1999 Annual Report

 

THE
ROYCE
FUNDS

Value Investing In Small Companies
For More Than 25 Years

 

ROYCE VALUE TRUST

ROYCE MICRO-CAP TRUST

ROYCE FOCUS TRUST

 

www.roycefunds.com

A FEW WORDS ON CLOSED-END FUNDS

Royce & Associates, Inc. manages three closed-end funds: Royce Value Trust, the first small-cap value closed-end fund offering; Royce Micro-Cap Trust, the only micro-cap closed-end fund; and Royce Focus Trust, formerly named Royce Global Trust, a closed-end fund that typically invests in a limited number of domestic and foreign companies.

A closed-end fund is an investment company whose shares are listed on a stock exchange or are traded in the over-the-counter market. Like all investment companies, including open-end mutual funds, the assets of a closed-end fund are professionally managed in accordance with the investment objectives and policies approved by the fund’s Board of Directors. A closed-end fund raises cash for investment by issuing a fixed number of shares through initial and other public offerings which may include periodic rights offerings. Proceeds from the offerings are invested in an actively managed portfolio of securities. Investors wanting to buy or sell shares of a publicly traded closed-end fund after the offerings must do so on a stock exchange or the Nasdaq market, as with any publicly traded stock. This is in contrast to open-end mutual funds where the fund sells and redeems its shares on a continuous basis.

A CLOSED-END FUND OFFERS SEVERAL DISTINCT ADVANTAGES
NOT AVAILABLE FROM AN OPEN-END FUND STRUCTURE

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 11, 13 and 15. For additional information on the Funds’ Distribution Reinvestment and Cash Purchase Options and the benefits for stockholders, see page 18.

THE ROYCE FUNDS

ANNUAL REPORT REFERENCE GUIDE

For more than 25 years, our approach has focused on evaluating a company’s current 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 current worth.
Letter to Our Stockholders:
Better Late Than Never: Small-Caps Join the Party...To the Investor Go the Spoils
2
Recent Market Cycle Results
8
Performance Highlights: History Since Inception
9
Performance and Portfolio Review:
Royce Value Trust, Royce Micro-Cap Trust, Royce Focus Trust
10
Q & A Session with Chuck Royce, Whitney George and Jack Fockler
16
Distribution Reinvestment and Cash Purchase Options
18
Updates and Notes: What's New at www.roycefunds.com and elsewhere at the Firm
19
Schedules of Investments and Other Financial Statements
20
Postscript: This Just In
Inside Back Cover

NAV Average Annual Total Returns Through December 31, 1999

           
   

4th Quarter

 

JUL-DEC

             

From

 

Inception

Fund

 

1999*

 

1999*

 

1-Year

 

3-Year

 

5-Year

 

Inception

 

Date

Royce Value Trust

 

11.8

%

6.5

%

11.7

%

13.7

%

15.8

%

12.9

%

11/26/86

Royce Micro-Cap Trust

 

13.6

 

10.1

 

12.7

 

11.2

 

14.5

 

13.0

 

12/14/93

Royce Focus Trust

 

5.9

 

-1.3

 

8.7

 

6.9

 

n/a

 

8.0

 

11/01/96**

Russell 2000

18.4

11.0

21.3

13.1

16.7

Royce Value Trust’s 10-year NAV average annual total return for the period ended 12/31/99 was 13.7% .

* Not annualized.

** Date Royce & Associates, Inc. assumed investment management responsibility.

LETTER TO OUR STOCKHOLDERS

[PHOTO]

Charles M. Royce, President

Over the last 20 years, falling interest rates have been the engine driving the stock market’s record-breaking run, but the ride may soon slow down. As of December 31, 1999, the annual coupon yield on the long-term Treasury bond had declined 57% from its 1981 high of 15.2% to the current 6.5%. Short-term yields declined 70% from an annual rate high of 17.7% in 1981 to 5.3% currently. In order to match the magnitude of this drop, long-term rates would have to decline below 2.8% and short-term rates would have to fall below 1.6% — a possible, but unlikely scenario. Without this powerful backdrop, we think that the longevity of high stock market returns is questionable.

[GRAPHIC: The Royce Funds portfolio managers celebrating in Times Square]

Watching for Value at the Dot.Com Party

BETTER LATE THAN NEVER: SMALL-CAPS JOIN THE PARTY

It was only fitting that the stock market concluded the year with a fireworks display that would have made the pyrotechnists at the Eiffel Tower envious. The technology-laden Nasdaq Composite exploded with an 85.6% gain for 1999, the best single-year performance ever by a diversified domestic equity index. For an unprecedented fifth consecutive year, large-cap indices, the S&P 500 and Dow Jones Industrial Average, concluded 1999 with strong double-digit gains. Small-cap companies managed a fourth-quarter flurry of their own that enabled the Russell 2000 (+21.3%) to edge out the S&P 500 (+21.1%) in 1999 for the first time since 1993, news that risks being lost in the wake of the Nasdaq Composite’s record-shattering year.

If all of this were not enough to convince you that the stock market succumbed to millennium madness, consider that, according to Lipper, Inc., the average technology fund rose 134.8% in 1999. Contributing to this unheard of ascent was a torrid IPO (initial

2 | The Royce Funds Annual Report 1999

public offering) market that produced first-day gains of 100% or more for 101 companies. If this were to continue, IPO would need to be relabeled "instant profit opportunity." To put 1999 into perspective, over the prior 207 years, or since investors began gathering at Wall Street’s buttonwood tree in 1792, there had only been 42 IPOs with first-day gains of more than 100% (Source: The Wall Street Journal).

We can perhaps be indulged in a bit of hyperbole in saying that small-cap stocks, like the heroic warriors in Braveheart, refused to surrender to their large-cap counterparts. After five long years of underperformance, the Russell 2000 eked out its small edge versus the S&P 500 with better performance in the second and fourth quarters after a complete disconnect in the first quarter. Not on most investors’ radar screens is the fact that 1999’s calendar year results also reflected excellent small-cap performance from both the 10/8/98 Russell 2000 market trough (Russell 2000 +65.2% versus S&P 500 +55.6%) and the 1999 Russell 2000 low on 3/23/99 (Russell 2000 +33.1% versus S&P 500 +17.5%). Another little noticed, but compelling statistic is that, for the first time ever, the dividend yield of the Russell 2000 is greater than that of the S&P 500 and was so for all of 1999. Do we think that this is the start of something good for our asset class? "You betcha."

1999 SMALL-CAP VS. LARGE-CAP RESULTS BY QUARTER

 

1st Qtr

 

2nd Qtr

 

3rd Qtr

 

4th Qtr

 

Russell 2000

-5.4

%

15.6

%

-6.3

%

18.4

%

S&P 500

5.0

%

7.1

%

-6.3

%

14.9

%

The Royce Funds Annual Report 1999 | 3

LETTER TO OUR STOCKHOLDERS

We looked at historical Russell 2000, Russell 2000 Value and Russell 2000 Growth index full market cycle returns to see if growth stocks had generally outperformed in up markets and value stocks in down markets over the last two decades. A full market cycle incorporates at least one up and one down phase and requires a move of at least 15% from the previous peak or trough.

Small-cap value outperformed growth during five out of six down market periods. Surprisingly, value also outperformed growth in four out of six up market periods. So despite strong recent performance by growth stocks — on the verge of winning their first full-market cycle out of six full market cycle periods throughout the small-cap index’s history (since 1979) — we believe that the long-term case for value remains compelling.

NEVER SURRENDER

Technology’s dominance extended across all capitalization categories. The sector now accounts for approximately 29% of the stocks in the S&P 500. In 1999, 66% of the S&P 500’s return was attributable to just 10 stocks, eight of which were technology issues. Approximately 93% of the Russell 2000’s gain for the year resulted from stocks in the technology sector, and it is now the largest sector in the Russell 2000, up from third at the beginning of 1999. In spite of these impressive statistics, technology’s impact was perhaps nowhere more evident than in the divergence between the growth and value investment styles. In all capitalization classes, growth stocks, typically those with high price/earnings and price/book ratios and high earnings growth rates, handily trounced value stocks, typically those with low P/E and P/B ratios and cyclical growth rates. In 1999, the year was like the old country music song, in which g rowth investors got th e goldmine and value investors got the shaft.

The divergence between growth and value in the small-cap sector was especially prominent. There was also substantial disparity within small-cap value itself. While performance spreads were consistent between growth and value in the Russell and the Wilshire small-cap style indices — growth outdistanced value — 1999 returns in the value category were markedly different for each index. The Russell 2000 Value index lost 1.5% in 1999, yet the Wilshire Small-Cap Value index’s return was even more miserable, down 15.6%. Since the Wilshire Small-Cap Value Index is made up of arguably higher-quality companies than the Russell 2000 Value, as measured by lower debt-to-capital and higher return-on-assets and return-on-equity ratios, the travails suffered by small-cap value investors in 1999 are readily evident (Source: Prudential Securities).

In all capitalization classes, growth stocks, typically those with high price/earnings and price/book ratios and high earnings growth rates, handily trounced value stocks, typically those with low P/E and P/B ratios and cyclical growth rates. In 1999, the year was like the old country music song, in which growth investors got the goldmine and value investors got the shaft.

 

4 | The Royce Funds Annual Report 1999

EXPECT THE UNEXPECTED

If Julius Caesar had gotten his way and been allowed to begin the calendar year with the spring equinox, we would be quite pleased with our closed-end funds’ performance in 1999, in what was as confounding and at times difficult a year as we have seen for some time. After getting off to a collectively slow start in the first quarter, each fund finished the year strongly. On a Net Asset Value - basis, for the last nine months of the year (3/31/99 - 12/31/99), Royce Value Trust was up 28.0%, Royce Micro-Cap Trust was up 28.3% and Royce Focus Trust was up 27.8%. These returns compare favorably with that of the small-cap oriented Russell 2000 - up 28.2% - for the same period.

Unfortunately, 1999’s results were measured by the twelve-month calendar that begins in January, and our closed-end portfolios were unable to shake off the adverse effects of the first-quarter downturn. All underperformed the Russell 2000 during the first quarter - in which small-cap value atypically lost ground to small-cap growth—only to outperform the index in the dynamic second quarter. During the difficult third quarter, in which the Russell 2000 was down 6.3%, Royce Value Trust and Royce Micro-Cap Trust outperformed the index, but Royce Focus Trust slightly lagged. Unfortunately, all three closed-end funds were unable to keep pace in the potent fourth quarter, when the Russell 2000 soared, up 18.4%.

Portfolio diversification, or lack thereof, did not seem to have a bearing on performance in 1999. For the full year, Royce Value Trust (+ 11.7%) and Royce Micro-Cap Trust (+12.7%), our two broadly diversified portfolios, and Royce Focus Trust (+8.7%), our concentrated small-cap portfolio, all turned in relatively solid, but unspectacular, performances in 1999, lagging the Russell 2000 (+21.3%). For a complete review and discussion of individual fund results and risk profiles, see pages 10-15.

If Julius Caesar had gotten his way and been allowed to begin the calendar year with the spring equinox, we would be quite pleased with our closed-end funds’ performance in 1999, in what was as confounding and at times difficult a year as we have seen for some time.

 

The Royce Funds Annual Report 1999 | 5

LETTER TO OUR STOCKHOLDERS

It comes as no surprise that technology, representing an average 15% of the index for the year, was the Russell 2000’s best performing sector in 1999, surging 101%. Less well-known is the fact that the Utilities sector (7% of the index) was up more than 40%. Offsetting these strong performances was the poor return of the highest weighted sector in the index, Financial Services (22% of the index), which was down almost 6% for the year.

Among small-caps, performance was skewed across the P/E range in 1999. The best performance was turned in by the companies with no earnings, up more than 85%, while the quintile with the lowest P/E ratios (median P/E of 7.5x) had the worst performance, down more than 10%.

[GRAPHIC: The Royce Funds portfolio managers conducting research]

Investors in a Speculators’ Market

NEW MILLENNIUM CONJECTURE

Like most people, we have spent some time reflecting on what the future might bring. Perhaps it is an occupational hazard, but looking forward always involves some looking backward for us as well. Investors in general seem comfortable taking more risk in order to achieve higher returns. Within the small-cap universe in 1999, the market appeared to us to undervalue good financial characteristics and to overvalue hopes, dreams and potential earnings growth. As a result, many "higher-quality" small-cap stocks are still waiting for their chance to shine. We have many portfolio companies that are very attractive to us from an earnings and balance sheet standpoint, yet their stocks performed worse in 1999 than most momentum-driven stocks that are highly leveraged and that have no earnings history. "Go figure."

Building long-term wealth is not simply a matter of participating in a favorable market. It is produced by applying a consistent discipline over time, and recognizing that in order to provide excellent long-term, absolute and relative results, our portfolios are likely to underperform over some short-term periods.

6 | The Royce Funds Annual Report 1999

What does it all mean for the future? Consider that, aside from technology, most stocks had an unspectacular year. Technology certainly led the market in terms of performance, but other sectors were generally unable to follow its lead. We think that this very narrow market environment could be followed by a return to "quality," a period where market performance will be driven less by momentum and more by business characteristics. While we recognize that technology is a very important factor in our economy, this offers no assurance that it must inevitably remain a market leader.

[PHOTO]

(l-r) Jack Fockler, Whitney George, Chuck Royce,
Charlie Dreifus, Buzz Zaino

TO THE INVESTOR GO THE SPOILS

As we evaluate 1999’s performance and consider what 2000 may hold, it occurs to us that the traditional distinction between the terms "speculator" and "investor" is more relevant than ever. Speculators ("traders") are only concerned about a short-term change in price, whereas investors, ourselves included, are concerned about the long-term appreciation potential of an enterprise.

We think that the current environment of record-setting stock market returns is unlikely to continue. For the speculator, this is bad news; for the long-term investor, it is of less concern. Building long-term wealth is not simply a byproduct of a favorable market. It is produced by applying a consistent discipline over time, and recognizing that in order to provide excellent long-term, absolute and relative results, our portfolios are likely to underperform over some short-term periods.

In this period of extreme divergence between growth and value, we have no interest in exchanging our investment charter for that of the speculator. Current conditions seem ripe to us for a return to value, with the accompanying prospect of higher short-term returns for this style. Whatever the outcome in the near term, we believe that the individual companies in the Funds’ portfolios offer substantial long-term performance opportunity.

Sincerely,

/s/ Charles M. Royce

Charles M. Royce

President

/s/ W. Whitney George

W. Whitney George

Vice President

/s/ Jack E. Fockler, Jr.

Jack E. Fockler, Jr.

Vice President

January 31, 2000

PS We invite you to visit our Website at www.roycefunds.com for up-to-date information on our Funds and our company. Your questions and comments are welcome.

The Royce Funds Annual Report 1999 | 7

RECENT MARKET CYCLE RESULTS

ROYCE FUNDS VS. RUSSELL 2000

Performance measurement refers to the idea of comparing returns against a benchmark — exactly which benchmark and over what time periods are always the questions.

Although a number of style indices within the small-cap sector are now available, each incorporates different, in some cases substantially different, definitions of value. Since we select securities from the entire small-cap universe, not just the "value" portion of the sector, we believe that the broadly defined Russell 2000 is a better index with which to compare our investment results.

Traditional performance presentations revolve around fixed time periods (e.g., one-, three- and five-year returns), rather than around market cycles, even though this method may not reveal the complete picture. In contrast, we believe that peak-to-peak, or full-market-cycle, analyses capture performance more completely because they include both up and down phases.

1996 - 1998 MARKET CYCLE
VALUE OUTPERFORMED DURING
UP AND DOWN PHASES

Russell 2000

12/31/95

1159.603

1162.624

1156.601

1140.408

1145.57

1145.449

1128.029

1111.876

1122.127

1120.153

1109.049

1107.92

1111.2

1116.188

1121.004

1128.004

1132.207

1139.877

1140.219

1142.593

1144.833

1150.935

1158.356

1165.696

1166.74

1169.7

1175.875

1173.69

1177.422

1180.124

1181.014

1175.809

1180.501

1179.413

1182.585

1172.482

1181.421

1195.307

1197.452

1195.876

1194.262

1195.828

1194.461

1191.851

1197.271

1202.014

1203.07

1204.361

1174.153

1184.779

1180.914

1190.357

1196.744

1196.662

1209.752

1210.76

1208.858

1210.754

1212.805

1206.464

1206.78

1210.164

1211.253

1218.774

1224.379

1227.424

1230.311

1233.121

1218.106

1224.703

1219.525

1214.059

1220.085

1228.701

1236.151

1233.843

1243.392

1247.458

1256.49

1265.592

1270.01

1275.966

1281.811

1283.638

1283.944

1291.24

1275.418

1278.645

1278.681

1274.141

1272.759

1281.629

1294.307

1306.699

1317.843

1320.232

1323.09

1329.682

1338.687

1338.138

1343.717

1343.203

1344.142

1333.428

1324.395

1329.072

1334.541

1332.674

1337.293

1340.949

1332.179

1323.251

1326.645

1325.662

1327.02

1318.861

1310.634

1306.081

1288.526

1281.818

1270.708

1274.661

1280.527

1272.021

1255.482

1263.249

1279.74

1283.506

1280.712

1272.785

1253.82

1243.206

1242.374

1228.879

1199.197

1195.733

1162.891

1145.612

1175.349

1193.101

1187.889

1173.641

1151.78

1136.955

1151.249

1162.099

1156.949

1158.847

1167.963

1180.945

1199.24

1200.64

1202.477

1211.201

1210.988

1210.656

1210.408

1204.363

1208.478

1212.143

1216.9

1218.588

1218.045

1217.235

1226.193

1227.572

1226.505

1234.903

1241.89

1238.14

1235.775

1233.726

1238.201

1227.45

1236.445

1242.231

1244.62

1246.654

1252.502

1262.163

1268.005

1267.576

1265.602

1264.635

1270.137

1265.371

1269.455

1273.365

1278.39

1280.535

1284.068

1280.169

1290.871

1287.316

1294.828

1293.253

1287.775

1283.46

1285.327

1290.117

1294.147

1294.497

1292.058

1291.638

1290.176

1283.92

1271.802

1271.999

1272.705

1272.518

1261.94

1254.658

1255.467

1264.278

1261.543

1262.015

1261.884

1271.902

1278.692

1279.884

1284.154

1285.712

1286.063

1290.386

1287.912

1285.733

1289.47

1291.806

1290.403

1300.884

1309.614

1306.495

1311.2

1316.372

1321.197

1330.573

1331.896

1335.526

1321.988

1340.7

1343.934

1330.835

1326.239

1318.032

1304.437

1303.2

1314.263

1325.795

1327.964

1323.308

1324.886

1331.869

1337.836

1341.042

12/31/96

1350.871

1337.442

1348.111

1349.883

1356.8

1357.012

1362.574

1364.306

1363.642

1369.936

1368.836

1368.095

1371.507

1376.957

1380.566

1381.867

1381.144

1372.291

1362.738

1366.281

1365.69

1373.533

1377.868

1378.765

1373.598

1363.249

1363.427

1367.937

1358.475

1353.502

1363.713

1374.126

1377.721

1381.114

1381.762

1372.072

1367.505

1367.717

1369.151

1358.576

1348.471

1344.459

1346.299

1351.537

1359.218

1358.945

1364.95

1371.038

1373.96

1361.544

1345.548

1349.089

1335.574

1326.616

1314.823

1316.807

1314.623

1306.176

1310.642

1317.212

1304.63

1281.019

1275.068

1263.703

1258.489

1275.08

1290.07

1293.949

1297.13

1291.183

1269.493

1267.2

1275.271

1273.443

1274.298

1279.171

1266.242

1265.575

1266.753

1266.985

1257.387

1258.496

1275.336

1284.59

1294.651

1325.735

1357.262

1354.682

1349.214

1348.739

1353.729

1362.497

1361.983

1365.771

1371.168

1369.053

1373.639

1379.73

1386.797

1392.128

1408.029

1412.027

1416.23

1418.683

1427.5

1437.833

1436.92

1434.827

1443.325

1451.511

1454.396

1452.422

1453.936

1461.433

1470.992

1471.57

1472.606

1472.739

1487.734

1477.176

1466.736

1476.186

1468.458

1465.398

1474.076

1488.676

1480.111

1481.944

1487.432

1487.589

1495.021

1491.934

1498.879

1510.508

1516.568

1526.035

1540.968

1533.34

1524.978

1516.09

1526.074

1531.531

1533.631

1535.139

1535.6

1540.135

1553.818

1557.948

1556.93

1562.434

1572.399

1581.395

1579.305

1557.031

1551.361

1546.984

1548.264

1549.197

1536.917

1537.317

1556.6

1576.105

1568.427

1563.781

1572.506

1573.457

1583.25

1586.463

1593.595

1610.864

1613.644

1616.899

1629.532

1640.77

1647.379

1644.381

1641.087

1657.039

1657.422

1676.58

1680.282

1681.708

1684.324

1691.271

1693.078

1689.788

1687.285

1691.458

1700.297

1710.237

1713.145

1721.595

1731.706

1739.655

1747.309

1747.066

1750.424

1752.335

1752.991

1748.446

1744.85

1724.248

1694.428

1711.662

1730.867

1728.651

1695.065

1688.659

1585.402

1621.245

1640.59

1617.468

1635.109

1664.007

1668.803

1678.415

1671.26

1642.61

1643.37

1636.002

1598.892

1598.725

1617.61

1644.834

1631.855

1626.687

1645.486

1642.988

1616.311

1612.9

1617.841

1624.533

1640.433

1634.025

1639.133

1643.103

1654.941

1669.946

1655.577

1635.561

1605.393

1597.837

1590.795

1607.708

1611.796

1589.217

1587.864

1598.846

1595.724

1591.767

1591.767

1593.304

1613.496

1641.127

12/31/97

1652.967

1650.89

1652.774

1637.92

1625.711

1610.42

1562.528

1554.605

1583.383

1596.587

1596.181

1613.395

1632.364

1626.643

1612.877

1607.337

1592.873

1598.612

1621.285

1634.18

1626.88

1626.88

1643.096

1655.527

1671.205

1679.615

1685.211

1692.072

1706.844

1710.29

1711.828

1719.062

1714.224

1720

1718.431

1717.632

1726.222

1718.762

1734.645

1746.328

1747.177

1747.177

1745.856

1749.482

1748.272

1728.208

1754.047

1744.109

1757.106

1766.758

1769.339

1773.154

1784.309

1781.649

1786.294

1794.504

1794.482

1793.574

1802.396

1805.059

1807.904

1805.838

1802.67

1819.235

1835.398

1840.737

1838.415

1823.739

1798.908

1799.583

1817.398

1815.564

1835.505

1844.482

1834.125

1844.132

1850.563

1860.459

1998 - CURRENT PERIOD
GROWTH LEADS ON STRENGTH OF
TROUGH-TO-PEAK PERFORMANCE

1859.628

1836.363

1818.711

1774.536

1789.677

1806.655

1829.301

1837.264

1839.102

1825.168

1816.631

1804.028

1817.294

1807.556

1804.465

1809.626

1802.198

1790.393

1771.896

1784.229

1775.434

1770.503

1754.703

1724.95

1706.786

1728.138

1730.781

1730.781

1710.284

1705.111

1703.02

1712.916

1722.445

1730.281

1731.472

1710.392

1684.958

1675.221

1646.059

1663.141

1684.932

1668.182

1663.077

1675.152

1696.925

1712.623

1707.728

1708.623

1721.424

1734.422

1743.948

1738.191

1744.878

1741.363

1744.743

1744.953

1739.033

1740.422

1742.84

1752.73

1759.182

1754.427

1753.009

1731.563

1711.585

1679.046

1664.64

1644.019

1622.534

1617.455

1630.373

1594.014

1569.596

1525.135

1514.037

1544.202

1579.146

1563.278

1521.334

1551.898

1534.041

1529.829

1534.245

1562.036

1541.509

1526.193

1503.303

1495.838

1480.806

1445.479

1390.822

1362.452

1284.489

1323.101

1340.447

1316.01

1318.99

1375.82

1340.66

1311.34

1344.41

1360.3

1360.31

1369.16

1351.71

1381.9

1379.53

1400.93

1430.76

1408.84

1404.28

1401.37

1392.94

1385.01

1333.74

1332.96

1283.67

1267.3

1228.06

1182.12

1212.87

1240.47

1220.79

1238.52

1276.25

1307.29

1343.65

1365.82

1372.15

1396.73

1399.05

1417.91

1415.59

1415.7

1427.11

1441.5

1474.05

1476.82

1497.62

1512.24

1525.61

1518.27

1512.58

1499.84

1495.14

1484.5

1488.79

1484.89

1494.93

1503.52

1503.56

1518.03

1512.32

1522.78

1533.1

1517.02

1520.78

1516.23

1506.76

1519.62

1530.56

1531.76

1533.85

1512.93

1508.68

1480.27

1486.51

1487.72

1502.83

1516.74

1533.13

1526.94

1544.39

1547.37

1557.5

1566.37

1572.46

12/31/98

1610.89

1608.42

1611.66

1633.44

1634.18

1647.22

1655.07

1633.09

1623.33

1604.99

1631.12

1646.37

1645.19

1620.08

1613.99

1612.46

1624.7

1608.74

1619.79

1632.3

1628.06

1611.58

1619.25

1596.81

1577.85

1572.32

1540.91

1521.67

1552.96

1523

1515.92

1489.92

1495.64

1500.41

1521.29

1525.75

1511.29

1501.88

1500.09

1508.22

1508.39

1499.15

1507.16

1522.3

1530.07

1527.2

1534.79

1534.87

1524.7

1534.14

1527.73

1525.04

1529.38

1517.99

1504.94

1467.54

1471.84

1504.67

1508.39

1531.36

1527.79

1523.51

1527.77

1541.32

1536.69

1524.19

1532.42

1555.26

1580.02

1599.1

1599.86

1601.07

1616.05

1581.03

1592.32

1635.23

1643.81

1655.08

1667.52

1668.29

1662.38

1660.36

1660.03

1661.84

1659.23

1665.8

1662.43

1672.95

1695.14

1714.15

1723.74

1730.09

1700.62

1693.68

1698.18

1712.5

1719.71

1723.86

1690.41

1667.62

1671.33

1661.98

1684.28

1679.58

1676.97

1674.13

1698.51

1715.91

1704.74

1709.78

1698.47

1682.5

1657.65

1666.76

1694.98

1703.44

1709.87

1726.72

1718.67

1717.72

1702.94

1702.84

1724.42

1745.64

1760.44

1760.44

1747.77

1755.72

1755.86

1741.2

1749.25

1761.78

1766.84

1762.33

1775.38

1792.03

1789.91

1775.07

1745.02

1749.23

1737.21

1725.32

1704.28

1718.19

1718.8

1699.82

1712.14

1703.89

1679.62

1654.3

1654.51

1648.16

1639.98

1628.23

1649.2

1651.59

1671.7

1671.03

1679.35

1668.47

1667.13

1673.52

1684.41

1684

1687.05

1679.96

1666.35

1646.96

1648.77

1661.19

1647.56

1680.25

1689.16

1680.46

1687.58

1700.64

1695.15

1689.68

1682.52

1659.24

1675.45

1670.54

1644.77

1648.95

1620.78

1608.79

1627.21

1614.78

1626.57

1649.13

1634.52

1646.4

1644.05

1658.88

1652.46

1650.92

1660.52

1639.45

1618.97

1619.03

1601.05

1578.78

1586.75

1598.29

1599.69

1616.77

1613.22

1605.56

1609.74

1633.03

1655.81

1667.9

1670.11

1693.92

1699.51

1709.24

1719.64

1724.4

1734.08

1729.4

1737.83

1750.44

1765.74

1765.8

1784.96

1781.91

1780.16

1755.73

1761.51

1773.04

1765.91

1754.68

1753.25

1779.36

1795.43

1800.06

1800.03

1812.16

1796.99

1803.95

1818.57

1788.92

1784.02

1799.5

1803.14

1806.99

1840.15

1848.59

1865.82

1873.47

1889.46

1924.03

1921.75

1953.31

12/31/99

1953.31

 

1996 PEAK TO 1998 PEAK
5/22/96 - 4/21/98

1998 PEAK TO CURRENT
4/21/98 - 12/31/99

1996 PEAK TO CURRENT
5/22/96 - 12/31/99

Russell 2000

38.5%

5.0%

45.4%

Russell 2000 Value

60.2  

-16.6   

33.7  

Russell 2000 Growth

19.3  

26.2  

50.6  

NAV CUMULATIVE TOTAL RETURN

 

 

 

Royce Value Trust

54.1  

1.4  

56.3  

Royce Micro-Cap Trust

48.6  

-3.9   

42.7  

Royce Focus Trust

n/a  

-12.3   

n/a  

Both Royce Value Trust and Royce Micro-Cap Trust beat the Russell 2000 index during the last full market cycle, attributable primarily to outperformance during the cycle’s decline.

All three Royce Funds are trailing the index in the 1998 peak-to-current period.

Royce Value Trust is outperforming the Russell 2000 from the 1996 peak.

8 | The Royce Funds Annual Report 1999

HISTORY SINCE INCEPTION

The following table details the share accumulations by an initial investor in the Funds who reinvested all distributions (including fractional shares) and participated fully in primary subscriptions for each of the rights offerings. Full participation in distribution reinvestments and rights offerings maximizes the returns available to a long-term investor. This table should be read in conjunction with the Performance and Portfolio Reviews of the Funds.

   

Amount

Purchase

 

NAV

Market

History

   

Invested

Price

Shares

Value*

Value*

Royce Value Trust

 

 

 

 

 

11/26/86

 

Initial Purchase

$ 10,000

$ 10.000

1,000

$  9,280

$ 10,000

10/15/87

 

Distribution $0.30

 

7.000

42

 

 

12/31/87

 

Distribution $0.22

 

7.125

32

8,578

7,250

12/27/88

 

Distribution $0.51

 

8.625

63

10,529

9,238

9/22/89

 

Rights Offering

405

9.000

45

 

 

12/29/89

 

Distribution $0.52

 

9.125

67

12,942

11,866

9/24/90

 

Rights Offering

457

7.375

62

 

 

12/31/90

 

Distribution $0.32

 

8.000

52

11,713

11,074

9/23/91

 

Rights Offering

638

9.375

68

 

 

12/31/91

 

Distribution $0.61

 

10.625

82

17,919

15,697

9/25/92

 

Rights Offering

825

11.000

75

 

 

12/31/92

 

Distribution $0.90

 

12.500

114

21,999

20,874

9/27/93

 

Rights Offering

1,469

13.000

113

 

 

12/31/93

 

Distribution $1.15

 

13.000

160

26,603

25,428

10/28/94

 

Rights Offering

1,103

11.250

98

 

 

12/19/94

 

Distribution $1.05

 

11.375

191

27,939

24,905

11/3/95

 

Rights Offering

1,425

12.500

114

 

 

12/7/95

 

Distribution $1.29

 

12.125

253

35,676

31,243

12/6/96

 

Distribution $1.15

 

12.250

247

41,213

36,335

9/8/97

 

Distribution $0.33

 

15.625

61

 

 

12/5/97

 

Distribution $0.88

 

15.313

169

52,556

46,814

3/6/98

 

Distribution $0.37

 

16.688

69

 

 

6/5/98

 

Distribution $0.39

 

16.250

76

 

 

9/8/98

 

Distribution $0.40

 

12.563

104

 

 

12/7/98

 

Distribution $0.38

 

13.000

98

54,313

47,506

3/8/99

 

Distribution $0.37

 

11.875

108

 

 

6/7/99

 

Distribution $0.34

 

13.313

91

 

 

9/7/99

 

Distribution $0.33

 

12.688

95

 

 

12/6/99

 

Distribution $0.33

 

12.750

97

 

 

12/31/99

 

 

$ 16,322

 

3,846

$ 60,653

$ 50,239

Royce Micro-Cap Trust

 

 

 

 

 

12/14/93

 

Initial Purchase

$  7,500

$  7.500

1,000

$  7,250

$  7,500

10/28/94

 

Rights Offering

1,400

7.000

200

 

 

12/19/94

 

Distribution $0.05

 

6.750

9

9,163

8,462

12/7/95

 

Distribution $0.36

 

7.500

58

11,264

10,136

12/6/96

 

Distribution $0.80

 

7.625

133

13,132

11,550

12/5/97

 

Distribution $1.00

 

10.000

140

16,694

15,593

12/7/98

 

Distribution $0.29

 

8.625

52

16,016

14,129

12/6/99

 

Distribution $0.27

 

8.781

49

 

 

12/31/99

 

 

$  8,900

 

1,641

$ 18,051

$ 14,769

Royce Focus Trust

 

 

 

 

 

10/31/96

 

Initial Purchase

$  4,375

$  4.375

1,000

$  5,280

$  4,375

12/31/96

 

 

 

 

 

5,520

4,594

12/5/97

 

Distribution $0.53

 

5.250

101

6,650

5,574

12/31/98

 

 

 

 

 

6,199

5,367

12/6/99

 

Distribution $0.145

 

4.750

34

 

 

12/31/99

 

 

$  4,375

 

1,135

$  6,742

$  5,356

* Other than for initial purchase, values are stated as of December 31 of the year indicated, after reinvestment of distributions.

The Royce Funds Annual Report 1999 | 9

ROYCE VALUE TRUST

NAV AVERAGE ANNUAL TOTAL RETURNS
Through 12/31/99

Fourth Quarter 1999*

11.8%

Jul-Dec 1999*

6.5   

1-Year

11.7   

3-Year

13.7   

5-Year

15.8   

10-year

13.7   

Since Inception (11/26/86)

12.9   

*Not annualized.

RISK/RETURN COMPARISON
3-Year Period ended 12/31/99

Average Annual
Total Return

Standard
Deviation

RUR*

Royce Value
Trust (NAV)

13.7

17.5

0.78

S&P 600

11.7

20.5

0.57

Russell 2000

13.1

20.9

0.63

*Return per unit of risk (RUR) is the average annual total return divided by the
annualized standard deviation over a designated time period.

Over the last three years, Royce Value Trust has outperformed the S&P 600
and the Russell 2000 on both an absolute and a risk-adjusted basis.

DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater
in Percentages (%)

RVT (NAV)

Russell 2000

8/25/87-10/28/87
-26.4
-38.9
10/9/89-10/31/90
-22.1
-32.5
2/12/92-7/8/92
 -2.1
-12.0
3/18/94-12/9/94
 -5.3
-12.3
5/22/96-7/24/96
 -6.3
-15.4
1/22/97-4/25/97
 -3.1
 -9.0
10/13/97-1/12/98
 -8.1
-11.3
4/21/98-10/8/98
-31.3
-36.5

CALENDAR YEAR NAV TOTAL RETURNS

Year

RVT      

    

Year

RVT     

1999

11.7%

 

1992

19.9%

1998

3.3   

 

1991

39.5   

1997

27.5   

 

1990

-13.1   

1996

15.5   

 

1989

19.2   

1995

22.6   

 

1988

22.8   

1994

1.1   

 

1987

-7.7   

1993

17.9   

     

MANAGER’S DISCUSSION

Royce Value Trust (RVT), our broadly diversified closed-end fund of small- and micro-cap stocks, was up 11.7% on a Net Asset Value basis and 5.7% on a market price basis in 1999. Although we think that the Fund’s NAV return was reasonable considering the difficulties that small-cap value endured last year, it was disappointing compared to its small-cap benchmarks, the S&P 600 (+12.4%) and the Russell 2000 (+21.3%). The Fund’s average annual NAV total return since inception (11/26/86) was 12.9%. This compares to respective returns of 12.3% for the Russell 2000 and 10.9% for the S&P 600.

For small-cap value in general, and RVT in particular, performance anomalies were common in 1999. After losing ground against its benchmark during the first quarter, the Fund outperformed the Russell 2000 during the more dynamic second quarter and in the third-quarter downturn. With these gyrations, RVT’s NAV performance was virtually flat through the end of the third quarter and holding its own relative to its benchmarks. During the explosive fourth quarter, however, the Fund could not keep pace, gaining 11.8% on an NAV basis, versus 12.5% for the S&P 600 and 18.4% for the Russell 2000.

In 1999, our holdings received little attention from a market that was focused on momentum, and our valuations, as measured by its weighted average P/E ratio, actually declined from the end of 1998. The attributes that we seek, namely strong balance sheets and strong records of earnings, did not consistently translate into high performance in 1999.

We increased our holdings in the Technology sector, which also generated the greatest positive impact on performance. For example, we took new positions in information technology service companies, such as CIBER and JDA Software Group, when Y2K anxiety created an earnings slowdown. We also sold our position in Unitrode Corporation, an analog semiconductor manufacturer, at a substantial profit.

Several new companies placed among our top-ten positions. Interim Services, new to the portfolio as a whole, is a staffing and career management services company that offers what we think is a winning combination of attractive value and balance sheet quality. We nearly doubled our position in Arnold Industries, in our view a very attractively valued trucking company in an industry that received scant investment attention in 1999 (Circle International Group, a freight forwarder company in the portfolio, has a similar profile). Lilly Industries, a manufacturer of industrial coatings and specialty chemicals, represents another significant increase, although we have held shares since RVT’s inception in November 1986.

In our view, RVT’s portfolio is well-positioned to take advantage of opportunities in the small- and micro-cap sectors. We believe that when the market again emphasizes "quality," as opposed to its current emphasis on momentum, good things will follow for Royce Value Trust.

10 | The Royce Funds Annual Report 1999

PERFORMANCE AND PORTFOLIO REVIEW

GOOD IDEAS THAT WORKED
 1999 Net Realized and Unrealized Gain

Exar

$8,331,788

Unitrode Corporation

4,642,115

Integral Systems

3,687,054

Micro Strategy Cl. A

3,367,006

Topps Company (The)

3,216,198

Exar — The management of this analog semiconductor manufacturer developed new telecommunications products that created a major turnaround in the company’s prospects and caused the stock price to surge in the fourth quarter.

Unitrode Corporation — Small-cap stocks are often subject to an advantageous "urge to merge," and a takeover last summer by Texas Instruments sent the price of this analog semiconductor manufacturer well beyond our initial sell target.

GOOD IDEAS AT THE TIME
 1999 Net Realized and Unrealized Loss

Axiohm Transaction Solutions

$2,747,124

Stone & Webster

2,416,906

Medical Assurance

2,233,311

PXRE Group

2,051,178

Nvest LP

1,956,101

Axiohm Transaction Solutions — It appeared that we had overstayed our welcome with this designer and manufacturer of thermal printheads and printer components when management began to take the majority of shares private. We were left with a minority stake of ever-dwindling value before selling what remained of our entire position last October.

Stone & Webster — The stock of this engineering, construction and design firm declined precipitously in the fourth quarter in the midst of a financial crisis. Selling the building that housed its corporate headquarters gave a small boost both to the company and its stock price. We are hopeful that the recovery can continue.

ROYCE VALUE TRUST MARKET PRICE — ACTUAL vs. ADJUSTED*

Market Price Total Returns

Since Inception

268.2%

10 Years =

221.3   

5 Years =

93.7   

3 Years =

38.2   

1 Year =

5.7   

 

Adjusted
Market Price

  

Actual
Market Price

10.00

 

10.00

1986

9.88

 

9.88

10.75

 

10.75

9.75

 

9.75

9.63

 

9.63

8.63

 

8.63

9.50

 

9.50

9.37

 

9.38

9.12

 

9.13

9.50

 

9.50

9.25

 

9.25

7.30

 

7.00

6.91

 

6.63

1987

7.26

 

6.75

7.53

 

7.00

8.60

 

8.00

8.73

 

8.13

8.60

 

8.00

8.46

 

7.88

9.27

 

8.63

9.14

 

8.50

9.00

 

8.38

9.54

 

8.88

9.27

 

8.63

8.87

 

8.25

1988

9.25

 

8.13

9.96

 

8.75

9.68

 

8.50

10.10

 

8.88

10.39

 

9.13

10.67

 

9.38

10.53

 

9.25

10.96

 

9.63

11.10

 

9.75

10.99

 

9.63

10.84

 

9.50

10.84

 

9.50

1989

11.46

 

9.50

10.71

 

8.88

10.56

 

8.75

11.16

 

9.25

11.16

 

9.25

11.46

 

9.50

11.61

 

9.63

11.31

 

9.50

10.26

 

8.25

9.53

 

7.88

8.78

 

7.25

9.38

 

7.75

1990

10.23

 

8.13

10.85

 

8.75

12.43

 

9.88

13.05

 

10.38

13.53

 

10.75

12.90

 

10.25

12.58

 

10.00

12.74

 

10.13

12.42

 

9.88

12.46

 

9.88

12.93

 

10.25

12.61

 

10.00

1991

13.83

 

10.38

14.67

 

11.00

15.67

 

11.75

15.33

 

11.50

15.50

 

11.63

15.33

 

11.38

15.00

 

11.25

15.00

 

11.25

14.83

 

11.13

15.19

 

11.38

15.36

 

11.50

16.86

 

12.63

1992

17.54

 

12.25

18.25

 

12.75

18.25

 

12.88

18.61

 

13.00

18.43

 

12.88

18.43

 

12.88

18.79

 

13.13

19.33

 

13.38

19.50

 

13.63

19.75

 

13.75

20.47

 

14.25

19.94

 

13.88

1993

20.13

 

12.88

20.72

 

13.25

20.33

 

13.00

19.16

 

12.25

19.55

 

12.50

19.35

 

12.38

19.16

 

12.25

19.35

 

12.38

19.74

 

12.63

18.76

 

12.00

18.18

 

11.63

19.18

 

12.13

1994

19.00

 

11.00

20.08

 

11.63

20.30

 

11.75

19.65

 

11.38

20.52

 

11.88

20.73

 

12.13

20.73

 

12.00

21.81

 

12.63

22.68

 

13.13

23.33

 

13.50

22.25

 

12.88

23.10

 

13.25

1995

22.91

 

11.88

23.87

 

12.38

23.39

 

12.13

23.63

 

12.25

23.63

 

12.25

24.35

 

12.63

23.87

 

12.38

22.42

 

11.63

23.63

 

12.25

24.35

 

12.63

23.87

 

12.38

24.84

 

12.88

1996

26.64

 

12.63

26.11

 

12.38

26.37

 

12.50

24.79

 

11.75

25.06

 

11.88

26.90

 

12.75

29.01

 

13.75

30.07

 

14.25

32.31

 

15.31

35.01

 

16.25

33.39

 

15.50

35.41

 

16.44

1997

34.32

 

15.06

34.03

 

14.94

36.74

 

16.13

39.88

 

17.13

39.45

 

16.94

39.01

 

16.75

39.35

 

16.50

36.07

 

15.13

28.02

 

11.75

31.68

 

12.88

33.68

 

13.69

34.45

 

14.00

1998

34.82

 

13.75

34.03

 

13.44

31.97

 

12.63

29.54

 

11.31

33.95

 

13.00

34.76

 

13.31

35.48

 

13.25

35.15

 

13.13

34.48

 

12.88

34.00

 

12.38

33.31

 

12.13

35.54

 

12.94

1999

36.82

 

13.06

*Reflects market price total return experience of a continuous stockholder who reinvested all
distributions and fully participated in primary subscriptions of rights offerings. This graph
illustrates the market price change from IPO of $10 per share on 11/26/86.

PORTFOLIO DIAGNOSTICS

Median Market Cap.

$519 million

Weighted Average P/E Ratio

13.7x 

Weighted Average P/B Ratio

1.6x 

Weighted Average Yield

1.3%

Fund Net Assets

$713 million

Turnover Rate

41%

Net Leverage†

13%

Symbol – Market Price

RVT

            – NAV

XRVTX

† Net leverage is the percentage, in excess of 100%, of the total value of equity type
investments divided by net assets, excluding preferred stock.

TOP 10 POSITIONS % of Net Assets

Charming Shoppes

1.3%

National Computer Systems

0.9   

Gallagher (Arthur J.) & Co.

0.9   

Velcro Industries

0.8   

Pioneer-Standard Electronics

0.8   

Circle International Group

0.8   

Arnold Industries

0.8   

Lilly Industries CL A

0.8   

Simpson Manufacturing

0.8   

Interim Services

0.8   

Portfolio Sector Breakdown
 % of Net Assets

Technology

19.2%

Industrial Products

13.8   

Industrial Services

12.7   

Financial Intermediaries

7.8   

Consumer Products

7.6   

Financial Services

7.2   

Natural Resources

5.1   

Health

4.1   

Consumer Services

2.9   

Miscellaneous

4.9   

Bonds & Preferred Stocks

2.5   

Treasuries, Cash &Cash Equivalents

12.2   

CAPITAL STRUCTURE
 Publicly Traded Securities Outstanding
at 12/31/99 at NAV or Liquidation Value

35.1 million shares
of Common Stock

$553 million

2.4 million shares of 7.80%
Cumulative Preferred Stock

$60 million

4.0 million shares of
7.30% Tax-Advantaged
Cumulative Preferred Stock

$100 million

11 | The Royce Funds Annual Report 1999

ROYCE MICRO-CAP TRUST

NAV AVERAGE ANNUAL TOTAL RETURNS
 Through 12/31/99

Fourth Quarter 1999*

13.6%

Jul-Dec 1999*

10.1   

1-Year

12.7   

3-Year

11.2   

5-Year

14.5   

Since Inception (12/14/93)

13.0   


*Not annualized.

RISK/RETURN COMPARISON
 3-Year Period ended 12/31/99
Average Annual
Total Return

Standard
Deviation

RUR*

Royce Micro-Cap

     

Trust (NAV)

11.2

16.6

0.67

Russell 2000

13.1

20.9

0.63

*Return per unit of risk (RUR) is the average annual total return
divided by the annualized standard deviation over a designated time period.

Over the last three years, Royce Micro-Cap Trust has outperformed the
Russell 2000 on a risk-adjusted basis.

DOWN MARKET PERFORMANCE COMPARISON
 All Down Periods of 7.5% or Greater, in Percentages (%)

OTCM (NAV)

Russell 2000

3/18/94-12/9/94
 -0.4
-12.3
5/22/96-7/24/96
 -6.8
-15.4
1/22/97-4/25/97
 -3.4
 -9.0
10/13/97-1/12/98
 -7.4
-11.3
4/21/98-10/8/98
-29.9
-36.5

CALENDAR YEAR NAV TOTAL RETURNS

Year

OTCM    

1999

12.7%

1998

-4.1   

1997

27.1   

1996

16.6   

1995

22.9   

1994

6.0   

MANAGER’S DISCUSSION

Never give your opponent a quarter-mile start in a one-mile race. After moving backwards in the first quarter (down 12.1% on a Net Asset Value basis), Royce Micro-Cap Trust (OTCM) finished the year strongly on both an NAV and market price basis. Although the Fund bested its benchmark, the Russell 2000, by a nose for the last three quarters (28.4% versus 28.2%, respectively), the difficult first quarter hindered 1999 performance. For the full year, OTCM was up 12.7% on an NAV basis and a relatively disappointing 4.5% on a market price basis, versus a gain of 21.3% for the Russell 2000. The Fund’s average annual NAV total return since inception (12/14/93) was 13.0%.

Virtually ignored from April ‘98 through April ‘99, micro-cap securities began to get their wind back in the second quarter, led by the technology sector. OTCM followed suit, posting strong second-quarter results, holding its own in the third-quarter downdraft and performing solidly in the fourth quarter. In a year characterized by wildly divergent micro-cap stock performance, we are not unhappy with OTCM’s NAV total return, considering its relatively low-risk profile. The micro-cap companies that we hold generally possess solid balance sheets and earnings records.

The Technology sector, which dominated every asset class in the market last year and accounted for approximately 20% of the Fund’s equity holdings, was our best performer in 1999. We enjoyed particular success in the semiconductor industry with companies such as Exar and Electroglas, as well as with Integral Systems, a ground-systems satellite builder whose stock price vaulted from the teens into the mid-forties near the end of the year.

There are several new names among the Fund’s top-ten holdings, such as Aurora Biosciences, a company that designs and develops proprietary drug discovery systems, services and technologies that accelerate and enhance the discovery of new medicines. BARRA, another strong performer, provides investment information products that combine technology, data, software and services. MSC.Software, another new addition to the top ten, is a designer and manufacturer of proprietary software for use in automotive, aerospace and other types of engineering whose price fell close to 50% in 1998’s third-quarter correction (when we first increased our position) before beginning to recover in the fourth quarter of this year.

We are pleased by the recent resurgence in micro-cap performance, but we are even more excited about the opportunities remaining in the non-technology sectors. We believe that these companies remain considerably undervalued by the market, which can be seen in the Fund’s low P/E and P/B ratios. The lack of correlation between individual company quality and market performance in 1999 fuels our hopes for a profitable new year.

12 | The Royce Funds Annual Report 1999

PERFORMANCE AND PORTFOLIO REVIEW

GOOD IDEAS THAT WORKED
1999 Net Realized and Unrealized Gain

Exar

$2,569,978

Aurora Biosciences

1,967,404

Kronos

1,543,205

Corel

1,535,684

Newport

1,463,182

Exar — The management of this analog semiconductor manufacturer developed new telecommunications products that created a major turnaround in the company’s prospects and caused the stock price to surge in the fourth quarter.

Aurora Biosciences — Both institutional interest and the stock price were low early in 1999 for this designer and developer of systems that enhance and accelerate the discovery of new drugs, although we were drawn by what we thought was terrific management. Late in the year, the company attracted serious attention from Wall Street, which led to a significant increase in the stock price.

GOOD IDEAS AT THE TIME
 1999 Net Realized and Unrealized Loss

800 JR Cigar

$1,173,423

Midwest Grain Products

1,078,850

North Face (The)

757,825

International Isotopes

740,254

Wellington Underwriting

669,713

800 JR Cigar — A glut of premium cigars caused this mail-order distributor to miss quarterly earnings estimates and subsequently slump just like other tobacco-related companies did in 1999. We remain optimistic due to the company’s low valuation and the fact that management holds about 75% of the stock.

Midwest Grain Products — The stock of this manufacturer of wheat gluten, premium wheat starch, food grade and fuel grade alcohol suffered an almost 50% decline last year. We expected that the stock would recover with the resolution of trade issue difficulties, but currently these issues remain unresolved. Their solid product line and valuable assets feed our hopes for an eventual turnaround.

ROYCE MICRO-CAP TRUST MARKET PRICE — ACTUAL vs. ADJUSTED*

Market Price Total Returns

Since Inception =

65.5%

5 Years =

74.4   

3 Years =

27.8   

1 Year =

4.5   

   

  

Adjusted
Market Price

  

Actual
Market Price

1993

7.50

7.50

7.75

7.75

7.50

7.50

6.50

6.50

6.63

6.63

7.13

7.13

6.75

6.75

7.00

7.00

7.13

7.13

7.00

7.00

7.38

7.38

7.19

7.13

1994

7.11

7.00

6.86

6.75

7.24

7.13

6.98

6.88

6.98

6.88

7.11

7.00

7.49

7.38

7.87

7.75

8.13

8.00

8.51

8.38

7.87

7.75

7.75

7.63

1995

8.52

8.00

8.25

7.75

8.25

7.75

8.25

7.75

8.92

8.38

8.92

8.38

9.18

8.63

8.25

7.75

8.45

7.94

8.52

8.00

8.52

8.00

9.05

8.50

1996

9.71

8.25

9.30

7.88

9.41

8.00

8.97

7.63

9.56

8.13

10.15

8.63

10.57

8.98

10.66

9.06

11.32

9.63

13.16

11.19

12.79

10.88

12.72

10.81

1997

13.10

10.13

12.62

9.75

13.43

10.38

13.64

11.31

14.40

11.13

13.91

10.75

13.35

10.31

12.62

9.75

10.11

7.81

10.43

8.06

10.67

8.25

11.56

8.94

1998

11.87

8.88

11.03

8.25

10.70

8.00

9.95

7.44

11.12

8.31

11.29

8.44

11.29

8.44

11.33

8.47

11.29

8.44

11.37

8.50

11.04

8.25

11.95

8.94

1999

12.41

9.00

*Reflects market price total return experience of a continuous stockholder who reinvested
all distributions and fully participated in the 1994 rights offering. This graph illustrates
the market price change from IPO of $7.50 per share on 12/14/93.

PORTFOLIO DIAGNOSTICS

Median Market Cap.

$236 million

Weighted Average P/E Ratio

14.1x

Weighted Average P/B Ratio

1.5x

Weighted Average Yield

1.1%

Fund Net Assets

$191 million

Turnover Rate

49%

Net Leverage†

0%

Symbol – Market Price

OTCM

            – NAV

XOTCX


† 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 

Kronos

1.6%

Duff & Phelps Credit Rating

1.5   

Matthews International CL. A

1.2   

Simpson Manufacturing

1.1   

Ash Grove Cement Company

1.0   

Aurora Biosciences

1.0   

Titan Exploration

1.0   

Florida Rock Industries

1.0   

BARRA

1.0   

MSC.Software

0.9   

PORTFOLIO SECTOR BREAKDOWN
 % of Net Assets

Technology

18.3%

Industrial Products

11.6

Industrial Services

11.3

Consumer Products

10.0

Health

  6.3

Natural Resources

  5.9

Financial Intermediaries

  4.1

Financial Services

  3.4

Consumer Services

  1.8

Utilities

  0.2

Miscellaneous

  4.8

Bond & Preferred Stock

  0.6

Treasuries, Cash &Cash Equivalents

21.7

CAPITAL STRUCTURE
 Publicly Traded Securities Outstanding
at 12/31/99 at NAV or Liquidation Value

13.8 million shares of
Common Stock

$151 million

1.6 million shares of 7.75%
Cumulative Preferred Stock

$40 million


13 | The Royce Funds Annual Report 1999

ROYCE FOCUS TRUST

NAV AVERAGE ANNUAL TOTAL RETURNS
 Through 12/31/99

Fourth Quarter 1999*

 5.9%

Jul-Dec 1999*

-1.3

1-Year

 8.7

3-Year

 6.9

Since Inception (11/1/96)(1)

 8.0


* Not annualized.

(1) Date Royce & Associates, Inc. assumed investment management responsibility.

RISK/RETURN COMPARISON
3-Year Period ended 12/31/99

Average Annual
Total Return

Standard
Deviation

RUR*

Royce Focus Trust (NAV)

6.9

19.8

0.35

Russell 2000

13.1

20.9

0.63


*Return per unit of risk (RUR) is the average annual total return divided by the annualized standard
deviation over a designated time period.

Over the last three years, Royce Focus Trust has had volatility comparable
to the Russell 2000, but with lower performance.

DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)

FUND (NAV)

Russell 2000

1/22/97- 4/25/97
 -1.1
 -9.0
10/13/97- 1/12/98
-10.3
-11.3
4/21/98- 10/8/98
-35.2
-36.5

CALENDAR YEAR NAV TOTAL RETURNS

Year

FUND

1999

  8.7%

1998

 -6.8   

1997

20.5   

MANAGER’S DISCUSSION

We think that Robert Ripley would have readily agreed that the performance of Royce Focus Trust (FUND) in 1999 was strange indeed. For the full year, the Fund’s concentrated portfolio of small-cap companies was up 8.7% on a Net Asset Value basis, but down a disappointing 0.3% on a market price basis. Both returns fell well behind the benchmark, the small-cap oriented Russell 2000, which was up 21.3%.

"Believe it or not," the Fund was no exception to the oddities that affected small-cap value investing in 1999, atypically losing ground against its benchmark in the first-quarter downturn, only to outperform the index — again atypically — during the subsequent second-quarter rally. It narrowly underperformed the Russell 2000 in the third-quarter downdraft and lagged dramatically in the fourth-quarter upswing. All of this took place during a difficult year for small-cap value stocks, in which the Russell 2000 Value index was down 1.5%.

The Fund’s use of concentration, in our view, acted as neither a help nor a hindrance to its 1999 performance. FUND’s preference for small-cap companies with great balance sheets trading at low valuations was out of step with a market that seemed bent on rewarding higher-risk, higher-valuation investments.

Portfolio holdings in the Technology sector made the greatest positive impact on performance. This was not surprising, owing to the sector’s market dominance last year. The bulk of our technology holdings are not "cutting edge" companies, but instead offer solid balance sheets and proven earnings records. Hurting the Fund’s performance in 1999 were companies in the Consumer Products and Financial Intermediaries sectors. We took advantage of low prices in the latter sector throughout the year, particularly when insurance company stocks declined to what we believe were attractive levels. We added significantly to our position in Arthur J. Gallagher & Co., an insurer specializing in risk management, that recovered nicely before the end of the year.

Several positions made new appearances in our top-ten holdings. Comdisco is a computer and technology leasing firm that has leveraged its expertise into some profitable Internet opportunities. Plantronics is a leader in the fast-growing telephone headset industry whose stock price endured some precipitous drops before rebounding in the fourth quarter. Arrow International is a designer and manufacturer of clinically advanced medical products for critical and cardiac care whose stock we bought when slower-than-expected growth rates caused its price to plummet last spring.

In our view, the underlying fundamentals of the individual portfolio companies possess substantial untapped performance opportunity. We believe that a return to "quality," as opposed to the current environment that has been dominated by momentum investing, will result in good things for Royce Focus Trust.

14 | The Royce Funds Annual Report 1999

PERFORMANCE AND PORTFOLIO REVIEW

GOOD IDEAS THAT WORKED
1999 Net Realized and Unrealized Gain

Marshall Industries

$2,186,393

Charming Shoppes

1,976,297

Comdisco

1,868,548

Gallagher (Arthur J.) & Co.

1,032,707

Avnet

1,030,909

Charming Shoppes — The stock of this women’s fashion retailer, a long-term holding with solid (and, in our view, improving) business fundamentals, continues to benefit from the increasing attention of other investors.

Comdisco — This firm has leveraged their expertise in leasing computer equipment and technology into a profitable combination of leasing information technology services, Internet access and Internet venture capital opportunities.

GOOD IDEAS AT THE TIME
 1999 Net Realized and Unrealized Loss

Gibson Greetings

$1,480,054

Oakley

1,193,287

Enesco Group

1,185,466

Morrison Knudsen

742,370

New England Business Service

675,461

Gibson Greetings — We began to sell our position in this greeting card and novelty toy company in May 1999, selling the position entirely out of the portfolio by October, once it appeared that its creative management might be unable to revitalize the company. American Greetings announced plans to buy the company with a tender offer in November.

Oakley — The company continues to be the dominant force in the sunglasses business, but its stock price was stomped on as a result of its slow start in the footwear industry. We still have high hopes based on their strong brand name and talented management.

ROYCE FOCUS TRUST MARKET PRICE — ACTUAL vs. ADJUSTED(2)

Market Price Total Returns

Since 11/1/96 =

22.4%

1 Year =

-0.3   

  

Adjusted
Market Price

  

Actual
Market Price

4.38

4.38

4.66

4.66

1996

4.59

4.59

4.75

4.75

4.56

4.56

4.88

4.88

4.72

4.72

4.81

4.81

5.00

5.00

5.28

5.28

5.44

5.44

6.06

6.06

5.69

5.69

5.69

5.69

1997

5.57

5.06

5.64

5.13

5.78

5.25

6.23

5.66

6.54

5.94

6.23

5.66

6.05

5.50

6.12

5.56

4.82

4.38

5.30

4.81

5.09

4.63

5.30

4.81

1998

5.37

4.88

4.82

4.38

4.54

4.13

4.41

4.00

4.54

4.13

5.37

4.88

5.44

4.94

5.54

5.03

5.58

5.06

5.37

4.88

5.34

4.84

5.30

4.81

1999

5.36

4.72

(2) Reflects market price total return experience of a continuous stockholder who reinvested all distributions.
This graph illustrates the market price change from $4.375 on 11/1/96, the date Royce & Associates, Inc. assumed
investment management responsibility.

PORTFOLIO DIAGNOSTICS

Median Market Cap.

$725 million

Weighted Average P/E Ratio

13.8x

Weighted Average P/B Ratio

1.9x

Weighted Average Yield

1.2%

Fund Net Assets

$71 million

Turnover Rate

60%

Net Leverage†

12%

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

6.8%

Morrison Knudsen

4.9   

Gallagher (Arthur J.) & Co.

4.8   

New England Business Service

4.6   

Florida Rock Industries

4.6   

Comdisco

4.5   

Lincoln Electric Holdings

4.2   

Plantronics

3.8   

Arrow International

3.7   

Oakley

3.2   


PORTFOLIO SECTOR BREAKDOWN
 % of Net Assets

Technology

14.9%

Industrial Products

13.7   

Industrial Services

13.3   

Natural Resources

9.5   

Financial Services

9.3   

Consumer Services

6.8   

Financial Intermediaries

6.3   

Health

3.7   

Consumer Products

3.2   

Treasuries, Cash &Cash Equivalents

19.3   

CAPITAL STRUCTURE
 Publicly Traded Securities Outstanding
at 12/31/99 at NAV or Liquidation Value

8.6 million shares
of Common Stock

$51 million

800,000 shares
of 7.45% Cumulative
Preferred Stock

$20 million

15 | The Royce Funds Annual Report 1999

Q&A WITH CHUCK ROYCE, WHITNEY GEORGE AND JACK FOCKLER

Senior staff members Chuck Royce, Jack Fockler and Whitney George recently sat down to discuss some of the changes that have taken place in money management. Chuck Royce has been President of Royce & Associates since 1973 and manages most of the firm’s offerings. Whitney George, who joined the firm as an analyst in 1991 and became a portfolio manager in 1997, is a Vice President and Managing Director of Royce & Associates. Vice President and Managing Director of Royce & Associates, Jack Fockler has worked closely with Chuck since joining the firm in 1989. Jack, Whitney and Chuck are also members of the firm’s Executive Committee.

Jack: Individual stocks such as Microsoft and AOL have had extraordinary returns through the ‘90s. At the same time, managed account investing is no longer the exclusive province of the wealthiest institutions and individuals. Why, then, should investors buy closed-end funds today?

Chuck: The classic argument in favor of closed-end investing was to build a diversified investment portfolio by using an active manager. Recently, the Internet has given individual investors access to information, trading, and order placement that they lacked five or ten years ago. It has also provided people with a greater sense of control over their money. However, these developments have not invalidated the idea that there are advantages to professional management, particularly in the small-cap world, even if this year’s results and the longer-term returns of a few very successful stocks appear to have obscured its importance.

Whitney: The individual may feel that he or she is winning in the short-term, especially if they’ve invested in Internet stocks or those in the Nasdaq 100, but I have substantial doubts about the long-term viability of such high returns and the idea that risk doesn’t need to be a primary consideration. With our approach, there is always an attempt to reduce risk, and we continue to view active professional management as having a distinct advantage over the long term. Which is not to say that owning closed-end funds is mutually exclusive from owning individual stocks, only that there are important differences between the two.

Jack: Do you think that there has been a tendency among investment managers to emphasize short-term performance?

Whitney: To some degree, this is true. Money managers have to answer to stockholders and institutional clients, and no manager wants to have to explain why he or she didn’t do something that they could have done. As a result, many professional investors have hopped on the momentum bandwagon to pacify and preserve their client base, even if they may not think it’s the right move over the long term.

Chuck: I agree. The dream of high performance with little or no consideration of risk has affected almost everyone to a certain extent, so it’s understandable that some professional investors would capitulate to the trend. We’re looking like the turtles in this race because we continue to pick stocks the way we always have. Fortunately, we have very experienced managers and a solid base of informed investors in our open-and closed-end funds, as well as in our institutional business.

Jack: Chuck, when you began to manage Pennsylvania Mutual Fund in the early ‘70s, you weren’t wed to a particular asset class or investment style—you simply bought the stocks of companies that satisfied your own risk-averse criteria. Did the increasing professionalization and popularity of money management in the ‘90s have a negative effect by limiting managers to style and asset categories too rigidly? How valid are the lines that many of us draw between value and growth?

16 | The Royce Funds Annual Report 1999

Chuck: I think it has had an unintended limiting effect, but more in terms of investment style than asset class. Many companies that we look at don’t fit the classic, Ben Graham-style value mold, but they probably wouldn’t be classified as growth companies, either. We try to buy cheap companies that we believe have the potential to grow, but we also pay close attention to risk factors that should give us protection against the downside. I don’t really like being considered a straight-out value investor. I want to be known as a very good investor in the small-cap world, one who takes into account both risk and reward. Whether small-cap growth is doing better than value, or vice-versa, is not something that affects our day-to-day work.

Jack: Has the delineation of asset classes and investment styles created too much emphasis on relative performance and not enough on absolute?

Whitney: Unfortunately, there’s no question that relative performance is the name of the game today. We’ve often said that you can’t eat from the table of relative performance, but many investors think that a fund’s investment objective is to be the top performer in its asset class every single quarter. We think our job as active managers is to deliver above-average absolute returns, adjusted for both risk and inflation. We try to accomplish this over long-term periods, usually three or more years. It’s unreasonable to expect a manager to outperform in every short-term performance period. It’s a nice idea, and we’re certainly proud of our relative performance achievements, but that’s not our goal. Short-term returns are only important insofar as they contribute to the goal of building strong absolute returns over the long term.

I want to be known as a very good investor in the small-cap world, one who takes into account both risk and reward. Whether small-cap growth is doing better than value, or vice-versa, is not something
that affects our day-to-day work.

 

Jack: Is it old-fashioned to talk about absolute performance when so many investors own funds in different classes with different styles and are generally just looking at the top performers in the most recent period and making their picks that way?

Chuck: It’s true that many people tend to invest by looking in the rearview mirror—they want yesterday’s stellar returns today and in the future. Since this is essentially impossible, we think that investors should look instead at a fund’s long-term returns and how they were achieved. They should also learn about a manager’s methodology, philosophy and risk tolerance. Unfortunately, the typical investor presumes that what worked in the last few years will work in the next few. I certainly couldn’t have predicted in 1998 how the Funds would perform in 1999. I’m sure that this year will have its own surprises. This takes us back to the importance of staying true to our approach over the long haul.

17 | The Royce Funds Annual Report 1999

DISTRIBUTION REINVESTMENT AND CASH PURCHASE OPTIONS FOR COMMON STOCKHOLDERS

Why should I reinvest my distributions?

By reinvesting distributions, a stockholder can maintain an undiluted investment in the Fund. The regular reinvestment of distributions has a significant impact on stockholder returns. In contrast, the stockholder who takes distributions in cash is penalized when shares are issued below net asset value to other stockholders.

How does the reinvestment of distributions from the Royce Closed-End Funds work?

The Funds automatically issue shares in payment of distributions unless you indicate otherwise. The shares are issued at the lower of the market price or net asset value on the valuation date.

How does this apply to registered stockholders?

If your shares are registered directly with a Fund, your distributions are automatically reinvested unless you have otherwise instructed the Funds’ custodian, State Street Bank and Trust Company, in writing. A registered stockholder also has the option to receive the distribution in the form of a stock certificate or in cash if State Street is properly notified.

What if my shares are held by a brokerage firm or a bank?

If your shares are held by a brokerage firm, bank, or other intermediary as the stockholder of record, you should contact your brokerage firm or bank to be certain that it is automatically reinvesting distributions on your behalf. If they are unable to reinvest distributions on your behalf, you should have your shares registered in your name in order to participate.

What other features are available for registered stockholders?

The Distribution Reinvestment and Cash Purchase Plans also allow registered stockholders to make optional cash purchases of shares of a Fund’s common stock directly through State Street on a monthly basis, and to deposit certificates representing your Fund shares with State Street for safekeeping. The Funds’ investment adviser is absorbing all commissions on optional cash purchases under the Plans through December 31, 2000.

How do the plans work for registered stockholders?

State Street maintains the accounts for registered stockholders in the Plans and sends written confirmation of all transactions in the account. Shares in the account of each participant will be held by State Street in non-certificated form in the name of the participant, and each participant will be able to vote those shares at a stockholder meeting or by proxy. A participant may also send other stock certificates held by them to State Street to be held in non-certificated form. There is no service fee charged to participants for reinvesting distributions. If a participant elects to sell shares from a Plan account, State Street will deduct a $2.50 fee plus brokerage commissions from the sale transaction. If a nominee is the registered owner of your shares, the nominee will maintain the accounts on your behalf.

How can I get more information on the plans?

You can call an Investor Services Representative at (800) 221-4268 or you can request a copy of the Plan for your Fund from State Street. All correspondence (including notifications) should be directed to: [Name of Fund] Distribution Reinvestment and Cash Purchase Plan, c/o State Street Bank and Trust Company, PO Box 8200, Boston, MA 02110, telephone (800) 426-5523.

18 | The Royce Funds Annual Report 1999

UPDATES AND NOTES TO PERFORMANCE AND RISK INFORMATION

FIRM UPDATES

We are pleased to report that we began the new year with no Y2K-related problems in our internal computer systems.

[GRAPHIC: Computer display "The Royce Funds"]

NEW @ www.roycefunds.com

We completed the redesign of our website in November, with a new look for our homepage and improved navigation. Please e-mail us at funds@roycenet.com and let us know what you think.

This Annual Report is available on our website in both PDF (Portable Document Format) for easy printing and HTML format for easy online reading.

AUTHORIZED SHARE TRANSACTIONS

Each of Royce Value Trust, Royce Micro-Cap Trust and Royce Focus Trust may repurchase up to 300,000 shares of its common stock and up to 10% of the issued and outstanding shares of each series of its preferred stock during the year ending December 31, 2000. Any such repurchases would take place at then prevailing prices in the open market or in other transactions. Common stock repurchases would be effected at a price per share that is less than the share’s then current net asset value, and preferred stock repurchases would be effected at a price per share that is less than the share’s liquidation value.

Royce Value Trust, Royce Micro-Cap Trust and Royce Focus Trust are also authorized to offer their common stockholders an opportunity to subscribe for additional shares of their common stock through rights offerings at a price per share that may be less than the share’s then current net asset value. The timing and terms of any such offering are within each Board’s discretion.

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. The Royce Funds invest primarily in securities of small-cap and/or micro-cap companies that may involve considerably more risk than investments in securities of larger-cap companies. Historical market trends are not necessarily indicative of future market movements. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

Standard deviation is a statistical measure within which a fund’s total returns have varied over time.
The greater the standard deviation, the greater a fund’s volatility.

The Russell 2000, Russell 2000 Value, Russell 2000 Growth, Wilshire Small-Cap Value, NASDAQ Composite, Dow Jones Industrial Average, S&P 500 and S&P 600 SmallCap are unmanaged indices of domestic common stocks. The Royce Funds is a service mark of The Royce Funds.


19 | The Royce Funds Annual Report 1999

 

ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


COMMON STOCKS—85.3%
 SHARES   VALUE
 
 
Consumer Products—7.6%
Apparel and Shoes—1.8%
Garan

96,900

$    2,773,763

K-Swiss Cl. A

82,700

1,536,411

North Face (The)*

451,100

1,832,594

Oshkosh B'Gosh Cl. A

114,300

2,407,444

Timberland Company Cl. A*

900

47,587

Weyco Group

159,400

4,094,588

     
 

 

12,692,387

     
Collectibles—0.4%
Action Performance*

2,000

23,000

Department 56*

51,200

1,158,400

Enesco Group

176,700

1,954,744

     
 

 

3,136,144

     
Food/Beverage/Tobacco—0.6%
Celestial Seasonings*

40,000

744,375

800 JR Cigar*

172,400

1,497,725

Hershey Creamery

583

1,224,300

J & J Snack Foods*

5,000

102,500

Tootsie Roll Industries

13,000

428,187

     
 

 

3,997,087

     
Home Furnishing/Appliances—1.2%
Bassett Furniture Industries

194,187

3,106,992

Burnham Corporation Cl. A

46,956

1,666,938

Burnham Corporation Cl. B

18,000

639,000

Conso International*

174,175

1,502,259

La-Z-Boy

28,200

474,113

Lifetime Hoan

238,992

1,254,708

     
 

 

8,644,010

     
Publishing—0.6%
Gibson Greetings*

173,400

1,555,181

Marvel Enterprises*

383,200

2,107,600

Reader's Digest Association (The) Cl. A

5,000

146,250

Scholastic*

1,200

74,625

     
 

 

3,883,656

     
Sports and Recreation—1.3%
Johnson Worldwide Associates Cl. A*

251,800

1,786,206

Lund International Holdings*

153,600

902,400

Oakley*

362,200

2,014,737

++RockShox*

1,060,400

1,855,700

Sturm, Ruger & Co.

298,800

2,651,850

     
 

 

9,210,893

     
Other Consumer Products—1.7%
Lazare Kaplan International*

190,100

1,544,563

Matthews International Cl. A

115,200

3,168,000

Starrett (L. S.) Company Cl. A

75,400

1,691,787

Velcro Industries

497,500

6,001,094

     
 

 

12,405,444

     
 

 

53,969,621

     
Consumer Services—2.9%
Leisure/Entertainment—0.1%
Anchor Gaming*

1,000

 43,438

Linea Aerea Nacional Chile ADR+

10,000

75,625

Seattle FilmWorks*

237,287

659,954

     
 

 

779,017

     
Restaurants/Lodgings—0.6%
Buffets*

443,435

4,434,350

Papa John's International*

5,000

130,312

     
 

 

4,564,662

     
Retail Stores—2.2%
Abercrombie & Fitch Cl. A*

2,000

53,375

Charming Shoppes*

881,900

5,842,587

Claire's Stores

70,200

1,570,725

Consolidated Stores*

10,000

162,500

Family Dollar Stores

4,700

76,669

Mikasa

168,900

1,699,556

Pier 1 Imports

52,500

334,688

Sunglass Hut International*

226,800

2,551,500

Suzy Shier

248,000

944,926

Urban Outfitters*

79,300

2,309,612

     
 

 

15,546,138

     
 

 

20,889,817

     
Financial Intermediaries—7.8%
Banking—1.4%
Argonaut Group

34,800

691,650

BOK Financial*

41,509

838,612

Boston Private Financial Holdings*

10,000

85,000

First National Bank of Anchorage

2,100

2,018,100

Fulton Financial

17,146

308,628

HomeFed*

429,990

376,241

Mechanics Bank

200

2,600,000

National Bancorp of Alaska

73,880

2,073,258

Oriental Financial Group

58,000

1,279,625

     
 

 

10,271,114

     
Closed End Funds—0.1%
Baker, Fentress & Co.

45,000

638,438

     
Insurance—6.2%
Baldwin & Lyons Cl. B

126,000

2,787,750

CNA Surety

20,000

260,000

Capitol Transamerica

106,415

1,070,801

Chicago Title

37,015

1,711,944

Commerce Group

54,318

1,419,058

Erie Indemnity Company Cl. A

17,000

550,375

Highlands Insurance Group*

236,800

2,249,600

Independence Holding

58,164

668,886

Leucadia National

4,500

104,062

Markel*

2,200

341,000

20 | The Royce Funds Annual Report 1999

 

ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


SHARES   VALUE
 
 
Financial Intermediaries (continued)
Insurance—(continued)
Medical Assurance*

188,068

$    3,984,691

Mutual Risk Management

246,900

4,151,006

NYMAGIC

47,700

629,044

Nobel Insurance*

121,500

30,375

Old Republic International

73,700

1,004,162

PMA Capital Cl. A

214,200

4,257,225

PXRE Group

298,151

3,875,963

RLI

41,162

1,399,508

Trenwick Group

245,950

4,165,778

Wesco Financial

11,990

2,937,550

Zenith National Insurance

206,700

4,263,188

White Mountains Insurance Group

22,200

2,675,100

     
 

 

44,537,066

     
Securities Brokers—0.1%
Raymond James Financial

7,500

140,156

     
 

 

55,586,774

     
Financial Services—7.2%
Information and Processing—1.6%
BARRA*

58,800

1,866,900

Duff & Phelps Credit Rating

60,200

5,354,038

Fair, Isaac and Co.

71,600

3,794,800

     
 

 

11,015,738

     
Insurance Brokers—2.6%
Blanch (E.W.) Holdings

42,600

2,609,250

Clark/Bardes Holdings*

80,900

1,162,937

Crawford & Co. Cl. A

327,350

3,723,606

Crawford & Co. Cl. B

75,300

1,025,963

Gallagher (Arthur J.) & Co.

101,900

6,598,025

Hilb, Rogal & Hamilton

112,675

3,183,069

     
 

 

18,302,850

     
Investment Management—3.0%
Affiliated Managers Group*

107,800

4,359,162

Alliance Capital Management Holding L.P.

107,200

3,209,300

Eaton Vance

97,100

3,689,800

Federated Investors Cl. B

10,000

200,625

John Nuveen Company Cl. A

41,400

1,492,987

Lexington Global Asset Managers*

21,100

51,431

Nvest LP

198,300

3,148,013

PIMCO Advisors Holdings LP

42,740

1,610,764

Phoenix Investment Partners

202,700

1,646,937

Pioneer Group (The)*

103,600

1,631,700

SEI Investments

2,000

238,031

U.S. Global Investors Cl. A*

249,205

373,808

     
 

 

21,652,558

     
 

 

50,971,146

     
Health—4.1%
Commercial Services—1.2%
IDEXX Laboratories*

20,000

322,500

PAREXEL International*

320,200

3,782,362

Quintiles Transnational*

61,600

1,151,150

Schein (Henry)*

239,000

3,181,688

Young Innovations*

49,700

729,969

     
 

 

9,167,669

     
Drugs and Biotech—1.5%
Affymetrix*

15,000

2,545,312

Biogen*

4,000

338,000

BioReliance*

61,000

348,844

Cerus Corporation*

26,800

710,200

Dura Pharmaceuticals*

6,200

86,413

Genzyme Corporation--General Division*

40,000

1,800,000

Genzyme Corporation--Tissue Repair*

15,300

43,987

Genzyme Corporation--Molecular Oncology*

4,322

30,254

Genzyme Corporation--Surgical Products*

7,160

41,618

IDEC Pharmaceuticals*

30,000

2,947,500

Incyte Pharmaceuticals*

13,000

780,000

Liposome Company (The)*

5,000

61,016

Millennium Pharmaceuticals*

5,000

610,000

Shire Pharmaceuticals Group ADR+*

20,853

607,344

     
 

 

10,950,488

     
Consumer Health Services—0.1%
Invacare

17,000

341,063

     
Personal Care—0.1%
Chattem*

5,000

95,000

     
Surgical Products and Devices—1.2%
Arrow International

98,700

2,862,300

Biomet

5,000

200,000

Haemonetics*

208,200

4,957,762

NMT Medical*

150,600

432,975

PE Corporation--PE Biosystems Group

2,000

240,625

PE Corporation--Celera Genomics Group*

500

74,500

     
 

 

8,768,162

     
 

 

29,322,382

     
Industrial Products—13.8%
Building Systems and Components—3.5%
Decker Manufacturing

6,022

319,166

Falcon Products

349,400

3,013,575

Fleetwood Enterprises

20,000

412,500

21 | The Royce Funds Annual Report 1999

 
ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


SHARES   VALUE
 
 
Industrial Products (continued)
Building Systems and Components—(continued)
International Aluminum

51,700

$    1,214,950

Juno Lighting

19,008

197,208

Kimball International Cl. B

168,580

2,781,570

Mueller (Paul)

53,200

1,536,150

Preformed Line Products Company

127,600

2,105,400

Simpson Manufacturing*

126,700

5,543,125

Skyline

123,400

2,899,900

Thor Industries

159,950

4,868,478

     
 

 

24,892,022

     
Construction Materials—2.0%
Ameron International

13,000

514,312

Ash Grove Cement Company Cl. B

50,518

5,051,800

Florida Rock Industries

148,000

5,096,750

Puerto Rican Cement

98,300

3,342,200

     
 

 

14,005,062

     
Industrial Components—0.1%
Woodhead Industries

45,400

527,775

     
Industrial OEM—0.1%
Ionics*

5,000

140,625

     
Machinery—1.6%
Atchison Casting*

58,600

534,725

Federal Signal

114,900

1,845,581

Hurco Companies*

5,000

17,500

Lincoln Electric Holdings

243,580

5,023,838

Nordson

41,100

1,983,075

Oshkosh Truck

59,100

1,732,369

PAXAR*

40,000

337,500

Tecumseh Products Company Cl. A

3,300

155,719

     
 

 

11,630,307

     
Paper and Packaging—1.1%
CLARCOR

4,550

81,900

Liqui-Box

59,978

2,968,911

PalEx*

250,800

1,755,600

Peak International*

44,500

456,125

Shorewood Packaging*

134,850

2,553,722

     
 

 

7,816,258

     
Pumps, Valves and Bearings—1.4%
ConBraCo Industries

7,630

3,891,300

Denison International ADR+*

88,400

906,100

Kaydon Corporation

159,100

4,265,869

Robroy Industries Cl. A

40,523

283,661

Sun Hydraulics

87,450

568,425

     
 

 

9,915,355

     
Specialty Chemicals and Materials—2.5%
Aceto

60,010

660,110

Brady (W.H.) Cl. A

121,100

4,109,831

Calgon Carbon

10,000

59,375

Chemfab*

133,219

2,081,547

Hawkins Chemical

301,278

2,617,353

Lilly Industries Cl. A

414,283

5,566,928

MacDermid

72,331

2,970,092

     
 

 

18,065,236

     
Textiles—0.9%
Delta Woodside Industries

125,400

235,125

Fab Industries

175,500

1,897,594

++Thomaston Mills Cl. A*

327,800

491,700

Unifi*

319,800

3,937,537

Wellman

15,000

279,375

     
 

 

6,841,331

     
Other Industrial Products—0.6%
BHA Group Holdings

123,209

970,271

Baldor Electric

27,000

489,375

Landauer

112,900

2,469,688

Myers Industries

34,862

549,076

     
 

 

4,478,410

     
 

 

98,312,381

     
Industrial Services—12.7%
Advertising/Publishing—0.7%
Grey Advertising

4,817

1,926,800

True North Communications

63,000

2,815,313

     
 

 

4,742,113

     
Commercial Services—3.2%
CDI*

100,000

2,412,500

Carlisle Holdings*

251,100

3,013,200

Catalina Marketing*

5,000

578,750

Cornell Corrections*

80,400

673,350

Fisher Companies

16,096

993,928

Interim Services*

223,000

5,519,250

Korn/Ferry International*

53,700

1,953,337

Marketing Specialists*

124,900

468,375

Modis Professional Services*

324,700

4,626,975

Olsten

86,600

979,662

++Open Plan Systems*

354,300

708,600

Shared Medical Systems

21,900

1,115,531

     
 

 

23,043,458

     
Engineering and Construction—1.9%
Danaher

14,396

694,607

McDermott International

11,000

99,688

Morrison Knudsen*

494,100

3,860,156

Sevenson Environmental Services

265,720

2,557,555

Stone & Webster

218,500

3,673,531

22 | The Royce Funds Annual Report 1999

 
ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


SHARES   VALUE
 
 
Industrial Services (continued)
Engineering and Construction (continued)
Todd Shipyards*

39,200

$      308,700

Willbros Group*

483,700

2,237,112

     
 

 

13,431,349

     
Food/Tobacco Processors—1.0%
DIMON

253,600

824,200

Farmer Bros.

26,000

4,134,000

Midwest Grain Products*

231,800

1,709,525

Seaboard

3,750

728,438

     
 

 

7,396,163

     
Industrial Distribution—0.5%
Central Steel & Wire

3,699

2,256,390

Ritchie Bros. Auctioneers*

40,900

1,134,975

TBC*

21,300

133,125

     
 

 

3,524,490

     
Printing—1.3%
Bowne & Co.

122,200

1,649,700

Ennis Business Forms

302,100

2,341,275

New England Business Service

86,000

2,101,625

Standard Register (The)

163,200

3,162,000

     
 

 

9,254,600

     
Transportation and Logistics—4.1%
Air Express International

152,268

4,920,160

AirNet Systems*

240,200

1,711,425

Arnold Industries

418,348

5,883,019

C. H. Robinson Worldwide

5,000

198,750

Circle International Group

266,725

5,934,631

Eagle USA Airfreight*

20,000

862,500

Fritz Companies*

56,000

588,000

Frozen Food Express Industries

220,670

855,096

Hub Group Cl. A*

107,000

2,140,000

Kenan Transport

63,300

2,005,819

Pittston BAX Group

285,300

3,031,313

Ryanair Holdings ADR+*

22,000

1,212,750

     
 

 

29,343,463

     
 

 

90,735,636

     
Natural Resources—5.1%
Energy Services—1.7%
Carbo Ceramics

148,100

3,239,687

Global Industries*

108,100

932,363

Helmerich & Payne

149,800

3,267,512

Input/Output*

343,100

1,736,944

Nabors Industries*

26,000

804,375

++Peerless Mfg.

79,300

1,030,900

Tidewater

28,000

1,008,000

Valley National Gases*

30,100

95,944

     
 

 

12,115,725

     
Gold—0.1%
MK Gold*

517,900

485,531

     
Oil and Gas—2.8%
Barrett Resources*

185,700

5,466,544

Tom Brown*

103,000

1,377,625

Denbury Resources*

1,173,500

5,060,719

Devon Energy

79,200

2,603,700

Forest Oil*

2,000

26,375

PetroCorp*

121,900

708,544

Renaissance Energy*

36,400

365,639

Titan Exploration*

682,500

3,711,094

Toreador Royalty*

97,100

424,813

     
 

 

19,745,053

     
Real Estate—0.5%
Alico

52,000

871,000

Consolidated-Tomoka Land

13,564

172,941

FRP Properties*

119,900

2,817,650

     
 

 

3,861,591

     
 

 

36,207,900

     
Technology—19.2%
Aerospace/Defense—1.5%
Curtiss-Wright

121,900

4,495,063

Special Metals*

676,300

2,155,706

Woodward Governor

138,600

3,811,500

     
 

 

10,462,269

     
Components and Systems—4.0%
American Power Conversion*

10,000

263,750

Coherent*

80,900

2,164,075

Dionex*

101,000

4,159,937

Ezenia!*

166,100

1,318,419

IFR Systems*

9,133

91,901

Imation Corporation*

50,000

1,678,125

Keithley Instruments

2,600

52,975

Logitech International ADR+*

1,000

27,562

National Instruments*

72,600

2,776,950

Newport

65,400

2,992,050

PCD*

124,600

841,050

Penn Engineering & Manufacturing

153,600

3,552,000

Penn Engineering & Manufacturing Cl. A

39,800

840,775

Perceptron*

242,100

968,400

PerkinElmer

1,000

41,687

Rainbow Technologies*

32,800

762,600

SAES Getters ADR+

5,000

30,000

Scitex*

307,100

4,472,144

Vicor*

5,000

202,500

Zebra Technologies Cl. A*

25,000

1,462,500

     
 

 

28,699,400

     

23 | The Royce Funds Annual Report 1999

 
ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


SHARES   VALUE
 
 
Technology (continued)
Distribution—1.5%
Arrow Electronics*

37,500

$      951,562

Avnet

81,659

4,940,370

Daisytek International*

65,300

1,522,306

Pioneer-Standard Electronics

123,925

1,789,167

Richardson Electronics

195,600

1,467,000

     
 

 

10,670,405

     
Semiconductors and Equipment—4.0%
BE Semiconductor Industries*

112,500

1,518,750

Credence Systems*

15,300

1,323,450

Cymer*

29,000

1,334,000

Dallas Semiconductor

46,100

2,970,569

DuPont Photomasks*

35,000

1,688,750

Electroglas*

178,400

4,526,900

Etec Systems*

5,000

224,375

Exar*

75,100

4,421,512

Helix Technology

50,700

2,271,994

Intevac*

198,050

693,175

Kulicke & Soffa Industries*

30,400

1,293,900

Lam Research*

13,000

1,450,313

Micrel*

30,000

1,708,125

Novellus Systems*

4,000

490,125

Varian Semiconductor Equipment Associates*

55,000

1,870,000

Veeco Instruments*

5,400

252,788

     
 

 

28,038,726

     
Software/Services—7.4%
ANSYS*

95,100

1,046,100

Aspect Development*

35,000

2,397,500

Aspen Technology*

54,400

1,438,200

Autodesk

82,100

2,770,875

Avant!*

46,000

690,000

Benchmark Electronics*

26,000

596,375

Business Objects ADR+*

12,000

1,603,500

CIBER*

117,100

3,220,250

Cognex*

93,700

3,654,300

Comdisco

75,500

2,812,375

Documentum*

5,000

299,375

FileNet*

10,000

255,000

Harbinger*

36,500

1,161,156

IMRglobal Corporation*

118,000

1,482,375

Integral Systems*

117,800

5,197,925

Integrated Systems*

5,000

167,813

i2 Technologies*

10,000

1,950,000

JDA Software Group*

194,500

3,184,937

Kronos*

19,600

1,176,000

MSC.Software*

128,800

1,304,100

Macromedia*

3,000

219,375

Manugistics Group*

20,000

646,250

MicroStrategy Cl. A*

10,000

2,100,000

National Computer Systems

176,000

6,622,000

Pegasystems*

45,000

 506,250

Phoenix Technologies*

4,700

74,319

QRS Corporation*

7,500

787,500

Radiant Systems*

15,000

602,812

Remedy*

10,600

502,175

Siebel Systems*

4,000

336,000

Sterling Commerce*

50,000

1,703,125

Structural Dynamics Research*

141,200

1,800,300

Sybase*

5,000

85,000

Tecnomatix Technologies*

10,000

287,500

Wind River Systems*

7,500

274,687

     
 

 

52,955,449

     
Telecommunication—0.8%
Davel Communications Group

65,000

308,750

FirstWorld Communications (Warrants)

4,239

423,900

Level 3 Communications*

2,200

180,125

Plantronics*

28,100

2,010,906

REMEC*

83,200

2,121,600

++Technical Communications*

106,700

626,863

Visual Networks*

1,000

79,250

     
 

 

5,751,394

     
 

 

136,577,643

     
Miscellaneous—4.9%

 

35,231,851

     
TOTAL COMMON STOCKS
(Cost $461,224,237)

 

607,805,151

     
PREFERRED STOCKS—0.6%
Pioneer-Standard Electronics 6.75% Conv.

80,000

4,160,000

SVB Capital I 8.25%

20,000

368,750

     
TOTAL PREFERRED STOCKS
(Cost $4,315,000)

 

4,528,750

     

24 | The Royce Funds Annual Report 1999

 
ROYCE VALUE TRUST, INC.

SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999


PRINCIPAL AMOUNT   VALUE
 
 
CORPORATE BONDS—1.9%
Charming Shoppes 7.50% Conv. Sub. Note due 7/15/06

$ 3,694,000

$    3,767,880

Dixie Group 7.00% Conv. Sub. Deb. due 5/15/12

728,000

521,430

FirstWorld Communications 0% (Step)** Sr. Note due 4/15/08

6,700,000

3,685,000

MSC.Software 7.875% Conv. Sub. Deb. due 8/18/04

2,765,000

2,419,375

Richardson Electronics 8.25% Conv. Sub. Deb. due 6/15/06

2,049,000

1,639,200

Richardson Electronics 7.25% Conv. Sub. Deb. due 12/15/06

1,319,000

989,250

Sunglass Hut International 5.25% Conv. Sub. Note due 6/15/03

500,000

408,125

Tops Appliance City 6.50% Conv. Sub. Deb. due 11/30/03

1,000,000

380,000

     
TOTAL CORPORATE BONDS
(Cost $13,898,190)

13,810,260

     
  
U. S. TREASURY OBLIGATIONS—10.7%
U.S. Treasury Notes      
4.875%, due 3/31/01

55,000,000

54,149,150

6.25%, due 8/31/02

10,000,000

9,984,400

4.75%, due 2/15/04

13,000,000

12,262,640

     
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $77,731,405)

76,396,190

     
REPURCHASE AGREEMENT—1.2%  

State Street Bank & Trust Company 2.50% dated 12/31/99, due 1/3/00, maturity value $8,532,777 (collateralized by U.S. Treasury Bonds, 7.25%--8.50% due 5/15/16--2/15/20, valued at $8,707,175) (Cost $8,531,000)    
8,531,000
     
TOTAL INVESTMENTS—99.7%
(Cost $565,699,832)

711,071,351

CASH AND OTHER ASSETS   LESS LIABILITIES—0.3%

1,857,078

     
NET ASSETS—100.0%

$712,928,429

     

* Non-income producing.

+ American Depository Receipt.

++ At December 31, 1999, 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.

** Coupon rate of 0% to 4/2003; thereafter 13%.

INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $568,478,231. At December 31, 1999, net unrealized appreciation for all securities was $142,593,120, consisting of aggregate gross unrealized appreciation of $200,813,807 and aggregate gross unrealized depreciation of $58,220,687. The Fund designated $41,325,401 as a capital gain dividend for the purpose of its dividend paid deduction.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

25 | The Royce Funds Annual Report 1999

 

ROYCE VALUE TRUST, INC.

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999

ASSETS:
Investments at value (identified cost $557,168,832)

$702,540,351

Repurchase agreement (at cost and value)

8,531,000

Cash

161,537

Receivable for investments sold

2,102,335

Receivable for dividends and interest

2,190,974

Prepaid expenses

24,689

Total Assets

715,550,886

LIABILITIES:
Payable for investments purchased

1,650,189

Payable for investment advisory fee

507,773

Preferred dividends accrued but not yet declared

266,223

Accrued expenses

198,272

Total Liabilities

2,622,457

Net Assets

$712,928,429

Net Assets applicable to Preferred Stock at a liquidation value of $25 per share

$160,000,000

Net Assets applicable to Common Stock (net asset value per share -- $15.77)

$552,928,429

SUMMARY OF STOCKHOLDERS' EQUITY:
7.80% Cumulative Preferred Stock-par value $0.001 per share; 2,400,000 shares outstanding

$          2,400

7.30% Tax-Advantaged Cumulative Preferred Stock-par value $0.001 per share; 4,000,000 shares outstanding

4,000

Common Stock-par value $0.001 per share; 35,071,781 shares outstanding (150,000,000 shares authorized)

35,072

Additional paid-in capital

548,391,715

Undistributed net investment income

4,175,310

Accumulated net realized gain on investments

15,214,636

Net unrealized appreciation on investments

145,371,519

Preferred dividends accrued but not yet declared

(266,223

)
Net Assets

$712,928,429

 

STATEMENT OF CHANGES IN NET ASSETS
Year ended
December 31,
1999
Year ended
December 31,
1998
 
 
 
INVESTMENT OPERATIONS:
Net investment income

$   7,312,087

$   5,725,999

Net realized gain on investments

61,397,109

53,554,124

Net change in unrealized appreciation on investments

(2,262,846

)

(31,906,113

)
Net increase in net assets from investment operations

66,446,350

27,374,010

DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
Net investment income

(1,338,166

)

(944,176

)
Net realized gain on investments

(10,641,834

)

(8,134,436

)
Preferred dividends accrued but not yet declared

—

(159,555

)
Total distributions to Preferred Stockholders

(11,980,000

)

(9,238,167

)
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income

(5,152,339

)

(5,045,674

)
Net realized gain on investments

(40,974,216

)

(43,475,552

)
Total distributions to Common Stockholders

(46,126,555

)

(48,521,226

)
CAPITAL STOCK TRANSACTIONS:
Conversion of Notes to Common Stock

—

26,814,113

Reinvestment of distributions to Common Stockholders

27,625,539

29,819,441

Net proceeds from issuance of Preferred Stock

—

96,484,000

Total capital stock transactions

27,625,539

153,117,554

NET INCREASE IN NET ASSETS

35,965,334

122,732,171

NET ASSETS:
Beginning of year

676,963,095

554,230,924

End of year (including undistributed net investment income
of $4,175,310 and $1,846,013, respectively)

$712,928,429

$676,963,095

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

26 | The Royce Funds Annual Report 1999

ROYCE VALUE TRUST, INC.

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999

INVESTMENT INCOME:
 
Income:
Dividends

$ 7,963,383

 
Interest

6,302,331

 
Total Income

14,265,714

 
Expenses:
Investment advisory fees

6,350,354

 
Administrative and office facilities expenses

306,685

 
Stockholder reports

264,069

 
Custodian and transfer agent fees

207,334

 
Directors' fees

77,133

 
Professional fees

69,240

 
Other expenses

122,530

 
Total Expenses

7,397,345

 
Fees Waived by Investment Adviser

(443,718

)
Net Expenses

6,953,627

 
Net Investment Income

7,312,087

 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments

61,397,109

 
Net change in unrealized appreciation on investments

(2,262,846

)
Net realized and unrealized gain on investments

59,134,263

 
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS

$66,446,350

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

27 | The Royce Funds Annual Report 1999

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,
 

1999

 

1998

 

1997

 

1996

 

1995

 
NET ASSET VALUE, BEGINNING OF PERIOD

$15.72

 

$16.91

 

$14.32

 

$13.56

 

$12.34

 
INVESTMENT OPERATIONS(a):
    Net investment income

0.26

 

0.17

 

0.21

 

0.26

 

0.04

 
    Net realized and unrealized gain on investments

1.65

 

0.67

 

3.85

 

1.92

 

2.70

 
      Total investment operations

1.91

 

0.84

 

4.06

 

2.18

 

2.74

 
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
    Net investment income

(0.04

)

(0.03

)

(0.03

)

(0.01

)

—

 
    Net realized gain on investments

(0.32

)

(0.26

)

(0.15

)

(0.06

)

—

 
      Total distributions to Preferred Stockholders

(0.36

)

(0.29

)

(0.18

)

(0.07

)

—

 
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
    Net investment income

(0.15

)

(0.16

)

(0.19

)

(0.15

)

(0.03

)
    Net realized gain on investments

(1.22

)

(1.38

)

(1.02

)

(1.00

)

(1.26

)
      Total distributions to Common Stockholders

(1.37

)

(1.54

)

(1.21

)

(1.15

)

(1.29

)
CAPITAL STOCK TRANSACTIONS:
    Effect of reinvestment of distributions by Common Stockholders

(0.13

)

(0.09

)

(0.08

)

(0.11

)

(0.11

)
    Effect of Preferred Stock offering or rights offerings

—

 

(0.11

)

—

 

(0.09

)

(0.12

)
      Total capital stock transactions

(0.13

)

(0.20

)

(0.08

)

(0.20

)

(0.23

)
NET ASSET VALUE, END OF PERIOD(a)

$15.77

 

$15.72

 

$16.91

 

$14.32

 

$13.56

 
MARKET VALUE, END OF PERIOD

$13.063

 

$13.750

 

$15.063

 

$12.625

 

$11.875

 
TOTAL RETURN(b):
Net Asset Value(a)

11.7

%

3.3

%

27.5

%

15.5

%

22.6

%
Market Value

5.7

%

1.5

%

28.8

%

16.3

%

20.5

%
RATIOS BASED ON AVERAGE NET ASSETS
   APPLICABLE TO COMMON STOCKHOLDERS:
Total expenses (c,d)

1.39

%

1.31

%

1.12

%

1.28

%

2.01

%
    Management fee expense

1.18

%

1.10

%

0.39

%

0.39

%

0.97

%
    Interest expense

—

 

—

 

0.45

%

0.64

%

0.75

%
    Other operating expenses

0.21

%

0.21

%

0.28

%

0.25

%

0.29

%
Net investment income

1.47

%

1.11

%

1.53

%

1.27

%

0.34

%
SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)

$712,928

 

$676,963

 

$554,231

 

$441,837

 

$338,970

 
Portfolio Turnover Rate

41

%

43

%

29

%

34

%

32

%
PREFERRED STOCK:
Total shares outstanding

6,400,000

 

6,400,000

 

2,400,000

 

2,400,000

 

—

 
Asset coverage per share

$111.40

 

$105.78

 

$165.72

 

$120.46

 

—

 
Liquidation preference per share

$25.00

 

$25.00

 

$25.00

 

$25.00

 

—

 
Average market value per share:
  7.80% Cumulative (e)

$24.98

 

$25.91

 

$25.70

 

$25.20

 

—

 
  7.30% Tax-Advantaged Cumulative (e)

$24.24

 

$25.43

 

—

 

—

 

—

 
NOTES:
Total amount outstanding (in thousands)

—

—

 

$27,801

 

$40,000

 

$40,000

 
Asset coverage per note

—

—

 

$2,093.56

 

$1,201.51

 

$944.35

 
Average market value per note (e)

—

—

 

$107.69

 

$100.68

 

$96.92

 

(a) From June 21, 1995 through December 31, 1997, Net Asset Value per share, Net Asset Value Total Returns and Income from Investment Operations were calculated assuming that the then outstanding convertible notes had been fully converted, except when the effect of doing so resulted in a higher Net Asset Value per share than would have been calculated without such assumption. If it were not assumed the Notes had been converted, the Net Asset Value per share would have been increased by $0.31, $0.17, and $0.09 at December 31, 1997, 1996 and 1995, respectively.

(b) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions and fully participated in primary subscriptions for rights offerings.

(c) Expense ratios based on total average net assets were 1.06%, 1.06%, 0.99%, 1.20% and 2.01% for the periods ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.48%, 1.34%, 1.14%, 1.31% and 2.04% for the periods ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(e) The average of month-end market values during the period.

28 | The Royce Funds Annual Report 1999

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 the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Valuation of Investments:

Securities listed on an exchange or on the Nasdaq National Market System 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 under procedures established by the Fund's Board of Directors. Bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services.

Investment Transactions and Related Investment Income:

Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes.

Expenses:

The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees payable on or after July 1, 1999. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement.

Taxes:

As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The Schedule of Investments includes information regarding income taxes under the caption "Income Tax Information".

Distributions:

The Fund currently has a policy of paying quarterly distributions on the Fund's Common Stock. Distributions are currently being made at the annual rate of 9% of the rolling average of the prior four calendar quarter-end NAVs of the Fund's Common Stock, with the fourth quarter distribution being the greater of 2.25% of the rolling average or the distribution required by IRS regulations. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year.

Repurchase Agreements:

The Fund enters into repurchase agreements with respect to its portfolio securities solely with State Street Bank and Trust Company ("SSB&T"), the custodian of its assets. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of SSB&T, including possible delays or restrictions upon the ability of the Fund to dispose of the underlying securities.

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 shares of Common Stock upon conversion of Notes for the period ended December 31, 1998.

29 | The Royce Funds Annual Report 1999

 
ROYCE VALUE TRUST, INC.
  
 
NOTES TO FINANCIAL STATEMENTS (continued)

Capital Stock:

The Fund currently has two issues of Preferred Stock outstanding: 7.80% Cumulative Preferred Stock and 7.30% Tax-Advantaged Cumulative Preferred Stock. Both issues of Preferred Stock have a liquidation preference of $25.00 per share.

Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing Preferred Stock.

The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital.

The Fund issued 2,191,520 and 2,080,238 shares of Common Stock as reinvestment of distributions by Common Stockholders for the years ended December 31, 1999 and 1998, respectively.

Investment Advisory Agreement:

As compensation for its services under the Investment Advisory Agreement, Royce & Associates, Inc. ("Royce") receives a fee comprised of a Basic Fee ("Basic Fee") and an adjustment to the Basic Fee based on the investment performance of the Fund in relation to the investment record of the S&P 600 SmallCap Index ("S&P 600").

The Basic Fee is a monthly fee equal to 1/12 of 1% (1% on an annualized basis) of the average of the month-end net assets of the Fund for the applicable performance period.

The performance period for each month will be from July 1, 1996 to the most recent month-end, until the Investment Advisory Agreement has been in effect for 60 full calendar months, when it will become a rolling 60-month period ending with the most recent calendar month.

The Basic Fee for each month is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the S&P 600 for the performance period by more than two percentage points. The maximum increase or decrease in the Basic Fee for any month may not exceed 1/12 of .5%. Accordingly, for each month, the maximum monthly fee rate as adjusted for performance is 1/12 of 1.5% and is payable if the investment performance of the Fund exceeds the percentage change in the investment record of the S&P 600 by 12 or more percentage points for the performance period, and the minimum monthly fee rate as adjusted for performance is 1/12 of .5% and is payable if the percentage change in the investment record of the S&P 600 exceeds the investment performance of the Fund by 12 or more percentage points for the performance period.

Notwithstanding the foregoing, Royce is not entitled to receive any fee for any month when the investment performance of the Fund for the rolling 36-month period ending with such month is negative. In the event that the Fund's investment performance for such a performance period is less than zero, Royce will not be required to refund to the Fund any fee earned in respect of any prior performance period.

Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to an issue of the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the applicable Preferred Stock dividend rate during that period.

For the year ended December 31, 1999, the Fund accrued and paid Royce advisory fees totaling $5,906,636, which is net of $443,718 voluntarily waived by Royce.

Purchases and Sales of Investment Securities:

For the year ended December 31, 1999, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $293,164,355 and $256,637,558, respectively.

30 | The Royce Funds Annual Report 1999

 
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 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the year ended December 31, 1999:

 
   
Purchases
 
Sales
  
    
  
       
Affiliated Company  

Shares

     

Cost

     

Shares

     

Cost

     

Realized Gain/Loss

     

Dividend Income

 
 
 
 
 
 
Axiohm Transaction Solutions  

5,000

$  18,750

445,575

$3,511,667

$(3,376,304)

—

Open Plan Systems  

209,300

$523,105

—

 

—

 

—

—

Peerless Mfg.  

—

—

—

—

—

$39,650

RockShox  

—

—

40,600

$  215,500

$  (152,684)

—

Technical Communications  

—

—

—

—

—

—

Thomaston Mills Cl.A  

—

—

—

—

—

—

 
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, 1999, and the related statement of operations for the year then ended, and the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for periods indicated thereon. 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.

We conducted our audits 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, 1999, 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 audits provide 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, 1999, the results of its operations for the year then ended, and the changes in its net assets for each of the two years in the period then ended and the financial highlights for periods presented, in conformity with generally accepted accounting principles.

TAIT, WELLER & BAKER

Philadelphia, PA

January 28, 2000

31 | The Royce Funds Annual Report 1999

 
ROYCE MICRO-CAP TRUST, INC.

   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

Common Stocks -- 77.7%
SHARES
   
VALUE
 
Consumer Products—10.0%
Apparel and Shoes—2.4%
Garan

46,700

 

$ 1,336,788

**Kleinert's*

14,200

 

142,000

North Face (The)*

84,600

 

343,687

Oshkosh B'Gosh Cl. A

46,600

 

981,513

Weyco Group

68,400

 

1,757,025

   

 

4,561,013

   
Collectibles—0.3%
Enesco Group

60,800

 

672,600

     
Food/Beverage/Tobacco—1.2%
800 JR Cigar*

133,300

 

1,158,044

++Smithfield Companies (The)

148,400

 

1,113,000

     

 

2,271,044

     
Home Furnishing/Appliances—1.5%
Bassett Furniture Industries

7,900

 

126,400

Conso International*

197,800

 

1,706,025

Lifetime Hoan

116,254

 

610,333

Mity-Lite*

21,300

 

331,481

     

 

2,774,239

     
Publishing—1.1%
Gibson Greetings*

51,600

 

462,788

Marvel Enterprises*

208,600

 

1,147,300

Topps Company (The)*

42,000

 

435,750

     

 

2,045,838

     
Sports and Recreation—0.8%
Allen Organ Cl. B

6,600

 

250,800

Johnson Worldwide Associates Cl. A*

60,000

 

425,625

Lund International Holdings*

146,700

 

861,862

     

 

1,538,287

     
Other Consumer Products—2.7%
Koala Corporation*

80,000

 

1,120,000

Lazare Kaplan International*

110,100

 

894,563

Matthews International Cl. A

81,000

 

2,227,500

Velcro Industries

81,500

 

983,094

     

 

5,225,157

     

 

19,088,178

     
Consumer Services—1.8%
Restaurants/Lodgings—0.3%
Pizza Inn

145,700

 

601,012

     
Retail Stores—1.5%
Bombay Company (The)*

46,600

 

209,700

Brookstone*

13,000

 

228,313

Cato Cl. A

47,500

 

599,687

Piercing Pagoda*

3,000

 

45,375

Stein Mart*

76,400

 

434,525

Suzy Shier

156,800

 

597,437

Urban Outfitters*

24,600

 

716,475

     

 

2,831,512

     

 

3,432,524

     
Financial Intermediaries—4.1%
Banking—0.3%
Iron & Glass Bancorp

8,580

 

197,340

Queen City Investments*

948

 

402,900

     

 

600,240

     
Closed End Funds—0.3%
Central Fund of Canada Cl. A

140,000

 

586,250

     
Insurance—3.5%
Capitol Transamerica

75,965

 

764,398

Highlands Insurance Group*

84,700

 

804,650

Independence Holding

33,300

 

382,950

NYMAGIC

52,700

 

694,981

Navigators Group*

42,600

 

426,000

Nobel Insurance*

183,000

 

45,750

PICO Holdings*

16,900

 

208,081

PMA Capital Cl. A

56,609

 

1,125,104

PXRE Group

75,164

 

977,132

Philadelphia Consolidated Holding*

34,200

 

495,900

Wellington Underwriting

444,712

 

748,873

     

 

6,673,819

     

 

7,860,309

     
Financial Services—3.4%
Information and Processing—2.5%
BARRA*

58,250

 

1,849,438

Duff & Phelps Credit Rating

32,600

 

2,899,362

     

 

4,748,800

     
Insurance Brokers—0.9%
Clark/Bardes Holdings*

46,200

 

664,125

CorVel*

10,000

 

235,000

Hilb, Rogal & Hamilton

30,300

 

855,975

     

 

1,755,100

     

 

6,503,900

     
Health—6.3%
Commercial Services—2.3%
Analysts International

15,000

 

187,500

ChiRex*

56,500

 

826,313

Healthworld Corporation*

35,000

 

726,250

ICON ADR+*

1,000

 

17,000

PAREXEL International*

144,400

 

1,705,725

Young Innovations*

65,900

 

967,906

     

 

4,430,694

     


32 | The Royce Funds Annual Report 1999

ROYCE MICRO-CAP TRUST, INC.
   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

SHARES
   
VALUE
 
Health (continued)
Drugs and Biotech—3.6%
Aurora Biosciences*

75,000

 

$ 1,987,500

BioReliance*

135,800

 

776,606

Celgene Corporation*

12,000

 

840,000

Cephalon*

40,000

 

1,382,500

Myriad Genetics*

10,000

 

460,000

Scotia Holdings*

80,000

 

167,991

ViroPharma*

28,000

 

1,036,000

Visible Genetics*

10,000

 

300,000

     

 

6,950,597

     
Surgical Products and Devices—0.4%
Allied Healthcare Products*

97,200

 

230,850

NMT Medical*

126,900

 

364,837

Orthofix International*

12,000

 

171,750

     

 

767,437

     

 

12,148,728

     
Industrial Products—11.6%
Building Systems and Components—3.2%
Falcon Products

66,500

 

573,563

LSI Industries

25,900

 

560,087

Mueller (Paul)

16,650

 

480,769

Simpson Manufacturing*

46,100

 

2,016,875

Skyline

32,100

 

754,350

Thor Industries

55,200

 

1,680,150

     

 

6,065,794

     
Construction Materials—3.3%
Ash Grove Cement Company

20,000

 

2,000,000

Florida Rock Industries

55,000

 

1,894,063

Monarch Cement

50,410

 

1,033,405

Puerto Rican Cement

38,200

 

1,298,800

     

 

6,226,268

     
Industrial Components—0.5%
Herley Industries*

50,000

 

759,375

Woodhead Industries

10,000

 

116,250

     

 

875,625

     
Machinery—0.2%
Oshkosh Truck

10,500

 

307,781

     
Paper and Packaging—0.6%
Liqui-Box

13,100

 

648,450

PalEx*

40,100

 

280,700

Tuscarora

23,000

 

278,875

     

 

1,208,025

     
Pumps, Valves and Bearings—0.2%
NN Ball & Roller

65,500

 

474,875

     
Specialty Chemicals and Materials—2.0%
Aceto

58,421

 

642,631

CFC International*

23,200

 

152,250

Chemfab*

80,700

 

1,260,937

Hauser*

45,400

 

141,875

Hawkins Chemical

122,667

 

1,065,670

Synalloy

73,700

 

552,750

     

 

3,816,113

     
Other Industrial Products—1.6%
BHA Group Holdings

126,915

 

999,456

Landauer

32,300

 

706,563

Myers Industries

52,459

 

826,229

Pioneer Metals*

1,570

 

596,600

     

 

3,128,848

     

 

22,103,329

     
Industrial Services—11.3%
Commercial Services—3.8%
Applied Analytical Industries*

103,400

 

943,525

++Business Resource Group*

315,000

 

1,673,437

Carlisle Holdings*

128,400

 

1,540,800

Cornell Corrections*

79,200

 

663,300

Exponent*

63,200

 

418,700

RCM Technologies*

62,300

 

1,074,675

RemedyTemp Cl. A*

44,000

 

836,000

     

 

7,150,437

     
Engineering and Construction—1.6%
Sevenson Environmental Services

125,120

 

1,204,280

Stone & Webster

85,100

 

1,430,744

Willbros Group*

100,000

 

462,500

     

 

3,097,524

     
Food/Tobacco Processors—1.3%
Farmer Bros.

4,000

 

636,000

Midwest Grain Products*

121,122

 

893,275

Seneca Foods Cl. A*

1,500

 

17,250

Seneca Foods Cl. B*

26,200

 

301,300

Standard Commercial

166,755

 

594,065

     

 

2,441,890

     
Printing—1.2%
Ennis Business Forms

132,700

 

1,028,425

New England Business Service

45,300

 

1,107,019

Schawk

26,300

 

223,550

     

 

2,358,994

     


33 | The Royce Funds Annual Report 1999

ROYCE MICRO-CAP TRUST, INC.
   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

SHARES
   
VALUE
 
Industrial Services (continued)
Transportation and Logistics—3.4%
AirNet Systems*

194,300

 

$ 1,384,387

Circle International Group

62,100

 

1,381,725

Forward Air*

36,600

 

1,587,525

Kenan Transport

34,800

 

1,102,725

Knight Transportation*

12,500

 

214,063

Pittston BAX Group

81,200

 

862,750

     

 

6,533,175

     

 

21,582,020

     
Natural Resources—5.9%
Energy Services—2.4%
Carbo Ceramics

52,600

 

1,150,625

Dril-Quip*

30,600

 

929,475

GulfMark Offshore*

49,600

 

725,400

Input/Output*

170,600

 

863,662

Lufkin Industries

25,000

 

375,000

MarkWest Hydrocarbon*

32,600

 

211,900

Peerless Mfg.

21,600

 

280,800

     

 

4,536,862

     
Gold—0.3%
MK Gold*

603,700

 

565,969

     
Oil and Gas—2.7%
Bonavista Petroleum*

105,000

 

1,185,660

Denbury Resources*

139,200

 

600,300

Evergreen Resources*

20,000

 

395,000

PetroCorp*

177,200

 

1,029,975

Titan Exploration*

350,500

 

1,905,844

     

 

5,116,779

Real Estate—0.5%
FRP Properties*

27,700

 

650,950

Liberte Investors

103,300

 

355,094

     

 

1,006,044

     

 

11,225,654

     
Technology—18.3%
Aerospace/Defense—0.9%
Curtiss-Wright

35,000

 

1,290,625

Special Metals*

154,300

 

491,831

     

 

1,782,456

     
Components and Systems—6.3%
Advanced Energy Industries*

14,600

 

719,050

Aladdin Knowledge Systems*

27,300

 

464,100

CEM*

84,800

 

911,600

Coherent*

45,000

 

1,203,750

MOCON

50,200

 

301,200

Newport

28,100

 

1,285,575

PCD*

76,100

 

513,675

Penn Engineering & Manufacturing

39,700

 

918,063

Penn Engineering & Manufacturing Cl. A

15,400

 

325,325

Perceptron*

152,100

 

608,400

Performance Technologies*

56,250

 

977,344

Printronix*

20,000

 

455,000

Rainbow Technologies*

68,700

 

1,597,275

SBS Technologies*

25,300

 

923,450

TSI

30,000

 

352,500

TransAct Technologies*

68,200

 

515,762

     

 

12,072,069

     
Distribution—1.0%
Kent Electronics*

30,100

 

684,775

Richardson Electronics

158,500

 

1,188,750

     

 

1,873,525

     
Semiconductors and Equipment—2.0%
Aetrium*

10,000

 

65,938

Align-Rite International*

40,000

 

877,500

Electroglas*

49,900

 

1,266,212

Exar*

14,800

 

871,350

Helix Technology

9,500

 

425,719

Intevac*

111,450

 

390,075

     

 

3,896,794

     
Software/Services—6.5%
CCC Information Services Group*

46,300

 

792,888

CSP*

58,581

 

446,680

Integral Systems*

32,600

 

1,438,475

JDA Software Group*

83,600

 

1,368,950

Kronos*

51,000

 

3,060,000

MSC.Software*

113,100

 

1,145,138

Mastech Corporation*

64,800

 

1,603,800

New Horizons Worldwide*

92,600

 

1,099,625

SPSS*

32,700

 

825,675

Tyler Technologies*

97,300

 

535,150

     

 

12,316,381

     
Telecommunication—1.6%
Globecomm Systems*

30,000

 

757,500

REMEC*

63,600

 

1,621,800

Vertex Communications*

30,000

 

615,000

     

 

2,994,300

     

 

34,935,525

     
Utilities—0.2%
EnergySouth

22,900

 

475,175

     
Miscellaneous—4.8%

 

9,274,204

     
TOTAL COMMON STOCKS
(Cost $107,983,960)

 

148,629,546

     
PREFERRED STOCK—0.3%
Seneca Foods Conv.*
(Cost $623,500)

51,250

 

589,375

     

34 | The Royce Funds Annual Report 1999

ROYCE MICRO-CAP TRUST, INC.
   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

  
PRINCIPAL
AMOUNT
  
VALUE
   
 
CORPORATE BOND—0.3%
MSC.Software 7.875% Conv.  
Sub. Deb. due 8/18/04  
(Cost $593,250)  

$     700,000

$     612,500

       
U.S. TREASURY OBLIGATIONS—17.6%  
U.S. Treasury Notes  
6.25%, due 8/31/00  

5,000,000

5,007,800

4.875%, due 3/31/01  

14,000,000

13,783,420

6.25%, due 8/31/02  

5,000,000

4,992,200

6.00%, due 8/15/04  

10,000,000

9,843,700

       
TOTAL U.S. TREASURY OBLIGATIONS  
(Cost $33,991,172)  

33,627,120

       

 
    
VALUE
   
REPURCHASE AGREEMENT—4.4%
State Street Bank & Trust Company,   
2.50% dated 12/31/99, due 1/3/00
maturity value $8,469,764
(collateralized by U.S. Treasury Bonds,
6.00%—7.25%, due 5/15/16—2/15/26,
valued at $8,639,188) (Cost $8,468,000)

$    8,468,000

   
TOTAL INVESTMENTS—100.3%  
 (Cost $151,659,882)

191,926,541

LIABILITIES LESS CASH
AND OTHER ASSETS—(0.3%)

(657,670)

   
NET ASSETS—100.0%

$191,268,871

   

* Non-income producing.

** A security for which market quotations are no longer readily available represents 0.07% of net assets. This security has been valued at its fair value under procedures established by the Fund's Board of Directors.

+ American Depository Receipt.

++ At December 31, 1999, the Fund owned 5% or more of the Company's outstanding voting securities thereby making the Company an Affiliated Company as the term is defined in the Investment Company Act of 1940.

INCOME TAX INFORMATION: The cost of total investments for Federal income tax purposes was $151,920,032. At December 31, 1999, net unrealized appreciation for all securities was $40,006,509, consisting of aggregate gross unrealized appreciation of $48,066,683 and aggregate gross unrealized depreciation of $8,060,174. The Fund designated $4,273,110 as a capital gain dividend for the purpose of its dividend paid deduction.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

35 | The Royce Funds Annual Report 1999

 

ROYCE MICRO-CAP TRUST, INC.
   
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
ASSETS:
Investments at value (identified cost $143,191,882)

$183,458,541

Repurchase agreement (at cost and value)

8,468,000

Receivable for investments sold

886,265

Receivable for dividends and interest

744,626

Prepaid expenses

6,460

Total Assets

193,563,892

LIABILITIES:
Payable for investments purchased

2,029,519

Payable for investment advisory fee

105,386

Preferred dividends accrued but not yet declared

68,889

Accrued expenses

91,227

Total Liabilities

2,295,021

Net Assets

$191,268,871

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—$11.00)

$151,268,871

SUMMARY OF STOCKHOLDERS' EQUITY:
7.75% Cumulative Preferred Stock--par value $0.001 per share; 1,600,000 shares outstanding

$1,600

Common Stock--par value $0.001 per share; 13,755,988 shares outstanding (150,000,000 shares authorized)

13,756

Additional paid-in capital

141,768,425

Undistributed net investment income

260,595

Accumulated net realized gain on investments and foreign currency

9,026,725

Net unrealized appreciation on investments and foreign currency

40,266,659

Preferred dividends accrued but not yet declared

(68,889)

Net Assets

$191,268,871

 

STATEMENTS OF CHANGES IN NET ASSETS

Year ended
December 31,
1999
Year ended
December 31,
1998
 
 
INVESTMENT OPERATIONS:
Net investment income

$   1,592,653

$   1,720,215

Net realized gain on investments and foreign currency

10,265,741

5,532,509

Net change in unrealized appreciation on investments and foreign currency

8,091,588

(10,118,947

)
Net increase (decrease) in net assets from investment operations

19,949,982

(2,866,223

)
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
Net investment income

(707,110

)

(758,880

)
Net realized gain on investments and foreign currency

(2,392,890

)

(2,341,120

)
Total distributions to Preferred Stockholders

(3,100,000

)

(3,100,000

)
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income

(834,803

)

(932,213

)
Net realized gain on investments and foreign currency

(2,800,617

)

(2,875,417

)
Total distributions to Common Stockholders

(3,635,420

)

(3,807,630

)
CAPITAL STOCK TRANSACTIONS:
Reinvestment of distributions to Common Stockholders

2,559,108

2,907,409

NET INCREASE (DECREASE) IN NET ASSETS

15,773,670

(6,866,444

)
NET ASSETS:
Beginning of year

175,495,201

182,361,645

End of year (including undistributed net investment income of $260,595 and $209,855, respectively)

$191,268,871

$175,495,201

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

36 | The Royce Funds Annual Report 1999

 

ROYCE MICRO-CAP TRUST, INC.
   
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999

INVESTMENT INCOME:
PageIncome:
Dividends

$  1,279,590

Interest

2,001,276

Total Income

3,280,866

Expenses:
Investment advisory fees

1,437,600

Custodian and transfer agent fees

103,216

Stockholder reports

86,345

Administration fees

85,611

Administrative and office facilities expenses

81,022

Professional fees

36,072

Directors' fees

34,230

Other expenses

50,692

Total Expenses

1,914,788

Fees Waived by Investment Adviser

(226,575

)
Net Expenses

1,688,213

Net Investment Income

1,592,653

REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investments and foreign currency

10,265,741

Net change in unrealized appreciation on investments and foreign currency

8,091,588

Net realized and unrealized gain on investments and foreign currency

18,357,329

NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS

$19,949,982

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

37 | The Royce Funds Annual Report 1999

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,

1999

1998

1997

1996

1995

 
NET ASSET VALUE, BEGINNING OF PERIOD

$10.06

$10.84

$9.38

$8.89

$7.58

 
INVESTMENT OPERATIONS:
Net investment income

0.12

0.13

0.17

0.09

0.02

 
Net realized and unrealized gain (loss) on investments and foreign currency

1.35

(0.36

)

2.61

1.32

1.69

 
Total investment operations

1.47

(0.23

)

2.78

1.41

1.71

 
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
Net investment income

(0.05

)

(0.06

)

(0.02

)

—

—

 
Net realized gain on investments and foreign currency

(0.18

)

(0.18

)

(0.12

)

—

—

 
Total distributions to Preferred Stockholders

(0.23

)

(0.24

)

(0.14

)

—

—

 
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income

(0.06

)

(0.07

)

(0.16

)

(0.10

)

(0.02

)
Net realized gain on investments and foreign currency

(0.21

)

(0.22

)

(0.84

)

(0.70

)

(0.34

)
Total distributions to Common Stockholders

(0.27

)

(0.29

)

(1.00

)

(0.80

)

(0.36

)
CAPITAL STOCK TRANSACTIONS:
Effect of reinvestment of distributions by Common Stockholders

(0.03

)

(0.02

)

(0.06

)

(0.12

)

(0.04

)
Effect of Preferred Stock offering

—

—

(0.12

)

—

—

 
Total capital stock transactions

(0.03

)

(0.02

)

(0.18

)

(0.12

)

(0.04

)
NET ASSET VALUE, END OF PERIOD

$11.00

$10.06

$10.84

$9.38

$8.89

 
MARKET VALUE, END OF PERIOD

$9.00

$8.875

$10.125

$8.25

$8.00

 
TOTAL RETURN(a):
Net Asset Value

12.7

%

(4.1

)%

27.1

%

16.6

%

22.9

%
Market Value

4.5

%

(9.4

)%

35.0

%

13.9

%

19.8

%
RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE  
TO COMMON STOCKHOLDERS:
Total expenses (b,c)

1.27

%

1.18

%

0.83

%

0.85

%

1.36

%
Management fee expense

0.91

%

0.80

%

0.40

%

0.47

%

0.77

%
Other operating expenses

0.36

%

0.38

%

0.43

%

0.38

%

0.59

%
Net investment income

1.20

%

1.21

%

1.77

%

0.88

%

0.26

%
SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)

$191,269

$175,495

$182,362

$113,953

$100,065

 
Portfolio Turnover Rate

49

%

44

%

34

%

51

%

51

%
PREFERRED STOCK:
Total shares outstanding

1,600,000

1,600,000

1,600,000

—

—

 
Asset coverage per share

$119.54

$109.68

$113.98

—

—

 
Liquidation preference per share

$25.00

$25.00

$25.00

—

—

 
Average market value per share (d)

$24.67

$25.40

$25.56

—

—

 
  

(a) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions.

(b) Expense ratios based on total average net assets were 0.98%, 0.92%, 0.72% , 0.85% and 1.36% for the periods ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(c) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.44% and 1.24% for the periods ended December 31, 1999 and 1998, respectively.

(d) The average of month-end market values during the period.

38 | The Royce Funds Annual Report 1999

 
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 the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Valuation of Investments:

Securities listed on an exchange or on the Nasdaq National Market System 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 under procedures established by the Fund's Board of Directors. Bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services.

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 more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees payable on or after July 1, 1999. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement.

Taxes:

As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The Schedule of Investments includes information regarding income taxes under the caption "Income Tax Information".

Distributions:

Distributions to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year.

Repurchase Agreements:

The Fund enters into repurchase agreements with respect to its portfolio securities solely with State Street Bank and Trust Company ("SSB&T"), the custodian of its assets. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued inter-est). 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.

39 | The Royce Funds Annual Report 1999

 
ROYCE MICRO-CAP TRUST, INC.
  
   
NOTES TO FINANCIAL STATEMENTS (continued)

Capital Stock:

The Fund currently has 1,600,000 shares of 7.75% Cumulative Preferred Stock outstanding. The stock has a liquidation preference of $25.00 per share.

Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing the Preferred Stock.

The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends on the shares of Preferred Stock are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital.

The Fund issued 291,429 and 334,780 shares of Common Stock as reinvestment of distributions by Common Stockholders for the years ended December 31, 1999 and 1998, 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 is increased or decreased at the rate of 1/12 of .05% for each percentage point that the investment performance of the Fund exceeds, or is exceeded by, the percentage change in the investment record of the Russell 2000 for the performance period by more than two percentage points. The performance period for each such month was from January 1, 1997 to the most recent month-end, until the Investment Advisory Agreement had been in effect for 36 full calendar months, when the performance period became 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.

Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the Preferred Stock's dividend rate.

For the year ended December 31, 1999, the Fund accrued and paid Royce advisory fees totaling $1,211,025, which is net of $226,575 voluntarily waived by Royce.

Administration Agreement:

Under an Administration Agreement with the Fund, Mitchell Hutchins Asset Management Inc. (the "Administrator") served as the Administrator, and performed or assisted in certain aspects of the Fund's operations. The Agreement was terminated effective September 30, 1999. As compensation for its services, the Administrator was 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, 1999, the cost of purchases and the proceeds from sales of investment securities, other than short-term securities, amounted to $91,600,193 and $78,901,102, respectively.

Transactions in Shares of Affiliated Companies:

An "Affiliated Company", as defined in the Investment Company Act of 1940, is a company in which a Fund owns 5% or more of the company's outstanding voting securities. The Fund effected the following transactions in shares of such companies during the year ended December 31, 1999:

   
Purchases
 
Sales
  
    
  
       
Affiliated Company
  

Shares

   

Cost

   

Shares

   

Cost

   

Realized Gain/Loss

   

Dividend Income

 
 
 
 
 
 
Art's-Way Manufacturing  

—

—

124,000

$894,413

$(505,965)

—

Business Resource Group  

315,000

$1,596,469

—

—

—

—

Smithfield Companies (The)  

—

—

—

—

—

$28,196

40 | The Royce Funds Annual Report 1999

ROYCE MICRO-CAP TRUST, INC.
  
   
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, 1999, and the related statement of operations for the year then ended, and the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for periods indicated thereon. 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.

We conducted our audits 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, 1999, 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 audits provide 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, 1999, the results of its operations for the year then ended, and the changes in its net assets for each of the two years in the period then ended and the financial highlights for periods presented, in conformity with generally accepted accounting principles.

TAIT, WELLER & BAKER

Philadelphia, PA
January 28, 2000

41 | The Royce Funds Annual Report 1999

 
ROYCE FOCUS TRUST, INC.

   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

COMMON STOCKS — 80.7%
SHARES   VALUE
 
Consumer Products—3.2%
Sports and Recreation—3.2%
Oakley*

407,800

 

$2,268,388

     
Consumer Services—6.8%
Retail Stores—6.8%
Charming Shoppes*

725,100

 

4,803,787

     
Financial Intermediaries—6.3%
Insurance—6.3%
Medical Assurance*

71,600

 

1,517,025

White Mountains Insurance Group

10,000

 

1,205,000

Zenith National Insurance

84,800

 

1,749,000

   

 

4,471,025

   
Financial Services—9.3%
Information and Processing—1.9%
Duff & Phelps Credit Rating

15,000

 

1,334,063

     
Insurance Brokers—7.4%
Blanch (E.W.) Holdings

30,000

 

1,837,500

Gallagher (Arthur J.) & Co.

52,800

 

3,418,800

   

 

5,256,300

   

 

6,590,363

   
Health—3.7%
Surgical Products and Devices—3.7%
Arrow International

90,700

 

2,630,300

     
Industrial Products—13.7%
Building Systems and Components—3.0%
Simpson Manufacturing*

48,600

 

2,126,250

     
Construction Materials—4.6%
Florida Rock Industries

95,000

 

3,271,562

     
Machinery—4.2%
Lincoln Electric Holdings

145,400

 

2,998,875

     
Pumps, Valves and Bearings—1.9%
Kaydon Corporation

50,000

 

1,340,625

   

 

9,737,312

   
Industrial Services—13.3%
Commercial Services—2.0%
Carlisle Holdings*

120,800

 

1,449,600

Engineering and Construction—4.9%
Morrison Knudsen*

442,100

 

3,453,906

Printing—4.6%
New England Business Service

135,000

 

3,299,063

     
Transportation and Logistics—1.8%
Circle International Group

56,200

 

1,250,450

   

 

9,453,019

   
Natural Resources—9.5%
Energy Services—5.1%
Input/Output*

320,000

 

1,620,000

Nabors Industries*

64,800

 

2,004,750

   

 

3,624,750

   
Gold—2.7%
Anglogold ADR+

74,100

 

1,903,444

     
Oil and Gas—1.7%
Tom Brown*

93,800

 

1,254,575

   

 

6,782,769

   
Technology—14.9%
Aerospace/Defense—1.6%
Curtiss-Wright

30,300

 

1,117,312

     
Distribution—4.8%
Avnet

31,919

 

1,931,100

Richardson Electronics

193,000

 

1,447,500

   

 

3,378,600

   
Software/Services—4.7%
Comdisco

84,900

 

3,162,525

National Computer Systems

5,000

 

188,125

   

 

3,350,650

   
Telecommunication—3.8%
Plantronics*

38,000

 

2,719,375

   

 

10,565,937

   
TOTAL COMMON STOCKS
(Cost $48,145,489)

 

57,302,900

     
PRINCIPAL AMOUNT
U.S. TREASURY OBLIGATIONS—18.1%
U.S. Treasury Notes
6.125%, due 12/31/01

$4,000,000

3,991,240

5.75%, due 10/31/02

5,000,000

4,931,250

6.00%, due 8/15/04

4,000,000

3,937,480

     
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $13,026,250)

12,859,970

     

42 | The Royce Funds Annual Report 1999

 

ROYCE FOCUS TRUST, INC.
   
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999

VALUE  
 
REPURCHASE AGREEMENT—1.4%
State Street Bank & Trust Company, 2.50% dated 12/31/99, due 1/3/00, maturity value $979,204 (collateralized by U.S. Treasury Bonds, 8.00% due 11/15/21, valued at $1,001,875) (Cost $979,000)

$     979,000

 
   
 
TOTAL INVESTMENTS—100.2%
(Cost $62,150,739)

$71,141,870

 
LIABILITIES LESS CASH AND OTHER ASSETS—(0.2%)

(138,447

)
   
 
NET ASSETS—100.0%

$71,003,423

 
   
 

* Non income producing.
+ American Depository Receipt.

INCOME TAX INFORMATION: The cost of total investments for Federal income tax puposes was $62,197,980. At December 31, 1999, net unrealized appreciation for all securities was $8,943,890, consisting of aggregate gross unrealized appreciation of $12,762,264 and aggregate gross unrealized depreciation of $3,818,374. The Fund designated $1,820,974 as a capital gain dividend for the purpose of its dividend paid deduction.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

43 | The Royce Funds Annual Report 1999

ROYCE FOCUS TRUST, INC.
   
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999

ASSETS:
Investments at value (identified cost $61,171,739)

$70,162,870

 
Repurchase agreement (at cost and value)

979,000

 
Cash

310

 
Receivable for dividends and interest

201,877

 
Prepaid expenses

2,477

 
Total Assets

71,346,534

 
LIABILITIES:
Payable for investments purchased

205,652

 
Payable for investment advisory fee

40,722

 
Preferred dividends accrued but not yet declared

33,112

 
Accrued expenses

63,625

 
Total Liabilities

343,111

 
Net Assets

$71,003,423

 
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—$5.94)

$51,003,423

 
SUMMARY OF STOCKHOLDERS' EQUITY:
7.45% Cumulative Preferred Stock--par value $0.001 per share; 800,000 shares outstanding

$           800

 
Common Stock--par value $0.001 per share; 8,584,506 shares outstanding (100,000,000 shares authorized)

8,585

 
Additional paid-in capital

62,139,076

 
Undistributed net investment income

690,366

 
Accumulated net realized loss on investments

(793,423

)
Net unrealized appreciation on investments

8,991,131

 
Preferred dividends accrued but not yet declared

(33,112

)
Net Assets

$71,003,423

 

 

STATEMENTS OF CHANGES IN NET ASSETS

Year ended
December 31,
1999		   Year ended
December 31,
1998 		 
 
 
 
INVESTMENT OPERATIONS:
Net investment income

$    690,366

 

$    991,047

 
Net realized gain (loss) on investments

(786,044

)

1,937,257

 
Net change in unrealized appreciation on investments

5,599,612

 

(4,873,694

)
Net increase (decrease) in net assets from investment operations

5,503,934

 

(1,945,390

)
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
Net investment income

(89,608

)

(1,343,086

)
Net realized gain on investments

(1,400,392

)

(146,914

)
Total distributions to Preferred Stockholders

(1,490,000

)

(1,490,000

)
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income

(73,455

)

—

 
Net realized gain on investments

(1,147,941

)

—

 
Total distributions to Common Stockholders

(1,221,396

)

—

 
CAPITAL STOCK TRANSACTIONS:
Reinvestment of distributions to Common Stockholders

753,514

 

—

 
NET INCREASE (DECREASE) IN NET ASSETS

3,546,052

 

(3,435,390

)
NET ASSETS:
Beginning of year

67,457,371

 

70,892,761

 
End of year (including undistributed net investment income of $690,366 and $136,580, respectively)

$71,003,423

 

$67,457,371

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

44 | The Royce Funds Annual Report 1999

 

ROYCE FOCUS TRUST, INC.
   
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999

INVESTMENT INCOME:
Income:
Dividends

$  634,991

 
Interest

761,791

 
Total Income

1,396,782

 
Expenses:
Investment advisory fees

668,522

 
Custodian and transfer agent fees

72,519

 
Stockholder reports

46,813

 
Administrative and office facilities expenses

30,975

 
Professional fees

29,183

 
Directors' fees

20,393

 
Other expenses

38,013

 
Total Expenses

906,418

 
Fees Waived by Investment Adviser

(200,002

)
Net Expenses

706,416

 
Net Investment Income

690,366

 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments

(786,044

)
Net change in unrealized appreciation on investments

5,599,612

 
Net realized and unrealized gain on investments

4,813,568

 
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS

$5,503,934

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

45 | The Royce Funds Annual Report 1999

 

ROYCE FOCUS TRUST, INC.
   
FINANCIAL HIGHLIGHTS

This table is presented to show selected data for a share of Common Stock outstanding throughout each period, and to assist stockholders in evaluating the Fund's performance for the periods presented.

 
Years ended December 31,

1999

 

1998

 

1997

 

1996

 

1995

 
NET ASSET VALUE, BEGINNING OF PERIOD

$5.63

 

$6.04

 

$5.52

 

$5.09

 

$4.70

 
INVESTMENT OPERATIONS:
Net investment income

0.08

 

0.12

 

0.08

 

0.06

 

0.13

 
Net realized and unrealized gain (loss) on investments and foreign currency

0.58

 

(0.35

)

1.12

 

0.35

 

0.36

 
Total investment operations

0.66

 

(0.23

)

1.20

 

0.41

 

0.49

 
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS:
Net investment income

(0.01

)

(0.16

)

—

 

—

 

—

 
Net realized gain on investments and foreign currency

(0.17

)

(0.02

)

(0.01

)

—

 

—

 
Total distributions to Preferred Stockholders

(0.18

)

(0.18

)

(0.01

)

—

 

—

 
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income

(0.01

)

—

 

(0.12

)

—

 

(0.16

)
Net realized gain on investments and foreign currency

(0.14

)

—

 

(0.41

)

—

 

(0.01

)
Total distributions to Common Stockholders

(0.15

)

—

 

(0.53

)

—

 

(0.17

)
CAPITAL STOCK TRANSACTIONS:
Effect of reinvestment of distributions by Common Stockholders

(0.02

)

—

 

(0.04

)

—

 

—

 
Effect of Preferred Stock offering

—

 

—

 

(0.10

)

—

 

—

 
Other Sources

—

 

—

 

—

 

0.02

 

0.07

 
Total capital stock transactions

(0.02

)

—

 

(0.14

)

0.02

 

0.07

 
NET ASSET VALUE, END OF PERIOD

$5.94

 

$5.63

 

$6.04

 

$5.52

 

$5.09

 
MARKET VALUE, END OF PERIOD

$4.72

 

$4.88

 

$5.06

 

$4.59

 

$4.19

 
TOTAL RETURN(a):
Net Asset Value (b)

8.7

%

(6.8

)%

20.5

%

—

 

—

 
Market Value

(0.3

)%

(3.7

)%

21.3

%

9.6

%

22.3

%
RATIOS BASED ON AVERAGE NET ASSETS APPLICABLE
TO COMMON STOCKHOLDERS:
Total expenses (c,d)

1.51

%

1.62

%

0.94

%

1.91

%

2.14

%
Management fee expense

1.00

%

1.14

%

0.39

%

0.83

%

1.00

%
Other operating expenses

0.51

%

0.48

%

0.55

%

1.08

%

1.14

%
Net investment income

1.47

%

1.95

%

1.35

%

1.80

%

2.80

%
SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)

$71,003

 

$67,457

 

$70,893

 

$44,154

 

$41,385

 
Portfolio Turnover Rate

60

%

90

%

74

%

159

%

76

%
PREFERRED STOCK:
Total shares outstanding

800,000

 

800,000

 

800,000

 

—

 

—

 
Asset coverage per share

$88.75

 

$84.32

 

$88.62

 

—

 

—

 
Liquidation preference per share

$25.00

 

$25.00

 

$25.00

 

—

 

—

 
Average market value per share (e)

$24.00

 

$25.16

 

$25.25

 

—

 

—

 

(a) The Net Asset Value and Market Value Total Returns assume a continuous Common Stockholder who reinvested all net investment income dividends and capital gain distributions.

(b) Net Asset Value Total Return is not available for years prior to 1997.

(c) Expense ratios based on total average net assets were 1.06%, 1.16%, 0.90% , 1.91% and 2.14% for the periods ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(d) Expense ratios based on average net assets applicable to Common Stockholders before waiver of fees by the investment adviser would have been 1.93%, 1.88%, 1.60% and 2.08% for the periods ended December 31, 1999, 1998, 1997 and 1996, respectively.

(e) The average of month-end market values during the period.

46 | The Royce Funds Annual Report 1999

 
ROYCE FOCUS TRUST, INC.
  
   
NOTES TO FINANCIAL STATEMENTS

Summary of Significant Accounting Policies:

Royce Focus Trust, Inc. (the "Fund") is a diversified closed-end investment company. Effective May 7, 1999, Royce Global Trust, Inc. changed its name to Royce Focus Trust, Inc. The Fund commenced operations on March 2, 1988. Royce & Associates, Inc. ("Royce") assumed investment management responsibility for the Fund on November 1, 1996.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Valuation of Investments:

Securities listed on an exchange or on the Nasdaq National Market System 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 under procedures established by the Fund's Board of Directors. Bonds and other fixed income securities may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services.

Investment Transactions and Related Investment Income:

Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and any non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes.

Expenses:

The Fund incurs direct and indirect expenses. Expenses directly attributable to the Fund are charged to the Fund's operations, while expenses applicable to more than one of the Royce Funds are allocated in an equitable manner. Allocated personnel and occupancy costs related to The Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Fund's Directors to defer the receipt of all or a portion of Directors Fees payable on or after July 1, 1999. The deferred fees remain invested in certain Royce Funds until distributed in accordance with the agreement.

Taxes:

As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The Schedule of Investments includes information regarding income taxes under the caption "Income Tax Information".

Distributions:

Distributions to Common Stockholders are recorded on the ex-dividend date and paid annually in December. Distributions to Preferred Stockholders are recorded on an accrual basis and paid quarterly. Distributions are determined in accordance with income tax regulations that may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications within the capital accounts. Undistributed net investment income may include temporary book and tax basis differences, which will reverse in a subsequent period. Any taxable income or gain remaining undistributed at fiscal year end is distributed in the following year.

Repurchase Agreements:

The Fund enters into repurchase agreements with respect to its portfolio securities solely with State Street Bank and Trust Company ("SSB&T"), the custodian of its assets. The Fund restricts repurchase agreements to maturities of no more than seven days. Securities pledged as collateral for repurchase agreements, which are held by SSB&T until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of SSB&T, including possible delays or restrictions upon the ability of the Fund to dispose of the underlying securities.

Capital Stock:

The Fund currently has 800,000 shares of 7.45% Cumulative Preferred Stock outstanding. The stock has a liquidation preference of $25.00 per share.

Under the Investment Company Act of 1940, the Fund is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines established by Moody's, the Fund is required to maintain a certain discounted asset coverage. The Fund has met these requirements since issuing the Preferred Stock.

47 | The Royce Funds Annual Report 1999

 

ROYCE FOCUS TRUST, INC.
  
   
NOTES TO FINANCIAL STATEMENTS (continued)

The Fund is required to allocate long-term capital gain distributions and other types of income proportionately to distributions made to holders of shares of Common Stock and Preferred Stock. To the extent that dividends on the shares of Preferred Stock are not paid from long-term capital gains, net investment income or net short-term capital gains, they will represent a return of capital.

The Fund issued 161,083 shares of Common Stock as reinvestment of distributions by Common Stockholders for the year ended December 31, 1999.

Investment Advisory Agreement:

The Investment Advisory Agreement between Royce and the Fund provides for fees to be paid at an annual rate of 1.0% of the average daily net assets of the Fund. Royce has voluntarily committed to waive the portion of its investment advisory fee attributable to the Fund's Preferred Stock for any month in which the Fund's average annual NAV total return since issuance of the Preferred Stock fails to exceed the Preferred Stock's dividend rate.

For the year ended December 31, 1999, the Fund accrued and paid Royce advisory fees totaling $468,520, which is net of $200,002 voluntarily waived by Royce.

Purchases and Sales of Investment Securities:

For the year ended December 31, 1999, the cost of purchases and proceeds from sales of investment securities, other than short-term securities, amounted to $41,072,228 and $38,151,336, respectively.

 

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Royce Focus Trust, Inc.

We have audited the accompanying statement of assets and liabilities of Royce Focus Trust, Inc., including the schedule of investments, as of December 31, 1999, and the related statement of operations for the year then ended, and the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for periods indicated thereon. 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.

We conducted our audits 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, 1999, 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 audits provide 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 Focus Trust, Inc. at December 31, 1999, the results of its operations for the year then ended, and the changes in its net assets for each of the two years in the period then ended and the financial highlights for periods presented, in conformity with generally accepted accounting principles.

TAIT, WELLER & BAKER

Philadelphia, PA
January 28, 2000

48 | The Royce Funds Annual Report 1999

 

POSTSCRIPT

THIS JUST IN ...

The advent of cable television, the proliferation of magazines and newsletters, and the increasing influence of the Internet have brought financial information closer to people than ever before. The effort to create a better educated investor is a great idea — one that we wholeheartedly support. We also think that, for the most part, the various media do a fine job of keeping the public informed about important financial events. At the cable networks, however, something seems to have gotten lost along the way. In their zeal to cover every price movement as an earth-shattering news event, they often get too caught up in short-term minutiae. Movement of an eighth of a point on a $100 stock is treated as something that can only be properly understood by market experts who seem to never agree on anything. Have they forgotten that information and opinion are not synonymous with knowledge? Exposure to this endless stream of instant analysis throughout the day does not automatically result in a smarter investor. What follows is a cheerfully exaggerated version of the kind of constant commentary that often appears on financial networks:

9:30 a.m.

TERESA: Good Morning, I’m Teresa Bourse for Financial Update News Network. The Street is buzzing today with rumors that a major announcement is due regarding humongotech.com, the Internet services and technology company. Will it be another stock split? A merger, perhaps? Here’s FUNN market expert Phil Fulminate with the latest. Phil?

PHIL: Terry, FUNN viewers may recall that I recommended this stock two years ago, at the time of its Initial Public Offering. This is a high-quality company with a major Internet presence whose stock has nowhere to go but up.

9:51 a.m.

TERESA: After-hours trading and endless gossip have resulted in a surprising opening for humongotech.com — the stock opened at $120 per share, down 6 points. Let’s go now to Steve deBear for additional insight into what has to be a shocking opening for many investors.

STEVE: Shocking for some, Teresa, but not to me. This stock is a dog that’s been barking for some time. Call me old-fashioned, but no earnings means "Beware of the Dog."

10:29 a.m.

TERESA: This just in, humongotech.com has just jumped a point, to $121.

PHIL: In today’s lightning-paced New Economy, you simply cannot keep a strong company like this down for long. The market is showing us that right now.

11:45 a.m.

TERESA: We’re getting word now that the stock is up again, a full five points, to $126.

PHIL: That’s not surprising — the sky’s the only limit for humongotech.com.

1:17 p.m.

TERESA: Humongotech.com is on its way to a dazzling day, currently at $154. Any comments, Steve?

STEVE: A sure sign that the bubble is about to burst. No bull can run forever. I may have been wrong about this in 1996. Okay, and in 1997, too. In 1998, my bear market prediction was more premature than inaccurate, but this time it’s really true.

3:17 p.m.

TERESA: Humongotech.com, a market favorite well into afternoon trading until around 2:30, is struggling to rally after some brisk selling dragged it down to its current price of $128.

PHIL: I think that this is actually a good sign, a sign that timid investors are getting out and the stock’s true believers are hanging around and hanging tough. This is a terrific stock, and I think it’s poised for a big run-up in the next few days.

4:02 p.m.

TERESA: What a day for humongotech.com. A disappointing opening, followed by some furious buying, then a late flurry of even more furious selling on the heels of less-than-optimistic comments by analysts at Great Bull Brokerage. When the smoke cleared, the stock closed unchanged at $126 per share. Please stay tuned for our post-market analysis, folks.

[GRAPHIC: Computer monitor displaying newscaster of "FUNN" network]

 

 

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 $3 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.

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 families currently have approximately $39 million
 invested in The Royce Funds.

THE ROYCE FUNDS
1414 AVENUE OF THE AMERICAS, NEW YORK NY 10019

 

GENERAL INFORMATION
Additional Report Copies
(800) 221-4268

BROKER/DEALER SERVICES
For Fund Materials and Performance Updates
(800) 59-ROYCE (597-6923)
STATE STREET BANK
AND TRUST COMPANY
Custodian, Transfer Agent and Registrar
(800) 426-5523
ADVISOR SERVICES
For Fund Materials, Performance Updates,
Transactions or Account Inquiries
(800) 33-ROYCE (337-6923)

 

www.roycefunds.com
funds@roycenet.com