positive impact on performance. This was largely the result of a generous weighting within the biotechnology industry, one of the market's hottest industries during the first quarter. Companies in which we sold some shares at hefty gains in the first half include Biosource International, a biomedical research firm specializing in new drug therapies and medical diagnostics, and Lexicon Genetics, a designer of gene trapping and mutagenesis technologies. We continue to see growth potential in biotechnology companies. Continuing the torrid pace that began in 1998's fourth quarter, Technology, like biotechnology, burst out of the gate as the year began, and then also suffered in the second-quarter downturn. Impressive performances came from Exar, an analog semiconductor manufacturer whose price dipped, then rebounded, in the second quarter. The price of Rainbow Technologies, a provider of computer network and Internet security products, soared in the first quarter -- prompting us to sell -- then crashed in the second, leading us to purchase again. We sold off our position in Coherent, a manufacturer of laser-based systems and precision optics, in March. The proceeds from these sales helped to fund purchases in stocks that were trading at what we think were attractive prices. The comeback of energy services and oil and natural gas stocks boosted performance in the Natural Resources sector. This was welcome news, as we had bought many of these companies when prices were low, hoping for a turnaround. We are holding large positions in the energy services companies Carbo Ceramics, Input/Output and GulfMark Offshore. Oil and natural gas exploration companies, including Denbury Resources, Bonavista Petroleum and 3TEC Energy, inspire a similar level of our confidence. Owners of insurance stocks have needed Job-like patience recently. We have been waiting for a turnaround for more than a year, but see rising premium costs and the strong performance of insurance brokerage stocks (as opposed to those firms that underwrite policies) as positive signs that may point to a long-awaited recovery for the industry. We are holding large stakes in property and casualty insurers such as NYMAGIC and in medical liability insurance providers such as Medical Assurance and MIIX Group. Although recognition is growing, micro-caps are still struggling towards official institutional acceptance, which suits us just fine. Investor indifference often creates the kinds of conditions where we believe our approach works best.
------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 6/30/00 ------------------------------------------------------- Second Quarter 2000* 2.09% Jan-June 2000* 11.18 1-Year 22.39 3-Year 10.93 5-Year 14.21 Since Inception (12/14/93) 13.75
*Not annualized. ------------------------------------------------------- RISK/RETURN COMPARISON 3-Year Period ended 6/30/00 -------------------------------------------------------
AVERAGE ANNUAL STANDARD TOTAL RETURN DEVIATION RUR* ROYCE MICRO-CAP TRUST (NAV) 10.9 17.7 0.62 Russell 2000 10.6 23.2 0.46
*Return per Unit of Risk (RUR) is the average annual total return divided by the annualized standard deviation over a designated time period. OVER THE LAST THREE YEARS, ROYCE MICRO-CAP TRUST HAS OUTPERFORMED THE RUSSELL 2000 ON A BOTH AN ABSOLUTE AND A RISK-ADJUSTED BASIS. [BAR CHART]
------------------------------------------------------- DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater, in Percentages (%) ------------------------------------------------------- 3/18/94- 5/22/96- 1/22/97- 10/13/97- 4/21/98- 3/9/00- 12/9/94 7/24/96 4/25/97 1/12/98 10/8/98 4/14/00 OTCM (NAV) -0.4 -6.8 -3.4 -7.4 -29.9 -13.4 RUSSELL 2000 -12.3 -15.4 -9.0 -11.3 -36.5 -25.1
------------------------------------------------------- CALANDAR YEAR NAV TOTAL RETURNS ------------------------------------------------------- YEAR OTCM 1999 12.7% 1998 -4.1 1997 27.1 1996 16.6 1995 22.9 1994 6.0
14 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 PERFORMANCE AND PORTFOLIO REVIEW ------------------------------------------------------------------------------- MYRIAD GENETICS -- We purchased this genomics company, focused on the development of therapeutic and diagnostic products, as a small research and-development position in 1998. Its price then more than quadrupled in the first quarter's white-hot biotechnology run-up. AURORA BIOSCIENCES -- We began to sell shares of this developer of systems for drug discovery and enhancement in late 1999 when its price nearly tripled. In the first quarter, it climbed even higher, which led to more selling, although we still retain a small position. KRONOS -- Once a stellar performer, this provider of workforce management, payroll and timecard software saw its business slump after the non-event of Y2K, and its stock price plummet after an earnings disappointment. We trimmed our position earlier this year. STONE & WEBSTER -- Any hopes that we had for this engineering and construction firm were dashed by bankruptcy. We thought that the new management that came aboard in 1999 might steady a declining business, but the sudden disclosure of massive overruns on existing projects sounded the death knell.
----------------------------------- GOOD IDEAS THAT WORKED Net Realized and Unrealized Gain Year-to-Date Through 6/30/00 ----------------------------------- Myriad Genetics $2,031,672 Aurora Biosciences 1,756,782 Richardson Electronics 1,357,156 Rainbow Technologies 1,140,249 Coherent 1,076,954
------------------------------------ GOOD IDEAS AT THE TIME Net Realized and Unrealized Loss Year-to-Date Through 6/30/00 ------------------------------------ Kronos $1,374,769 Stone & Webster 1,369,557 Urban Outfitters 947,048 RCM Technologies 904,181 Reliance Group Holdings 788,528 [LINE CHART] ----------------------------------------------------------- ROYCE MICRO-CAP TRUST MARKET PRICE -- ACTUAL VS. ADJUSTED* ----------------------------------------------------------- MARKET PRICE TOTAL RETURNS Since Inception = 85.0% 5 Years = 91.7 3 Years = 47.4 1 Year = 22.9
ADJUSTED ACTUAL MARKET MARKET PRICE PRICE ----- ----- 1993 7.50 7.50 7.75 7.75 7.50 7.50 6.50 6.50 6.63 6.63 7.13 7.13 6.75 6.75 7.00 7.00 7.13 7.13 7.00 7.00 7.38 7.38 7.19 7.13 1994 7.11 7.00 6.86 6.75 7.24 7.13 6.98 6.88 6.98 6.88 7.11 7.00 7.49 7.38 7.87 7.75 8.13 8.00 8.51 8.38 7.87 7.75 7.75 7.63 1995 8.52 8.00 8.25 7.75 8.25 7.75 8.25 7.75 8.92 8.38 8.92 8.38 9.18 8.63 8.25 7.75 8.45 7.94 8.52 8.00 8.52 8.00 9.05 8.50 1996 9.71 8.25 9.30 7.88 9.41 8.00 8.97 7.63 9.56 8.13 10.15 8.63 10.57 8.98 10.66 9.06 11.32 9.63 13.16 11.19 12.79 10.88 12.72 10.81 1997 13.10 10.13 12.62 9.75 13.43 10.38 13.64 11.31 14.40 11.13 13.91 10.75 13.35 10.31 12.62 9.75 10.11 7.81 10.43 8.06 10.67 8.25 11.56 8.94 1998 11.87 8.88 11.03 8.25 10.70 8.00 9.95 7.44 11.12 8.31 11.29 8.44 11.29 8.44 11.33 8.47 11.29 8.44 11.37 8.50 11.04 8.25 11.95 8.94 1999 12.41 9.13 13.19 9.56 13.88 10.06 14.31 10.38 13.28 9.63 13.23 9.59 2000 13.88 10.06
Adjusted Market Price Actual Market Price Annual distribution totals as indicated * Reflects market price total return experience of a continuous stockholder who reinvested all distributions and fully participated in the 1994 rights offering. This graph illustrates the market price change from IPO of $7.50 per share on 12/14/93.
------------------------------------------------------- PORTFOLIO DIAGNOSTICS ------------------------------------------------------- Median Market Cap. $215 million Weighted Average P/E Ratio 12.3x* Weighted Average P/B Ratio 1.4x Weighted Average Yield 1.2% Fund Net Assets $208 million Turnover Rate 29% Net Leverage+ 10% Symbol - Market Price OTCM - NAV XOTCX
* Excludes 17% of portfolio holdings with zero or negative earnings as of 6/30/00. + Net leverage is the percentage, in excess of 100%, of the total value of equity type investments divided by net assets, excluding preferred stock.
------------------------------------------------------- TOP 10 POSITIONS % of Net Assets ------------------------------------------------------- BARRA 1.4% Richardson Electronics 1.2 Pure Resources 1.2 Matthews International Cl. A 1.1 Myriad Genetics 1.1 Simpson Manufacturing 1.1 Forward Air 1.1 Denbury Resources 1.0 New Horizons Worldwide 1.0 Ash Grove Cement Company 1.0
------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN % of Net Assets ------------------------------------------------------- Industrial Services 14.3% Technology 14.2 Industrial Products 13.4 Consumer Products 10.2 Natural Resources 8.6 Financial Intermediaries 7.9 Health 7.0 Consumer Services 3.8 Financial Services 3.6 Utilities 0.3 Miscellaneous 5.0 Bond & Preferred Stock 0.6 Treasuries, Cash & Cash Equivalents 11.1
------------------------------------------------------- CAPITAL STRUCTURE Publicly Traded Securities Outstanding at 6/30/00 at NAV or Liquidation Value ------------------------------------------------------- 13.8 million shares of Common Stock $168 million 1.6 million shares of 7.75% Cumulative Preferred Stock $40 million
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 15 ROYCE FOCUS TRUST ------------------------------------------------------------------------------- MANAGER'S DISCUSSION As someone once said of the Godfather trilogy, one of the films had to finish third. This reasoning makes ROYCE FOCUS TRUST (FUND) the first half's GODFATHER PART III of our closed-end funds. The Fund was up 0.84% on a net asset value (NAV) basis, behind its small-cap benchmark, the Russell 2000, which was up 3.04%. The Fund's average annual NAV total return since the inception of our management (11/1/96) was 7.13%. The Fund struggled in the dynamic first quarter, up 1.68%. Its concentrated portfolio of what we think are high-quality small-cap stocks may have hindered performance, as companies with poor showings had a proportionately greater effect on performance. While the Fund's second-quarter return was also unspectacular -- it was down 0.83% -- the portfolio lost less than the Russell 2000, which was down 3.78% for the same period. One reason for our underperformance was the Fund's relatively low weighting in Technology stocks, a sector that we significantly reduced our exposure to in the first half. We sold off small positions in Avnet and National Computer Systems at a profit. Low exposure to Technology, of course, also helped the Fund to hold its value in the second quarter, although its comparative absence was admittedly a more critical factor in the first quarter. Some of the Fund's more disappointing performances came from stocks in which we still have a lot of confidence. For example, the price of Lincoln Electric Holdings, a manufacturer of welding and cutting products and a long-time Fund holding, was underwater in the first half. In April, the company announced a large acquisition, but followed that news with a report that it would need to borrow funds to complete the deal, which sent its price into a tailspin. We believe in the company's long-term prospects based on its previous business success and on the growth potential that the acquisition offers, so we have increased our position. We are also hopeful about the prospects for Morrison Knudsen, a large-scale construction and engineering firm with what we think is terrific management. After almost a year of sluggish performance, energy stocks bounced back in the first half. We had built positions in what we think are high-quality companies in this industry throughout 1999. The price of top-ten holding Input/Output, a designer and manufacturer of seismic data acquisition products used on land and water, climbed steadily through the first half. Tom Brown, an oil and natural gas exploration company, also performed very well. We think that the industry as a whole still has strong growth potential, which led us to initiate a position in 3TEC Energy, a regional natural gas exploration company, in late June. While we were not pleased with the Fund's recent performance, we see the makings of a turnaround. In fact, the Fund was up 10.02% in July on an NAV basis (up 10.94% year-to-date through 7/31/00). We are confident that the Fund's concentrated value approach can provide above-average long-term return potential.
------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 6/30/00 ------------------------------------------------------- Second Quarter 2000* -0.83% Jan-June 2000* 0.84 1-Year -0.44 3-Year 2.23 Since Inception (11/1/96)(1) 7.13
* Not annualized. (1) Date Royce & Associates, Inc. assumed investment management responsibility.
------------------------------------------------------- RISK/RETURN COMPARISON 3-Year Period ended 6/30/00 ------------------------------------------------------- AVERAGE ANNUAL STANDARD TOTAL RETURN DEVIATION RUR* ROYCE FOCUS TRUST (NAV) 2.2 19.9 0.11 Russell 2000 10.6 23.2 0.48
*Return per Unit of Risk (RUR) is the average annual total return divided by the annualized standard deviation over a designated time period. OVER THE LAST THREE YEARS, ROYCE FOCUS TRUST HAS HAD LOWER VOLATILITY RELATIVE TO THE RUSSELL 2000, BUT HAS UNDERPERFORMED ON AN ABSOLUTE AND RELATIVE BASIS. [BAR CHART]
------------------------------------------------------- DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater, in Percentages (%) ------------------------------------------------------- 1/22/97- 10/13/97- 4/21/98- 3/9/00- 4/25/97 1/12/98 10/8/98 4/14/00 FUND (NAV) -1.1 -10.3 -35.2 -4.1 Russell 2000 -9.0 -11.3 -36.5 -25.1
------------------------------------------------------- CALENDAR YEAR NAV TOTAL RETURNS ------------------------------------------------------- YEAR FUND 1999 8.7% 1998 -6.8 1997 20.5
16 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 PERFORMANCE AND PORTFOLIO REVIEW ------------------------------------------------------------------------------- OAKLEY -- After spending much of the last two years wandering in the single-digit wilderness, this leading designer, manufacturer and distributor of high-performance eyewear, footwear, watches and apparel finally came back as new products were more effectively integrated and institutional interest returned. RICHARDSON ELECTRONICS -- Wall Street finally noticed this distributor of electronic components and equipment for industrial, communications, medical, and scientific applications. The company first got our attention back in 1998's third-quarter correction. Unlike many technology stocks, its price kept climbing throughout the second quarter. BLANCH (E.W.) HOLDINGS -- After we touted the virtues of this reinsurance and insurance risk management company in 1999's Semi-Annual Report, a combination of missed earnings estimates and management defections led to a more than 50% loss in 2000's first quarter. Nonetheless, we are still believers in the high value of the firm's core business. NEW ENGLAND BUSINESS SERVICE -- Although this business product marketer has met earnings estimates and realized its recent business goals, we suspect that a profound lack of investor interest in its core business continues to impede stock performance.
-------------------------------------------- GOOD IDEAS THAT WORKED Net Realized and Unrealized Gain Year-to-Date Through 6/30/00 -------------------------------------------- Oakley $2,294,794 Richardson Electronics 1,387,079 Input/Output 1,149,854 Tom Brown 817,154 White Mountains Insurance Group 643,850
-------------------------------------------- GOOD IDEAS AT THE TIME Net Realized and Unrealized Loss Year-to-Date Through 6/30/00 -------------------------------------------- Blanch (E.W.) Holdings $1,858,279 New England Business Service 1,100,280 Lincoln Electric Holdings 1,016,727 Charming Shoppes 941,007 Medical Assurance 916,482
[LINE CHART] -------------------------------------------------------- ROYCE FOCUS TRUST MARKET PRICE -- ACTUAL VS. ADJUSTED(2) --------------------------------------------------------
MARKET PRICE TOTAL RETURNS Since 11/1/96 = 27.2% 3 Years = 11.3 1 Year = 2.4
ADJUSTED ACTUAL MARKET MARKET PRICE PRICE ----- ----- 4.38 4.38 4.66 4.66 1996 4.59 4.59 4.75 4.75 4.56 4.56 4.88 4.88 4.72 4.72 4.81 4.81 5.00 5.00 5.28 5.28 5.44 5.44 6.06 6.06 5.69 5.69 5.69 5.69 1997 5.57 5.06 5.64 5.13 5.78 5.25 6.23 5.66 6.54 5.94 6.23 5.66 6.05 5.50 6.12 5.56 4.82 4.38 5.30 4.81 5.09 4.63 5.30 4.81 1998 5.37 4.88 4.82 4.38 4.54 4.13 4.41 4.00 4.54 4.13 5.37 4.88 5.44 4.94 5.54 5.03 5.58 5.06 5.37 4.88 5.34 4.84 5.30 4.81 1999 5.36 4.72 5.40 4.75 5.47 4.81 5.79 5.09 5.61 4.94 5.75 5.06 5.58 4.91
Adjusted Market Price Actual Market Price Annual distribution totals as indicated (2) Reflects market price total return experience of a continuous stockholder who reinvested all distributions. This graph illustrates the market price change from $4.375 on 11/1/96, the date Royce & Associates, Inc. assumed investment management responsibility.
------------------------------------------------------- PORTFOLIO DIAGNOSTICS ------------------------------------------------------- Median Market Cap. $706 million Weighted Average P/E Ratio 12.1x* Weighted Average P/B Ratio 1.6x Weighted Average Yield 1.2% Fund Net Assets $71 million Turnover Rate 42% Net Leverage+ 9% Symbol - Market Price FUND - NAV XFUNX
* Excludes 27% of portfolio holdings with zero or negative earnings as of 6/30/00. + Net leverage is the percentage, in excess of 100%, of the total value of equity type investments divided by net assets, excluding preferred stock.
------------------------------------------------------- TOP 10 POSITIONS % of Net Assets ------------------------------------------------------- Florida Rock Industries 5.0% Charming Shoppes 4.9 Oakley 4.6 Morrison Knudsen 4.6 Arrow International 4.3 Input/Output 4.2 Blanch (E.W.) Holdings 4.1 Simpson Manufacturing 3.7 Interim Services 3.6 White Mountains Insurance Group 3.6
------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN % of Net Assets ------------------------------------------------------- Industrial Services 15.7% Industrial Products 15.6 Natural Resources 12.1 Financial Intermediaries 8.7 Financial Services 6.8 Consumer Services 5.7 Technology 4.7 Consumer Products 4.7 Health 4.4 Treasuries, Cash & Cash Equivalents 21.6
------------------------------------------------------- CAPITAL STRUCTURE Publicly Traded Securities Outstanding at 6/30/00 at NAV or Liquidation Value ------------------------------------------------------- 8.6 million shares of Common Stock $51 million 800,000 shares of 7.45% Cumulative Preferred Stock $20 million
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 17 DISTRIBUTION REINVESTMENT AND CASH PURCHASE OPTIONS FOR COMMON STOCKHOLDERS -------------------------------------------------------------------------------- WHY SHOULD I REINVEST MY DISTRIBUTIONS? By reinvesting distributions, a stockholder can maintain an undiluted investment in the Fund. The regular reinvestment of distributions has a significant impact on stockholder returns. In contrast, the stockholder who takes distributions in cash is penalized when shares are issued below net asset value to other stockholders. HOW DOES THE REINVESTMENT OF DISTRIBUTIONS FROM THE ROYCE CLOSED-END FUNDS WORK? The Funds automatically issue shares in payment of distributions unless you indicate otherwise. The shares are issued at the lower of the market price or net asset value on the valuation date. HOW DOES THIS APPLY TO REGISTERED STOCKHOLDERS? If your shares are registered directly with a Fund, your distributions are automatically reinvested unless you have otherwise instructed the Funds' custodian, State Street Bank and Trust Company, in writing. A registered stockholder also has the option to receive the distribution in the form of a stock certificate or in cash if State Street is properly notified. WHAT IF MY SHARES ARE HELD BY A BROKERAGE FIRM OR A BANK? If your shares are held by a brokerage firm, bank, or other intermediary as the stockholder of record, you should contact your brokerage firm or bank to be certain that it is automatically reinvesting distributions on your behalf. If they are unable to reinvest distributions on your behalf, you should have your shares registered in your name in order to participate. WHAT OTHER FEATURES ARE AVAILABLE FOR REGISTERED STOCKHOLDERS? The Distribution Reinvestment and Cash Purchase Plans also allow registered stockholders to make optional cash purchases of shares of a Fund's common stock directly through State Street on a monthly basis, and to deposit certificates representing your Fund shares with State Street for safekeeping. The Funds' investment adviser is absorbing all commissions on optional cash purchases under the Plans through December 31, 2000. HOW DO THE PLANS WORK FOR REGISTERED STOCKHOLDERS? State Street maintains the accounts for registered stockholders in the Plans and sends written confirmation of all transactions in the account. Shares in the account of each participant will be held by State Street in non-certificated form in the name of the participant, and each participant will be able to vote those shares at a stockholder meeting or by proxy. A participant may also send other stock certificates held by them to State Street to be held in non-certificated form. There is no service fee charged to participants for reinvesting distributions. If a participant elects to sell shares from a Plan account, State Street 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. HOW CAN I GET MORE INFORMATION ON THE PLANS? You can call an Investor Services Representative at (800) 221-4268 or you can request a copy of the Plan for your Fund from State Street. All correspondence (including notifications) should be directed to: [Name of Fund] Distribution Reinvestment and Cash Purchase Plan, c/o State Street Bank and Trust Company, PO Box 8200, Boston, MA 02110, telephone (800) 426-5523. 18 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 [GRAPHIC: Computer and Keyboard with "The Royce Funds" displayed on monitor] UPDATES AND NOTES TO PERFORMANCE AND RISK INFORMATION -------------------------------------------------------------------------------- NEW @ www.roycefunds.com The process of keeping our website fresh is ongoing. We are currently focusing on enriching our content, improving navigation and architecture, and developing greater interactivity for our clients. In the past couple of months, we have added and/or enhanced the following: SEARCH-BY-FUND - Homepage pull-down menu to improve navigation. E-NHANCEMENTS FOR SHAREHOLDERS - Open-end fund shareholders can establish online account access, alter account PINs and request electronic delivery of shareholder reports and prospectuses directly and immediately. DISTRIBUTIONS: 1999 AND 2000 - Centralized distribution information. Go to Open-End Funds or Closed-End Funds sections. WHAT'S NEW - More performance commentary at month- and quarter-ends, and features such as What's New on the Site and a What's New Archive. IN THE NEWS - More in-depth treatment of press mentions. Go to What's New or Bulletin Board sections. ILLUSTRATION BANK - "While we are serious in our approach to value investing, `serious' is not our standard approach to ourselves..." Go to Just for Fun. What would you like to see on www.roycefunds.com? We want your feedback. Please e-mail any suggestions or comments to Heather MacLeod at heather@roycenet.com. NOTES TO PERFORMANCE AND RISK INFORMATION All performance information is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Share prices will fluctuate, so that shares may be worth more or less than their original cost when sold. The Royce Funds invest primarily in securities of small-cap and/or micro-cap companies that may involve considerably more risk than investments in securities of larger-cap companies. The thoughts expressed in this report concerning recent market movements and future prospects for small-cap company stocks are solely those of Royce, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of June 30, 2000 and are subject to change at any time without notice.There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future. Standard deviation is a statistical measure within which a fund's total returns have varied over time. The greater the standard deviation, the greater a fund's volatility. The Russell 2000, Russell 2000 Value, Russell 2000 Growth, Nasdaq Composite, S&P 500 and S&P 600 SmallCap are unmanaged indices of domestic common stocks. The Royce Funds is a service mark of The Royce Funds. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 19 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
COMMON STOCKS - 91.1% SHARES VALUE ------ ----- CONSUMER PRODUCTS - 7.5% Apparel and Shoes - 1.7% Garan 96,900 $ 2,192,363 K-Swiss Cl. A 107,500 1,713,281 Oshkosh B'Gosh Cl. A 114,300 1,871,662 +Polo Ralph Lauren Cl. A(a) 151,100 2,153,175 Weyco Group 167,664 4,275,432 Wolverine World Wide 59,900 591,513 ------------- 12,797,426 ------------- Collectibles - 0.3% Action Performance(a) 2,000 14,500 Department 56(a) 68,200 750,200 Enesco Group 176,700 839,325 Russ Berrie and Company 9,500 182,875 Sotheby's Holdings Cl. A(a) 31,600 553,000 ------------- 2,339,900 ------------- Food/Beverage/Tobacco - 0.7% 800 JR Cigar(a) 172,400 1,702,450 Hain Celestial Group(a) 50,600 1,856,387 Hershey Creamery 583 932,800 J & J Snack Foods(a) 5,000 89,375 Tootsie Roll Industries 13,390 468,650 ------------- 5,049,662 ------------- Home Furnishing/Appliances - 1.5% Bassett Furniture Industries 194,187 2,451,611 Burnham Corporation Cl. A 46,956 1,737,372 Burnham Corporation Cl. B 18,000 666,000 Ethan Allen Interiors 10,000 240,000 La-Z-Boy 68,200 954,800 Lifetime Hoan 361,727 2,893,816 Mikasa 172,900 1,901,900 ------------- 10,845,499 ------------- Publishing - 0.3% Marvel Enterprises(a) 398,200 2,488,750 Scholastic Corporation(a) 1,200 73,350 ------------- 2,562,100 ------------- Sports and Recreation - 1.4% Johnson Outdoors Cl. A(a) 251,800 1,778,338 Lund International Holdings(a) 153,600 729,600 Oakley(a) 366,700 4,217,050 RockShox(a),(c) 1,060,400 894,712 Sturm, Ruger & Co. 298,800 2,651,850 Winnebago Industries 3,200 41,800 ------------- 10,313,350 ------------- Other Consumer Products - 1.6% Lazare Kaplan International(a) 190,100 1,544,563 Matthews International Cl. A 115,200 3,340,800 Starrett (L. S.) Company Cl. A 75,400 1,319,500 VELCRO INDUSTRIES 525,800 5,948,112 ------------- 12,152,975 ------------- TOTAL (Cost $53,067,556) 56,060,912 ============= CONSUMER SERVICES - 3.1% Leisure/Entertainment - 0.2% Anchor Gaming(a) 1,000 47,938 Aztar(a) 4,600 71,300 Cheap Tickets(a) 20,000 240,000 Coachmen Industries 85,500 983,250 ------------- 1,342,488 ------------- Restaurants/Lodgings - 0.9% BUFFETS(a) 535,135 6,789,525 Diedrich Coffee(a) 57,900 119,419 Papa John's International(a) 5,000 122,500 ------------- 7,031,444 ------------- Retail Stores - 2.0% Abercrombie & Fitch Cl. A(a) 25,000 304,687 CHARMING SHOPPES(a) 861,800 4,389,794 Claire's Stores 144,300 2,777,775 Consolidated Stores(a) 149,100 1,789,200 Family Dollar Stores 4,700 91,944 Michaels Stores(a) 5,000 229,063 Pep Boys-Manny, Moe & Jack (The) 5,000 30,000 Pier 1 Imports 57,500 560,625 Sunglass Hut International(a) 226,800 1,864,012 Suzy Shier 248,000 586,486 Urban Outfitters(a) 224,800 1,981,050 Whitehall Jewellers(a) 3,100 57,738 ------------- 14,662,374 ------------- TOTAL (Cost $21,559,727) 23,036,306 ============= FINANCIAL INTERMEDIARIES - 10.1% Banking - 1.3% BOK Financial(a) 41,509 729,002 Boston Private Financial Holdings 10,000 100,625 +Farmers & Merchants Bank of Long Beach(a) 1,266 2,342,100 Federal Realty Investment Trust 5,400 108,000 First American (The) 47,100 674,119 First National Bank of Anchorage 2,100 1,900,500 Fulton Financial 18,003 318,428 HSB Group 30,000 933,750 Hudson City Bancorp 20,000 341,250 Mechanics Bank 200 2,080,000 Oriental Financial Group 58,000 837,375 ------------- 10,365,149 ------------- Insurance - 8.7% Argonaut Group 161,600 2,767,400 Baldwin & Lyons Cl. B 126,000 2,149,875 Berkley (W.R.) 84,200 1,578,750 CNA Surety 15,000 179,063 Capitol Transamerica 108,415 1,280,652 Commerce Group 54,318 1,602,381 Erie Indemnity Company Cl. A 23,100 727,650 +Everest Re Group 107,300 3,527,488 Fidelity National Financial 140,800 2,578,400 Frontier Insurance Group(a) 56,000 42,000 HCC Insurance Holdings 113,200 2,136,650 Highlands Insurance Group(a) 242,800 2,276,250 Horace Mann Educators 74,300 1,114,500
20 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
SHARES VALUE ------ ----- FINANCIAL INTERMEDIARIES (CONTINUED) Insurance (continued) Independence Holding 58,164 $ 712,509 LaSalle Re Holdings(a) 79,900 1,133,581 Leucadia National 59,300 1,352,781 Liberty Financial Companies 5,000 109,687 Markel(a) 2,200 311,575 Medical Assurance(a) 230,371 2,591,674 +Mercury General 85,000 2,008,125 Mutual Risk Management 250,500 4,336,781 NYMAGIC 47,700 679,725 Nobel Insurance(a) 121,500 30,375 Old Republic International 188,100 3,103,650 PMA Capital Cl. A 219,700 4,174,300 PXRE Group 298,151 4,025,039 RLI 66,362 2,306,079 RenaissanceRe Holdings 15,000 653,438 Trenwick Group 245,950 3,581,647 Wesco Financial 11,990 2,457,950 White Mountains Insurance Group 30,400 4,864,000 Zenith National Insurance 226,700 4,817,375 ------------- 65,211,350 ------------- Securities Brokers - 0.1% Raymond James Financial 7,500 168,750 ------------- TOTAL (Cost $66,137,631) 75,745,249 ============= FINANCIAL SERVICES - 8.1% Information and Processing - 1.0% BARRA(a) 60,100 2,978,706 Fair, Isaac and Co. 78,500 3,454,000 Sungard Data Systems(a) 24,600 762,600 ------------- 7,195,306 ------------- Insurance Brokers - 3.5% +Aon 127,700 3,966,681 Blanch (E.W.) Holdings 175,800 3,570,937 Clark/Bardes Holdings(a) 80,900 1,334,850 Crawford & Co. Cl. A 327,350 3,539,472 Crawford & Co. Cl. B 75,300 828,300 GALLAGHER (ARTHUR J.) & COMPANY 209,800 8,811,600 Hilb, Rogal & Hamilton 112,675 3,908,414 ------------- 25,960,254 ------------- Investment Management - 3.6% Affiliated Managers Group(a) 87,800 3,994,900 BKF Capital Group(a) 17,500 277,812 BlackRock Cl. A(a) 55,000 1,595,000 Eaton Vance 65,100 3,010,875 Federated Investors Cl. B 10,000 350,625 John Nuveen Company Cl. A 51,400 2,155,588 Lexington Global Asset Managers(a) 16,100 167,037 NVEST LP 208,300 7,889,363 Phoenix Investment Partners 243,700 2,558,850 Pioneer Group (The)(a) 103,600 4,390,050 SEI Investments 6,000 238,875 U.S. Global Investors Cl. A(a) 249,205 459,472 ------------- 27,088,447 ------------- TOTAL (Cost $35,844,970) 60,244,007 ============= HEALTH - 6.7% Commercial Services - 2.0% ChiRex(a) 60,000 1,200,000 IDEXX Laboratories(a) 35,100 802,913 +MedQuist(a) 55,000 1,870,000 PAREXEL International(a) 320,200 3,061,912 Quintiles Transnational(a) 127,000 1,793,875 SCHEIN (HENRY)(a) 292,900 5,052,525 Young Innovations(a) 51,700 924,138 ------------- 14,705,363 ------------- Drugs and Biotech - 2.4% Affymetrix(a) 20,000 3,302,500 Biogen(a) 4,000 258,000 BioReliance(a) 66,000 321,750 Cerus Corporation(a) 26,800 1,371,825 Chiron(a) 42,300 2,009,250 Dura Pharmaceuticals(a) 77,600 1,115,500 +Gene Logic(a) 51,000 1,820,062 Genzyme Corporation - General Division(a) 50,000 2,971,875 Genzyme Corporation - Tissue Repair(a) 15,300 80,325 Genzyme Corporation - Molecular Oncology(a) 4,322 59,968 Genzyme Corporation - Surgical Products(a) 7,160 71,153 IDEC Pharmaceuticals(a) 15,000 1,759,687 Incyte Genomics(a) 7,000 575,313 Millennium Pharmaceuticals(a) 12,000 1,342,500 Shire Pharmaceuticals Group ADR(a),(b) 20,853 1,081,749 ------------- 18,141,457 ------------- Health Services - 0.2% Capital Senior Living(a) 500 1,469 Shared Medical Systems 21,900 1,597,331 ------------- 1,598,800 ------------- Personal Care - 0.3% Chattem(a) 20,000 273,750 Nu Skin Enterprises Cl. A(a) 20,100 115,575 Regis 115,600 1,445,000 ------------- 1,834,325 ------------- Surgical Products and Devices - 1.8% Arrow International 148,700 4,981,450 Biomet 5,000 192,187 Haemonetics(a) 215,200 4,519,200 Invacare 17,000 446,250 NMT Medical(a) 150,600 451,800 PE Corporation-PE Biosystems Group 2,000 131,750 PE Corporation-Celera Genomics Group(a) 1,000 93,500 STERIS(a) 43,600 386,950 Varian Medical Systems(a) 60,000 2,347,500 ------------- 13,550,587 ------------- TOTAL (Cost $36,286,134) 49,830,532 =============
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 21 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
SHARES VALUE ------ ----- INDUSTRIAL PRODUCTS - 14.7% Building Systems and Components - 3.5% Decker Manufacturing 6,022 $ 283,034 Falcon Products 349,400 3,319,300 Fleetwood Enterprises 65,900 939,075 International Aluminum 56,700 978,075 KIMBALL INTERNATIONAL CL. B 386,380 5,699,105 Mueller (Paul) 53,200 1,330,000 Preformed Line Products Company 127,600 1,850,200 SIMPSON MANUFACTURING(a) 126,700 6,057,844 Skyline 123,400 2,653,100 Thor Industries 159,950 3,358,950 ------------- 26,468,683 ------------- Construction Materials - 1.9% Ameron International 13,000 464,750 ASH GROVE CEMENT COMPANY CL. B 50,518 5,102,318 FLORIDA ROCK INDUSTRIES 148,000 5,272,500 Moore (Benjamin) & Co. 34,000 820,250 Puerto Rican Cement Company 100,400 2,792,375 ------------- 14,452,193 ------------- Industrial Components - 1.0% PENN ENGINEERING & MANUFACTURING 153,600 5,414,400 PENN ENGINEERING & MANUFACTURING CL. A 39,800 1,283,550 PerkinElmer 1,000 66,125 Woodhead Industries 45,400 828,550 ------------- 7,592,625 ------------- Industrial OEM - 0.1% Ionics(a) 5,000 153,125 ------------- Machinery - 1.5% Astec(a) 5,000 126,875 Atchison Casting(a) 58,600 336,950 Federal Signal 114,900 1,895,850 Hurco Companies(a) 5,000 20,000 Lincoln Electric Holdings 253,580 3,613,515 Nordson Corporation 60,300 3,052,687 PAXAR(a) 165,100 1,970,881 Tecumseh Products Company Cl. A 3,300 126,019 ------------- 11,142,777 ------------- Paper and Packaging - 0.4% CLARCOR 4,550 90,431 Liqui-Box 59,978 2,968,911 ------------- 3,059,342 ------------- Pumps, Valves and Bearings - 1.3% ConBraCo Industries 7,630 3,891,300 Denison International ADR(a),(b) 88,400 1,116,050 Kaydon Corporation 158,500 3,328,500 NN 127,100 1,334,550 Robroy Industries Cl. A 40,523 263,400 ------------- 9,933,800 ------------- Specialty Chemicals and Materials - 3.4% Aceto 60,010 660,110 Arch Chemicals 24,000 525,000 Brady (W.H.) Cl. A 121,100 3,935,750 Calgon Carbon 50,000 387,500 Chemfab(a) 133,219 1,581,976 Donaldson Company 26,000 513,500 Hauser(a) 6,000 10,500 Hawkins Chemical 301,278 2,372,564 LILLY INDUSTRIES CL. A 339,283 10,199,695 MacDermid 204,131 4,797,078 Valspar 10,000 337,500 ------------- 25,321,173 ------------- Textiles - 0.9% Delta Woodside Industries(a) 125,400 274,313 Fab Industries 175,500 1,864,687 Thomaston Mills Cl. A(a),(c) 327,800 358,531 Unifi(a) 319,800 3,957,525 Wellman 15,000 242,813 ------------- 6,697,869 ------------- Other Industrial Products - 0.7% BHA Group Holdings 123,209 1,201,288 Baldor Electric 62,900 1,171,512 Landauer 112,900 1,757,006 Myers Industries 34,862 374,767 Scott Technologies(a) 1,000 17,187 Steelcase Cl. A 50,000 850,000 ------------- 5,371,760 ------------- TOTAL (Cost $84,571,130) 110,193,347 ============= INDUSTRIAL SERVICES - 11.9% Advertising/Publishing - 0.6% Grey Advertising 4,717 2,452,840 True North Communications 48,000 2,112,000 ------------- 4,564,840 ------------- Commercial Services - 3.2% ABM Industries 77,500 1,782,500 Analytical Surveys(a) 5,000 15,469 CDI(a) 196,600 4,005,725 Carlisle Holdings(a) 251,100 1,844,016 Catalina Marketing(a) 10,000 1,020,000 Comdisco 78,700 1,755,994 Cornell Companies(a) 80,400 643,200 Fisher Companies 16,096 1,142,816 Hall Kinion & Associates(a) 5,000 166,563 Hardinge 106,600 1,112,637 INTERIM SERVICES(a) 292,900 5,198,975 Kelly Services Cl. A 5,000 115,625 Korn/Ferry International(a) 53,700 1,701,619 Manpower 30,800 985,600 Marketing Specialists(a) 124,900 218,575 MAXIMUS(a) 5,000 110,625 Modis Professional Services(a) 142,700 1,266,463 Open Plan Systems(a),(c) 392,600 748,394 Volt Information Sciences(a) 3,200 105,400 ------------- 23,940,196 ------------- Engineering and Construction - 1.0% Insituform Technologies Cl. A(a) 1,700 46,112 McDermott International 11,000 96,938 Morrison Knudsen(a) 510,100 3,698,225 Sevenson Environmental Services 265,720 2,972,742 Stone & Webster(a) 212,700 152,931 Todd Shipyards(a) 39,200 308,700 ------------- 7,275,648 -------------
22 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
SHARES VALUE ------ ----- INDUSTRIAL SERVICES (CONTINUED) Food/Tobacco Processors - 1.0% DIMON 253,600 $ 538,900 Farmer Bros. 26,000 4,550,000 Midwest Grain Products(a) 231,800 1,926,838 Seaboard 3,750 645,000 ------------- 7,660,738 ------------- Industrial Distribution - 0.9% Central Steel & Wire 3,699 1,856,898 Ritchie Bros. Auctioneers(a) 197,200 4,720,475 TBC(a) 21,300 98,512 ------------- 6,675,885 ------------- Printing - 1.7% Bowne & Co. 383,100 3,854,944 Ennis Business Forms 302,100 2,416,800 New England Business Service 224,200 3,643,250 Standard Register (The) 163,200 2,325,600 ------------- 12,240,594 ------------- Transportation and Logistics - 3.5% Airborne Freight 27,400 518,888 AirNet Systems(a) 325,900 1,486,919 Arnold Industries 418,348 5,046,323 C. H. Robinson Worldwide 25,000 1,237,500 CIRCLE INTERNATIONAL GROUP 266,725 6,701,466 EGL(a) 18,500 568,875 Fritz Companies(a) 343,600 3,543,375 Frozen Food Express Industries(a) 220,670 662,010 Hub Group Cl. A(a) 107,000 1,598,312 Kenan Transport 63,300 1,305,563 Landstar System(a) 5,000 297,812 Ocean Group 13,000 214,406 Pittston Brink's Group 236,213 3,233,165 ------------- 26,414,614 ------------- TOTAL (Cost $100,387,597) 88,772,515 ============= NATURAL RESOURCES - 7.1% Energy Services - 3.0% CARBO CERAMICS 149,100 5,237,138 Global Industries(a) 119,500 2,255,562 HELMERICH & PAYNE 135,200 5,053,100 Input/Output(a) 345,100 2,911,781 Nabors Industries(a) 29,600 1,230,250 Peerless Mfg.(c) 79,300 1,338,188 Tidewater 28,000 1,008,000 Valley National Gases(a) 30,100 146,737 Willbros Group(a) 483,700 3,325,437 ------------- 22,506,193 ------------- Gold - 0.1% MK Gold(a) 517,900 509,808 ------------- Oil and Gas - 3.2% Alberta Energy Company 20,000 810,000 BARRETT RESOURCES(a) 185,600 5,649,200 Tom Brown(a) 103,000 2,375,438 DENBURY RESOURCES(a) 1,154,700 5,990,006 Devon Energy 32,100 1,803,619 EOG Resources 10,000 335,000 PetroCorp(a) 124,400 870,800 PURE RESOURCES(a) 290,632 5,195,047 Renaissance Energy(a) 36,400 352,932 Toreador Resources 97,100 509,775 ------------- 23,891,817 ------------- Real Estate - 0.8% Alico 52,000 825,500 +Chelsea GCA Realty 87,000 3,006,938 Consolidated-Tomoka Land 13,564 164,463 Patriot Transportation Holding(a) 119,900 2,060,781 Vornado Realty Trust 10,000 347,500 ------------- 6,405,182 ------------- TOTAL (Cost $45,273,803) 53,313,000 ============= TECHNOLOGY - 17.1% Aerospace/Defense - 1.4% Curtiss-Wright 121,900 4,533,156 Special Metals(a) 676,300 1,775,288 Woodward Governor 138,600 3,924,112 ------------- 10,232,556 ------------- Components and Systems - 2.8% Cognex(a) 54,500 2,820,375 Dionex(a) 101,000 2,701,750 Echelon Corporation(a) 5,000 289,688 Ezenia!(a) 166,100 737,069 IFR Systems(a) 9,133 45,665 Imation Corporation(a) 52,000 1,527,500 Kronos(a) 19,600 509,600 Logitech International ADR (a),(b) 1,000 73,000 National Computer Systems 91,000 4,481,750 Newport 1,500 161,062 Perceptron(a) 242,100 824,653 Printronix(a) 2,800 36,750 Radiant Systems(a) 22,500 540,000 Rainbow Technologies(a) 32,800 1,594,900 SAES Getters ADR(b) 5,000 36,875 Scitex(a) 307,100 3,397,294 Vicor(a) 5,000 174,063 Zebra Technologies Cl.A(a) 25,000 1,107,812 ------------- 21,059,806 ------------- Distribution - 1.7% Arrow Electronics(a) 54,100 1,677,100 AVNET 105,926 6,276,116 Daisytek International(a) 65,300 616,269 Pioneer-Standard Electronics 118,925 1,754,144 Richardson Electronics 180,300 2,896,069 ------------- 13,219,698 ------------- IT Services - 1.6% American Management Systems(a) 46,800 1,536,356 AnswerThink(a) 50,000 831,250 Cambridge Technology Partners(a) 51,900 452,503 CIBER(a) 203,800 2,700,350 Complete Business Solutions(a) 23,200 407,450 Computer Horizons(a) 5,000 67,187 Concord Communications(a) 5,000 199,375 Gartner Group Cl.A(a) 70,000 840,000
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 23 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
SHARES VALUE ------ ----- TECHNOLOGY (CONTINUED) IT Services (continued) IMRglobal Corporation(a) 212,300 $ 2,773,169 Keane(a) 30,000 648,750 MarchFirst(a) 63,700 1,162,525 QRS Corporation(a) 7,500 184,219 Renaissance Worldwide(a) 50,000 78,125 Syntel(a) 24,400 244,000 ------------- 12,125,259 ------------- Internet Services - 0.1% FirstWorld Communications (Warrants) 1,054 68,510 NaviSite(a) 5,000 209,063 Online Resources & Communications(a) 72,500 466,719 ------------- 744,292 ------------- Semiconductors and Equipment - 4.4% BE Semiconductor Industries(a) 59,500 892,500 Benchmark Electronics(a) 20,900 764,156 Coherent(a) 38,300 3,212,413 Credence Systems(a) 20,600 1,136,862 Cymer(a) 14,500 692,375 Dallas Semiconductor 92,200 3,757,150 DuPont Photomasks(a) 35,000 2,397,500 ESS Technology(a) 14,800 214,600 Electroglas(a) 128,000 2,752,000 Exar(a) 46,150 4,023,703 Helix Technology 40,100 1,563,900 Intevac(a) 191,850 731,428 Kulicke & Soffa Industries(a) 30,400 1,805,000 Lam Research(a) 24,000 900,000 Micrel(a) 20,000 868,750 National Semiconductor(a) 1,000 56,750 Novellus Systems(a) 12,000 678,750 PCD(a) 124,600 967,597 QuickLogic Corporation(a) 2,500 55,625 Read-Rite(a) 5,000 11,094 Varian(a) 55,000 2,536,875 Varian Semiconductor Equipment Associates(a) 37,000 2,324,063 Veeco Instruments(a) 5,400 395,550 ------------- 32,738,641 ------------- Software - 4.1% ANSYS(a) 95,100 1,081,762 Aspen Technology(a) 39,400 1,516,900 Autodesk 72,100 2,500,969 Avant!(a) 51,000 955,453 BSQUARE Corporation(a) 200 4,487 Business Objects ADR (a),(b) 17,000 1,498,125 COMARCO(a) 1,400 45,500 +Covance(a) 246,900 2,175,806 Documentum(a) 5,000 446,875 J. D. Edwards & Company(a) 20,000 301,250 FileNet(a) 10,000 183,750 HNC Software(a) 10,000 617,500 Igate Capital(a) 12,200 167,750 Informix(a) 350,500 2,606,844 Integral Systems(a) 102,800 1,721,900 JDA Software Group(a) 194,500 3,731,969 MSC.Software(a) 128,800 1,199,450 Macromedia(a) 3,000 290,062 Manugistics Group(a) 12,000 561,000 National Instruments(a) 72,600 3,167,175 Pegasystems(a) 45,000 225,000 Peregrine Systems(a) 25,275 876,727 Phoenix Technologies(a) 3,800 61,988 Progress Software(a) 10,000 179,375 Project Software & Development(a) 7,000 126,000 Remedy(a) 10,600 590,950 SPSS(a) 27,000 786,375 +Salient 3 Communications Cl. A(a) 4,200 50,662 Structural Dynamics Research(a) 141,200 2,126,825 Tecnomatix Technologies(a) 10,000 136,250 West Teleservices(a) 5,000 126,563 Wind River Systems(a) 12,100 458,287 ------------- 30,519,529 ------------- Telecommunication - 1.0% AVT Corporation(a) 30,000 221,250 MCK Communications(a) 5,000 115,625 Plantronics(a) 28,100 3,245,550 REMEC(a) 46,600 1,951,375 Technical Communications(a),(c) 106,700 353,444 Technitrol 16,400 1,588,750 Visual Networks(a) 1,000 28,500 ------------- 7,504,494 ------------- TOTAL (Cost $79,171,455) 128,144,275 ============= MISCELLANEOUS - 4.8% TOTAL (Cost $31,999,160) 36,047,151 ============= TOTAL COMMON STOCKS (Cost $554,299,163) 681,387,294 ============= PREFERRED STOCKS - 0.6% Pioneer-Standard Electronics 6.75% Conv. 80,000 4,120,000 SVB Capital I 8.25% 20,000 400,000 ------------- TOTAL PREFERRED STOCKS (Cost $4,315,000) 4,520,000 =============
24 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ---------- ----- CORPORATE BONDS - 1.3% CHARMING SHOPPES 7.50% Conv. Sub. Note due 7/15/06 $ 3,694,000 $ 3,176,840 Dixie Group 7.00% Conv. Sub. Deb. due 5/15/12 681,000 435,840 FirstWorld Communications 0% (Step)(d) Sr. Note due 4/15/08 4,515,000 2,088,187 MSC.Software 7.875% Conv. Sub. Deb. due 8/18/04 2,765,000 2,377,900 Richardson Electronics 7.25% Conv. Sub. Deb. due 12/15/06 1,319,000 1,134,340 Sunglass Hut International 5.25% Conv. Sub. Note due 6/15/03 500,000 360,000 ------------ TOTAL CORPORATE BONDS (Cost $10,376,356) 9,573,107 ============ U.S. TREASURY OBLIGATIONS - 6.0% U. S. Treasury Note 4.875%, due 3/31/01 (Cost $44,922,656) 45,000,000 44,465,400 ============ REPURCHASE AGREEMENT - 0.9% State Street Bank & Trust Company, 5.50% dated 6/30/00, due 7/3/00, maturity value $7,003,208 (collateralized by U.S. Treasury Notes, 5.125% due 8/31/00, valued at $7,140,525) (Cost $7,000,000) $ 7,000,000 ============ TOTAL INVESTMENTS - 99.9% (Cost $620,913,175) 746,945,801 CASH AND OTHER ASSETS LESS LIABILITIES - 0.1% 745,722 ------------ NET ASSETS - 100.0% $747,691,523 ============
-------------------------------------------------------------------------------- (a) Non-income producing. (b) American Depository Receipt. (c) At June 30, 2000, the Fund owned 5% or more of the Company's outstanding voting securities thereby making the Company an Affiliated Company as that term is defined in the Investment Company Act of 1940. (d) Coupon rate of 0% to 4/2003; thereafter 13%. + New Additions in 2000. BOLD INDICATES THE FUND'S LARGEST 20 EQUITY HOLDINGS IN TERMS OF JUNE 30, 2000 MARKET VALUE. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $623,703,059. At June 30, 2000, net unrealized appreciation for all securities was $123,242,742, consisting of aggregate gross unrealized appreciation of $195,905,491 and aggregate gross unrealized depreciation of $72,662,749. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 25 ROYCE VALUE TRUST, INC.
----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED) ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $613,913,175) $739,945,801 Repurchase agreement (at cost and value) 7,000,000 Cash 655,940 Receivable for investments sold 5,335,917 Receivable for dividends and interest 1,507,242 Prepaid expenses 75,365 ----------------------------------------------------------------------------------------------------------------------------------- Total Assets 754,520,265 ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investments purchased 5,777,739 Payable for investment advisory fee 565,125 Preferred dividends accrued but not yet declared 266,222 Accrued expenses 219,656 ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 6,828,742 ----------------------------------------------------------------------------------------------------------------------------------- Net Assets $747,691,523 =================================================================================================================================== Net Assets applicable to Preferred Stock at(a)liquidation value of $25 per share $160,000,000 =================================================================================================================================== Net Assets applicable to Common Stock (net asset value per share - $16.17) $587,691,523 =================================================================================================================================== SUMMARY OF STOCKHOLDERS' EQUITY: 7.80% Cumulative Preferred Stock - par value $0.001 per share; 2,400,000 shares outstanding $ 2,400 7.30% Tax-Advantaged Cumulative Preferred Stock - par value $0.001 per share; 4,000,000 shares outstanding 4,000 Common Stock-par value $0.001 per share; 36,344,876 shares outstanding (150,000,000 shares authorized) 36,345 Additional paid-in capital 565,549,647 Undistributed net investment income 7,837,657 Accumulated net realized gain on investments 78,537,364 Net unrealized appreciation on investments 126,032,626 Quarterly and accrued distributions (30,308,516) ----------------------------------------------------------------------------------------------------------------------------------- Net Assets $747,691,523 ===================================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS ----------------------------------------------------------------------------------------------------------------------------------- Six months ended Year ended June 30, 2000 December 31, (unaudited) 1999 ------------------ ---------------- INVESTMENT OPERATIONS: Net investment income $ 3,662,347 $ 7,312,087 Net realized gain on investments 63,322,728 61,397,109 Net change in unrealized appreciation on investments (19,338,893) (2,262,846) ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from investment operations 47,646,182 66,446,350 ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (1,338,166) Net realized gain on investments - (10,641,834) Quarterly distributions* (5,990,000) - ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (5,990,000) (11,980,000) ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (5,152,339) Net realized gain on investments - (40,974,216) Quarterly distributions* (24,052,293) - ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (24,052,293) (46,126,555) ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders 17,159,205 27,625,539 ----------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS 34,763,094 35,965,334 NET ASSETS: Beginning of period 712,928,429 676,963,095 ----------------------------------------------------------------------------------------------------------------------------------- End of period (including undistributed net investment income of $7,837,657 and $4,175,310, respectively) $747,691,523 $712,928,429 ===================================================================================================================================
* To be allocated to net investment income and capital gains at year-end. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 26 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC.
------------------------------------------------------------------------------- STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) ------------------------------------------------------------------------------- INVESTMENT INCOME: Income: Dividends $ 4,949,826 Interest 2,404,628 ------------------------------------------------------------------------------- Total income 7,354,454 ------------------------------------------------------------------------------- Expenses: Investment advisory fees 3,435,746 Administrative and office facilities expenses 156,722 Stockholder reports 151,904 Custodian and transfer agent fees 115,024 Directors' fees 36,387 Professional fees 36,079 Other expenses 61,378 ------------------------------------------------------------------------------- Total expenses 3,993,240 Fees waived by investment adviser (301,133) ------------------------------------------------------------------------------- Net expenses 3,692,107 ------------------------------------------------------------------------------- Net investment income 3,662,347 ------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 63,322,728 Net change in unrealized appreciation on investments (19,338,893) ------------------------------------------------------------------------------- Net realized and unrealized gain on investments 43,983,835 ------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $ 47,646,182 ================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 27 ROYCE VALUE TRUST, INC. -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- This table is presented to show selected data for(a)share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.
Six months ended Years ended December 31, June 30, 2000 ------------------------------------------------------- (unaudited) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $15.77 $15.72 $16.91 $14.32 $13.56 $12.34 ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS(a): Net investment income 0.10 0.26 0.17 0.21 0.26 0.04 Net realized and unrealized gain on investments 1.24 1.65 0.67 3.85 1.92 2.70 ----------------------------------------------------------------------------------------------------------------------------------- Total investment operations 1.34 1.91 0.84 4.06 2.18 2.74 ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income -- (0.04) (0.03) (0.03) (0.01) -- Net realized gain on investments -- (0.32) (0.26) (0.15) (0.06) -- Quarterly distributions* (0.17) -- -- -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (0.17) (0.36) (0.29) (0.18) (0.07) -- ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income -- (0.15) (0.16) (0.19) (0.15) (0.03) Net realized gain on investments -- (1.22) (1.38) (1.02) (1.00) (1.26) Quarterly distributions* (0.68) -- -- -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (0.68) (1.37) (1.54) (1.21) (1.15) (1.29) ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders (0.09) (0.13) (0.09) (0.08) (0.11) (0.11) Effect of Preferred Stock offerings or rights offering -- -- (0.11) -- (0.09) (0.12) ----------------------------------------------------------------------------------------------------------------------------------- Total capital stock transactions (0.09) (0.13) (0.20) (0.08) (0.20) (0.23) ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD(a) $16.17 $15.77 $15.72 $16.91 $14.32 $13.56 ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $13.625 $13.063 $13.750 $15.063 $12.625 $11.875 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b): Net Asset Value (a) 7.8%*** 11.7% 3.3% 27.5% 15.5% 22.6% Market Value 9.6%*** 5.7% 1.5% 28.8% 16.3% 20.5% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c,d) 1.31%** 1.39% 1.31% 1.12% 1.28% 2.01% Management fee expense 1.11%** 1.18% 1.10% 0.39% 0.39% 0.97% Interest expense -- -- -- 0.45% 0.64% 0.75% Other operating expenses 0.20%** 0.21% 0.21% 0.28% 0.25% 0.29% Net investment income 1.30%** 1.47% 1.11% 1.53% 1.27% 0.34% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $747,692 $712,928 $676,963 $554,231 $441,837 $338,970 Portfolio Turnover Rate 22%*** 41% 43% 29% 34% 32% PREFERRED STOCK: Total shares outstanding 6,400,000 6,400,000 6,400,000 2,400,000 2,400,000 -- Asset coverage per share $116.83 $111.40 $105.78 $165.51 $120.15 -- Liquidation preference per share $25.00 $25.00 $25.00 $25.00 $25.00 -- Average market value per share: 7.80% Cumulative (e) $22.70 $24.98 $25.91 $25.70 $25.20 -- 7.30% Tax-Advantaged Cumulative (e) $21.70 $24.24 $25.43 -- -- -- NOTES: Total amount outstanding (in thousands) -- -- -- $27,801 $40,000 $40,000 Asset coverage per note -- -- -- $2,090.89 $1,201.51 $943.93 Average market value per note (e) -- -- -- $107.69 $100.68 $96.92
------------------------------------------------------------------------------- (a) From June 21, 1995 through December 31, 1997, Net Asset Value per share, Net Asset Value Total Returns and Income from Investment Operations were calculated assuming that the then outstanding convertible notes had been fully converted, except when the effect of doing so resulted in a higher Net Asset Value per share than would have been calculated without such assumption. If it were not assumed the Notes had been converted, the Net Asset Value per share would have been increased by $0.31, $0.17, and $0.09 at December 31, 1997, 1996 and 1995, respectively. (b) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions and fully participated in primary subscriptions for rights offerings. (c) Expense ratios based on total average net assets were 1.02%, 1.06%, 1.06%, 0.99%, 1.20% and 2.01% for the periods ended June 30, 2000, and December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.42%, 1.48%, 1.34%, 1.14%, 1.31% and 2.04% for the periods ended June 30, 2000, and December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (e) The average of month-end market values during the period. * To be allocated to net investment income and capital gains at year-end. ** Annualized. *** Not annualized. 28 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC. ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Royce Value Trust, Inc. ("the Fund") was incorporated under the laws of the State of Maryland on July 1, 1986 as a diversified closed-end investment company. The Fund commenced operations on November 26, 1986. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. VALUATION OF INVESTMENTS: Securities listed on an exchange or on the Nasdaq National Market System (NMS) are valued on the basis of the 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 NMS 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 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 and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes. EXPENSES: The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees otherwise payable. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement. 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". DISTRIBUTIONS: The Fund currently has a policy of paying quarterly distributions on the Fund's Common Stock. Distributions are currently being made at the annual rate of 9% of the rolling average of the prior four calendar quarter-end NAVs of the Fund's Common Stock, with the fourth quarter distribution being the greater of 2.25% of the rolling average or the distribution required by IRS regulations. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. 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 undistributed at fiscal year end is 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, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). 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. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 29 ROYCE VALUE TRUST, INC. ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ------------------------------------------------------------------------------- CAPITAL STOCK: The Fund currently has two issues of Preferred Stock outstanding: 7.80% Cumulative Preferred Stock and 7.30% Tax-Advantaged Cumulative Preferred Stock. Both issues of Preferred Stock have a liquidation preference of $25.00 per share. Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing Preferred Stock. The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital. The Fund issued 1,273,095 and 2,191,520 shares of Common Stock as reinvestment of distributions by Common Stockholders for the periods ended June 30, 2000 and December 31, 1999, respectively. INVESTMENT ADVISORY AGREEMENT: As compensation for its services under the Investment Advisory Agreement, Royce & Associates, Inc. ("Royce") receives a fee comprised of a Basic Fee ("Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 600 SmallCap Index ("S&P 600"). The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the month-end net assets of the Fund for the applicable performance period. The performance period for each month will be from July 1, 1996 to the most recent month-end, until the Investment Advisory Agreement has been in effect for 60 full calendar months, when it will become a rolling 60-month period ending with the most recent calendar month. The Basic Fee for each month is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the S&P 600 for the performance period by more than two percentage points. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and is payable if the investment performance of the Fund exceeds the percentage change in the investment record of the S&P 600 by 12 or more percentage points for the performance period, and the minimum monthly fee rate as adjusted for performance is 1/12 of .5% and is payable if the percentage change in the investment record of the S&P 600 exceeds the investment performance of the Fund by 12 or more percentage points for the performance period. Notwithstanding the foregoing, Royce is not entitled to receive any fee for any month when the investment performance of the Fund for the rolling 36-month period ending with such month is negative. In the event that the Fund's investment performance for such a performance period is less than zero, Royce will not be required to refund to the Fund any fee earned in respect of any prior performance period. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to an issue of the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the applicable Preferred Stock dividend rate. For the period ended June 30, 2000, the Fund accrued and paid Royce advisory fees totaling $3,134,613, which is net of $301,133 voluntarily waived by Royce. PURCHASES AND SALES OF INVESTMENT SECURITIES: For the period ended June 30, 2000, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $154,956,209 and $161,534,560, respectively. 30 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE VALUE TRUST, INC. ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ------------------------------------------------------------------------------- TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES: An "Affiliated Company", as defined in the Investment Company Act of 1940, is a company in which a Fund owns 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the period ended June 30, 2000:
================================================================================================================================== Purchases Sales ------------------- ----------------- Affiliated Company Shares Cost Shares Cost Realized Gain (Loss) Dividend Income ------------------ ---------- -------- ------ ----- -------------------- --------------- Open Plan Systems 38,300 $81,234 -- -- -- -- Peerless Mfg. -- -- -- -- -- $19,825 Rockshox -- -- -- -- -- -- Technical Communications -- -- -- -- -- -- Thomaston Mills Cl. A -- -- -- -- -- -- ==================================================================================================================================
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 31
ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) -------------------------------------------------------------------------------- COMMON STOCKS - 88.3% SHARES VALUE ------ ----- CONSUMER PRODUCTS - 10.2% Apparel and Shoes - 2.0% Garan 46,700 $ 1,056,588 Kleinert's (a,c) 14,200 170,400 Oshkosh B'Gosh Cl. A 75,800 1,241,225 WEYCO GROUP 68,400 1,744,200 -------------- 4,212,413 -------------- Collectibles - 0.8% Action Performance (a) 20,000 145,000 +The Boyds Collection (a) 137,000 1,164,500 Enesco Group 93,500 444,125 -------------- 1,753,625 -------------- Food/Beverage/Tobacco - 1.3% 800 JR Cigar (a) 173,500 1,713,312 Smithfield Companies (The) (d) 148,400 973,875 -------------- 2,687,187 -------------- Home Furnishing/Appliances - 1.7% Bassett Furniture Industries 92,600 1,169,075 Lifetime Hoan 120,054 960,432 Mikasa 99,400 1,093,400 Mity-Lite (a) 21,300 282,225 -------------- 3,505,132 -------------- Publishing - 1.1% MARVEL ENTERPRISES (a) 288,600 1,803,750 Topps Company (The) (a) 42,000 483,000 -------------- 2,286,750 -------------- Sports and Recreation - 0.7% Allen Organ Cl. B 5,600 326,900 Johnson Outdoors Cl. A (a) 60,000 423,750 Lund International Holdings (a) 146,700 696,825 -------------- 1,447,475 -------------- Other Consumer Products - 2.6% Koala Corporation (a) 80,000 1,130,000 Lazare Kaplan International (a) 110,100 894,563 MATTHEWS INTERNATIONAL CL. A 81,000 2,349,000 Velcro Industries 81,500 921,969 -------------- 5,295,532 -------------- TOTAL (Cost $16,909,530) 21,188,114 ============== CONSUMER SERVICES - 3.8% Leisure/Entertainment - 0.6% +Coachmen Industries 117,900 1,355,850 -------------- Restaurants/Lodgings - 0.5% Chart House Enterprises (a) 20,000 110,000 Diedrich Coffee (a) 93,600 193,050 Pizza Inn 202,800 722,475 -------------- 1,025,525 -------------- Retail Stores - 2.7% Bombay Company (The) (a) 46,600 136,887 Brookstone (a) 13,000 124,719 Buckle (The) (a) 66,200 777,850 Cato Cl. A 100,000 1,162,500 Dress Barn (The) (a) 21,700 480,113 Noodle Kidoodle (a) 22,500 67,500 Piercing Pagoda (a) 3,000 43,500 Restoration Hardware (a) 60,300 331,650 SHARES VALUE ------ ----- Stein Mart (a) 76,400 $ 783,100 Suzy Shier 156,800 370,811 Urban Outfitters (a) 153,500 1,352,719 -------------- 5,631,349 -------------- TOTAL (Cost $8,809,558) 8,012,724 ============== FINANCIAL INTERMEDIARIES - 7.9% Banking - 0.6% First Midwest Financial 1,000 9,594 HomeFed (a) 1,108,521 742,709 Iron & Glass Bancorp 8,580 157,657 Queen City Investments (a) 948 331,800 -------------- 1,241,760 -------------- Closed End Funds - 0.2% Central Fund of Canada Cl. A 140,000 498,750 -------------- Insurance - 7.1% Capitol Transamerica 107,865 1,274,155 Highlands Insurance Group (a) 88,700 831,563 +IPC Holdings (a) 80,600 1,128,400 Independence Holding 33,300 407,925 Medical Assurance (a) 139,500 1,569,375 MIIX Group 124,900 1,498,800 NYMAGIC 125,200 1,784,100 Navigators Group (a) 153,400 1,380,600 Nobel Insurance (a) 183,000 45,750 PICO Holdings (a) 16,900 237,656 PMA Capital Cl. A 57,109 1,085,071 PXRE Group 75,164 1,014,714 Philadelphia Consolidated Holding (a) 54,200 911,237 Trenwick Group 56,500 822,781 Wellington Underwriting 444,712 672,894 -------------- 14,665,021 -------------- TOTAL (Cost $16,563,735) 16,405,531 ============== FINANCIAL SERVICES - 3.6% Information and Processing - 1.6% BARRA (a) 58,250 2,887,016 CCC Information Services Group (a) 40,400 429,250 -------------- 3,316,266 -------------- Insurance Brokers - 1.9% BLANCH (E.W.) HOLDINGS 93,200 1,893,125 Clark/Bardes Holdings (a) 55,500 915,750 CorVel (a) 10,000 246,875 Hilb, Rogal & Hamilton 30,300 1,051,031 -------------- 4,106,781 -------------- Investment Management - 0.1% GAINSCO 25,000 125,000 -------------- TOTAL (Cost $5,120,187) 7,548,047 ============== HEALTH - 7.0% Commercial Services - 1.8% ChiRex (a) 56,500 1,130,000 ICON ADR (a,b) 1,000 16,625 PAREXEL International (a) 144,400 1,380,825 Young Innovations (a) 65,900 1,177,963 -------------- 3,705,413 -------------- 32 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) -------------------------------------------------------------------------------- SHARES VALUE ------ ----- HEALTH (CONTINUED) Drugs and Biotech - 4.3% Aurora Biosciences (a) 4,800 $ 327,300 BioReliance (a) 135,800 662,025 CEPHALON (a) 32,000 1,916,000 Geron (a) 6,000 192,000 +Lexicon Genetics (a) 28,500 979,687 MYRIAD GENETICS (a) 15,000 2,221,172 +Organogenesis (a) 71,200 814,350 Scotia Holdings (a) 80,000 155,547 ViroPharma (a) 21,000 328,125 Visible Genetics (a) 29,500 1,331,188 -------------- 8,927,394 -------------- Personal Care - 0.4% +Chattem (a) 62,400 854,100 -------------- Surgical Products and Devices - 0.5% Allied Healthcare Products (a) 97,200 328,050 Biopure Corporation Cl. A (a) 10,000 188,125 NMT Medical (a) 126,900 380,700 Orthofix International (a) 12,000 214,500 -------------- 1,111,375 -------------- TOTAL (Cost $8,801,924) 14,598,282 ============== INDUSTRIAL PRODUCTS - 13.4% Building Systems and Components - 2.7% Falcon Products 72,000 684,000 LSI Industries 25,900 393,356 Mueller (Paul) 16,650 416,250 SIMPSON MANUFACTURING (a) 46,100 2,204,156 Skyline 32,100 690,150 Thor Industries 55,200 1,159,200 -------------- 5,547,112 -------------- Construction Materials - 3.1% ASH GROVE CEMENT COMPANY 20,000 2,020,000 FLORIDA ROCK INDUSTRIES 55,000 1,959,375 Monarch Cement 50,410 882,175 Puerto Rican Cement Company 58,200 1,618,687 -------------- 6,480,237 -------------- Industrial Components - 1.5% Herley Industries (a) 50,000 943,750 PENN ENGINEERING & MANUFACTURING 39,700 1,399,425 PENN ENGINEERING & MANUFACTURING CL. A 15,400 496,650 Scientific Technologies 10,700 60,856 Woodhead Industries 10,000 182,500 -------------- 3,083,181 -------------- Machinery - 0.2% Oshkosh Truck 10,500 375,375 -------------- Paper and Packaging - 0.5% Liqui-Box 13,100 648,450 Tuscarora 32,500 507,813 -------------- 1,156,263 -------------- Pumps, Valves and Bearings - 1.5% Denison International ADR (a,b) 113,500 1,432,937 NN 80,500 845,250 Sun Hydraulics 90,450 757,519 -------------- 3,035,706 -------------- SHARES VALUE ------ ----- Specialty Chemicals and Materials - 2.2% Aceto 58,421 $ 642,631 Balchem 10,000 112,500 CFC International (a) 144,700 1,121,425 Chemfab (a) 88,100 1,046,187 Hauser (a) 45,400 79,450 Hawkins Chemical 122,667 966,003 Synalloy Corporation 95,700 680,367 -------------- 4,648,563 -------------- Other Industrial Products - 1.7% BHA Group Holdings 126,915 1,237,421 CompX International Cl. A 42,700 867,344 FLIR Systems (a) 46,700 303,550 Landauer 32,300 502,669 Myers Industries 52,459 563,934 -------------- 3,474,918 -------------- TOTAL (Cost $20,552,822) 27,801,355 ============== INDUSTRIAL SERVICES - 14.3% Commercial Services - 5.9% Applied Analytical Industries (a) 103,400 991,994 Business Resource Group (a) 190,000 1,211,250 Carlisle Holdings (a) 128,400 942,937 Cordiant Communications Group ADR (b) 7,000 194,250 Cornell Companies (a) 111,800 894,400 Exponent (a) 63,200 529,300 Hagler Bailly (a) 20,000 100,000 Marketing Specialists (a) 30,100 52,675 NEW HORIZONS WORLDWIDE (a) 92,600 2,151,503 On Assignment (a) 30,000 915,000 RCM Technologies (a) 94,800 699,150 RemedyTemp Cl. A (a) 102,300 1,253,175 StaffMark (a) 55,000 367,813 Tyler Technologies (a) 272,300 697,769 +Wackenhut Corrections (a) 157,300 1,179,750 -------------- 12,180,966 -------------- Engineering and Construction - 0.7% Sevenson Environmental Services 125,120 1,399,780 Stone & Webster (a) 85,100 61,187 -------------- 1,460,967 -------------- Food/Tobacco Processors - 1.5% Farmer Bros. 4,000 700,000 Midwest Grain Products (a) 121,122 1,006,827 Seneca Foods Cl. A (a) 13,000 151,125 Seneca Foods Cl. B (a) 39,200 467,950 Standard Commercial 166,755 760,820 -------------- 3,086,722 -------------- Industrial Distribution - 0.1% Lawson Products 10,000 246,250 -------------- Printing - 1.8% +Bowne & Co. 110,000 1,106,875 Ennis Business Forms 163,900 1,311,200 New England Business Service 71,500 1,161,875 Schawk Cl. A 26,300 246,563 -------------- 3,826,513 -------------- THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 33 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) -------------------------------------------------------------------------------- SHARES VALUE ------ ----- INDUSTRIAL SERVICES (CONTINUED) Transportation and Logistics - 4.3% AirNet Systems (a) 252,800 $ 1,153,400 Aramex International (a) 68,600 686,000 Circle International Group 62,100 1,560,262 FORWARD AIR (a) 54,900 2,196,000 +Fritz Companies (a) 135,500 1,397,344 Kenan Transport 34,800 717,750 Knight Transportation (a) 48,700 709,194 Pittston Brink's Group 39,365 538,808 -------------- 8,958,758 -------------- TOTAL (Cost $29,983,936) 29,760,176 ============== NATURAL RESOURCES - 8.6% Energy Services - 3.8% CARBO CERAMICS 52,600 1,847,575 Dril-Quip (a) 23,800 1,112,650 GulfMark Offshore (a) 49,600 1,215,200 Input/Output (a) 200,600 1,692,562 Lufkin Industries 25,000 396,875 MarkWest Hydrocarbon (a) 15,200 128,250 National-Oilwell (a) 3,385 111,282 Peerless Mfg. 21,600 364,500 Willbros Group (a) 150,000 1,031,250 -------------- 7,900,144 -------------- Gold - 0.3% MK Gold (a) 603,700 594,267 -------------- Oil and Gas - 4.1% BONAVISTA PETROLEUM (a) 105,000 1,844,595 DENBURY RESOURCES (a) 418,300 2,169,931 Evergreen Resources (a) 20,000 592,500 PetroCorp (a) 203,200 1,422,400 PURE RESOURCES (a) 140,724 2,515,441 -------------- 8,544,867 -------------- Real Estate - 0.4% Liberte Investors 134,300 428,081 Patriot Transportation Holding (a) 27,700 476,094 -------------- 904,175 -------------- TOTAL (Cost $11,740,682) 17,943,453 ============== TECHNOLOGY 14.2% Aerospace/Defense - 2.5% Curtiss-Wright 35,000 1,301,563 DUCOMMUN (a) 165,200 1,972,075 +HEICO 75,000 1,068,750 Special Metals (a) 154,300 405,037 Woodward Governor 14,000 396,375 -------------- 5,143,800 -------------- Components and Systems - 2.8% CSP (a) 63,581 508,648 Kronos (a) 42,500 1,105,000 MOCON 50,200 282,375 Perceptron (a) 152,100 518,091 Performance Technologies (a) 24,750 210,375 Printronix (a) 20,000 262,500 Rainbow Technologies (a) 15,300 743,963 SBS Technologies (a) 26,600 982,537 SHARES VALUE ------ ----- SIPEX Corporation (a) 20,000 $ 553,750 TransAct Technologies (a) 68,200 741,675 -------------- 5,908,914 -------------- Distribution - 1.7% Kent Electronics (a) 7,800 232,538 +Pioneer-Standard Electronics 57,000 840,750 RICHARDSON ELECTRONICS 158,500 2,545,906 -------------- 3,619,194 -------------- IT Services - 0.5% Alternative Resources (a) 25,000 46,875 Analysts International 15,000 139,687 CACI International (a) 5,000 97,500 Computer Task Group 55,000 278,438 Intelligroup (a) 5,000 60,000 Metro Information Services (a) 10,000 100,000 SCB Computer Technology (a) 6,600 3,894 Syntel (a) 42,200 422,000 -------------- 1,148,394 -------------- Internet Services - 0.8% +internet.com (a) 77,500 1,525,781 Online Resources & Communications (a) 24,000 154,500 -------------- 1,680,281 -------------- Semiconductors and Equipment - 2.3% Aetrium (a) 10,000 57,500 Elamex (a) 70,200 210,600 Electroglas (a) 20,800 447,200 Exar (a) 8,500 741,094 Helix Technology 9,500 370,500 Intevac (a) 111,450 424,903 PCD (a) 143,800 1,116,697 Photronics (a) 29,750 844,156 Robotic Vision Systems (a) 20,000 360,000 Xicor (a) 25,000 167,187 -------------- 4,739,837 -------------- Software - 3.2% Aladdin Knowledge Systems (a) 37,300 589,806 ANSYS (a) 94,500 1,074,938 Applix (a) 20,000 155,000 Igate Capital (a) 15,200 209,000 Integral Systems (a) 58,300 976,525 JDA Software Group (a) 86,200 1,653,962 MSC.Software (a) 99,700 928,456 SPSS (a) 30,700 894,138 Sapiens International (a) 10,000 63,125 -------------- 6,544,950 -------------- Telecommunication - 0.4% Globecomm Systems (a) 29,000 398,750 REMEC (a) 11,600 485,750 -------------- 884,500 -------------- TOTAL (Cost $21,913,394) 29,669,870 ============== UTILITIES 0.3% EnergySouth 30,200 570,025 -------------- TOTAL (Cost $592,891) 570,025 ============== 34 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) -------------------------------------------------------------------------------- SHARES VALUE ------ ----- MISCELLANEOUS - 5.0% TOTAL (Cost $10,269,201) $ 10,398,681 ============== TOTAL COMMON STOCKS (Cost $151,257,860) 183,896,258 ============== PREFERRED STOCK - 0.3% Seneca Foods Conv. (a) (Cost $623,500) 51,250 582,969 ============== PRINCIPAL AMOUNT ------ CORPORATE BOND - 0.3% MSC.Software 7.875% Conv. Sub. Deb. due 8/18/04 (Cost $593,250) $ 700,000 602,000 ============== U.S. TREASURY OBLIGATIONS - 9.1% U.S. Treasury Notes 6.25%, due 8/31/00 5,000,000 5,001,550 4.875%, due 3/31/01 9,000,000 8,893,080 6.25%, due 8/31/02 5,000,000 4,982,800 -------------- TOTAL U.S. TREASURY OBLIGATIONS (Cost $18,999,766) 18,877,430 ============== VALUE ----- REPURCHASE AGREEMENT - 0.9% State Street Bank & Trust Company, 5.50% dated 6/30/00, due 7/3/00, maturity value $2,000,917 (collateralized by U.S. Treasury Bonds, 8.125% due 8/15/21, valued at $2,041,575) (Cost $2,000,000) $ 2,000,000 ============== TOTAL INVESTMENTS - 98.9% (Cost $173,474,376) 205,958,657 CASH AND OTHER ASSETS LESS LIABILITIES - 1.1% 2,236,498 -------------- NET ASSETS - 100.0% $208,195,155 ==============
-------------------------------------------------------------------------------- (a) Non-income producing. (b) American Depository Receipt. (c) A security for which market quotations are no longer readily available represents 0.08% of net assets. This security has been valued at its fair value under procedures established by the Fund's Board of Directors. (d) At June 30, 2000, the Fund owned 5% or more of the Company's outstanding voting securities thereby making the Company an Affiliated Company as the term is defined in the Investment Company Act of 1940. + New Additions in 2000. BOLD INDICATES THE FUND'S LARGEST 20 EQUITY HOLDINGS IN TERMS OF JUNE 30, 2000 MARKET VALUE. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $173,731,332. At June 30, 2000, net unrealized appreciation for all securities was $32,227,325, consisting of aggregate gross unrealized appreciation of $47,120,279 and aggregate gross unrealized depreciation of $14,892,954. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 35 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
ASSETS: Investments at value (identified cost $171,474,376) $203,958,657 Repurchase agreement (at cost and value) 2,000,000 Cash 224,296 Receivable for investments sold 2,961,815 Receivable for dividends and interest 436,130 Prepaid expenses 29,851 ------------------------------------------------------------------------------------------------------------------------------------ Total Assets 209,610,749 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Payable for investments purchased 1,103,886 Payable for investment advisory fee 152,101 Preferred dividends accrued but not yet declared 68,889 Accrued expenses 90,718 ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 1,415,594 ------------------------------------------------------------------------------------------------------------------------------------ Net Assets $208,195,155 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Net Assets applicable to Preferred Stock at a liquidation value of $25 per share $ 40,000,000 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Net Assets applicable to Common Stock (net asset value per share - $12.23) $168,195,155 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF STOCKHOLDERS' EQUITY: 7.75% Cumulative Preferred Stock - par value $0.001 per share; 1,600,000 shares outstanding $ 1,600 Common Stock - par value $0.001 per share; 13,755,988 shares outstanding (150,000,000 shares authorized) 13,756 Additional paid-in capital 141,768,425 Undistributed net investment income 1,100,675 Accumulated net realized gain on investments 34,445,307 Net unrealized appreciation on investments 32,484,281 Quarterly and accrued distributions (1,618,889) ------------------------------------------------------------------------------------------------------------------------------------ Net Assets $208,195,155 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ Six months ended Year ended June 30, 2000 December 31, (unaudited) 1999 ----------------- -------------- INVESTMENT OPERATIONS: Net investment income $ 840,080 $ 1,592,653 Net realized gain on investments 25,418,582 10,265,741 Net change in unrealized appreciation on investments (7,782,378) 8,091,588 ------------------------------------------------------------------------------------------------------------------------------------ Net increase in net assets from investment operations 18,476,284 19,949,982 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (707,110) Net realized gain on investments - (2,392,890) Quarterly distributions* (1,550,000) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders (1,550,000) (3,100,000) ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (834,803) Net realized gain on investments - (2,800,617) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders - (3,635,420) ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders - 2,559,108 ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN NET ASSETS 16,926,284 15,773,670 NET ASSETS: Beginning of period 191,268,871 175,495,201 ------------------------------------------------------------------------------------------------------------------------------------ End of period (including undistributed net investment income of $1,100,675 and $260,595, respectively) $208,195,155 $191,268,871 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------
* To be allocated to net investment income and capital gains at year-end. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 36 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE MICRO-CAP TRUST, INC. --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Income: Dividends $ 725,740 Interest 1,039,189 ------------------------------------------------------------------------------------------------------------------------------------ Total income 1,764,929 ------------------------------------------------------------------------------------------------------------------------------------ Expenses: Investment advisory fees 709,573 Custodian and transfer agent fees 61,646 Administrative and office facilities expenses 42,609 Stockholder reports 39,956 Professional fees 18,297 Directors' fees 17,246 Other expenses 35,522 ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 924,849 ------------------------------------------------------------------------------------------------------------------------------------ Net investment income 840,080 ------------------------------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 25,418,582 Net change in unrealized appreciation on investments (7,782,378) ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 17,636,204 ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $18,476,284 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 37 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.
Six months ended Years ended December 31, June 30, 2000 -------------------------------------------------------- (unaudited) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $11.00 $10.06 $10.84 $9.38 $8.89 $7.58 ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS: Net investment income 0.06 0.12 0.13 0.17 0.09 0.02 Net realized and unrealized gain (loss) on investments and foreign currency 1.28 1.35 (0.36) 2.61 1.32 1.69 ------------------------------------------------------------------------------------------------------------------------------------ Total investment operations 1.34 1.47 (0.23) 2.78 1.41 1.71 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income -- (0.05) (0.06) (0.02) -- -- Net realized gain on investments and foreign currency -- (0.18) (0.18) (0.12) -- -- Quarterly distributions* (0.11) -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders (0.11) (0.23) (0.24) (0.14) -- -- ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income -- (0.06) (0.07) (0.16) (0.10) (0.02) Net realized gain on investments and foreign currency -- (0.21) (0.22) (0.84) (0.70) (0.34) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders -- (0.27) (0.29) (1.00) (0.80) (0.36) ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders -- (0.03) (0.02) (0.06) (0.12) (0.04) Effect of Preferred Stock offering -- -- -- (0.12) -- -- ------------------------------------------------------------------------------------------------------------------------------------ Total capital stock transactions -- (0.03) (0.02) (0.18) (0.12) (0.04) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $12.23 $11.00 $10.06 $10.84 $9.38 $8.89 ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE, END OF PERIOD $10.063 $9.00 $8.875 $10.125 $8.25 $8.00 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (a): Net Asset Value 11.2%*** 12.7% (4.1)% 27.1% 16.6% 22.9% Market Value 11.8%*** 4.5% (9.4)% 35.0% 13.9% 19.8% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (b,c) 1.16%** 1.27% 1.18% 0.83% 0.85% 1.36% Management fee expense 0.89%** 0.91% 0.80% 0.40% 0.47% 0.77% Other operating expenses 0.27%** 0.36% 0.38% 0.43% 0.38% 0.59% Net investment income 1.05%** 1.20% 1.21% 1.77% 0.88% 0.26% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $208,195 $ 191,269 $ 175,495 $ 182,362 $ 113,953 $ 100,065 Portfolio Turnover Rate 29%*** 49% 44% 34% 51% 51% PREFERRED STOCK: Total shares outstanding 1,600,000 1,600,000 1,600,000 1,600,000 -- -- Asset coverage per share $130.12 $119.54 $109.68 $113.98 -- -- Liquidation preference per share $25.00 $25.00 $25.00 $25.00 -- -- Average market value per share (d) $22.41 $24.67 $25.40 $25.56 -- -- ------------------------------------------------------------------------------------------------------------------------------------
(a) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions. (b) Expense ratios based on total average net assets were 0.93%, 0.98%, 0.92%, 0.72% , 0.85% and 1.36% for the periods ended June 30, 2000, and December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (c) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.44% and 1.24% for the years ended December 31, 1999 and 1998, respectively. (d) The average of month-end market values during the period. * To be allocated to net investment income and capital gains at year-end. ** Annualized. *** Not annualized. 38 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Royce Micro-Cap Trust, Inc. (the "Fund") was incorporated under the laws of the State of Maryland on September 9, 1993 as a diversified closed-end investment company. The Fund commenced operations on December 14, 1993. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. VALUATION OF INVESTMENTS: Securities listed on an exchange or on the Nasdaq National Market System (NMS) are valued on the basis of the 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 NMS 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 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 and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes. EXPENSES: The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees otherwise payable. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement. 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". DISTRIBUTIONS: Distributions to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. 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 undistributed at fiscal year end is 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, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). 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. CAPITAL STOCK: The Fund currently has 1,600,000 shares of 7.75% Cumulative Preferred Stock outstanding. The stock has a liquidation preference of $25.00 per share. Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing the Preferred Stock. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 39 ROYCE MICRO-CAP TRUST, INC. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends on the shares of Preferred Stock are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital. The Fund issued 291,429 shares of Common Stock as reinvestment of distributions by Common Stockholders for the year ended December 31, 1999. INVESTMENT ADVISORY AGREEMENT: As compensation for its services under the Investment Advisory Agreement, Royce & Associates, Inc. ("Royce") receives a fee comprised of a Basic Fee ("Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the Russell 2000. The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the month-end net assets of the Fund for the rolling 36-month period ending with such month. The Basic Fee for each month is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the Russell 2000 for the performance period by more than two percentage points. The performance period for each such month is a rolling 36-month period ending with such month. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and is payable if the investment performance of the Fund exceeds the percentage change in the investment record of the Russell 2000 by 12 or more percentage points for the performance period, and the minimum monthly fee rate as adjusted for performance is 1/12 of .5% and is payable if the percentage change in the investment record of the Russell 2000 exceeds the investment performance of the Fund by 12 or more percentage points for the performance period. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the Preferred Stock's dividend rate. For the period ended June 30, 2000, the Fund accrued and paid Royce advisory fees totaling $709,573. PURCHASES AND SALES OF INVESTMENT SECURITIES: For the period ended June 30, 2000, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $58,657,110 and $55,793,323, respectively. TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES: An "Affiliated Company", as defined in the Investment Company Act of 1940, is a company in which a Fund owns 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the period ended June 30, 2000:
------------------------------------------------------------------------------------------------------------------------------------ Purchases Sales ------------------ ------------------ Affiliated Company Shares Cost Shares Cost Realized Gain (Loss) Dividend Income ------------------ ------ ---- ------ ---- ------------------- -------------- Smithfield Companies (The) -- -- -- -- -- $10,388 ------------------------------------------------------------------------------------------------------------------------------------
40 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE FOCUS TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
COMMON STOCKS - 78.4% SHARES VALUE ------- ----- CONSUMER PRODUCTS - 4.7% Apparel and Shoes - 0.1% +Polo Ralph Lauren Cl. A(a) 5,000 $ 71,250 ----------- Sports and Recreation - 4.6% OAKLEY(a) 287,800 3,309,700 ----------- TOTAL (Cost $2,296,531) 3,380,950 ========== CONSUMER SERVICES - 5.7% Retail Stores - 5.7% CHARMING SHOPPES(a) 689,000 3,509,594 Claire's Stores 10,000 192,500 +Consolidated Stores(a) 30,000 360,000 ----------- TOTAL (Cost $3,742,531) 4,062,094 ========== FINANCIAL INTERMEDIARIES - 8.7% Insurance - 8.7% MEDICAL ASSURANCE(a) 186,555 2,098,744 WHITE MOUNTAINS INSURANCE GROUP 16,000 2,560,000 ZENITH NATIONAL INSURANCE 73,600 1,564,000 ----------- TOTAL (Cost $6,703,383) 6,222,744 ========== FINANCIAL SERVICES - 6.8% Insurance Brokers - 6.5% BLANCH (E.W.) HOLDINGS 143,000 2,904,688 GALLAGHER (ARTHUR J.) & COMPANY 41,000 1,722,000 ----------- 4,626,688 ----------- Investment Management - 0.3% Phoenix Investment Partners 20,000 210,000 ----------- TOTAL (Cost $4,015,581) 4,836,688 ========== HEALTH - 4.4% Drugs and Biotech - 0.2% +Dura Pharmaceuticals(a) 10,000 143,750 ----------- Surgical Products and Devices - 4.2% ARROW INTERNATIONAL 90,700 3,038,450 ----------- TOTAL (Cost $2,583,784) 3,182,200 ========== INDUSTRIAL PRODUCTS - 15.6% Building Systems and Components - 6.2% SIMPSON MANUFACTURING(a) 55,000 2,629,687 +THOR INDUSTRIES 84,600 1,776,600 ----------- 4,406,287 ----------- Construction Materials - 5.0% FLORIDA ROCK INDUSTRIES 100,000 3,562,500 ----------- Machinery - 3.4% LINCOLN ELECTRIC HOLDINGS 170,800 2,433,900 ----------- Pumps, Valves and Bearings - 1.0% +Roper Industries 29,500 755,938 ----------- TOTAL (Cost $10,848,081) 11,158,625 ========== INDUSTRIAL SERVICES - 15.7% Commercial Services - 6.5% Carlisle Holdings(a) 132,700 $ 974,516 Comdisco 47,500 1,059,844 +INTERIM SERVICES(a) 146,000 2,591,500 ----------- 4,625,860 ----------- Engineering and Construction - 4.6% +Jacobs Engineering Group(a) 900 29,419 MORRISON KNUDSEN(a) 452,100 3,277,725 ----------- 3,307,144 ----------- Industrial Distribution - 1.7% RITCHIE BROS. AUCTIONEERS(a) 49,900 1,194,481 ----------- Printing - 2.9% NEW ENGLAND BUSINESS SERVICE 127,700 2,075,125 ----------- TOTAL (Cost $13,956,030) 11,202,610 ========== NATURAL RESOURCES - 12.1% Energy Services - 4.8% INPUT/OUTPUT(a) 351,500 2,965,781 Nabors Industries(a) 10,000 415,625 ----------- 3,381,406 ----------- Gold - 3.3% ANGLOGOLD ADR(b) 115,000 2,364,687 ----------- Oil and Gas - 4.0% +Barrett Resources(a) 10,000 304,375 TOM BROWN(a) 63,800 1,471,387 +3TEC Energy(a) 110,000 1,100,000 ----------- 2,875,762 ----------- TOTAL (Cost $6,745,856) 8,621,855 ========== TECHNOLOGY - 4.7% Aerospace/Defense - 1.6% Curtiss-Wright 30,300 1,126,781 ----------- Components and Systems - 0.1% +Kronos(a) 3,000 78,000 ----------- Distribution - 2.6% RICHARDSON ELECTRONICS 114,600 1,840,762 ----------- Telecommunication - 0.4% Plantronics(a) 2,500 288,750 ----------- TOTAL (Cost $1,960,263) 3,334,293 ========== TOTAL COMMON STOCKS (Cost $52,852,040) 56,002,059 ==========
THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 41 ROYCE FOCUS TRUST, INC. -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE -------- ----- U.S. TREASURY OBLIGATIONS 21.2% U.S. Treasury Notes 7.75%, due 2/15/01 $5,000,000 $ 5,037,500 5.75%, due 10/31/02 5,000,000 4,928,900 7.25%, due 8/15/04 5,000,000 5,169,550 ----------- TOTAL U.S. TREASURY OBLIGATIONS (Cost $15,179,687) 15,135,950 =========== TOTAL INVESTMENTS 99.6% (Cost $68,031,727) 71,138,009 CASH AND OTHER ASSETS LESS LIABILITIES 0.4% 293,387 ----------- NET ASSETS - 100.0% $71,431,396 ===========
-------------------------------------------------------------------------------- (a) Non income producing. (b) American Depository Receipt. + New Additions in 2000. BOLD INDICATES THE FUND'S LARGEST 20 EQUITY HOLDINGS IN TERMS OF JUNE 30, 2000 MARKET VALUE. INCOME TAX INFORMATION: The cost of total investments for Federal income tax puposes was $68,078,968. At June 30, 2000 net unrealized appreciation for all securities was $3,059,041, consisting of aggregate gross unrealized appreciation of $8,700,920 and aggregate gross unrealized depreciation of $5,641,879. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 42 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE FOCUS TRUST, INC. --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments at value (identified cost $68,031,727) $71,138,009 Cash 342,673 Receivable for investments sold 1,157,604 Receivable for dividends and interest 377,233 Prepaid expenses 16,865 ------------------------------------------------------------------------------------------------------------------------------------ Total Assets 73,032,384 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Payable for investments purchased 1,463,535 Payable for investment advisory fee 42,390 Preferred dividends accrued but not yet declared 33,112 Accrued expenses 61,951 ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 1,600,988 ------------------------------------------------------------------------------------------------------------------------------------ Net Assets $71,431,396 ------------------------------------------------------------------------------------------------------------------------------------ Net Assets applicable to Preferred Stock at a liquidation value of $25 per share $20,000,000 ------------------------------------------------------------------------------------------------------------------------------------ Net Assets applicable to Common Stock (net asset value per share - $5.99) $51,431,396 ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF STOCKHOLDERS' EQUITY: 7.45% Cumulative Preferred Stock - par value $0.001 per share; 800,000 shares outstanding $ 800 Common Stock - par value $0.001 per share; 8,584,506 shares outstanding (100,000,000 shares authorized) 8,585 Additional paid-in capital 62,139,076 Undistributed net investment income 1,169,998 Accumulated net realized gain on investments 5,784,767 Net unrealized appreciation on investments 3,106,282 Quarterly and accrued distributions (778,112) ------------------------------------------------------------------------------------------------------------------------------------ Net Assets $71,431,396 ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS ------------------------------------------------------------------------------------------------------------------------------------ Six months ended Year ended June 30, 2000 December 31, (unaudited) 1999 ----------- ---- INVESTMENT OPERATIONS: Net investment income $ 479,632 $ 690,366 Net realized gain (loss) on investments 6,578,190 (786,044) Net change in unrealized appreciation on investments (5,884,849) 5,599,612 ------------------------------------------------------------------------------------------------------------------------------------ Net increase in net assets from investment operations 1,172,973 5,503,934 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (89,608) Net realized gain on investments - (1,400,392) Quarterly distributions* (745,000) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders (745,000) (1,490,000) ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (73,455) Net realized gain on investments - (1,147,941) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders - (1,221,396) ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders - 753,514 ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN NET ASSETS 427,973 3,546,052 NET ASSETS: Beginning of period 71,003,423 67,457,371 ------------------------------------------------------------------------------------------------------------------------------------ End of period (including undistributed net investment income of $1,169,998 and $690,366, respectively) $71,431,396 $71,003,423 ------------------------------------------------------------------------------------------------------------------------------------
*To be allocated to net investment income and capital gains at year-end. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 43 ROYCE FOCUS TRUST, INC. --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Income: Dividends $ 356,642 Interest 512,148 ------------------------------------------------------------------------------------------------------------------------------------ Total income 868,790 ------------------------------------------------------------------------------------------------------------------------------------ Expenses: Investment advisory fees 355,017 Custodian and transfer agent fees 40,735 Stockholder reports 29,337 Administrative and office facilities expenses 15,524 Professional fees 14,088 Directors' fees 10,467 Other expenses 23,444 ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 488,612 Fees waived by investment adviser (99,454) ------------------------------------------------------------------------------------------------------------------------------------ Net expenses 389,158 ------------------------------------------------------------------------------------------------------------------------------------ Net investment income 479,632 ------------------------------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 6,578,190 Net change in unrealized appreciation on investments (5,884,849) ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 693,341 ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $ 1,172,973 ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 44 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE FOCUS TRUST, INC. -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.
Six months ended June 30, 2000 Years ended December 31, ------------------------------------------------------- (unaudited) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $5.94 $5.63 $6.04 $5.52 $5.09 $4.70 ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS: Net investment income 0.06 0.08 0.12 0.08 0.06 0.13 Net realized and unrealized gain (loss) on investments and foreign currency 0.08 0.58 (0.35) 1.12 0.35 0.36 ------------------------------------------------------------------------------------------------------------------------------------ Total investment operations 0.14 0.66 (0.23) 1.20 0.41 0.49 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income - (0.01) (0.16) - - - Net realized gain on investments and foreign currency - (0.17) (0.02) (0.01) - - Quarterly distributions* (0.09) - - - - - --------------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (0.09) (0.18) (0.18) (0.01) - - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income - (0.01) - (0.12) - (0.16) Net realized gain on investments and foreign currency - (0.14) - (0.41) - (0.01) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders - (0.15) - (0.53) - (0.17) ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Effect of reinvestment of distributions by Common Stockholders - (0.02) - (0.04) - - Effect of Preferred Stock offering - - - (0.10) - - Other sources - - - - 0.02 0.07 ------------------------------------------------------------------------------------------------------------------------------------ Total capital stock transactions - (0.02) - (0.14) 0.02 0.07 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $5.99 $5.94 $5.63 $6.04 $5.52 $5.09 ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE, END OF PERIOD $4.91 $4.72 $4.88 $5.06 $4.59 $4.19 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (a): Net Asset Value (b) 0.8%*** 8.7% (6.8)% 20.5% - - Market Value 4.0%*** (0.3)% (3.7)% 21.3% 9.6% 22.3% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c,d) 1.52%** 1.51% 1.62% 0.94% 1.91% 2.14% Management fee expense 1.00%** 1.00% 1.14% 0.39% 0.83% 1.00% Other operating expenses 0.52%** 0.51% 0.48% 0.55% 1.08% 1.14% Net investment income 1.88%** 1.47% 1.95% 1.35% 1.80% 2.80% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $71,431 $71,003 $67,457 $70,893 $44,154 $41,385 Portfolio Turnover Rate 42%*** 60% 90% 74% 159% 76% PREFERRED STOCK: Total shares outstanding 800,000 800,000 800,000 800,000 - - Asset coverage per share $89.29 $88.75 $84.32 $88.62 - - Liquidation preference per share $25.00 $25.00 $25.00 $25.00 - - Average market value per share (e) $21.61 $24.00 $25.16 $25.25 - - ------------------------------------------------------------------------------------------------------------------------------------
(a) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions. (b) Net Asset Value Total Return is not available for years prior to 1997. (c) Expense ratios based on total average net assets were 1.10%, 1.06%, 1.16%, 0.90%, 1.91% and 2.14% for the periods ended June 30, 2000, and December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.91%, 1.93%, 1.88%, 1.60% and 2.08% for the periods ended June 30, 2000, and December 31, 1999, 1998, 1997 and 1996, respectively. (e) The average of month-end market values during the period. * To be allocated to net investment income and capital gains at year-end. ** Annualized. *** Not annualized. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 45 ROYCE FOCUS TRUST, INC. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Royce Focus Trust, Inc. (the "Fund") is a diversified closed-end investment company. Effective May 7, 1999, Royce Global Trust, Inc. changed its name to Royce Focus Trust, Inc. The Fund commenced operations on March 2, 1988. Royce & Associates, Inc. ("Royce") assumed investment management responsibility for the Fund on November 1, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. VALUATION OF INVESTMENTS: Securities listed on an exchange or on the Nasdaq National Market System (NMS) are valued on the basis of the 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 NMS 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 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 and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes. EXPENSES: The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees otherwise payable. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement. 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". DISTRIBUTIONS: Distributions to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. 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 undistributed at fiscal year end is 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, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). 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. 46 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 ROYCE FOCUS TRUST, INC. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued) -------------------------------------------------------------------------------- CAPITAL STOCK: The Fund currently has 800,000 shares of 7.45% Cumulative Preferred Stock outstanding. The stock has a liquidation preference of $25.00 per share. Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing the Preferred Stock. The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends on the shares of Preferred Stock are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital. The Fund issued 161,083 shares of Common Stock as reinvestment of distributions by Common Stockholders for the year ended December 31, 1999. INVESTMENT ADVISORY AGREEMENT: The Investment Advisory Agreement between Royce and the Fund provides for fees to be paid at an annual rate of 1.0% of the average daily net assets of the Fund. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the Preferred Stock's dividend rate. For the period ended June 30, 2000, the Fund accrued and paid Royce advisory fees totaling $255,563, which is net of $99,454 voluntarily waived by Royce. PURCHASES AND SALES OF INVESTMENT SECURITIES: For the period ended June 30, 2000, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $29,515,107 and $29,233,309, respectively. THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 | 47 -------------------------------------------------------------------------------- OFFICERS Charles M. Royce, President and Treasurer John D. Diederich, Vice President Jack E. Fockler, Jr., Vice President W. Whitney George, Vice President Daniel A. O'Byrne, Vice President and Assistant Secretary John E. Denneen, Secretary DIRECTORS John D. Diederich (RVT and OTCM) Royce Fund Services, Inc., President Donald R. Dwight Dwight Partners, Inc., President Richard M. Galkin Richard M. Galkin Associates, Inc., President Stephen L. Isaacs The Center for Health and Social Policy, President; Attorney William L. Koke (FUND) Shoreline Financial Consultants Registered Investment Adviser David L. Meister Communications Industry, Consultant Charles M. Royce Royce & Associates, Inc., President INDEPENDENT ACCOUNTANTS Tait, Weller & Baker CUSTODIAN AND TRANSFER AGENT AND REGISTRAR State Street Bank and Trust Company 48 | THE ROYCE FUNDS SEMI-ANNUAL REPORT 2000 POSTSCRIPT -------------------------------------------------------------------------------- [GRAPHIC: Pair of eyeglasses reflecting "Value"] REMEMBER Y2K? Only a short time ago, the media was covering stories of people digging fallout shelters, stocking up on canned food and gearing up for the computer apocalypse known as Y2K. Even those of us not quite convinced that the end of the world was at hand were at least a bit apprehensive. As midnight approached on December 31, the world collectively held its breath time zone by time zone. By the afternoon of January 1, however, it all seemed like a joke, a major case of much ado about nothing. Many of us bragged that we knew that all the hysteria wouldn't amount to much. Everybody else may have been taken in, but we weren't fooled. This is how perceptions often work, especially with the benefit of 20/20 hindsight. One minute we can be certain that something is true, only to be convinced of the opposite moments later when new experience or information comes into view. How do you keep an eye on `reality' when it refuses to stand still? As value investors, we confront this problem in various ways every day. How do we size up a business when so many factors change, sometimes radically, and often very quickly? The picture that we create of a company is not a portrait or a photograph -- it more closely resembles a video, with several inputs that cause the picture to shift over time. We walk a fine line between remaining true to our convictions and acknowledging that our perspective on a company can turn in a heartbeat. Many of the companies that we look at as potential purchase candidates are not high on other investors' hit lists. Often this relates to perceptions. A couple of quarters' worth of missed earnings, a depressed stock price and a difficult business cycle is a recipe for discouragement for many investors, while to us it can smack of a potentially sweet opportunity. The same company looks very different based on the multiple perspectives of investors. Our eyes are always on the long term, so we can afford to be patient while a company that we think is well-run rights itself. Sometimes a company falls out of favor, although its underlying business strengths remain very attractive to us. We may take a position in this kind of company and wait for Wall Street to catch on. After all, the band Kiss, currently in the midst of a highly profitable farewell tour, was for years derided by parents and critics alike for being dangerous on the one hand and derivative on the other. Today, they are routinely cited as a positive influence on younger musicians and seem as safe and familiar as Donny and Marie. Shaquille O'Neal used to be the poster child for a whole generation of slackers and underachievers; today he is the very model of a champion. Kiss still sounds the same as they did when shag carpeting was in style. Shaquille insists that all he ever wanted to do was win. So what exactly changed, the players or the perceptions? We see companies go through similar ups and downs all the time. Our goal is to buy them when interest is low so that we can reap the potential rewards when sentiments shift later on. By keeping our perspective on the companies that we invest in -- the strength of a balance sheet, the ability to generate free cash flow and the prospect of future growth -- we believe that we can potentially provide our shareholders with strong absolute returns over long-term periods. THE ROYCE FUNDS WEALTH OF EXPERIENCE With approximately $3.3 billion in total assets under management, Royce & Associates is an independent firm committed to the same small-company investing principles that have served us well for more than 25 years. Charles M. Royce, who has been our primary portfolio manager since 1973, enjoys one of the longest tenures of any active mutual fund manager. He is supported by a senior staff that includes three Portfolio Managers and a Managing Director, as well as six analysts and four traders. MULTIPLE FUNDS, COMMON FOCUS Our goal is to offer both individual and institutional investors the best available small-cap value portfolios. Unlike a lot of mutual fund groups with broad product offerings, we have chosen to concentrate on small-company value investing by providing investors with a range of funds that take full advantage of this large and diverse sector. CONSISTENT DISCIPLINE Our approach emphasizes paying close attention to risk and maintaining the same discipline, regardless of market movements and trends. The price we pay for a security must be significantly below our appraisal of its current worth. This requires a thorough analysis of the financial and business dynamics of an enterprise, as though we were purchasing the entire company. CO-OWNERSHIP OF FUNDS It is important that our employees and shareholders share a common financial goal; our officers, employees and their affiliates currently have approximately $45 MILLION invested in The Royce Funds. THE ROYCE FUNDS 1414 AVENUE OF THE AMERICAS, NEW YORK NY 10019 GENERAL INFORMATION BROKER/DEALER SERVICES ADDITIONAL REPORT COPIES FOR FUND MATERIALS AND PERFORMANCE UPDATES (800) 221-4268 (800) 59-ROYCE (597-6923) STATE STREET BANK ADVISOR SERVICES AND TRUST COMPANY FOR FUND MATERIALS, PERFORMANCE UPDATES, CUSTODIAN, TRANSFER AGENT TRANSACTIONS OR ACCOUNT INQUIRIES AND REGISTRAR (800) 426-5523 (800) 33-ROYCE (337-6923) www.roycefunds.com funds@roycenet.com