-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BnDKjOBHUGmE6ibluFx/l00R3OLoKMEdPxjyZVFR8SwHenDjWnjMhoiqqq5nNsnc boETNSSwvIYN9RajlxWvWg== 0000950146-99-000433.txt : 19990308 0000950146-99-000433.hdr.sgml : 19990308 ACCESSION NUMBER: 0000950146-99-000433 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE OTC MICRO CAP FUND INC CENTRAL INDEX KEY: 0000912147 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133739778 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-08030 FILM NUMBER: 99557891 BUSINESS ADDRESS: STREET 1: C/O MITCHELL HUTCHINS ASSET MANAGEMENT STREET 2: 1414 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127138392 MAIL ADDRESS: STREET 1: ROYCE OTC MICRO -CAP FUND INC STREET 2: 1285 AVE OF THE AMERICAS 16TH FLR CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE VALUE TRUST INC CENTRAL INDEX KEY: 0000804116 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133356097 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 001-09313 FILM NUMBER: 99557892 BUSINESS ADDRESS: STREET 1: 1414 AVE OF THE AMERICAS 9TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123557311 MAIL ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYCE GLOBAL TRUST INC CENTRAL INDEX KEY: 0000825202 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 592876580 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05379 FILM NUMBER: 99557893 BUSINESS ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125084578 MAIL ADDRESS: STREET 1: C/O QUEST ADVISORY CORP STREET 2: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: ALL SEASONS GLOBAL FUND INC DATE OF NAME CHANGE: 19950803 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAS ALL SEASON FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 ROYCE CLOSED-END ANNUAL REPORT ---------------------------------------------- THE ROYCE FUNDS Value Investing in Small Companies for More Than 25 Years ROYCE VALUE TRUST ROYCE MICRO-CAP TRUST ROYCE GLOBAL TRUST ---------------------------------------------- 1998 Annual Report 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 Global Trust, a closed-end fund that focuses on a limited number of domestic and foreign small-cap 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. 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 in 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 10, 12 and 14. For additional information on the Funds' Distribution Reinvestment and Cash Purchase Options and the benefits for stockholders, see page 17. THE ROYCE FUNDS - -------------------------------------------------------------------------------- ANNUAL REPORT REFERENCE GUIDE - -------------------------------------------------------------------------------- Jump, Jive An' Wail: 1998's stock market provided more than its share 2 of swinging moments. - ------------------------------------------------------------------------------------------------------------------- It Don't Mean a Thing (If It Ain't Got That Swing): Recent changes to small-cap 5 stock definitions have little impact on our own small- and micro-cap work. - ------------------------------------------------------------------------------------------------------------------- Royce Value Trust outperformed both small-cap benchmark indices, 10 the Russell 2000 and S&P 600, for the one-, three-, five- and 10-year periods on an NAV basis. - ------------------------------------------------------------------------------------------------------------------- Royce Micro-Cap Trust outperformed the Russell 2000 for the three-year, 12 five-year and since inception (12/14/93) periods on an NAV basis, in spite of a difficult year for both micro-cap securities and for the Fund. - ------------------------------------------------------------------------------------------------------------------- Royce Global Trust's more concentrated approach produced disappointing returns 14 relative to its small-cap benchmark index for the fourth quarter and for the year. - ------------------------------------------------------------------------------------------------------------------- Updates and Notes: What's New on Our Website (www.roycefunds.com) 18 and a Y2K Update. - ------------------------------------------------------------------------------------------------------------------- Schedules of Investments and Other Financial Statements. 19 - ------------------------------------------------------------------------------------------------------------------- Postscript: Furby-Mania. Inside back cover - -------------------------------------------------------------------------------------------------------------------
For more than 25 years, our value approach has focused on evaluating a company's worth -- what we believe a business would sell for in a private transaction between rational and well-informed parties. This requires a thorough analysis of the financial and operating dynamics of a business, as though we were purchasing the entire company. The price we pay for a security must be substantially lower than our appraisal of its worth. [MAGNIFING GLASS PHOTO]
- -------------------------------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through December 31, 1998 - -------------------------------------------------------------------------------- SINCE FUND (INCEPTION) 1-YEAR 3-YEAR 5-YEAR INCEPTION - -------------------------------------------------------------------------------- Royce Value Trust (11/26/86) 3.3% 15.0% 13.5% 13.0% - -------------------------------------------------------------------------------- Royce Micro-Cap Trust (12/14/93) -4.1 12.4 13.1 13.0 - -------------------------------------------------------------------------------- Royce Global Trust (11/1/96)* -6.8 N/A N/A 7.7
*Date Royce & Associates assumed investment management. [START SIDEBAR] [Photo of Charles M. Royce] Charles M. Royce, President I feel very strongly that the new market cycle will be shorter, with more historically typical annualized returns. The last cycle began in 1990. By any traditional measurement, that was a very long period. I think that the new cycle will last no more than a couple of years and could well be a very low return period. [END SIDEBAR] LETTER TO OUR STOCKHOLDERS - -------------------------------------------------------------------------------- [Cartoon graphic: dancers "jiving" to a swing band at the "Wall Street Hop"] - -c- Blaustein '99 JUMP, JIVE AN' WAIL Although the stock market took a brief but dramatic downturn during the third quarter, it was not enough to keep its swinging participants off the dance floor. In three out of four quarters in 1998, large-cap stocks provided investors with jazzed-up returns. In contrast, small-cap securities grooved in quarters one and four, but sang the blues in quarters two and three. This year's stock market soiree also produced swing in abundance. According to Tim Hayes of Ned Davis Research, the average daily swing of the Dow Jones Industrial Average ("Dow") in 1998 from the low to the high was 2.6% on an intra day basis or about 225 points a day. On an intra-year basis, the large-cap S&P 500 was off 19.2% from its peak on July 17, 1998 to its trough on August 31, 1998, while the small-cap Russell 2000 was off 36.5% from its April 21, 1998 peak to its October 8 trough. Although both large- and small-cap securities rallied in 1998's fourth quarter, the calendar-year performance disparity between the two indices was the widest since the inception of the Russell 2000 Index in 1979. THE JOINT IS JUMPIN' Large-cap and technology stocks were at the top of the charts in 1998. Both the Dow and S&P 500 reached record highs despite third quarter setbacks. The Dow (+18.1%) generated its fourth consecutive year of double digit gains, and the S&P 500 (+28.6%) posted an unprecedented fourth consecutive year of 20%+ returns. If this were not amazing enough, consider the results of the Nasdaq Composite, which was up 39.6% for the year. How much of a difference did technology make? The tech-heavy Nasdaq 100 finished 1998 up 85.5% versus only 6.8% for the Nasdaq Industrials. Wow! 2 | THE ROYCE FUNDS ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- I GOT IT BAD (AND THAT AIN'T GOOD) While large-cap enjoyed cheers and applause in 1998, small-cap endured cat calls. However, even though the small-cap oriented Russell 2000 did hit some sour notes -- the index was down 2.6% for the full year -- it was not entirely off key, considering it was down 23.9% for the combined second and third quarters. Just how tough was it for small-cap mutual fund investors? According to fund rating service Morningstar, out of 2,802 open-end domestic equity funds overall, only 12 of the 398 small-cap objective funds with a three-year history garnered four or five star ratings as of December 31, 1998. This means that out of the 910 funds that received four or five star ratings, only 1.3% were small-cap portfolios. Fortunately for those of us in the small-cap business, there were some smooth sounds to soothe the second and third quarter blues as small-caps staged a short but impressive rally at year-end. From its bottom on October 8 through December 31, the Russell 2000 was up 36.3%, comfortably ahead of the S&P 500, which was up 28.1%. A little more of this in 1999 would be music to our ears. [START CALLOUT] [O]ut of the 910 funds that received four or five star [Morningstar] ratings, only 1.3% [12 funds] were small-cap portfolios. [END CALLOUT] EVERY PICTURE TELLS A STORY While calendar-year periods are often used in performance comparisons, we find that peak-to-peak periods, or full market cycles, are generally more revealing, especially when discussing relative performance. Although small-cap underperformance was evident throughout most of 1998, we believe that the small-cap downturn began much earlier. Prior to the high established on April 21, the last major peak for the Russell 2000 occurred on May 22, 1996, led by technology and a flood of IPO offerings. From that previous peak to the Russell 2000 trough on October 8, 1998, small-cap stocks were not on investors' hit parade. Many investors forget that small-caps were the market leaders for the almost six-year period prior to the peak on May 22, 1996, which began with the small-cap trough in October, 1990. Perhaps the recent period of prolonged underperformance has made memories fuzzy. These distinctly different periods demonstrate the ebb and flow between large- and small-cap performance and how unrealistic it is to expect small-cap companies to always lag or large-cap companies to permanently lead. With this in mind, we thought that it would be interesting to examine the April - October small-cap decline in the context of previous downturns. Since the Russell 2000's inception in 1979, there have been five major small-cap declines of 20% or more, including 1998's. Each of the four previous declines was followed by one- to two-year periods of substantial upside performance (70%+).
- ---------------------------------------- LATE '90s: SMALL CAPS LANGUISH - ---------------------------------------- 5/22/96 - 10/8/98 - ---------------------------------------- Russell 2000 -12.0% - ---------------------------------------- S&P 500 47.6% - ----------------------------------------
- ------------------------------------------- EARLY '90S: A COMPLETELY DIFFERENT PICTURE - ------------------------------------------- 10/31/90 - 5/22/96 - ------------------------------------------- Russell 2000 236.2% - ------------------------------------------- S&P 500 162.1% - -------------------------------------------
THE ROYCE FUNDS ANNUAL REPORT 1998 | 3 [START SIDEBAR] There has certainly been a change in market leadership, one that so far has had its greatest effect within large-cap. Global multinationals and financial services have relinquished leadership to technology, which continues to be a market-leading sector within both large- and small-cap. This is the beginning, I think, of a substantial shift in overall market leadership, which signals the beginning of a new market cycle. [END SIDEBAR] - -------------------------------------------------------------------------------- With the Russell 2000 up 36.3% from its October low, have potential small-cap investors missed the boat? If history is any indication, we don't think so. While the past is not a blueprint for the future, historical precedent might suggest that the small-cap rally has both time and distance on its side. RUSSELL 2000 PEAK-TO-TROUGH-TO-PEAK PERFORMANCE PERIODS [bar chart]
Decline From Peak Subsequent Rise --------------------- ------------------------- 6/15/81- -26.2% 8/12/82- 115.5% 8/12/82 6/24/83 6/24/83- -24.1% 7/25/84- 72.5% 7/25/84 7/3/86 8/25/87- -38.9% 10/28/87- 76.8% 10/28/87 10/9/89 10/9/89- -32.5% 10/31/90- 83.1% 10/31/90 2/12/92 4/21/98- -36.5% 10/8/98- 36.3% 10/8/98 12/31/98
Historical market trends are not necessarily indicative of future market movements. [END BAR CHART] WE WALK THE LINE Twice each year, we provide details and offer commentary on our Funds' recent performance. This exercise, while important in many ways, always gives us pause. As long-term investors, it feels odd to spend time commenting on short-term performance. Yet the investment world is captivated by the short term, with far too much attention devoted to who has this year's -- or even this quarter's -- best returns. In contrast, we believe that investors should be neither too encouraged nor too dismayed by short-term relative results. We are less concerned about near-term performance -- even when, as in 1998, we are pleased with the results -- because valuation and performance are rarely in sync in the short run. In other words, we do not expect today's undervalued stock to immediately reach what we think is its full value. Take The "A" Train During a holiday season vacation, the intrepid advisor hopped on the New York City subway and took the "A" train to the Columbus Circle stop. After joining in on a jam session with the Duke Ellington Orchestra, he made his way to our office and chatted with Chuck Royce about the relevance of the terms "growth" and "value" in today's small-cap market. With all the changes that have taken place in the small-cap world over the last decade, do you think that the definitions of value and growth have changed as well? The definitions have not changed as much as their usefulness has. At some level, we think that describing the way that we manage money exclusively as "value" is incomplete. Although it's common practice within the investment community to do so, we don't divide the equity world into growth and value stocks. We spend our time thinking about how to limit risk without sacrificing return. If we find a stock that we believe has terrific growth prospects, we want to buy it with the least risk possible, i.e., at an attractive price -- we don't worry about whether or not the stock is considered a value or a growth stock. 4 | THE ROYCE FUNDS ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- Our investment horizon for portfolio selection is three to five years; in general we try to find stocks with the potential to at least double in value during that time period. What happens in the short term is a function of market direction and luck. We can control neither. While, on an NAV basis, Royce Value Trust did provide a short-term performance advantage over the Russell 2000, we are most pleased that on an NAV basis, Royce Value Trust and Royce Micro-Cap Trust have provided a long-term performance edge. While we are disappointed with Royce Global Trust's performance since assuming management on November 1, 1996, we remain confident about the Fund's long-term prospects. For a complete review and discussion of our results and our risk profiles, please see pages 10-15. [START CALLOUT] Our investment horizon for portfolio selection is three to five years; in general we try to find stocks with the potential to at least double in value during that time period. [END CALLOUT] IT DON'T MEAN A THING (IF IT AIN'T GOT THAT SWING) Several years ago, Billboard magazine made changes in the criteria of its famous chart system to more effectively track the changing music scene. In a similar move, Morningstar, Inc. and Lipper Analytical, the fund industry's preeminent ranking and analysis services, recently announced that they would be altering their capitalization and style criteria to more accurately reflect the realities of today's equity market. For instance, rather than use pre-established market-cap cutoffs, with small-cap being defined as less than $1 billion, Morningstar has now divided the equity universe based on
- -------------------------------------------------------------------------------- RUSSELL 2000'S EXPANDING MARKET CAPITALIZATION - -------------------------------------------------------------------------------- 12/31/89 12/31/94 12/31/98 - -------------------------------------------------------------------------------- Weighted Average $190 $400 $880 - -------------------------------------------------------------------------------- Median $ 70 $210 $430 - -------------------------------------------------------------------------------- Russell 2000 weighted average and median market capitalization in millions. Source: Frank Russell Company - --------------------------------------------------------------------------------
If value and growth have become less useful terms, what has been the effect on the firm's selection process? There really hasn't been an appreciable effect on our selection process. We have always looked at our mission in life, so to speak, as wanting to be very good small-cap investors who pay equal attention to risk and reward. We've never been anti-growth, we just don't want to overpay for growth, so we try to be conscious of all the risk elements when selecting securities. These elements may include evaluating growth prospects relative to the stock price, as well as trading strategy, ownership issues, business risk and liquidity risk. Frankly, in most instances, we can't buy high-growth companies at attractive prices, i.e., at "lower risk," because the world frequently tends to overprice these securities. But it's important to remember that this has nothing to do with how the outside world is classifying these stocks -- we are value investors, but we don't confine ourselves to "value" stocks. THE ROYCE FUNDS ANNUAL REPORT 1998 | 5 [START SIDEBAR] Relative valuations for small-cap stocks remain very strong in our view, even after the recent run of solid performance in the fourth quarter. Although valuation and performance do not correlate in the short term, we certainly expect that over most full market cycles they should [END SIDEBAR] - -------------------------------------------------------------------------------- the following percentages: Large-cap will constitute the top 5% of the 5,000 largest U.S. stocks in their database, mid-cap will be the next 15% of the 5,000 and small-cap will comprise the remaining 80%. The net effect is a more liberal definition of small-cap stocks and by extension small-cap funds -- as of December 31, 1998, the highest median market cap among funds in the small-cap category was $1.2 billion. [START CALLOUT] [T]he difference between the small- and micro-cap sectors is critical to us because we believe that they behave dif- ferently and require different investment strategies. [END CALLOUT] The small-cap expansion has affected small-cap indices as well. The Russell 2000, which measures the 2,000 smallest U.S. companies out of the largest 3,000 U.S. companies (as tracked by the Russell 3000), has undergone considerable capitalization drift during the decade. As of December 31, 1998, the largest stock in the Russell 2000 had a market cap of $3.2 billion. The median market cap for the index was $430 million and the weighted-average market cap was $880 million, squarely in the upper end of the small-cap sector. It may not be long until the weighted-average market cap exceeds $1 billion. Regardless of how others are defining and redefining small-cap, there has been no effect on our daily work. We concern ourselves primarily with the same financial characteristics that have been central to our work for more than 25 years. However, the difference between the small- and micro-cap sectors is critical to us because we believe that they behave differently and require different investment strategies. In making our case, we are happy to risk sounding like the fan who doggedly insists that major differences exist between country and western music, or soul and rhythm and blues (this may be the only risk we don't mind taking). Under what business or market conditions would you buy the stock of a company conventionally regarded as "small-cap growth"? Although we are usually not interested in the high-priced, "super growth" type of company, there are four conditions that bring traditional growth companies into our price range. One would be companies with the flu, as opposed to pneumonia, i.e., ones that have experienced a temporary earnings shortfall. This often scares investors, which leads them to sell. The result is usually a lower price, one that we are willing to pay if the company's underlying financial condition remains stable. A second type would be companies whose growth rates are shifting to more real-world levels, i.e., 10% - 15% cyclically from 20% sequentially, and whose stock price has been penalized by the market. Over the years, we've bought securities with these characteristics trading at attractive prices. Another would be companies in high-growth industries whose specific year-over-year results vary. The last case is the least common. Adverse market conditions can simply drive prices down to the point where growth becomes cheap. This generally occurs only in more serious market downturns, maybe once or 6 | THE ROYCE FUNDS ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- The more efficient upper tier of small-cap receives considerable institutional attention and research coverage. This is why we use a concentrated approach in this sector. We rely not only on our standard criteria -- looking for companies with unusually strong returns on assets, cash flows and balance sheets, as well as solid growth prospects -- but on non-quantitative research, such as competitive and strategic analysis. [START CALLOUT] Investing in micro-caps more closely resembles the way we have chosen stocks historically, with close atten- tion to quantitive factors such as balance sheets and cash flows. [END CALLOUT] With micro-cap stocks, institutional competition is the least of our worries. Liquidity issues and trading constraints are of much greater concern to us in this sector, where institutional interest is thin and research coverage is often nonexistent. Due to the breadth and diversity of the micro-cap sector, the research and security selection process is both time-consuming and labor-intensive. We look at dozens to find a handful. Investing in micro-caps more closely resembles the way we have chosen stocks historically, with close attention to quantitative factors such as balance sheets and cash flows. It also requires an understanding of what makes micro-cap companies distinctive. Unlike upper-tier small-cap companies, which have corporate cultures similar to larger companies, micro-cap companies are usually dominated by the personalities of their CEOs, who are often the founders and majority owners of the business. So even as the equity market continues the natural process of change and expansion, we will stay with what has worked for us in the past, and what we believe continues to work for us today. We have adjusted as the times have demanded without sacrificing the essence of who we are -- uncompromising and risk-conscious money managers. twice in a decade. This past year's market downturn is the most recent instance, but prior to that, we'd have to go back to 1990. Do you think that more attractive valuations and risk factors still exist in the less glamorous kind of company that traditionally draws attention from value investors? This may surprise people, but many of these companies -- those that the industry would regard as "value" -- are not as attractively priced relative to many small-cap stocks that might be considered growth. The reason is that within small-cap, value has generally outperformed growth over the last two-and-a-half years. These "value" stocks are therefore not quite the bargains that they were a few years ago, which is another reason why we see less usefulness in terms such as value and growth. Regardless of how the industry classifies them, we have a strong preference for a company that has proven it can weather storms, but whose stock price, for whatever reason, has been knocked off balance. THE ROYCE FUNDS ANNUAL REPORT 1998 | 7 [START SIDEBAR] What sometimes happens in a period preceding an upswing such as we experienced recently is that small-caps become extraordinarily cheap across the board. The market creates conditions that enable us to buy stocks that typically don't trade at the kind of attractive discounts that we have been seeing. This summer's downturn enabled us to purchase higher growth rates at a cheaper price than we have been able to do in a very long time. [END SIDEBAR] - -------------------------------------------------------------------------------- [Cartoon graphic: 2 optimistic guys walking down the street with sign "The Future for Small-Caps." They are flanked by three cautious-looking guards. Caption: "Guarded Optimism"] -c- Hank Blaustein 1999 THE TIMES THEY ARE A-CHANGING If nothing else, this summer's decline served as a reminder that cycles remain a reality in the equity markets and that returns go up and down. This is true whether we are talking about individual stocks or stock markets. The dominant theme in 1998 was change, as declining prices produced significant investment opportunities and a shift in market leadership. This summer's decline gave us a rare investment opportunity, as virtually all small-cap securities were repriced regardless of an individual company's circumstances. According to a Salomon Smith Barney report published in July in The Wall Street Journal, the average stock with a market value of $250 million or less fell more than 40% from its 52-week high. The last time such a substantial small-cap sector repricing occurred was 1990. If one believes (as we do) that long-term outperformance is directly related to exploiting valuation discrepancies, then this summer's downturn provided us with substantial future performance potential. In addition to creating numerous investment opportunities, the October trough may have signaled the completion of the 1990's bull market. From October 31, 1990 through its trough on August 31, 1998, the S&P 500 compounded at an 18.8% average annual rate of return, well above its long-term norm of 10.5% (Source: Ibbotson and Associates). Although it is difficult to say with any certainty, we believe that the new cycle will be different, with chart toppers coming from both large- and small-cap securities. [START CALLOUT] If one believes (as we do) that long- term outperformance is directly related to exploiting valuation discrepancies, then this summer's downturn provided us with substan- tial future performance potential. [END CALLOUT] 8 | THE ROYCE FUNDS ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- [PHOTO] (l-r) Jack Fockler, Whitney George, Chuck Royce, Charlie Dreifus, Buzz Zaino Signs of change were already present in the fourth quarter. Market leadership shifted away from the trio of global multinationals, large financials and technology, leaving technology as a solo act -- more exciting, but much less stable. According to Goldman Sachs, the average internet stock -- a dominant force inside the technology sector -- was up 225% in 1998. Internet frenzy has recently consumed the market landscape. It seems a fitting coda to this decade's bull market, an outsized, speculative phase to an outsized market cycle. However, when this sector corrects, a subsequent correction to the market as a whole seems likely, and a new cycle will be under way for certain. It is in this new cycle that we believe our "guarded optimism" for small-caps will be substantiated. We are also confident that in this low-return environment, there will be great value in "value." We appreciate your continued support and invite your questions and comments. 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 - -------------------------------------------------------------------------------- Fans of all musical genres may be interested to know that... "Jump, Jive An' Wail" is a swing standard originally made famous by Louis Prima that jumped back on the charts in 1998 thanks to a new version by the Brian Setzer Orchestra, with a little help from a popular TV commercial for The Gap. "The Joint Is Jumpin'" also enjoyed a second life when the music of Fats Waller became the subject of the Broadway show Ain't Misbehavin' in the '80s. "I Got It Bad (And That Ain't Good)," a swing classic, was one of the centerpieces of the Duke Ellington Orchestra's repertoire through the '40s and '50s. "Every Picture Tells a Story" is the title track from Rod Stewart's groundbreaking 1971 album, one of the first rock and roll records to emphasize acoustic instruments. "Take the 'A' Train," another in a long list of Duke Ellington classics, is indeed one of the trains that stops just minutes from our midtown Manhattan offices. When it comes to small-cap stocks and a long-term investment horizon, like country music legend Johnny Cash, "We Walk The Line." "It Don't Mean A Thing (If It Ain't Got That Swing)," yet another Ellington gem, is one of the best-known songs of the swing era, and says it all about the music that once again has the country hopping. "The Times They Are A-Changin," the title song from an early Bob Dylan record, comes from what is probably the most famous protest album of all time. - -------------------------------------------------------------------------------- THE ROYCE FUNDS ANNUAL REPORT 1998 | 9 [START SIDEBAR] WHAT WE DO Royce Value Trust ("RVT") is a closed-end fund that invests primarily in small- and micro-cap companies using a disciplined value approach. HOW WE DID Royce Value Trust finished 1998 with a solid fourth-quarter showing, up 16.7% on an NAV basis and 9.9% on a market price basis. This compares to 16.3% for the Russell 2000 and 17.6% for the S&P 600, the two small-cap benchmark indices. For the full year, RVT outperformed both indices, posting a 3.3% NAV total return (+1.5% market price total return) versus respective returns of -2.6% and -1.3% for the Russell 2000 and S&P 600. In addition, RVT's average annual NAV total return bested both indices for the three-, five-, 10-year and since inception (11/26/86) periods. In 1998's second half, the Fund benefited from an increased exposure to technology stocks, a market-leading sector within both large- and small-cap in 1998. Strong gains from portfolio securities in this market-leading sector made important contributions to the Fund's 1998 performance. This increased exposure to technology is not indicative of a change in our investment style, but instead reflects the growing role technology plays in the economy, which includes a vastly expanding universe of small-cap technology companies. We remain committed to absolute valuation measures in our selection process. RVT, which celebrated its twelfth year of performance, remains the oldest and largest small-company closed-end fund available. The Fund's officers, employees and affiliates currently own more than $4 million of the Fund's Common Stock. [END SIDEBAR] ROYCE VALUE TRUST - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 12/31/98 - -------------------------------------------------------------------------------- 4th Quarter 1998* 16.7% - ------------------------------------------------------------------------------- July-Dec 1998* -4.8 - -------------------------------------------------------------------------------- 1-Year 3.3 - -------------------------------------------------------------------------------- 3-Year 15.0 - -------------------------------------------------------------------------------- 5-Year 13.5 - -------------------------------------------------------------------------------- 10-Year 14.4 - -------------------------------------------------------------------------------- Since Inception (11/26/86) 13.0 - --------------------------------------------------------------------------------
*Not annualized.
- -------------------------------------------------------------------------------- RISK/RETURN COMPARISON 10-Year Period Ended 12/31/98 - -------------------------------------------------------------------------------- Average Annual Standard Total Return Deviation RUR - -------------------------------------------------------------------------------- RVT (NAV) 14.4% 11.9 1.21 - -------------------------------------------------------------------------------- S&P 600 13.2 16.8 0.79 - -------------------------------------------------------------------------------- Russell 2000 12.9 16.6 0.78 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 10 years, Royce Value Trust has outperformed the S&P 600 and the Russell 2000 on BOTH an absolute and a risk-adjusted basis. - -------------------------------------------------------------------------------- ROYCE VALUE TRUST MARKET PRICE -- ACTUAL vs. ADJUSTED* - --------------------------------------------------------------------------------
- --------------------------- Market Price Total Returns - --------------------------- Since Inception = 248.2% - --------------------------- 10 Years = 276.4 - --------------------------- 5 Years = 72.9 - --------------------------- 3 Years = 52.0 - --------------------------- 1 Year = 1.5 - ---------------------------
Adjusted Market Price Actual Market Price [PLOT POINTS] Royce Value Trust Actual vs. Adjusted Market Price Chart
Actual Adjusted Market Price Market Price ------------ ------------ 11/26/86 10 10 12/31/86 9.88 9.88 1/31/87 10.75 10.75 2/28/87 9.75 9.75 3/31/87 9.63 9.63 4/30/87 8.63 8.63 5/31/87 9.5 9.5 6/30/87 9.38 9.37 7/31/87 9.13 9.12 8/31/87 9.5 9.5 9/30/87 9.25 9.25 10/31/87 7 7.3 11/30/87 6.63 6.91 12/31/87 6.75 7.26 1/31/88 7 7.53 2/29/88 8 8.6 3/31/88 8.13 8.73 4/30/88 8 8.6 5/31/88 7.88 8.46 6/30/88 8.63 9.27 7/31/88 8.5 9.14 8/31/88 8.38 9 9/30/88 8.88 9.54 10/31/88 8.63 9.27 11/30/88 8.25 8.87 12/31/88 8.13 9.25 1/31/89 8.75 9.96 2/28/89 8.5 9.68 3/31/89 8.88 10.1 4/30/89 9.13 10.39 5/31/89 9.38 10.67 6/30/89 9.25 10.53 7/31/89 9.63 10.96 8/31/89 9.75 11.1 9/30/89 9.63 10.99 10/31/89 9.5 10.84 11/30/89 9.5 10.84 12/31/89 9.5 11.46 1/31/90 8.88 10.71 2/28/90 8.75 10.56 3/31/90 9.25 11.16 4/30/90 9.25 11.16 5/31/90 9.5 11.46 6/30/90 9.63 11.61 7/31/90 9.5 11.31 8/31/90 8.25 10.26 9/30/90 7.88 9.53 10/31/90 7.25 8.78 11/30/90 7.75 9.38 12/31/90 8.13 10.23 1/31/91 8.75 10.85 2/28/91 9.88 12.43 3/31/91 10.38 13.05 4/30/91 10.75 13.53 5/31/91 10.25 12.9 6/30/91 10 12.58 7/31/91 10.13 12.74 8/31/91 9.88 12.42 9/30/91 9.88 12.46 10/31/91 10.25 12.93 11/30/91 10 12.61 12/31/91 10.38 13.83 1/31/92 11 14.67 2/29/92 11.75 15.67 3/31/92 11.5 15.33 4/30/92 11.63 15.5 5/31/92 11.38 15.33 6/30/92 11.25 15 7/31/92 11.25 15 8/31/92 11.13 14.83 9/30/92 11.38 15.19 10/31/92 11.5 15.36 11/30/92 12.63 16.86 12/31/92 12.25 17.54 1/31/93 12.75 18.25 2/28/93 12.88 18.25 3/31/93 13 18.61 4/30/93 12.88 18.43 5/31/93 12.88 18.43 6/30/93 13.13 18.79 7/31/93 13.38 19.33 8/31/93 13.63 19.5 9/30/93 13.75 19.75 10/31/93 14.25 20.47 11/30/93 13.88 19.94 12/31/93 12.88 20.13 1/31/94 13.25 20.72 2/28/94 13 20.33 3/31/94 12.25 19.16 4/30/94 12.5 19.55 5/31/94 12.38 19.35 6/30/94 12.25 19.16 7/31/94 12.38 19.35 8/31/94 12.63 19.74 9/30/94 12 18.76 10/31/94 11.63 18.18 11/30/94 12.13 19.18 12/31/94 11 19 1/31/95 11.63 20.08 2/28/95 11.75 20.3 3/31/95 11.38 19.65 4/30/95 11.88 20.52 5/31/95 12.13 20.73 6/30/95 12 20.73 7/31/95 12.63 21.81 8/31/95 13.13 22.68 9/30/95 13.5 23.33 10/31/95 12.88 22.25 11/30/95 13.25 23.1 12/31/95 11.88 22.91 1/31/96 12.38 23.87 2/29/96 12.13 23.39 3/31/96 12.25 23.63 4/30/96 12.25 23.63 5/31/96 12.63 24.35 6/30/96 12.38 23.87 7/31/96 11.63 22.42 8/31/96 12.25 23.63 9/30/96 12.63 24.35 10/31/96 12.38 23.87 11/30/96 12.88 24.84 12/31/96 12.63 26.64 1/31/97 12.38 26.11 2/28/97 12.5 26.37 3/31/97 11.75 24.79 4/30/97 11.88 25.06 5/31/97 12.75 26.9 6/30/97 13.75 29.01 7/31/97 14.25 30.07 8/31/97 15.31 32.31 9/30/97 16.25 35.01 10/31/97 15.5 33.39 11/30/97 16.44 35.41 12/31/97 15.06 34.32 1/31/98 14.94 34.03 2/28/98 16.13 36.74 3/31/98 17.13 39.88 4/30/98 16.94 39.45 5/31/98 16.75 39.01 6/30/98 16.5 39.35 7/31/98 15.13 36.07 8/31/98 11.75 28.02 9/30/98 12.88 31.68 10/31/98 13.69 33.68 11/30/98 14 34.45 12/31/98 13.75 34.82
---------------------------------------- Annual distribution totals as indicated ---------------------------------------- Adjusted Market Price Actual Market Price The regular reinvestment of distributions makes a difference! * 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. 10 | THE ROYCE FUNDS ANNUAL REPORT 1998 PERFORMANCE AND PORTFOLIO REVIEW [bar chart] DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater, in Percentages (%)
RVT (NAV) Russell 2000 --------------------- --------------------- 8/25/87- -26.4% 8/25/87- -38.9% 10/28/87 10/28/87 10/9/89- -22.1% 10/9/89- -32.5% 10/31/90 10/31/90 2/12/92- -2.1% 2/12/92- -12.0% 7/8/92 7/8/92 3/18/94- -5.3% 3/18/94- -12.3% 12/9/94 12/9/94 5/22/96- -6.3% 5/22/96- -15.4% 7/24/96 7/24/96 1/22/97- -3.1% 1/22/97- -9.0% 4/25/97 4/25/97 10/31/97- -8.1% 10/31/97- -11.1% 1/12/98 1/12/98 4/21/98- -31.3% 4/21/98- -36.5% 10/8/98 10/8/98
[END BAR CHART] Royce Value Trust has outperformed the Russell 2000 during all eight major downturns since its inception.
- --------------------------------------- ---------------------------------- PORTFOLIO DIAGNOSTICS TOP 10 POSITIONS % of Net Assets - --------------------------------------- ---------------------------------- Median Market Cap. $355 million National Computer Systems 1.3% - --------------------------------------- ---------------------------------- Weighted Average P/E Ratio 15.6x Velcro Industries 1.2 - --------------------------------------- ---------------------------------- Weighted Average P/B Ratio 1.7x Alliance Capital - --------------------------------------- Management L.P. 1.1 Weighted Average Yield 1.5% ---------------------------------- - --------------------------------------- Charming Shoppes 1.0 Net Assets $677 million ---------------------------------- - --------------------------------------- Medical Assurance 0.9 Turnover Rate 43% ---------------------------------- - --------------------------------------- Dionex Corporation 0.8 Net Leverage+ 15% ---------------------------------- - --------------------------------------- Farmer Bros. 0.8 Symbol -- Market Price RVT ---------------------------------- -- NAV XRVTX Crawford & Company 0.8 - --------------------------------------- ---------------------------------- Unitrode Corporation 0.8 ---------------------------------- Florida Rock Industries 0.8 ----------------------------------
+Net leverage is the percentage, in excess of 100%, of the total value of equity type investments divided by net assets, excluding preferred stock. [START BAR CHART]
- ----------------------------------------------------------------------------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN With Examples % of Net Assets - ----------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------| Industrial Products Building Systems and Components, Construction Materials, Specialty Chemicals and Materials 17.2% | - ------------------------------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------------------------------------| Technology Components and Systems, Software/Services, Semiconductors and Equipment 14.5 | - ----------------------------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------------------| Industrial Services Transportation and Logistics, Printing, Engineering and Construction 11.8 | - --------------------------------------------------------------------------------------------------------------------------| - ------------------------------------------------------------------------------------------------------------------------| Consumer Products Home Furnishings/Appliances, Apparel and Shoes, Publishing 10.5 | - ------------------------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------------------------------| Financial Intermediaries Insurance, Banking, Closed-end Funds, Securities Brokers 9.3 | - ----------------------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------------| Financial Services Insurance Brokers, Investment Management, Information and Processing 7.8 | - --------------------------------------------------------------------------------------------------------------------| - ------------------------------------------------------------------------------------------------------------------| Natural Resources Oil and Gas, Energy Services, Real Estate 3.7 | - ------------------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------------------------| Consumer Services Retail Stores, Restaurants/Lodging, Leisure/Entertainment 3.0 | - ----------------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------| Health Surgical Products and Devices, Drugs and Biotech, Health Services 2.8 | - --------------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------------------| Utilities 0.5 | - ----------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------| Miscellaneous 4.8 | - --------------------------------------------------------------------------------------------------------------| - ------------------------------------------------------------------------------------------------------------| Bonds & Preferred Stocks 2.1 | - ------------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------------------| Treasuries, Cash & Cash Equivalents 12.0 | - --------------------------------------------------------------------------------------------------------------------------|
[END BAR CHART]
- ------------------------------------------- GOOD IDEAS THAT WORKED 1998 Realized and Unrealized Gain - ------------------------------------------- Level 3 Communications $ 5,271,475 - ------------------------------------------- National Computer Systems 5,019,005 - ------------------------------------------- Velcro Industries 2,968,297 - ------------------------------------------- LandAmerica Financial Group 2,574,274 - ------------------------------------------- MacDermid Incorporated 2,430,193 - ------------------------------------------- Combined Gain $18,263,244 - -------------------------------------------
- ------------------------------------------- GOOD IDEAS AT THE TIME 1998 Realized and Unrealized Loss - ------------------------------------------- Denbury Resources $ 6,429,892 - ------------------------------------------- DIMON Incorporated 3,331,181 - ------------------------------------------- Standard Commercial Corporation 2,216,392 - ------------------------------------------- Special Metals Corporation 1,657,084 - ------------------------------------------- Willbros Group 1,622,789 - ------------------------------------------- Combined Loss $15,257,338 - -------------------------------------------
Level 3 Communications -- Our strongest performer at mid-year, Level 3 Communications continued to be recognized in the market. We bought this Internet pipeline builder in the pink sheets when it was not yet a Nasdaq company, saw its price triple, and took our profits. National Computer Systems -- Dominant in the educational testing business for many years, this company has emerged as a true leader in technology solutions for both educational and large corporate customers. A long-term core holding in the Fund, the combination of solid results and market recognition improved not only the company's business, but also its valuations. Denbury Resources -- The senior managers of this small energy company have significant experience at successfully building energy enterprises. Having suffered from the general collapse in energy prices, we believe that the talented management team will help this stock to turn around when energy prices recover. DIMON Incorporated -- The world's second largest tobacco leaf processor has suffered from a downturn in its cyclical business, the turmoil in emerging markets like Brazil and Southeast Asia from which it procures tobacco and the difficult circumstances surrounding a cautious U.S. customer base that is being sued by the government. We continue to hold the stock under hopeful assumptions that cycles turn, emerging markets recover and governments don't put tobacco companies out of business. THE ROYCE FUNDS ANNUAL REPORT 1998 | 11 ROYCE MICRO-CAP TRUST - -------------------------------------------------------------------------------- [START SIDEBAR] WHAT WE DO Royce Micro-Cap Trust ("OTCM") is a closed-end fund that uses a value approach to invest primarily in a broadly diversified portfolio of companies with market capitalizations of less than $300 million. We believe that the more volatile micro-cap sector, while often higher in risk, offers greater potential for higher returns than any other sector of the domestic equity marketplace. HOW WE DID Royce Micro-Cap Trust's results reflect the performance difficulties of its investment universe. 1998 was an especially turbulent year for micro-cap stocks, marked by increased volatility and underperformance relative to the equity market as a whole. Investors' preference for larger, more liquid stocks kept micro-cap companies out of the investment spotlight. For the quarter, the Fund was up 9.8% on an NAV basis and 13.8% on a market price basis versus 16.3% for the Russell 2000, the Fund's small-cap benchmark index. For the full year, both NAV and market price performance (-4.1% and -9.4%) trailed the index (-2.6%). On an NAV basis, however, OTCM outperformed the Russell 2000 for the three-year, five-year and since inception (12/14/93) periods. Although OTCM did not perform as we would have liked in 1998, we remain excited about the long-term investment opportunities in micro-cap stocks. OTCM now has five years of performance history and is the only closed-end micro-cap fund available. The Fund's officers, employees and their affiliates currently own more than $8 million, or 7.5% of the Fund's Common Stock. Royce Micro-Cap Trust is now featured in the mutual funds section of MicroCap1000.com (www.microcap1000.com), a web-site dedicated to the micro-cap investment universe. [END SIDEBAR]
- -------------------------------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 12/31/98 - -------------------------------------------------------------------------------- 4th Quarter 1998* 9.8% - -------------------------------------------------------------------------------- Jul-Dec 1998* -11.5 - -------------------------------------------------------------------------------- 1-Year -4.1 - -------------------------------------------------------------------------------- 3-Year 12.4 - -------------------------------------------------------------------------------- 5-Year 13.1 - -------------------------------------------------------------------------------- Since Inception (12/14/93) 13.0 - --------------------------------------------------------------------------------
*Not annualized.
- -------------------------------------------------------------------------------- RISK/RETURN COMPARISON From Inception (12/14/93) Through 12/31/98 - -------------------------------------------------------------------------------- Average Annual Standard Total Return Deviation RUR - -------------------------------------------------------------------------------- OTCM (NAV) 13.0% 12.2 1.07 - -------------------------------------------------------------------------------- Russell 2000 12.5% 16.7 0.75 - -------------------------------------------------------------------------------- Return per Unit of Risk (RUR) is the average annual total return divided by the annualized standard deviation over a designated time period. - --------------------------------------------------------------------------------
Since its inception, Royce Micro-Cap Trust has outperformed the Russell 2000 on BOTH an absolute and a risk-adjusted basis. - -------------------------------------------------------------------------------- ROYCE MICRO-CAP TRUST MARKET PRICE -- ACTUAL vs. ADJUSTED* - --------------------------------------------------------------------------------
- -------------------------- Market Price Total Returns - -------------------------- Since Inception = 58.3% - -------------------------- 5 Years = 58.3 - -------------------------- 3 Years = 39.3 - -------------------------- 1 Year = -9.4 - --------------------------
Adjusted Market Price Actual Market Price [PLOT POINTS] Royce Micro-Cap Trust Actual vs. Adjusted Market Price Chart
Actual Adjusted Market Price Market Price ------------ ------------ 12/15/93 7.5 7.5 1/31/94 7.75 7.75 2/28/94 7.5 7.5 3/31/94 6.5 6.5 4/30/94 6.63 6.63 5/31/94 7.13 7.13 6/30/94 6.75 6.75 7/31/94 7 7 8/31/94 7.13 7.13 9/30/94 7 7 10/31/94 7.38 7.38 11/30/94 7.13 7.19 12/31/94 7 7.11 1/31/95 6.75 6.86 2/28/95 7.13 7.24 3/31/95 6.88 6.98 4/30/95 6.88 6.98 5/31/95 7 7.11 6/30/95 7.38 7.49 7/31/95 7.75 7.87 8/31/95 8 8.13 9/30/95 8.38 8.51 10/31/95 7.75 7.87 11/30/95 7.63 7.75 12/31/95 8 8.52 1/31/96 7.75 8.25 2/29/96 7.75 8.25 3/31/96 7.75 8.25 4/30/96 8.38 8.92 5/31/96 8.38 8.92 6/30/96 8.63 9.18 7/31/96 7.75 8.25 8/31/96 7.94 8.45 9/30/96 8 8.52 10/31/96 8 8.52 11/30/96 8.5 9.05 12/31/96 8.25 9.71 1/31/97 7.88 9.3 2/28/97 8 9.41 3/31/97 7.63 8.97 4/30/97 8.13 9.56 5/31/97 8.63 10.15 6/30/97 8.98 10.57 7/31/97 9.06 10.66 8/31/97 9.63 11.32 9/30/97 11.19 13.16 10/31/97 10.88 12.79 11/30/97 10.81 12.72 12/31/97 10.13 13.1 1/31/98 9.75 12.62 2/28/98 10.38 13.43 3/31/98 11.31 13.64 4/30/98 11.13 14.4 5/31/98 10.75 13.91 6/30/98 10.31 13.35 7/31/98 9.75 12.62 8/31/98 7.81 10.11 9/30/98 8.06 10.43 10/31/98 8.25 10.67 11/30/98 8.94 11.56 12/31/98 8.88 11.87
--------------------------------------- Annual distribution totals as indicated --------------------------------------- The regular reinvestment of distributions makes a difference! * 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. 12 | THE ROYCE FUNDS ANNUAL REPORT 1998 PERFORMANCE AND PORTFOLIO REVIEW - -------------------------------------------------------------------------------- [bar chart] DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater, in Percentages (%)
OTCM (NAV) Russell 2000 --------------------- --------------------- 3/18/94- -0.4% 3/18/94- -12.3% 12/9/94 12/9/94 5/22/96- -6.8% 5/22/96- -15.4% 7/24/96 7/24/96 1/22/97- -3.4% 1/22/97- -9.0% 4/25/97 4/25/97 10/31/97- -7.4% 10/31/97- -11.3% 1/12/98 1/12/98 4/21/98- -29.9% 4/21/98- -36.5% 10/8/98 10/8/98
[END BAR CHART] Royce Micro-Cap Trust has outperformed the Russell 2000 during all five major downturns since its inception.
- --------------------------------------- --------------------------------- PORTFOLIO DIAGNOSTICS TOP 10 POSITIONS % of Net Assets - --------------------------------------- --------------------------------- Median Market Cap. $166 million Midwest Grain Products 1.5% - --------------------------------------- --------------------------------- Weighted Average P/E Ratio 13.7x Matthews International - --------------------------------------- Corporation Cl.A 1.5 Weighted Average P/B Ratio 1.5x --------------------------------- - --------------------------------------- 800-JR CIGAR 1.3 Weighted Average Yield 1.3% --------------------------------- - --------------------------------------- REMEC 1.2 Net Assets $175 million --------------------------------- - --------------------------------------- Duff & Phelps Credit Rating 1.1 Turnover Rate 44% --------------------------------- - --------------------------------------- Advanced Energy Industries 1.1 Net Leverage+ 5% --------------------------------- - --------------------------------------- Oshkosh B'Gosh Cl. A 1.1 Symbol -- Market Price OTCM --------------------------------- -- NAV XOTCX Velcro Industries 1.0 - --------------------------------------- --------------------------------- Ash Grove Cement Company 1.0 --------------------------------- New England Business Service 1.0 ---------------------------------
+Net leverage is the percentage, in excess of 100%, of the total value of equity type investments divided by net assets, excluding preferred stock. [START BAR GRAPH]
- -------------------------------------------------------------------------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN With Examples % of Net Assets - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------| Industrial Products Building Systems and Components, Construction Materials, Specialty Chemicals and Materials 19.2% | - --------------------------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------------| Technology Components and Systems, Software/Services, Semiconductors and Equipment 14.9 | - --------------------------------------------------------------------------------------------------------------------| - ---------------------------------------------------------------------------------------------------------------| Consumer Products Home Furnishings/Appliances, Apparel and Shoes, Publishing 13.4 | - ---------------------------------------------------------------------------------------------------------------| - -----------------------------------------------------------------------------------------------------------| Industrial Services Transportation and Logistics, Printing, Engineering and Construction 10.9 | - -----------------------------------------------------------------------------------------------------------| - -------------------------------------------------------------------------------------------------------| Financial Intermediaries Insurance, Banking, Closed-end Funds, Securities Brokers 6.3 | - -------------------------------------------------------------------------------------------------------| - -------------------------------------------------------------------------------------------------| Consumer Services Retail Stores, Restaurants/Lodging, Leisure/Entertainment 3.4 | - -------------------------------------------------------------------------------------------------| - ------------------------------------------------------------------------------------------------| Health Surgical Products and Devices, Drugs and Biotech, Health Services 3.3 | - ------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------| Natural Resources Oil and Gas, Energy Services, Real Estate 3.0 | - ----------------------------------------------------------------------------------------------| - ---------------------------------------------------------------------------------------------| Financial Services Insurance Brokers, Investment Management, Information and Processing 1.5 | - ---------------------------------------------------------------------------------------------| - ------------------------------------------------------------------------------------------------------| Miscellaneous 4.6 | - ------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------| Preferred Stock 0.4 | - ----------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------------------------| Treasuries, Cash & Cash Equivalents 19.1 | - --------------------------------------------------------------------------------------------------------------------------|
[END BAR GRAPH]
- ----------------------------------------- GOOD IDEAS THAT WORKED 1998 Realized and Unrealized Gain - ----------------------------------------- REMEC $1,153,691 - ----------------------------------------- Advanced Energy Industries 1,132,298 - ----------------------------------------- MovieFone Cl. A 1,103,528 - ----------------------------------------- 800-JR CIGAR 1,007,575 - ----------------------------------------- International Isotopes 964,328 - ----------------------------------------- Combined Gain $5,361,420 - -----------------------------------------
- ----------------------------------------- GOOD IDEAS AT THE TIME 1998 Realized and Unrealized Loss - ----------------------------------------- Denbury Resources $1,085,985 - ----------------------------------------- RockShox 987,388 - ----------------------------------------- Perceptron 966,934 - ----------------------------------------- Willbros Group 917,378 - ----------------------------------------- Axiohm Transaction Solutions 720,428 - ----------------------------------------- Combined Loss $4,678,113 - -----------------------------------------
REMEC -- This small microwave component manufacturer suffered from declining orders as a result of problems in Southeast Asia and as a result we were able to buy this stock at a very attractive price. They have a solid business with the military and it now appears as if their commercial business is recovering, which has caused a dramatic reversal in share price performance. MovieFone Cl. A -- Patience paid off in 1998 as this company was discovered by investors looking for promising Internet plays. MovieFone, which provides information for moviegoers, successfully migrated to the web with a business model that may actually be profitable -- unlike many Internet companies. Denbury Resources -- The senior managers of this small energy company have significant experience at successfully building energy enterprises. Having suffered from the general collapse in energy prices, we believe that the talented management team will help this stock to turn around when energy prices recover. Perceptron -- This leading manufacturer of three-dimensional image units for automobile-inspections robots continued to suffer from difficult product transition cycles. That drove this stock from a high of $30 all the way down to $6. We have increased our position due to our confidence in this company's ability to develop new products and technology. THE ROYCE FUNDS ANNUAL REPORT 1998 | 13 ROYCE GLOBAL TRUST - -------------------------------------------------------------------------------- [START SIDEBAR] WHAT WE DO Royce Global Trust ("FUND") is a closed-end fund that invests primarily in a limited number of domestic and foreign companies, selected using a value approach. While it is not restricted as to stock market capitalization, Royce focuses the Fund's investments primarily in small-cap companies with significant business activities in the United States. Normally, at least 65% of the assets will be invested in the securities of companies of at least three countries, including the United States. HOW WE DID Royce Global Trust's more concentrated approach produced out-of-sync returns relative to its small-cap benchmark index for the fourth quarter and for the year. In the fourth quarter, the Fund generated NAV and market price total returns of 5.4% and 1.3% and for the full year returns of -6.8% and -3.7%, respectively. The Russell 2000's returns for these periods were 16.3% and -2.6%, respectively. Several sectors, including natural resources, consumer products and industrial products were mired in performance difficulties. Although we were disappointed with the performance of the domestic small-cap sector in general and FUND in particular, we are excited about the long-term prospects for both. The significant small-cap downturn from April 21, 1998 through October 8, 1998 created numerous investment opportunities for the Fund, which we believe can potentially translate into future performance. The Fund's officers, employees and their affiliates increased their commitment during the quarter and now own more than $4 million, or 10%, of the Fund's Common Stock. [END SIDEBAR]
- -------------------------------------------------------------------------------- NAV AVERAGE ANNUAL TOTAL RETURNS Through 12/31/98 - -------------------------------------------------------------------------------- 4th Quarter 1998* 5.4% - -------------------------------------------------------------------------------- Jul-Dec 1998* -12.4 - -------------------------------------------------------------------------------- 1-Year -6.8 - -------------------------------------------------------------------------------- Since Inception** (11/1/96) 7.7 - --------------------------------------------------------------------------------
*Not annualized. **Royce & Associates assumed investment management responsibility for the Fund on 11/1/96. - -------------------------------------------------------------------------------- ROYCE GLOBAL TRUST MARKET PRICE -- ACTUAL vs. ADJUSTED* - --------------------------------------------------------------------------------
- --------------------------- Market Price Total Returns - --------------------------- Since 6/25/96 = 28.2% - --------------------------- Since 11/1/96 = 22.7 - --------------------------- 1 Year = -3.7 - ---------------------------
Adjusted Market Price Actual Market Price [PLOT POINTS] Royce Global Trust Actual vs. Adjusted Market Price Chart
Actual Adjusted Market Price Market Price ------------ ------------ 6/15/96 4.19 4.19 7/31/96 4.19 4.19 8/31/96 4.13 4.13 9/30/96 4.13 4.13 10/31/96 4.38 4.38 11/30/96 4.66 4.66 12/31/96 4.59 4.59 1/31/97 4.75 4.75 2/28/97 4.56 4.56 3/31/97 4.88 4.88 4/30/97 4.72 4.72 5/31/97 4.81 4.81 6/30/97 5 5 7/31/97 5.28 5.28 8/31/97 5.44 5.44 9/30/97 6.06 6.06 10/31/97 5.69 5.69 11/30/97 5.69 5.69 12/31/97 5.06 5.57 1/31/98 5.13 5.64 2/28/98 5.25 5.78 3/31/98 5.66 6.23 4/30/98 5.94 6.54 5/31/98 5.66 6.23 6/30/98 5.5 6.05 7/31/98 5.56 6.12 8/31/98 4.38 4.82 9/30/98 4.81 5.3 10/31/98 4.63 5.09 11/30/98 4.81 5.3 12/31/98 4.88 5.37
--------------------------------------- Annual distribution totals as indicated --------------------------------------- * Reflects market price total return experience of a continuous stockholder who reinvested all distributions. This graph illustrates the market price change from $4.1875 on 6/25/96, the date the Fund's Board announced its recommendation that stockholders approve the assumption by Royce & Associates of investment management responsibility for the Fund. - -------------------------------------------------------------------------------- ROYCE GLOBAL TRUST MARKET CAPITALIZATION BREAKDOWN* As of December 31, 1998 - -------------------------------------------------------------------------------- [START BAR GRAPH] -------------------------------| [more than sign]$1,000 - 25%| -------------------------------| ----------------------------------| $500-$1,000 - 28%| ----------------------------------| -------------------------------------------| $300-$500 - 32%| -------------------------------------------| ----------------------| [less than sign]$300 - 18%| ----------------------| -------------------------------------------------------- 0% 10% 20% 30% 40% % of Portfolio - -------------------------------------------------------------------------------- *in millions [END BAR GRAPH] 14 | THE ROYCE FUNDS ANNUAL REPORT 1998 PERFORMANCE AND PORTFOLIO REVIEW - --------------------------------------------------------------------------------
- ------------------------------------------ PORTFOLIO DIAGNOSTICS - ------------------------------------------ Median Market Cap. $654 million - ------------------------------------------ Weighted Average P/E Ratio 15.7x - ------------------------------------------ Weighted Average P/B Ratio 1.6x - ------------------------------------------ Weighted Average Yield 1.9% - ------------------------------------------ Top 3 Countries: U.S. (79%), Canada (4%), Belize (2%) - ------------------------------------------ Net Assets $67 million - ------------------------------------------ Turnover Rate 90% - ------------------------------------------ Net Leverage+ 10% - ------------------------------------------ Symbol -- Market Price FUND -- NAV XFUNX - ------------------------------------------
+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 - ------------------------------------------ Charming Shoppes 5.3% - ------------------------------------------ Enesco Group 4.5 - ------------------------------------------ Morrison Knudsen Corporation 4.1 - ------------------------------------------ Kaydon Corporation 3.9 - ------------------------------------------ Medical Assurance 3.6 - ------------------------------------------ Gibson Greetings 3.5 - ------------------------------------------ Oakley 3.5 - ------------------------------------------ Trenwick Group 3.0 - ------------------------------------------ E.W. Blanch Holdings 2.7 - ------------------------------------------ New England Business Service 2.7 - ------------------------------------------
[START BAR GRAPH]
- -------------------------------------------------------------------------------------------------------------------------- PORTFOLIO SECTOR BREAKDOWN With Examples % of Net Assets - -------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------| Industrial Products Building Systems and Components, Construction Materials, Specialty Chemicals and Materials 13.8% | - -----------------------------------------------------------------------------------------------------------------------| - -----------------------------------------------------------------------------------------------------------| Industrial Services Transportation and Logistics, Printing, Engineering and Construction 11.9 | - -----------------------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------------------| Consumer Products Home Furnishings/Appliances, Apparel and Shoes, Publishing 11.5 | - --------------------------------------------------------------------------------------------------------| - ----------------------------------------------------------------------------------------------------| Financial Intermediaries Insurance, Banking, Closed-end Funds, Securities Brokers 8.3 | - ----------------------------------------------------------------------------------------------------| - -------------------------------------------------------------------------------------------------| Financial Services Insurance Brokers, Investment Management, Information and Processing 8.1 | - -------------------------------------------------------------------------------------------------| - -----------------------------------------------------------------------------------------------| Technology Components and Systems, Software/Services, Semiconductors and Equipment 7.9 | - -----------------------------------------------------------------------------------------------| - --------------------------------------------------------------------------------------------| Natural Resources Oil and Gas, Energy Services, Real Estate 7.1 | - --------------------------------------------------------------------------------------------| - -----------------------------------------------------------------------------------------| Consumer Services Retail Stores, Restaurants/Lodging, Leisure/Entertainment 6.6 | - -----------------------------------------------------------------------------------------| - -------------------------------------------------------------------------------------| Health Surgical Products and Devices, Drugs and Biotech, Health Services 2.2 | - -------------------------------------------------------------------------------------| - -----------------------------------------------------------------------------------------------------------------------------| Treasuries, Cash & Cash Equivalents 22.6 | - -----------------------------------------------------------------------------------------------------------------------------|
[END BAR GRAPH]
- ------------------------------------------ GOOD IDEAS THAT WORKED 1998 Realized and Unrealized Gain - ------------------------------------------ Level 3 Communications $1,231,056 - ------------------------------------------ National Computer Systems 1,031,803 - ------------------------------------------ EarthWeb 1,017,858 - ------------------------------------------ Ryanair Holdings ADR 662,566 - ------------------------------------------ Kaydon Corporation 630,352 - ------------------------------------------ Combined Gain $4,573,635 - ------------------------------------------
- ------------------------------------------ GOOD IDEAS AT THE TIME 1998 Realized and Unrealized Loss - ------------------------------------------ Gibson Greetings $1,511,525 - ------------------------------------------ Denbury Resources 804,997 - ------------------------------------------ The Pioneer Group 798,763 - ------------------------------------------ Willbros Group 793,141 - ------------------------------------------ Input Output 691,829 - ------------------------------------------ Combined Loss $4,600,255 - ------------------------------------------
Level 3 Communications -- Our strongest performer at mid-year, Level 3 Communications continued to be recognized in the market. We bought this Internet pipeline builder in the pink sheets when it was not yet a Nasdaq company, saw its price triple, and took our profits. National Computer Systems -- Dominant in the educational testing business for many years, this company has emerged as a true leader in technology solutions for both educational and large corporate customers. A long-term core holding in the Fund, the combination of solid results and market recognition improved not only the company's business, but also its valuations. Gibson Greetings -- A multiple of new products and new ventures in 1998 were not enough to overcome a difficult competitive landscape in the greeting-card industry, while near-term earnings disappointments caused the stock to trade at a fraction of its book value. Although a losing proposition so far, we remain encouraged by the company's strong balance sheet, large cash position and highly motivated and very creative management team. Denbury Resources -- The senior managers of this small energy company have significant experience at successfully building energy enterprises. We sold our position to realize the tax loss, not due to a lack of confidence in the company, whose valuations may become attractive again in the future. THE ROYCE FUNDS ANNUAL REPORT 1998 | 15 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 - ---------------------------------------------------------------------------------------------------------------- 12/31/98 $16,322 3,455 $54,313 $47,506 - ---------------------------------------------------------------------------------------------------------------- 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 52 - ---------------------------------------------------------------------------------------------------------------- 12/31/98 $ 8,900 1,592 $16,016 $14,129 - ---------------------------------------------------------------------------------------------------------------- Royce Global 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 $ 4,375 1,101 $ 6,199 $ 5,367 - ----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- * Other than for initial purchase, values are stated as of December 31 of the year indicated, after reinvestment of distributions. 16 | THE ROYCE FUNDS ANNUAL REPORT 1998 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? Simply put, 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, 1999. 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 Investor Services Representatives 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 02266-8200, telephone (800) 426-5523. THE ROYCE FUNDS ANNUAL REPORT 1998 | 17 UPDATES AND NOTES TO PERFORMANCE AND RISK INFORMATION - -------------------------------------------------------------------------------- [Graphic of Computer and Keyboard with "The Royce Funds" on monitor] NEW @ www.roycefunds.com New this quarter on our website is the addition of Fund prices for our open- and closed-end funds. Fund prices are updated daily on the site and can be found in the Performance/Diagnostics/Prices section. Our What's New column continues to be popular. What's New is updated each week on Mondays and features fund updates, market commentary and Chuck Royce's latest thoughts. Y2K UPDATE Royce & Associates recently filed its report on Year 2000 (Y2K) readiness (Form ADV-Y2K), as required by the U.S. Securities and Exchange Commission. Form ADV-Y2K -- which is available on our website in Up-to-the-Minute's Recent Developments section -- asks for specific Y2K information, such as the existence and progress of Y2K compliance plans and contingency plans, systems that may be affected by Y2K and the Y2K readiness of third parties upon which Royce and its clients may be relying to perform mission critical services. Royce and the Funds are working to ensure that our systems and those of our service providers are Y2K compliant, and we do not anticipate that any Y2K problems will have a material impact on Royce's ability to provide services to the Funds at current levels. - -------------------------------------------------------------------------------- NOTES TO PERFORMANCE AND RISK INFORMATION All performance information is presented on a total return basis and reflects the reinvestment of distributions and participation in primary subscriptions of any rights offerings. 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. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future. Morningstar proprietary risk ratio measures a fund's downside volatility relative to all equity funds, which have an average score of 1.00. The average score for the 37 funds in the closed-end domestic equity objective category with a three-year history was 1.09 for the three years ended 12/31/98. The lower the risk ratio, the lower a fund's downside volatility has been. The risk scores for Royce Value Trust and Royce Micro-Cap Trust for this period were 0.98 and 1.02, respectively. 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, Nasdaq Composite, Nasdaq 100, Nasdaq Industrials, S&P 500, S&P 600 and Dow Jones Industrial Average are unmanaged indices of domestic common stocks. The Royce Funds is a service mark of The Royce Funds. The Boards of Directors have given Royce Value Trust's, Royce Micro-Cap Trust's and Royce Global Trust's management the discretionary authority to cause each Fund to repurchase up to 300,000 shares of its common stock in the open market and other transactions through December 31, 1999. Such repurchases would be effected at a price per share that is less than the then current net asset value, but not in excess of the then prevailing market price. The Boards of Directors of Royce Value Trust, Royce Micro-Cap Trust and Royce Global Trust are authorized to offer stockholders an opportunity to subscribe for additional shares of common stock of the Fund through rights offerings at a price per share that may be less than the then current net asset value of the Fund's common stock. The timing and terms of any such offering are left to the Board's discretion. - -------------------------------------------------------------------------------- 18 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - -------------------------------------------------------------------------------- COMMON STOCKS -- 85.9%
SHARES VALUE ------ ----- Consumer Products -- 10.5% Apparel and Shoes - 2.5% Garan Incorporated 116,300 $3,270,938 K-Swiss Cl. A 135,200 3,633,500 Marisa Christina, Incorporated* 62,600 89,987 Oshkosh B'Gosh Cl. A 198,800 4,013,275 St. John Knits 85,600 2,225,600 Weyco Group 159,400 4,044,775 ---------- 17,278,075 ---------- Collectibles - 0.5% Enesco Group 137,100 3,187,575 ---------- Food/Beverage/Tobacco - 0.7% 800-JR CIGAR* 86,000 1,999,500 Hershey Creamery Company 643 1,607,500 J & J Snack Foods* 5,000 111,875 WLR Foods* 106,577 959,193 ---------- 4,678,068 ---------- Home Furnishings/Appliances - 1.8% Bassett Furniture Industries 136,387 3,290,336 Burnham Corporation Cl. A 42,514 1,615,532 Burnham Corporation Cl. B 18,000 684,000 Conso International Corporation* 174,175 1,023,278 Ethan Allen Interiors 24,500 1,004,500 La-Z-Boy 28,200 502,313 Lifetime Hoan Corporation 221,069 2,155,423 The Rival Company 160,000 2,150,000 Semi-Tech Corporation Cl. A* 260,600 15,636 ---------- 12,441,018 ---------- Publishing - 0.9% Gibson Greetings* 111,700 1,326,437 The Reader's Digest Association Cl. A 5,000 125,938 Scholastic Corporation* 6,200 332,475 The Topps Company* 821,700 4,108,500 ---------- 5,893,350 ---------- Sports and Recreation - 1.6% Johnson Worldwide Associates Cl. A* 251,800 2,329,150 Oakley* 187,800 1,772,362 ++RockShox* 1,101,000 2,821,313 Sturm, Ruger & Company 322,000 3,843,875 ---------- 10,766,700 ---------- Other Consumer Products - 2.5% Lazare Kaplan International* 190,100 1,330,700 Marvel Enterprises* 250,900 1,552,444 Matthews International Corporation Cl. A 115,200 3,628,800 The L. S. Starrett Company Cl. A 73,700 2,528,831 Velcro Industries 54,200 8,075,800 ---------- 17,116,575 ---------- 71,361,361 ==========
SHARES VALUE ------ ----- Consumer Services -- 3.0% Direct Marketing - 0.1% Amway Japan ADR+ 154,500 $ 830,437 ---------- Leisure/Entertainment - 0.3% Linea Aerea Nacional Chile ADR*+ 10,000 47,500 Seattle Filmworks* 481,887 2,228,727 ---------- 2,276,227 ---------- Restaurants/Lodging - 0.9% Applebee's International 118,000 2,433,750 Buffets* 178,850 2,135,022 Lone Star Steakhouse & Saloon* 60,000 551,250 Papa John's International* 5,000 220,625 Sbarro* 24,200 633,738 ---------- 5,974,385 ---------- Retail Stores - 1.6% Abercrombie & Fitch Cl. A* 1,000 70,750 Catherines Stores Corporation* 214,300 2,330,512 Charming Shoppes* 801,000 3,454,313 Claire's Stores 2,400 49,200 Family Dollar Stores 4,700 103,400 Little Switzerland* 60,000 138,750 Mikasa 168,900 2,153,475 Pier 1 Imports 17,500 169,531 Sunglass Hut International* 325,400 2,277,800 Suzy Shier 10,000 62,152 ---------- 10,809,883 ---------- Other Consumer Services - 0.1% Groupe AB ADR*+ 51,500 99,781 ---------- 19,990,713 ========== Financial Intermediaries -- 9.3% Banking - 1.4% Boston Private Financial Holdings* 10,000 85,000 The First National Bank of Anchorage 2,100 2,205,000 The Mechanics Bank* 200 2,620,000 National Bancorp of Alaska 73,880 2,493,450 Oriental Financial Group 68,000 2,129,250 ---------- 9,532,700 ---------- Insurance - 7.8% Alleghany Corporation* 13,705 2,574,827 Baldwin & Lyons Cl. B 126,000 3,118,500 CNA Surety Corporation* 20,000 315,000 Capitol Transamerica Corporation 118,415 2,212,880 Chicago Title Corporation 49,415 2,319,417 The Commerce Group 49,318 1,747,707 Erie Indemnity Company Cl. A 17,000 531,250 Fremont General Corporation 76,700 1,898,325 Fund American Enterprises Holdings 18,400 2,577,150
THE ROYCE FUNDS ANNUAL REPORT 1998 | 19 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Financial Intermediaries (continued) Insurance (continued) Highlands Insurance Group* 147,500 $1,926,719 Independence Holding Company 56,664 793,296 Leucadia National Corporation 4,500 141,750 Markel Corporation* 2,200 398,200 Medical Assurance* 188,068 6,218,002 NYMAGIC 59,400 1,232,550 Nobel Insurance Limited 121,500 94,922 Old Guard Group 148,000 2,127,500 Orion Capital Corporation 50,874 2,025,421 PMA Capital Cl.A 193,400 3,783,387 PXRE Corporation 178,710 4,478,919 Philadelphia Consolidated Holdings* 9,200 208,150 RLI 26,662 886,512 Trenwick Group 111,850 3,649,106 Wesco Financial Corporation 11,490 4,076,077 Zenith National Insurance 170,700 3,947,438 ---------- 53,283,005 ---------- Securities Brokers - 0.1% Legg Mason 8,666 273,521 Raymond James Financial 7,500 158,437 ---------- 431,958 ---------- 63,247,663 ========== Financial Services -- 7.8% Information and Processing - 1.4% BARRA* 55,000 1,299,375 Duff & Phelps Credit Rating 74,600 4,089,013 Fair Isaac and Company, Incorporated 50,400 2,327,850 Investors Financial Services Corporation 26,259 1,565,693 ---------- 9,281,931 ---------- Insurance Brokers - 2.7% E.W. Blanch Holdings 85,900 4,074,881 Clark/Bardes Holdings* 90,900 1,533,937 Crawford & Company Cl. A 327,350 4,378,306 Crawford & Company Cl. B 75,300 1,162,444 Arthur J. Gallagher & Co. 101,900 4,496,338 Hilb, Rogal & Hamilton Company 146,075 2,903,241 ---------- 18,549,147 ---------- Investment Management - 3.7% Affiliated Managers Group* 97,000 2,897,875 Alliance Capital Management L.P. 295,400 7,606,550 Eaton Vance 161,800 3,377,575 The John Nuveen Company Cl. A 26,400 980,100 Lexington Global Asset Managers* 21,100 81,762 NVEST L.P. 81,400 2,263,938
SHARES VALUE ------ ----- PIMCO Advisors Holdings L.P. 112,740 $3,509,032 Phoenix Investment Partners 202,700 1,710,281 The Pioneer Group 103,600 2,046,100 SEI Investments Company 2,000 198,750 U.S. Global Investors Cl. A* 249,205 389,383 ---------- 25,061,346 ---------- 52,892,424 ========== Health -- 2.8% Commercial Services - 0.5% IDEXX Laboratories* 35,000 941,719 PAREXEL International Corporation* 75,500 1,887,500 Henry Schein* 5,000 223,750 ---------- 3,052,969 ---------- Drugs and Biotech - 1.0% Biogen* 7,000 581,000 Centocor* 55,000 2,481,875 Cerus Corporation* 26,800 562,800 Genzyme (General Division)* 40,000 1,990,000 Genzyme Molecular Oncology 4,322 14,046 Genzyme (Tissue Repair)* 15,300 34,425 Guilford Pharmaceuticals* 20,000 285,000 IDEC Pharmaceuticals Corporation* 20,000 940,000 U.S. Bioscience* 10,000 71,875 ---------- 6,961,021 ---------- Health Services - 0.2% Jenny Craig* 278,400 1,670,400 ---------- Personal Care - 0.2% Chattem* 10,000 478,750 Jean-Philippe Fragrances* 84,300 516,337 Rexall Sundown* 10,000 140,000 ---------- 1,135,087 ---------- Surgical Products and Devices - 0.9% Biomet 5,000 201,250 Haemonetics Corporation* 175,200 3,985,800 Nitinol Medical Technologies* 265,600 996,000 Spacelabs Medical* 39,400 906,200 ---------- 6,089,250 ---------- 18,908,727 ========== Industrial Products -- 17.2% Building Systems and Components - 4.2% Decker Manufacturing Corporation 6,022 313,144 Falcon Products 158,800 1,905,600 International Aluminum Corporation 63,700 1,883,131 Juno Lighting 102,800 2,402,950 Kimball International Cl. B 168,580 3,203,020 Paul Mueller Company 53,200 2,147,950
20 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Industrial Products (continued) Building Systems and Components (continued) Preformed Line Products Company 82,600 $ 2,312,800 Simpson Manufacturing Co.* 126,700 4,743,331 Skyline Corporation 142,700 4,637,750 **Thermal Industries* 42,586 638,790 Thor Industries 154,950 3,951,225 ----------- 28,139,691 ----------- Construction Materials - 2.3% Ameron International Corporation 13,000 481,000 Ash Grove Cement Company Cl. B 50,518 4,622,397 CalMat 56,600 1,747,525 Florida Rock Industries 166,000 5,146,000 Puerto Rican Cement Company 96,300 3,364,481 ----------- 15,361,403 ----------- Industrial Components - 0.1% Woodhead Industries 45,400 590,200 ----------- Machinery - 2.2% Atchison Casting Corporation* 58,600 542,050 Federal Signal Corporation 9,000 246,375 Lincoln Electric Holdings 227,980 5,072,555 Lund International Holdings* 136,100 1,156,850 Nordson Corporation 41,100 2,111,513 Oshkosh Truck Corporation Cl. B 141,500 4,687,187 Tecumseh Products Company Cl. A 28,300 1,319,488 ----------- 15,136,018 ----------- Paper and Packaging - 1.9% CLARCOR 14,550 291,000 P. H. Glatfelter Company 67,700 837,787 Liqui-Box Corporation 66,778 3,472,456 Mercer International 13,000 88,563 PalEx* 234,800 1,775,675 Peak International Limited* 122,300 1,024,262 Shorewood Packaging Corporation* 250,950 5,144,475 ----------- 12,634,218 ----------- Pumps, Valves and Bearings - 1.3% ConBraCo Industries* 7,630 4,120,200 Denison International ADR*+ 10,000 125,000 Kaydon Corporation 104,800 4,198,550 Robroy Industries Cl. A 51,270 717,780 ----------- 9,161,530 ----------- Specialty Chemicals and Materials - 2.9% Aceto Corporation 50,010 662,632 Brady Corporation Cl. A 111,100 2,992,756 Chemfab Corporation* 133,219 2,755,968 Hawkins Chemical 301,278 3,012,780 LeaRonal 89,475 3,030,966 Lilly Industries Cl. A 152,983 3,050,099
SHARES VALUE ------ ----- MacDermid, Incorporated 72,331 $ 2,829,950 Quaker Chemical Corporation 66,950 1,205,100 ----------- 19,540,251 ----------- Textiles - 1.3% Delta Woodside Industries 125,400 752,400 Fab Industries 152,800 3,285,200 ++Thomaston Mills Cl. A 327,800 1,044,863 Unifi 175,500 3,433,219 Wellman 15,000 152,813 ----------- 8,668,495 ----------- Other Industrial Products - 1.0% BHA Group Holdings 143,209 1,987,025 Baldor Electric Company 22,000 445,500 Landauer 112,900 3,655,137 Myers Industries 31,693 909,193 Quixote Corporation 1,900 23,394 ----------- 7,020,249 ----------- 116,252,055 =========== Industrial Services -- 11.8% Advertising/Publishing - 0.8% Grey Advertising 9,617 3,500,588 True North Communications 63,000 1,693,125 ----------- 5,193,713 ----------- Commercial Services - 1.2% BHI Corporation* 83,700 2,573,775 CDI* 39,800 803,463 Catalina Marketing Corporation* 5,000 341,875 Cornell Corrections* 85,400 1,622,600 Fisher Companies 16,096 1,062,336 The Olsten Corporation 153,600 1,132,800 Open Plan Systems* 145,000 326,250 ----------- 7,863,099 ----------- Engineering and Construction - 2.3% Dames & Moore 32,800 422,300 Insituform Technologies Cl. A* 177,100 2,567,950 Morrison Knudsen Corporation* 214,100 2,087,475 Sevenson Environmental Services 265,720 2,258,620 Stone & Webster 99,900 3,321,675 Todd Shipyards Corporation* 39,200 186,200 The Turner Corporation* 110,700 2,027,194 Willbros Group* 426,500 2,372,406 ----------- 15,243,820 ----------- Food/Tobacco Processors - 1.6% DIMON Incorporated 195,300 1,452,544 Farmer Bros. 26,000 5,564,000 Seaboard Corporation 3,750 1,582,500 Standard Commercial Corporation 282,501 2,418,915 ----------- 11,017,959 -----------
THE ROYCE FUNDS ANNUAL REPORT 1998 | 21 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Industrial Services (continued) Industrial Distribution - 1.2% Central Steel & Wire Company 3,699 $2,633,688 TBC Corporation* 98,000 698,250 Treadco* 67,100 452,925 Vallen Corporation* 202,929 4,058,580 ---------- 7,843,443 ---------- Printing - 1.9% Bowne & Co. 97,200 1,737,450 Ennis Business Forms 199,100 1,978,556 Merrill Corporation 168,000 3,244,500 New England Business Service 86,000 3,364,750 The Standard Register Company 92,700 2,867,906 ---------- 13,193,162 ---------- Transportation and Logistics - 2.8% Air Express International Corporation 140,268 3,050,829 AirNet Systems* 112,200 1,612,875 Arnold Industries 233,648 3,767,574 Circle International Group 238,125 4,881,563 Kenan Transport Company 47,000 1,574,500 The Pittston BAX Group 264,300 2,940,338 Ryanair Holdings ADR*+ 38,300 1,445,825 ---------- 19,273,504 ---------- 79,628,700 ========== Natural Resources -- 3.7% Energy Services - 0.9% Carbo Ceramics 129,400 2,264,500 Global Industries* 111,200 681,100 Helmerich & Payne 115,200 2,232,000 Lufkin Industries 22,000 407,000 Nabors Industries* 5,000 67,813 ++Peerless Mfg. 79,300 882,212 ---------- 6,534,625 ---------- Metals and Mining - 0.1% MK Gold Company* 517,900 291,319 ---------- Oil and Gas - 2.0% Barrett Resources* 137,200 3,292,800 Denbury Resources* 876,500 3,560,781 Devon Energy Corporation 100,500 3,084,094 PetroCorp Incorporated* 121,900 700,925 Titan Exploration* 406,500 2,667,656 Toreador Royalty Corporation* 97,100 303,438 Valley National Gases* 30,100 169,312 ---------- 13,779,006 ----------
SHARES VALUE ------ ----- Real Estate - 0.7% Alico 72,700 $1,308,600 Consolidated-Tomoka Land 7,800 110,175 FRP Properties* 119,900 3,237,300 Resurgence Properties* 143,400 7,170 ---------- 4,663,245 ---------- 25,268,195 ========== Technology -- 14.5% Aerospace/Defense - 1.4% Curtiss-Wright Corporation 116,900 4,456,813 Special Metals Corporation* 255,700 2,285,319 Woodward Governor Company 130,600 2,889,525 ---------- 9,631,657 ---------- Components and Systems - 3.8% ++Axiohm Transaction Solutions* 440,575 2,863,737 CTS Corporation 3,400 147,900 Credence Systems Corporation* 15,300 283,050 Dionex Corporation* 154,000 5,640,250 Giga-tronics Incorporated* 57,100 128,475 Hach Company 42,150 505,800 Hach Company Cl. A 50,650 519,163 IFR Systems* 9,133 42,240 Itron* 5,000 35,937 National Instruments* 48,400 1,651,650 Newport Corporation 50,900 858,938 Penn Engineering and Manufacturing 153,600 3,436,800 Penn Engineering and Manufacturing Cl. A 39,800 786,050 Perceptron* 242,100 1,603,912 SAES Getters ADR+ 5,000 27,812 Scitex Corporation Limited* 347,100 4,078,425 Vicor Corporation* 5,000 45,000 VideoServer* 166,100 3,052,087 ---------- 25,707,226 ---------- Distribution - 1.3% Daisytek International Corporation* 94,000 1,786,000 Marshall Industries* 167,200 4,096,400 Pioneer-Standard Electronics 73,525 689,297 Richardson Electronics 195,600 1,882,650 ---------- 8,454,347 ---------- Semiconductors and Equipment - 3.5% Analog Devices* 117,100 3,674,012 Brooks Automation* 5,000 73,125 Cymer* 33,500 489,938 Dallas Semiconductor Corporation 68,000 2,771,000 DuPont Photomasks* 45,000 1,909,687 Etec Systems* 5,000 200,000 8x8* 11,600 65,250
22 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Technology (continued) Semiconductors and Equipment (continued) Electroglas* 212,200 $ 2,493,350 Exar Corporation* 200,900 3,239,512 Helix Technology Corporation 60,700 789,100 Kulicke and Soffa Industries* 30,000 532,500 Lam Research Corporation* 21,500 382,969 Micrel, Incorporated* 5,000 275,000 Novellus Systems* 4,000 198,000 Ultratech Stepper* 5,000 80,000 Uniphase Corporation* 15,000 1,040,625 Unitrode Corporation* 309,500 5,416,250 Veeco Instruments* 5,400 286,875 ----------- 23,917,193 ----------- Software/Services - 4.2% ABR Information Services* 30,000 588,750 ANSYS* 85,200 937,200 Aspect Development* 6,000 265,875 Aspen Technology* 46,800 678,600 Benchmark Electronics* 43,100 1,578,537 Check Point Software Technologies* 65,000 2,977,813 Cognex Corporation* 127,200 2,544,000 Comdisco 70,000 1,181,250 Documentum* 5,000 267,187 FileNet Corporation* 10,000 114,688 Harbinger Corporation* 33,700 269,600 IMR Global* 3,000 88,312 Industri-Matematik International* 4,000 20,000 Integral Systems* 157,800 3,067,238 Integrated Systems* 5,000 74,687 International Network Services* 5,000 332,500 i2 Technologies* 10,000 303,750 The Learning Company* 800 20,750 Lycos* 6,000 333,375 MacNeal-Schwendler Corporation* 83,300 583,100 Macromedia* 3,000 101,062 Manugistics Group* 15,000 187,500 MetaCreations Corporation* 5,000 26,875 National Computer Systems 244,000 9,028,000 Nichols Research Corporation* 15,950 332,956 Phoenix Technologies* 1,000 8,625 QRS Corporation* 5,000 240,000 Radiant Systems* 15,000 110,625 Remedy Corporation* 10,600 147,738 Siebel Systems* 10,140 344,126 Sybase* 145,600 1,078,350 ++Technical Communications Corporation* 106,700 480,150 Wind River Systems* 5,000 235,000 ----------- 28,548,219 -----------
SHARES VALUE ------ ----- Telecommunications - 0.3% Level 3 Communications* 2,200 $ 94,875 Mosaix* 42,900 332,475 Plantronics* 15,000 1,290,000 Xylan Corporation* 17,800 322,625 ----------- 2,039,975 ----------- 98,298,617 =========== Utilities -- 0.5% Southern Union Company* 127,440 3,106,350 =========== Miscellaneous -- 4.8% 32,642,342 =========== TOTAL COMMON STOCKS (Cost $432,117,066) 581,597,147 =========== PREFERRED STOCKS -- 0.6% Pioneer-Standard Electronics (Conv.) 80,000 3,320,000 SVB Capital 20,000 465,000 ----------- TOTAL PREFERRED STOCKS (Cost $4,315,000) 3,785,000 ===========
PRINCIPAL AMOUNT ------ CORPORATE BONDS -- 1.5% Charming Shoppes 7.50% Conv. Sub. Note due 7/15/06 $3,694,000 3,324,600 Dixie Group 7.00% Conv. Sub. Deb. due 5/15/12 775,000 577,375 FirstWorld Communications 0% Sr. Note due 4/15/08 6,950,000 2,085,000 International Semi-Tech 0% Sr. Disc. Note due 8/15/03 105,000 9,581 Richardson Electronics 8.25% Conv. Sub. Deb. due 6/15/06 2,049,000 1,741,650 Richardson Electronics 7.25% Conv. Sub. Deb. due 12/15/06 1,319,000 1,068,390 Shoney's 0% Conv. Sub. Deb. due 4/11/04 2,146,000 525,770 Sunglass Hut International 5.25% Conv. Sub. Note due 6/15/03 500,000 345,000 Thorn Apple Valley 9.00% Conv. Sub. Deb. due 4/01/07 100,000 30,000 Tops Appliance City 6.50% Conv. Sub. Deb. due 11/30/03 1,000,000 600,000 ----------- TOTAL CORPORATE BONDS (Cost $11,693,468) 10,307,366 ===========
THE ROYCE FUNDS ANNUAL REPORT 1998 | 23 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
VALUE ----- U.S. TREASURY OBLIGATION -- 1.5% U. S. Treasury Notes, principal amount $10,000,000, 6.25% due 8/31/02 (Cost $ 9,994,530) $ 10,510,900 ============ REPURCHASE AGREEMENT -- 9.8% State Street Bank and Trust Company, 4.25% dated 12/31/98, due 1/04/99, maturity value $66,131,214 (collateralized by U.S. Treasury Bonds, 6.75% due 8/15/26, valued at $67,427,325) (Cost $66,100,000) 66,100,000 ============
VALUE ----- TOTAL INVESTMENTS -- 99.3% (Cost $524,220,064) $672,300,413 CASH AND OTHER ASSETS LESS LIABILITIES -- 0.7% 4,662,682 ------------ NET ASSETS -- 100.0% $676,963,095 ============
- -------------------------------------------------------------------------------- * Non-income producing. ** A security for which market quotations are no longer readily available represents 0.09% of net assets. This security has been valued in good faith by the Board of Directors. + American Depository Receipt. ++ At December 31, 1998, 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. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $526,364,573. At December 31, 1998, net unrealized appreciation for all securities was $145,935,840, consisting of aggregate gross unrealized appreciation of $182,941,350 and aggregate gross unrealized depreciation of $37,005,510. The Fund designated $51,609,988 as a capital gain dividend for the purpose of the dividend paid deduction. - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 24 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE VALUE TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $458,120,064) $ 606,200,413 Repurchase agreement (at cost and value) 66,100,000 Cash 63,744 Receivable for investments sold 6,884,822 Receivable for dividends and interest 1,101,306 Prepaid expenses 18,965 - --------------------------------------------------------------------------------------------------------------------------- Total Assets 680,369,250 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investments purchased 2,427,165 Payable for investment advisory fee 495,280 Preferred dividends accrued but not yet declared 266,222 Accrued expenses 217,488 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities 3,406,155 - --------------------------------------------------------------------------------------------------------------------------- Net Assets $ 676,963,095 =========================================================================================================================== Net Assets applicable to Preferred Stock at a liquidation value of $25 per share $ 160,000,000 =========================================================================================================================== Assets applicable to Common Stock (net asset value per share -- $15.72) $ 516,963,095 =========================================================================================================================== SUMMARY OF STOCKHOLDERS' EQUITY: 7.80% Cumulative Preferred Stock - par value $0.001 per share; 2,400,000 shares $ 2,400 outstanding 7.30% Tax-Advantaged Cumulative Preferred Stock - par value $0.001 per share; 4,000,000 4,000 shares outstanding Common Stock - par value $0.001 per share; 32,880,261 shares outstanding (150,000,000 32,880 shares authorized) Additional paid-in capital 520,768,368 Undistributed net investment income 1,846,013 Accumulated net realized gain on investments 6,495,307 Preferred dividends accrued but not yet declared (266,222) Net unrealized appreciation on investments 148,080,349 - --------------------------------------------------------------------------------------------------------------------------- Net Assets $ 676,963,095 ===========================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Year ended Year ended December 31, December 31, 1998 1997 ------------ ------------ INVESTMENT OPERATIONS: Net investment income $ 5,725,999 $ 6,702,922 Net realized gain on investments 53,554,124 29,196,786 Net change in unrealized appreciation on investments (31,906,113) 80,620,819 - ---------------------------------------------------------------------------------------------------------------- Net increase in net assets from investment operations 27,374,010 116,520,527 - ---------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (944,176) (736,536) Net realized gain on investments (8,134,436) (4,063,464) Preferred dividends accrued but not yet declared (159,555) (106,667) - ---------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (9,238,167) (4,906,667) - ---------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (5,045,674) (5,058,567) Net realized gain on investments (43,475,552) (27,907,269) - ---------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (48,521,226) (32,965,836) - ---------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Conversion of Notes to Common Stock 26,814,113 11,874,610 Reinvestment of distributions to Common Stockholders 29,819,441 21,871,618 Net proceeds from issuance of Preferred Stock 96,484,000 -- - ---------------------------------------------------------------------------------------------------------------- Total capital stock transactions 153,117,554 33,746,228 - ---------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS 122,732,171 112,394,252 NET ASSETS: Beginning of year 554,230,924 441,836,672 - ---------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $1,846,013 and $2,136,325, respectively) $676,963,095 $554,230,924 ================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS ANNUAL REPORT 1998 | 25 ROYCE VALUE TRUST, INC. YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- INVESTMENT INCOME: Income: Dividends $ 8,243,179 Interest 4,275,571 - -------------------------------------------------------------------------------------- Total Income 12,518,750 - -------------------------------------------------------------------------------------- Expenses: Investment advisory fees 5,819,144 Administrative and office facilities expenses 281,364 Custodian and transfer agent fees 200,218 Shareholder reports 206,362 Proxy 128,686 Professional fees 87,325 Directors' fees 64,136 Amortization of underwriting discount and offering costs of Notes 13,004 Interest expense 1,390 Other expenses 128,436 - -------------------------------------------------------------------------------------- Total Expenses 6,930,065 Fees Waived by Investment Adviser (137,314) - -------------------------------------------------------------------------------------- Net Expenses 6,792,751 - -------------------------------------------------------------------------------------- Net Investment Income 5,725,999 - -------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 53,554,124 Net change in unrealized appreciation on investments (31,906,113) - -------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 21,648,011 - -------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $ 27,374,010 ======================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 26 | THE ROYCE FUNDS ANNUAL REPORT 1998 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.
Years ended December 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $16.91 $14.32 $13.56 $12.34 $13.47 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS (a): Net investment income 0.17 0.21 0.26 0.04 0.04 Net realized and unrealized gain on investments 0.67 3.85 1.92 2.70 0.09 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment operations 0.84 4.06 2.18 2.74 0.13 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (0.03) (0.03) (0.01) -- -- Net realized gain on investments (0.26) (0.15) (0.06) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders (0.29) (0.18) (0.07) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (0.16) (0.19) (0.15) (0.03) (0.01) Net realized gain on investments (1.38) (1.02) (1.00) (1.26) (1.04) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders (1.54) (1.21) (1.15) (1.29) (1.05) - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Effect of Preferred Stock offerings or rights offerings (0.11) -- (0.09) (0.12) (0.14) Effect of reinvestment of distributions by Common Stockholders (0.09) (0.08) (0.11) (0.11) (0.07)* - ------------------------------------------------------------------------------------------------------------------------------------ Total capital stock transactions (0.20) (0.08) (0.20) (0.23) (0.21) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD (a) $15.72 $16.91 $14.32 $13.56 $12.34 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE, END OF PERIOD $13.75 $15.063 $12.625 $11.875 $11.000 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (b): Net Asset Value (a) 3.3% 27.5% 15.5% 22.6% 1.1% Market Value 1.5% 28.8% 16.3% 20.5% (5.6)% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c, d) 1.31% 1.12% 1.28% 2.01% 2.01% Management fee expense 1.10% 0.39% 0.39% 0.97% 1.21% Interest expense -- 0.45% 0.64% 0.75% 0.46% Other operating expenses 0.21% 0.28% 0.25% 0.29% 0.34% Net investment income 1.11% 1.53% 1.27% 0.34% 0.31% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $676,963 $554,231 $441,837 $338,970 $269,032 Portfolio Turnover Rate 43% 29% 34% 32% 35% PREFERRED STOCK: Total shares outstanding 6,400,000 2,400,000 2,400,000 -- -- Asset coverage per share 423% 662% 481% -- -- Liquidation preference per share $25.00 $25.00 $25.00 -- -- Average market value per share: 7.80% Cumulative (e) $25.91 $25.70 $25.20 -- -- 7.30% Tax-Advantaged Cumulative (e) $25.43 -- -- -- -- NOTES: Total amount outstanding (in thousands) -- $27,801 $40,000 $ 40,000 $ 40,000 Asset coverage per note -- 2091% 1202% 944% 769% Average market value per note (e) -- $107.69 $100.68 $ 96.92 $ 95.62 - ------------------------------------------------------------------------------------------------------------------------------------
(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 the 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 1.06%, 0.99%, 1.20%, 2.01% and 2.01% for the periods ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.34%, 1.14%, 1.31%, 2.04% and 2.02% for the periods ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (e) The average of month-end market values during the period. * Includes distributions paid January 31, 1994 and December 30, 1994. THE ROYCE FUNDS ANNUAL REPORT 1998 | 27 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 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 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 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 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 one or more Royce Funds are allocated in an equitable manner. Allocated personnel costs of employees of The Royce Funds are included in administrative and office facilities expenses. 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 paid 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. Investment Company Convertible Notes: On February 5, 1998, the Fund redeemed $256,000 of Investment Company Convertible Notes ("Notes"), constituting all of the then outstanding Notes, at a price equal to 100% of the principal amount of each Note plus accrued unpaid interest to that date. Prior to February 5, 1998, the remainder of the Notes had been converted to Common Stock of the Fund. The Fund issued 2,091,425 and 937,268 shares of Common Stock upon conversion of Notes for the periods ended December 31, 1998 and 1997, respectively. 28 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- Capital Stock: The Fund currently has two issues of Preferred Stock outstanding. At a Special Meeting on March 2, 1998, Stockholders approved an increase in the frequency of the dividend payments on the Cumulative Preferred Stock then outstanding, from an annual payment at a rate of 8% to a quarterly payment at an annual rate of 7.80%. Stockholders also approved an extension of the call protection period on the 7.80% Cumulative Preferred Stock by two years to August 15, 2003. In conjunction with the rate change, an extra $.05 per share of Cumulative Preferred Stock was paid on March 23, 1998. On May 22, 1998, the Fund issued and sold 4,000,000 shares of 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 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 2,080,238 and 1,422,952 shares of Common Stock as reinvestment by Common Stockholders of distributions for the years ended December 31, 1998 and 1997, 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 will be increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds by more than two percentage points, or is exceeded by more than two percentage points by, the percentage change in the investment record of the S&P 600 for the performance period. 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 during that period. For the year ended December 31, 1998, the Fund accrued and paid Royce advisory fees totaling $5,681,830, which is net of $137,314 voluntarily waived by Royce. Purchases and Sales of Investment Securities: For the year ended December 31, 1998, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $256,135,977 and $251,996,708, respectively. THE ROYCE FUNDS ANNUAL REPORT 1998 | 29 ROYCE VALUE TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (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 at least 5% of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the year ended December 31, 1998.
- ---------------------------------------------------------------------------------------------------------------------- Purchases Sales ----------------------- ------------------ Affiliated Company Shares Cost Shares Cost Realized Gain/Loss Dividend Income ------------------ ------ ---- ------ ---- ------------------ --------------- Axiohm Transaction Solutions 343,475 $1,915,946 -- -- -- -- General Builders Corporation -- -- 73,645 $131,141 $ 52,971 -- Peerless Mfg. -- -- -- -- -- $39,650 RockShox 1,103,500 $2,672,107 2,500 $ 8,125 $ (5,938) -- Sage Laboratories -- -- 108,000 $813,888 $1,036,427 -- Technical Communications 63,600 $ 270,300 5,700 $ 53,196 $ (28,259) -- Thomaston Mills Cl. A 327,800 $1,024,375 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------
30 | THE ROYCE FUNDS ANNUAL REPORT 1998 REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Royce Value Trust, Inc. We have audited the accompanying statement of assets and liabilities of Royce Value Trust, Inc., including the schedule of investments, as of December 31, 1998, and the related statement of operations, the statement of changes in net assets and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial highlights for the four years in the period ended December 31, 1997 and the statement of changes in net assets for the year ended December 31, 1997 were audited by other auditors whose reports dated February 13, 1995 and February 10, 1998 expressed unqualified opinions on that statement and financial highlights. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above and audited by us present fairly, in all material respects, the financial position of Royce Value Trust, Inc. at December 31, 1998, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. Tait, Weller & Baker Philadelphia, PA January 29, 1999 THE ROYCE FUNDS ANNUAL REPORT 1998 | 31 ROYCE MICRO-CAP TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - -------------------------------------------------------------------------------- COMMON STOCKS -- 80.5%
SHARES VALUE ------ ----- Consumer Products -- 13.4% Apparel and Shoes - 3.3% Garan Incorporated 53,200 $1,496,250 K-Swiss Cl. A 22,800 612,750 **Kleinert's* 14,200 170,400 Oshkosh B'Gosh Cl. A 91,600 1,849,175 Weyco Group 68,400 1,735,650 ---------- 5,864,225 ---------- Food/Beverage/Tobacco - 2.1% 800-JR CIGAR* 98,300 2,285,475 Golden Enterprises 47,500 255,313 Piercing Pagoda* 3,000 29,250 ++The Smithfield Companies 148,400 1,205,750 ---------- 3,775,788 ---------- Home Furnishings/Appliances - 2.7% Bassett Furniture Industries 52,800 1,273,800 Conso International Corporation* 197,800 1,162,075 Lifetime Hoan Corporation 120,054 1,170,527 Meadowcraft* 79,800 892,762 Mity-Lite* 14,200 202,350 ---------- 4,701,514 ---------- Publishing - 0.8% The Topps Company* 277,300 1,386,500 ---------- Sports and Recreation - 1.2% Aldila* 348,500 871,250 Baldwin Piano & Organ Company* 42,300 407,138 Johnson Worldwide Associates Cl. A* 87,100 805,675 ---------- 2,084,063 ---------- Other Consumer Products - 3.3% Koala Corporation 40,000 695,000 Lazare Kaplan International* 91,600 641,200 Matthews International Corporation Cl. A 81,000 2,551,500 Velcro Industries 12,300 1,832,700 ---------- 5,720,400 ---------- 23,532,490 ========== Consumer Services -- 3.4% Leisure/Entertainment - 0.6% MovieFone Cl. A* 67,600 1,106,950 ---------- Restaurants/Lodging - 0.4% Pizza Inn 145,700 646,544 ---------- Retail Stores - 2.4% The Bombay Company* 46,600 259,212 Brookstone* 33,000 565,125 Catherines Stores Corporation* 76,900 836,288 Cato Corporation Cl. A 47,500 467,578 Lechters* 93,400 230,581 Suzy Shier 156,800 974,550 Urban Outfitters* 56,900 960,187 ---------- 4,293,521 ---------- 6,047,015 ==========
SHARES VALUE ------ ----- Financial Intermediaries -- 6.3% Banking - 0.9% Iron and Glass Bancorp 33,200 $ 796,800 Oriental Financial Group 10,733 336,077 Queen City Investments* 948 380,148 ---------- 1,513,025 ---------- Insurance - 5.4% Capitol Transamerica Corporation 55,965 1,045,846 Chartwell Re Corporation 28,500 676,875 Highlands Insurance Group* 77,000 1,005,813 Independence Holding Company 33,300 466,200 NYMAGIC 40,400 838,300 The Navigators Group* 36,800 570,400 Nobel Insurance Limited 183,000 142,969 Old Guard Group 56,500 812,187 PMA Capital Cl. A 56,609 1,107,414 PXRE Corporation 40,664 1,019,142 Trenwick Group 11,950 389,869 Wellington Underwriting 444,712 1,418,586 ---------- 9,493,601 ---------- 11,006,626 ========== Financial Services -- 1.5% Information and Processing - 1.1% Duff & Phelps Credit Rating 35,600 1,951,325 ---------- Insurance Brokers - 0.4% CorVel Corporation* 5,000 176,250 Hilb, Rogal & Hamilton Company 30,300 602,212 ---------- 778,462 ---------- 2,729,787 ========== Health -- 3.3% Commercial Services - 1.1% ChiRex * 53,000 1,132,875 ICON ADR*+ 1,000 33,500 Young Innovations* 58,400 766,500 ---------- 1,932,875 ---------- Drugs and Biotech - 1.8% BioReliance Corporation* 145,800 1,166,400 International Isotopes* 77,400 1,238,400 Scotia Holdings* 120,000 127,596 ViroPharma Incorporated* 55,900 520,569 ---------- 3,052,965 ---------- Health Services - 0.2% Jenny Craig* 57,000 342,000 ---------- Personal Care - 0.1% Jean-Philippe Fragrances* 39,200 240,100 ---------- Surgical Products and Devices - 0.1% Nitinol Medical Technologies* 35,300 132,375 ---------- 5,700,315 ==========
32 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE MICRO-CAP TRUST, INC . DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Industrial Products -- 19.2% Building Systems and Components - 6.8% AFC Cable Systems* 19,750 $ 664,094 American Buildings Company* 35,700 874,650 Falcon Products 115,600 1,387,200 International Aluminum Corporation 12,100 357,706 Juno Lighting 35,600 832,150 Kit Manufacturing* 38,800 179,450 LSI Industries 25,900 581,131 Paul Mueller Company 16,650 672,244 Preformed Line Products Company 45,000 1,260,000 Simpson Manufacturing Co.* 46,100 1,725,869 Skyline Corporation 32,100 1,043,250 **Thermal Industries* 58,700 880,500 Thor Industries 55,200 1,407,600 ---------- 11,865,844 ---------- Construction Materials - 3.4% Ash Grove Cement Company 20,000 1,830,000 Florida Rock Industries 55,000 1,705,000 The Monarch Cement Company 50,410 1,121,623 Northwest Pipe Company* 7,200 116,100 Puerto Rican Cement Company 33,200 1,159,925 ---------- 5,932,648 ---------- Machinery - 1.6% ++Art's-Way Manufacturing Co.* 124,000 620,000 DeVlieg-Bullard* 601,900 376,187 Lund International Holdings* 93,700 796,450 Oshkosh Truck Corporation Cl. B 32,100 1,063,313 ---------- 2,855,950 ---------- Paper and Packaging - 1.0% Liqui-Box Corporation 13,100 681,200 PalEx* 140,100 1,059,506 ---------- 1,740,706 ---------- Pumps, Valves and Bearings - 0.6% NN Ball and Roller 55,400 325,475 Sun Hydraulics Corporation 78,400 651,700 ---------- 977,175 ---------- Specialty Chemicals and Materials - 2.8% Aceto Corporation 43,875 581,344 CFC International* 113,800 910,400 Chemfab Corporation* 80,700 1,669,481 Hauser* 141,400 627,463 Hawkins Chemical 122,667 1,226,670 ---------- 5,015,358 ---------- Textiles - 0.5% Fab Industries 45,100 969,650 ---------- Other Industrial Products - 2.5% BHA Group Holdings 95,965 1,331,514 Landauer 32,300 1,045,712 Myers Industries 52,690 1,511,544
SHARES VALUE ------ ----- Pioneer Metals* 1,570 $ 518,100 ---------- 4,406,870 ---------- 33,764,201 ========== Industrial Services -- 10.9% Commercial Services - 1.7% BHI Corporation* 42,800 1,316,100 Cornell Corrections* 67,500 1,282,500 Exponent* 58,200 349,200 ---------- 2,947,800 ---------- Engineering and Construction - 1.7% Insituform Technologies Cl. A* 69,000 1,000,500 Sevenson Environmental Services 125,120 1,063,520 Willbros Group* 152,900 850,506 ---------- 2,914,526 ---------- Food/Tobacco Processors - 2.0% Farmer Bros. 4,000 856,000 Midwest Grain Products* 192,922 2,628,562 ---------- 3,484,562 ---------- Industrial Distribution - 0.9% Vallen Corporation* 76,800 1,536,000 ---------- Printing - 2.1% Ennis Business Forms 112,400 1,116,975 Merrill Corporation 40,800 787,950 New England Business Service 45,300 1,772,363 Schawk 1,300 18,037 ---------- 3,695,325 ---------- Transportation and Logistics - 2.5% AirNet Systems* 28,800 414,000 Circle International Group 79,700 1,633,850 Frozen Food Express Industries 138,500 1,090,688 Kenan Transport Company 34,800 1,165,800 Knight Transportation* 7,500 200,156 ---------- 4,504,494 ---------- 19,082,707 ========== Natural Resources - 3.0% Energy Services - 0.8% Carbo Ceramics 44,200 773,500 Gulfmark Offshore* 26,000 409,500 Peerless Mfg. 21,600 240,300 ---------- 1,423,300 ---------- Metals and Mining - 0.2% MK Gold Company* 603,700 339,581 ---------- Oil and Gas - 1.5% Denbury Resources* 283,600 1,152,125 MarkWest Hydrocarbon* 15,200 136,800 Titan Exploration* 211,600 1,388,625 ---------- 2,677,550 ---------- Real Estate - 0.5% FRP Properties* 33,700 909,900 ---------- 5,350,331 ==========
THE ROYCE FUNDS ANNUAL REPORT 1998 | 33 ROYCE MICRO-CAP TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
SHARES VALUE ------ ----- Technology - 14.9% Aerospace/Defense - 1.3% Curtiss-Wright Corporation 35,000 $ 1,334,375 Special Metals Corporation* 113,000 1,009,937 ------------ 2,344,312 ------------ Components and Systems - 6.7% Advanced Energy Industries* 74,600 1,865,000 CEM Corporation* 75,700 742,806 Control Devices 83,332 1,333,312 Elamex, S.A. de C.V.* 86,600 313,925 Industrial Scientific Corporation 32,400 753,300 Innovex 27,400 375,894 Modern Controls 36,900 212,175 Newport Corporation 60,300 1,017,563 PCD* 30,000 390,000 Penn Engineering and Manufacturing 39,700 888,288 Penn Engineering and Manufacturing Cl. A 15,400 304,150 Perceptron* 152,100 1,007,662 Performance Technologies* 37,500 492,188 Printronix* 10,000 143,750 Rainbow Technologies* 73,700 1,386,481 TSI Incorporated 30,000 262,500 Transact Technologies Incorporated* 101,700 336,881 ------------ 11,825,875 ------------ Distribution - 0.8% Richardson Electronics 153,500 1,477,438 ------------ Semiconductors and Equipment - 1.4% Aetrium Incorporated* 10,000 110,000 Align-Rite International* 30,000 348,750 Exar Corporation* 55,900 901,387 Helix Technology Corporation 36,800 478,400 Optek Technology* 29,300 553,037 ------------ 2,391,574 ------------ Software/Services - 3.3% CSP* 44,165 350,560 Integral Systems* 42,600 828,037 JDA Software Group* 93,600 906,750
SHARES VALUE Kronos Incorporated* 39,000 $ 1,728,188 MacNeal-Schwendler Corporation* 159,600 1,117,200 Tyler Corporation* 122,300 749,087 ------------ 5,679,822 ------------ Telecommunications - 1.4% REMEC* 113,200 2,037,600 Vertex Communications Corporation* 10,000 158,750 Wireless Telecom Group 90,000 168,750 ------------ 2,365,100 ------------ 26,084,121 ============ Miscellaneous -- 4.6% 8,094,613 ============ TOTAL COMMON STOCKS (Cost $109,588,315) 141,392,206 ============ PREFERRED STOCK -- 0.4% Seneca Foods Corporation* (Cost $623,500) 51,250 627,812 ============
PRINCIPAL AMOUNT ------ U.S. TREASURY OBLIGATIONS -- 5.9% U.S. Treasury Notes 6.25%, due 8/31/00 $5,000,000 5,126,550 6.25%, due 8/31/02 5,000,000 5,255,450 ------------ TOTAL U.S. TREASURY OBLIGATIONS (Cost $10,015,235) 10,382,000 ============ REPURCHASE AGREEMENT -- 12.8% State Street Bank & Trust Company, 4.25% dated 12/31/98, due 1/04/99 maturity value $22,410,578 (collateralized by U.S. Treasury Bonds, 10.625% due 8/15/15, valued at $22,848,343) (Cost $22,400,000) 22,400,000 ============ TOTAL INVESTMENTS -- 99.6% (Cost $142,627,050) 174,802,018 CASH AND OTHER ASSETS LESS LIABILITIES -- 0.4% 693,183 ------------ NET ASSETS -- 100.0% $175,495,201 ============
- -------------------------------------------------------------------------------- * Non-income producing. ** Two securities for which market quotations are no longer readily available represent 0.60% of net assets. These securities have been valued in good faith by the Board of Directors. + American Depository Receipt. ++ At December 31, 1998, 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. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $142,816,118. At December 31, 1998, net unrealized appreciation for all securities was $31,985,900, consisting of aggregate gross unrealized appreciation of $41,628,445 and aggregate gross unrealized depreciation of $9,642,545. The Fund designated $5,216,647 as a capital gain dividend for the purpose of the dividend paid deduction. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 34 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE MICRO-CAP TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $120,227,050) $ 152,402,018 Repurchase agreement (at cost and value) 22,400,000 Cash 103,402 Receivable for investments sold 506,931 Receivable for dividends and interest 344,848 Prepaid expenses 5,845 - -------------------------------------------------------------------------------------------------------------------------- Total Assets 175,763,044 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investment advisory fee 110,669 Preferred dividends accrued but not yet declared 68,889 Payable for administration fee 9,571 Accrued expenses 78,714 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities 267,843 - -------------------------------------------------------------------------------------------------------------------------- Net Assets $ 175,495,201 ========================================================================================================================== 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 -- $10.06) $ 135,495,201 ========================================================================================================================== 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; 13,464,559 shares outstanding (150,000,000 shares authorized) 13,465 Additional paid-in capital 139,209,608 Undistributed net investment income 209,855 Accumulated net realized gain on investments and foreign currency 3,954,491 Preferred dividends accrued but not yet declared (68,889) Net unrealized appreciation on investments and foreign currency 32,175,071 - --------------------------------------------------------------------------------------------------------------------------- Net Assets $175,495,201 ==========================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Year ended Year ended December 31, December 31, 1998 1997 ------------- ------------- INVESTMENT OPERATIONS: Net investment income $1,720,215 $2,268,785 Net realized gain on investments and foreign currency 5,532,509 10,619,371 Net change in unrealized appreciation on investments and foreign currency (10,118,947) 21,021,456 - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from investment operations (2,866,223) 33,909,612 - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (758,880) (242,787) Net realized gain on investments and foreign currency (2,341,120) (1,298,601) Preferred dividends accrued but not yet declared -- (68,889) - -------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (3,100,000) (1,610,277) - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (932,213) (1,914,145) Net realized gain on investments and foreign currency (2,875,417) (10,239,254) - -------------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders (3,807,630) (12,153,399) - -------------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders 2,907,409 9,762,687 Net proceeds from issuance of Preferred Stock -- 38,500,000 - -------------------------------------------------------------------------------------------------------------------------- Total capital stock transactions 2,907,409 48,262,687 - -------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS (6,866,444) 68,408,623 NET ASSETS: Beginning of year 182,361,645 113,953,022 - -------------------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $209,855 and $180,733, respectively) $ 175,495,201 $ 182,361,645 ==========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS ANNUAL REPORT 1998 | 35 ROYCE MICRO-CAP TRUST, INC. YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
INVESTMENT INCOME: Income: Interest $ 1,859,902 Dividends 1,532,503 - --------------------------------------------------------------------------------------------- Total Income 3,392,405 - --------------------------------------------------------------------------------------------- Expenses: Investment advisory fees 1,229,021 Administration fees 111,424 Custodian and transfer agent fees 104,279 Administrative and office facilities expenses 85,180 Shareholder reports 83,692 Professional fees 41,099 Directors' fees 28,369 Other expenses 81,487 - --------------------------------------------------------------------------------------------- Total Expenses 1,764,551 Fees Waived by Investment Adviser (92,361) - --------------------------------------------------------------------------------------------- Net Expenses 1,672,190 - --------------------------------------------------------------------------------------------- Net Investment Income 1,720,215 - --------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on investments and foreign currency 5,532,509 Net change in unrealized appreciation on investments and foreign currency (10,118,947) - --------------------------------------------------------------------------------------------- Net realized and unrealized loss on investments and foreign currency (4,586,438) - --------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $ (2,866,223) =============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 36 | THE ROYCE FUNDS ANNUAL REPORT 1998 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.
Years Ended December 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $10.84 $9.38 $8.89 $7.58 $7.27 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS: Net investment income 0.13 0.17 0.09 0.02 0.01 Net realized and unrealized gain (loss) on investments and foreign currency (0.36) 2.61 1.32 1.69 0.41 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment operations (0.23) 2.78 1.41 1.71 0.42 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (0.06) (0.02) -- -- -- Net realized gain on investments and foreign currency (0.18) (0.12) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Preferred Stockholders (0.24) (0.14) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income (0.07) (0.16) (0.10) (0.02) (0.02) Net realized gain on investments and foreign currency (0.22) (0.84) (0.70) (0.34) (0.03) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions to Common Stockholders (0.29) (1.00) (0.80) (0.36) (0.05) - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL STOCK TRANSACTIONS: Effect of Preferred Stock offering or rights offering -- (0.12) -- -- (0.06) Effect of reinvestment of distributions by Common Stockholders (0.02) (0.06) (0.12) (0.04) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total capital stock transactions (0.02) (0.18) (0.12) (0.04) (0.06) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $10.06 $10.84 $9.38 $8.89 $7.58 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE, END OF PERIOD $8.875 $10.125 $8.25 $8.00 $7.00 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (a): Net Asset Value (4.1)% 27.1% 16.6% 22.9% 6.0 Market Value (9.4)% 35.0% 13.9% 19.8% (5.1)% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (b,c) 1.18% 0.83% 0.85% 1.36% 1.88% Management fee expense 0.80% 0.40% 0.47% 0.77% 1.20% Other operating expenses 0.38% 0.43% 0.38% 0.59% 0.68% Net investment income 1.21% 1.77% 0.88% 0.26% 0.21% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $175,495 $182,362 $113,953 $100,065 $82,534 Portfolio Turnover Rate 44% 34% 51% 51% 23% PREFERRED STOCK: Total shares outstanding 1,600,000 1,600,000 -- -- -- Asset coverage per share 439% 456% -- -- -- Liquidation preference per share $25.00 $25.00 -- -- -- Average market value per share (d) $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 and fully participated in the primary subscription for the rights offering. (b) Expense ratios based on total average net assets were 0.92%, 0.72%, 0.85%, 1.36% and 1.88% for the periods ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (c) Expense ratio based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.24% for the period ended December 31, 1998. (d) The average of month-end market values during the period. THE ROYCE FUNDS ANNUAL REPORT 1998 | 37 ROYCE MICRO-CAP TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 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 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 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 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. Foreign Currency: The Fund does not isolate that portion of the results of operations which result from changes in foreign exchange rates on investments from the portion arising from changes in market prices of securities held. Such fluctuations are included with net realized and unrealized gains and losses on investments. Net realized foreign exchange gains or losses arise from currency gains or losses realized between the trade and settlement dates on securities transactions and from the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, including investments in securities, as a result of changes in the exchange rates. 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 one or more Royce Funds are allocated in an equitable manner. Allocated personnel costs of employees of The Royce Funds are included in administrative and office facilities expenses. 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 paid to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions paid to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to 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. 38 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE MICRO-CAP TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- Capital Stock: On July 2, 1997, the Fund issued and sold 1,600,000 shares of 7.75% Cumulative Preferred Stock. 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 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 334,780 and 976,268 shares of Common Stock as reinvestment by Common Stockholders of distributions for the years ended December 31, 1998 and 1997, 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 Russell 2000 for certain prescribed performance periods, as described below. 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 may be increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds by more than two percentage points, or is exceeded by more than two percentage points by, the percentage change in the investment record of the Russell 2000 for the performance period. The performance period for each such month is from January 1, 1997 to the most recent month-end, until the Investment Advisory Agreement has been in effect for 36 full calendar months, when the performance period will become 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 would be payable if the investment performance of the Fund exceeded 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 would be payable if the percentage change in the investment record of the Russell 2000 exceeded the investment performance of the Fund by 12 or more percentage points for the performance period. The present Investment Advisory Agreement replaced a similar investment advisory agreement between the Fund and Royce, under which the Fund's investment performance was measured against the record of the Nasdaq Composite over a rolling period of up to 36 months. The present Investment Advisory Agreement provides that, for the 18-month period from January 1, 1997 to June 30, 1998, the monthly fee payable to Royce was the lower of the fee calculated under such Agreement or the fee that would have been payable to Royce for the month involved under the prior agreement. 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 from the date of the Preferred Stock original issue fails to exceed the Preferred Stock's dividend rate during that period. For the year ended December 31, 1998, the Fund accrued and paid Royce advisory fees totaling $1,136,660, which is net of $92,361 voluntarily waived by Royce. Administration Agreement: Under an Administration Agreement with the Fund, Mitchell Hutchins Asset Management Inc. (the "Administrator") serves as the Administrator, and performs or assists in certain aspects of the Fund's operations. As compensation for its services, the Administrator is paid an annual fee, payable monthly, of $50,000 plus .05% on the first $125 million of the Fund's average daily net assets, and .03% of average daily net assets exceeding $125 million. Purchases and Sales of Investment Securities: For the year ended December 31, 1998, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $71,507,847 and $69,540,929, respectively. THE ROYCE FUNDS ANNUAL REPORT 1998 | 39 ROYCE MICRO-CAP TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (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 at least 5% of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the year ended December 31, 1998.
- -------------------------------------------------------------------------------------------------------------------- Purchases Sales ------------------- -------------- Affiliated Company Shares Cost Shares Cost Realized Gain/Loss Dividend Income ------------------ ------ ---- ------ ---- ------------------ --------------- Art's-Way Manufacturing Co. 30,000 $258,700 -- -- -- -- The Smithfield Companies 67,600 $473,200 -- -- -- $14,494 - ---------------------------------------------------------------------------------------------------------------------
40 | THE ROYCE FUNDS ANNUAL REPORT 1998 REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Royce Micro-Cap Trust, Inc. We have audited the accompanying statement of assets and liabilities of Royce Micro-Cap Trust, Inc., including the schedule of investments, as of December 31, 1998, and the related statement of operations, the statement of changes in net assets and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial highlights for the four years in the period ended December 31, 1997 and the statement of changes in net assets for the year ended December 31, 1997 were audited by other auditors whose reports dated February 13, 1995 and February 10, 1998 expressed unqualified opinions on that statement and financial highlights. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above and audited by us present fairly, in all material respects, the financial position of Royce Micro-Cap Trust, Inc. at December 31, 1998, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. Tait, Weller & Baker Philadelphia, PA January 29, 1999 THE ROYCE FUNDS ANNUAL REPORT 1998 | 41 ROYCE GLOBAL TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - -------------------------------------------------------------------------------- COMMON STOCKS -- 77.4%
SHARES VALUE Consumer Products -- 11.5% Collectibles - 4.5% Enesco Group 131,000 $ 3,045,750 ----------- Publishing - 3.5% Gibson Greetings* 200,000 2,375,000 ----------- Sports and Recreation - 3.5% Oakley* 247,800 2,338,613 ----------- 7,759,363 =========== Consumer Services -- 6.6% Retail Stores - 6.6% Charming Shoppes* 825,000 3,557,812 Suzy Shier 147,800 918,613 ----------- 4,476,425 =========== Financial Intermediaries -- 8.3% Insurance - 8.3% Leucadia National Corporation 37,200 1,171,800 Medical Assurance* 74,351 2,458,237 Trenwick Group 61,050 1,991,756 ----------- 5,621,793 =========== Financial Services -- 8.1% Information and Processing - 2.1% Duff & Phelps Credit Rating 25,500 1,397,719 ----------- Insurance Brokers - 4.4% E.W. Blanch Holdings 38,400 1,821,600 Arthur J. Gallagher & Co. 25,800 1,138,425 ----------- 2,960,025 ----------- Investment Management - 1.6% NVEST L.P. 40,000 1,112,500 ----------- 5,470,244 =========== Health -- 2.2% Drugs and Biotech - 2.2% Chiron Corporation* 55,000 1,440,312 =========== Industrial Products -- 13.8% Building Systems and Components - 2.0% Simpson Manufacturing Co.* 36,600 1,370,212 ----------- Construction Materials - 3.0% Florida Rock Industries 40,000 1,240,000 Puerto Rican Cement Company 21,400 747,663 ----------- 1,987,663 ----------- Machinery - 2.6% Lincoln Electric Holdings 80,000 1,780,000 ----------- Pumps, Valves and Bearings - 3.9% Kaydon Corporation 66,100 2,648,131 -----------
SHARES VALUE Textiles - 2.3% Unifi 77,600 $ 1,518,050 ----------- 9,304,056 =========== Industrial Services -- 11.9% Commercial Services - 2.1% BHI Corporation* 45,300 1,392,975 ----------- Engineering and Construction - 5.2% Morrison Knudsen Corporation* 287,100 2,799,225 Willbros Group* 131,850 733,416 ----------- 3,532,641 ----------- Printing - 2.7% New England Business Service 46,500 1,819,312 ----------- Transportation and Logistics - 1.9% Circle International Group 5,000 102,500 Ryanair Holdings ADR*+ 32,000 1,208,000 ----------- 1,310,500 ----------- 8,055,428 =========== Natural Resources -- 7.1% Energy Services - 1.7% Input Output* 160,000 1,170,000 ----------- Gold - 2.0% Anglogold Limited ADR+ 69,100 1,351,769 ----------- Oil and Gas - 3.4% Tom Brown* 87,000 872,719 Renaissance Energy* 122,500 1,398,512 ----------- 2,271,231 ----------- 4,793,000 =========== Technology -- 7.9% Aerospace/Defense - 1.3% Curtiss-Wright Corporation 22,300 850,187 ----------- Distribution - 3.3% Marshall Industries* 52,500 1,286,250 Richardson Electronics 100,000 962,500 ----------- 2,248,750 ----------- Software/Services - 3.3% MacNeal-Schwendler Corporation* 127,500 892,500 National Computer Systems 36,200 1,339,400 ----------- 2,231,900 ----------- 5,330,837 =========== TOTAL COMMON STOCKS (Cost $49,007,360) 52,251,458 ===========
42 THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE GLOBAL TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE U.S. TREASURY OBLIGATIONS -- 15.1% U.S. Treasury Notes 7.125%, due 9/30/99 $2,000,000 $ 2,035,620 5.75%, due 10/31/02 5,000,000 5,179,700 4.25%, due 11/15/03 3,000,000 2,961,570 ----------- TOTAL U.S. TREASURY OBLIGATIONS (Cost $10,029,531) 10,176,890 =========== REPURCHASE AGREEMENT -- 6.1% State Street Bank and Trust Company, 4.25% dated 12/31/98, due 1/04/99, maturity value $4,101,936 (collateralized by U.S. Treasury Notes, 7.125% due 2/29/00, valued at $4,183,975) (Cost $4,100,000) 4,100,000 ===========
VALUE TOTAL INVESTMENTS--98.6% (Cost $63,136,891) $66,528,348 CASH AND OTHER ASSETS LESS LIABILITIES -- 1.4% 929,023 ----------- NET ASSETS -- 100.0% $67,457,371 ===========
- -------------------------------------------------------------------------------- * Non-income producing. + American Depository Receipt. INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $63,163,793. At December 31, 1998, net unrealized appreciation for all securities was $3,364,555, consisting of aggregate gross unrealized appreciation of $7,675,252 and aggregate gross unrealized depreciation of $4,310,697. The Fund designated $146,914 as a capital gain dividend for the purpose of the dividend paid deduction. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS ANNUAL REPORT 1998 | 43 ROYCE GLOBAL TRUST, INC. DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- ASSETS: Investments at value (identified cost $59,036,891) $ 62,428,348 Repurchase Agreement (at cost and value) 4,100,000 Cash 50,295 Receivable for investments sold 1,038,237 Receivable for dividends and interest 211,881 Prepaid expenses 2,286 - ----------------------------------------------------------------------------------------------------------------------- Total Assets 67,831,047 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investments purchased 259,412 Payable for investment advisory fee 38,412 Preferred dividends accrued but not yet declared 33,112 Accrued expenses 42,740 - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities 373,676 - ----------------------------------------------------------------------------------------------------------------------- Net Assets $ 67,457,371 ======================================================================================================================= 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 -- $5.63) $ 47,457,371 ======================================================================================================================= 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; 8,423,423 shares outstanding (100,000,000 8,423 shares authorized) Additional paid-in capital 61,385,724 Undistributed net investment income 136,580 Accumulated net realized gain on investments and foreign currency 2,567,437 Preferred dividends accrued but not yet declared (33,112) Net unrealized appreciation on investments and foreign currency 3,391,519 - ----------------------------------------------------------------------------------------------------------------------- Net Assets $ 67,457,371 =======================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Year ended Year ended December 31, December 31, 1998 1997 ------------ ------------ INVESTMENT OPERATIONS: Net investment income $ 991,047 $ 667,252 Net realized gain on investments and foreign currency 1,937,257 2,063,873 Net change in unrealized appreciation on investments and foreign currency (4,873,694) 7,000,782 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from investment operations (1,945,390) 9,731,907 - ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (1,343,086) (30,862) Net realized gain on investments and foreign currency (146,914) (101,582) Preferred dividends accrued but not yet declared -- (33,112) - ----------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (1,490,000) (165,556) - ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income -- (987,805) Net realized gain on investments and foreign currency -- (3,251,357) - ----------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders -- (4,239,162) - ----------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Reinvestment of distributions to Common Stockholders -- 2,231,274 Net proceeds from issuance of Preferred Stock -- 19,180,000 - ----------------------------------------------------------------------------------------------------------------------- Total capital stock transactions -- 21,411,274 - ----------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS (3,435,390) 26,738,463 NET ASSETS: Beginning of year 70,892,761 44,154,298 - ----------------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $136,580 and $488,619, respectively) $ 67,457,371 $ 70,892,761 =======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 44 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE GLOBAL TRUST, INC. YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- INVESTMENT INCOME: Income: Interest $ 953,567 Dividends 860,974 - -------------------------------------------------------------------------------------------- Total Income 1,814,541 - -------------------------------------------------------------------------------------------- Expenses: Investment advisory fees 708,420 Custodian and transfer agent fees 70,904 Shareholder reports 57,830 Professional fees 42,660 Administrative and office facilities expenses 32,744 Directors' fees 17,552 Other expenses 24,463 - -------------------------------------------------------------------------------------------- Total Expenses 954,573 Fees Waived by Investment Adviser (131,079) - -------------------------------------------------------------------------------------------- Net Expenses 823,494 - -------------------------------------------------------------------------------------------- Net Investment Income 991,047 - -------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on investments and foreign currency 1,937,257 Net change in unrealized appreciation on investments and foreign currency (4,873,694) - -------------------------------------------------------------------------------------------- Net realized and unrealized loss on investments and foreign currency (2,936,437) - -------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $ (1,945,390) ============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE ROYCE FUNDS ANNUAL REPORT 1998 | 45 ROYCE GLOBAL 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.
Years ended December 31, ------------------------ 1998 1997 - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $6.04 $5.52 - ---------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS: Net investment income 0.12 0.08 Net realized and unrealized gain (loss) on investments and foreign currency (0.35) 1.12 - ---------------------------------------------------------------------------------------------------------- Total investment operations (0.23) 1.20 - ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income (0.16) -- Net realized gain on investments and foreign currency (0.02) (0.01) - ---------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders (0.18) (0.01) - ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income -- (0.12) Net realized gain on investments and foreign currency -- (0.41) - ---------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders -- (0.53) - ---------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Effect of Preferred Stock offering -- (0.10) Effect of reinvestment of distributions by Common Stockholders -- (0.04) Other sources -- -- - ---------------------------------------------------------------------------------------------------------- Total capital stock transactions -- (0.14) - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $5.63 $6.04 - ---------------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $4.88 $5.06 - ---------------------------------------------------------------------------------------------------------- TOTAL RETURN (a): Net Asset Value (b) (6.8)% 20.5% Market Value (3.7)% 21.3% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c, d) 1.62% 0.94% Management fee expense 1.14% 0.39% Other operating expenses 0.48% 0.55% Net investment income 1.95% 1.35% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $67,457 $70,893 Portfolio Turnover Rate 90% 74% PREFERRED STOCK: Total shares outstanding 800,000 800,000 Asset coverage per share 337% 354% Liquidation preference per share $25.00 $25.00 Average market value per share (e) $25.16 $25.25 Years ended December 31, --------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $5.09 $4.70 $5.24 - -------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS: Net investment income 0.06 0.13 0.19 Net realized and unrealized gain (loss) on investments and foreign currency 0.35 0.36 (0.62) - -------------------------------------------------------------------------------------------------------------------------- Total investment operations 0.41 0.49 (0.43) - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO PREFERRED STOCKHOLDERS: Net investment income -- -- -- Net realized gain on investments and foreign currency -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Total distributions to Preferred Stockholders -- -- -- - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: Net investment income -- (0.16) (0.11) Net realized gain on investments and foreign currency -- (0.01) -- - -------------------------------------------------------------------------------------------------------------------------- Total distributions to Common Stockholders -- (0.17) (0.11) - -------------------------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Effect of Preferred Stock offering -- -- -- Effect of reinvestment of distributions by Common Stockholders -- -- -- Other sources 0.02 0.07 -- - -------------------------------------------------------------------------------------------------------------------------- Total capital stock transactions 0.02 0.07 -- - -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $5.52 $5.09 $4.70 - -------------------------------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $4.59 $4.19 $3.56 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (a): Net Asset Value (b) -- -- -- Market Value 9.6% 22.3% (17.4)% RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS: Total expenses (c, d) 1.91% 2.14% 2.27% Management fee expense 0.83% 1.00% 1.00% Other operating expenses 1.08% 1.14% 1.27% Net investment income 1.80% 2.80% 3.81% SUPPLEMENTAL DATA: Net Assets, End of Period (in thousands) $44,154 $41,385 $41,106 Portfolio Turnover Rate 159% 76% 483% PREFERRED STOCK: Total shares outstanding -- -- -- Asset coverage per share -- -- -- Liquidation preference per share -- -- -- Average market value per share (e) --
- -------------------------------------------------------------------------------- (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) For years prior to 1997, the Net Asset Value Total Return is not available. (c) Expense ratios based on total average net assets were 1.16%, 0.90%, 1.91%, 2.14% and 2.27% for the periods ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.88%, 1.60% and 2.08% for the periods ended December 31, 1998, 1997 and 1996, respectively. (e) The average of month-end market values during the period. 46 | THE ROYCE FUNDS ANNUAL REPORT 1998 ROYCE GLOBAL TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Summary of Significant Accounting Policies: Royce Global Trust, Inc. (the "Fund"), formerly named All Seasons Global Fund, Inc., is a diversified closed-end investment company. The Fund commenced operations on March 2, 1988. 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 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 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 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 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. Foreign Currency: The Fund does not isolate that portion of the results of operations which result from changes in foreign exchange rates on investments from the portion arising from changes in market prices of securities held. Such fluctuations are included with net realized and unrealized gains and losses on investments. Net realized foreign exchange gains or losses arise from currency gains or losses realized between the trade and settlement dates on securities transactions and from the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, including investments in securities, as a result of changes in the exchange rates. 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 one or more Royce Funds are allocated in an equitable manner. Allocated personnel costs of employees of The Royce Funds are included in administrative and office facilities expenses. 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 paid to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions paid 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 ANNUAL REPORT 1998 | 47 ROYCE GLOBAL TRUST, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- Capital Stock: On November 21, 1997, the Fund issued and sold 800,000 shares of 7.45% Cumulative Preferred Stock. 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 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 425,004 shares of Common Stock as reinvestment by Common Stockholders of distributions for the year ended December 31, 1997. Investment Advisory Agreement: Royce & Associates, Inc. ("Royce") assumed investment management responsibility for the Fund on November 1, 1996. The Investment Advisory Agreement between Royce and the Fund provides for fees 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 dividend rate during that period. Additionally, Royce had voluntarily committed to waive its fee to the extent necessary to reduce the Fund's expenses, as a percentage of total average net assets, to 1.375% from the date of Preferred Stock issuance to December 31, 1998. For the year ended December 31, 1998, the Fund accrued and paid Royce advisory fees totaling $577,341, which is net of $131,079 voluntarily waived by Royce. Purchases and Sales of Investment Securities: For the year ended December 31, 1998, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $60,728,397 and $60,164,783, respectively. REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Royce Global Trust, Inc. We have audited the accompanying statement of assets and liabilities of Royce Global Trust, Inc., including the schedule of investments, as of December 31, 1998, and the related statement of operations, the statement of changes in net assets and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial highlights for each of the four years in the period ended December 31, 1997 and the statement of changes in net assets for the year ended December 31, 1997 were audited by other auditors whose reports dated January 24, 1996 and February 10, 1998 expressed unqualified opinions on that statement and financial highlights. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above and audited by us present fairly, in all material respects, the financial position of Royce Global Trust, Inc. at December 31, 1998, the results of its operations, changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. Tait, Weller & Baker Philadelphia, PA January 29, 1999 48 | THE ROYCE FUNDS ANNUAL REPORT 1998 POSTSCRIPT - -------------------------------------------------------------------------------- [Graphic of a ball and jumping jacks] "FURBY-MANIA" A member of our senior investment staff told us this tale of holiday shopping mania. Like all dutiful Dads, I do my best to help my wife out with Christmas shopping. Of course, having an office a block away from FAO Schwartz doesn't hurt. This year we faced the same problem that every parent of young children faces every Christmas. The names may change, but the dilemma is as old as St. Nick himself. I can sum it up in one word -- Furby. At first my wife and I, delusional, I guess, with terror at being unable to locate one of these odd furry fellows, tried to convince our child that something else -- a teddy bear or jigsaw puzzle -- might be a little easier on Santa. With the curious combination of awe and greed that afflicts every youngster at this time of year, our little darling sweetly replied,"Santa will bring me a Furby because Santa can do anything." We made a few more lame attempts to stem the tide. "If you don't stop pestering your mother and me," I announced around the 18th, "you'll wind up with coal in your stocking," a statement that produced a torrent of tears and a demand from my wife that I limit my conversations with the children to the injustices of trading spreads on micro-cap stocks until after Christmas. I was also put on solo Furby procurement duty. First I tried using one of those online bidding sites. Nothing in my years of trading stocks on Wall Street prepared me for the brutality and ruthlessness of desperate parents vying for Furbies. I realized as I bid $200 for a toy with as much intrinsic value as a pair of sweat socks that I had forgotten everything I had learned about value investing, but I didn't care -- I had to get a Furby or risk sleeping in the reindeer stable. But I couldn't do it. My instincts as a value investor were too strong, and a housewife from Des Moines bid the last remaining one away from me for $220. It was almost lunch time on the 23rd. No Furby. Suddenly, the phone rang. It was an old college friend, "Fast" Eddie. Eddie is a buyer for FAO Schwartz. "Listen, I could be fired for even thinking about telling you this, but a shipment of Furbies is coming in today at 3:00, on the floor by 3:30. Remember, you never spoke to me!" Before I could even muster a "And how are you, Eddie," he hung up. Talk about insider information! At 3:15 I was out the door and headed down West 58th Street toward the toy Mecca of midtown Manhattan, casually elbowing tourists foolish enough to get in my way. Just as I got through the door, I saw Eddie ducking into a stairwell and out of sight. I recognized a young portfolio manager of a very aggressive growth fund running toward the back of the store, scattering children in his wake. I followed, knowing how these growth guys are always after the next big thing. Were we too late? Through a maze of shouting kids and pushy parents, all I could see was a Furby display and some empty shelves. My watch said 3:28! Suddenly, I heard a scream and the sound of something falling. Apparently, my young portfolio manager friend was reaching for the last Furby when he was hit with an avalanche of discounted Tickle-Me-Elmos and Sing-and-Snore Ernies, the Furbies of 1996 and 1997, now being hawked for a fraction of their original price as part of a display called "Precious Memories of Christmas Past." I could just make out his outstretched hand and the very top of his head, the rest of him buried under a sea of red Elmo fur. As I bent down to see if he was all right, a kindly old woman gently scooped the last Furby from the floor. "Buy, buy, I don't care how high it goes, I need that stock," murmured my friend, obviously dizzy from so many furry blows to the head. Fortunately, he was fine, just a little shaken up. I returned to the office disappointed, but grateful that my brush with Furby-mania had taught me an important lesson about why we don't buy stocks the way consumers buy Furbies. If anything, we stick to Barbies, footballs and board games, the predictable but steady items that may never be this (or any) year's "gotta have it," but never really go out of style, either. Lost in my reflections, I barely noticed that my telephone message light was on. It was from Eddie. "Sorry I didn't get to you at the store," his message said, "but I was able to put one aside for you. Come by my office after work, and it's all yours." I guess it's a good thing Eddie chose toys over stocks. [START SIDEBAR] Furby-mania had taught me an important lesson about why we don't buy stocks the way consumers buy Furbies. If anything, we stick to Barbies, footballs and board games, the predictable but steady items that may never be this (or any) year's "gotta have it," but never really go out of style, either. [END SIDEBAR] - -------------------------------------------------------------------------------- THE ROYCE FUNDS ONE OF THE INDUSTRY'S MOST EXPERIENCED AND HIGHLY RESPECTED SMALL-COMPANY VALUE MANAGERS Charles M. Royce, who has been our primary portfolio manager since 1973, enjoys one of the longest tenures of any active mutual fund manager. Today, with $2.8 billion in total assets under management, Royce & Associates remains an independent firm committed to the same principles that have served us well for more than 25 years. MULTIPLE FUNDS, COMMON FOCUS Over the years, we have chosen to concentrate on small-company value investing. Chuck Royce and his team provide investors with a range of funds that take full advantage of the large and diverse small-cap sector. Our goal is to offer both individual and institutional investors the best available small-cap value portfolios by participating in the small-cap market's total returns with below-average volatility. CONSISTENT DISCIPLINE We cultivated our approach by paying close attention to risk and by always 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 worth. This requires a thorough analysis of the financial and operating dynamics of a business, as though we were purchasing the entire company. CO-OWNERSHIP OF FUNDS As part of this commitment, it is important that our employees and shareholders share a common financial goal; our officers, employees and their affiliates currently have approximately $35 million invested in The Royce Funds. - -------------------------------------------------------------------------------- THE ROYCE FUNDS 1414 AVENUE OF THE AMERICAS, NEW YORK NY10019 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 AND TRUST COMPANY Custodian, Transfer Agent and Registrar (800) 426-5523 www.roycefunds.com funds@roycenet.com -----END PRIVACY-ENHANCED MESSAGE-----