The Royce Funds
PMF II
PROSPECTUS -- November 1, 1996
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-
800-221-4268 SHAREHOLDER SERVICES -- 1-800-841-1180 INVESTMENT
ADVISOR SERVICES -- 1-800-33-ROYCE INVESTMENT
OBJECTIVE AND
POLICIES
PMF II (the "Fund") seeks long-term capital appreciation by investing
primarily in common stocks and securities convertible into common stocks
of small and micro-cap companies. The Fund's securities are selected on a
value basis. There can be no assurance that the Fund will achieve its
objective.
The Fund is a no-load series of The Royce Fund (the "Trust"), a
diversified open-end management
investment company. The Trust is currently offering shares of 12 series.
This Prospectus relates to PMF II only.
ABOUT THIS
PROSPECTUS
This Prospectus sets forth concisely the information that you should know
about the Fund before you invest. It should be retained for future
reference. A "Statement of Additional Information,"
containing further information about the Fund and the Trust, has been filed
with the Securities and Exchange Commission. The Statement is dated November
1, 1996 and has been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Trust or calling Investor
Information.
If you are viewing the electronic version of this Prospectus through an on-
line computer service, you may request a printed version free of charge by
calling Investor Information. The E-mail address for The Royce Funds is
[email protected] and the Internet Home Page is
http://www.roycefunds.com
TABLE OF CONTENTS
Page
Fund Expenses.. . . . . . . 2
Investment Performance . . . 2
Investment Objective . . . . 2
Investment Policies. . . . . 3
Investment Risks . . . . . . 3
Investment Limitations . . . 5
Management of the Trust . . 6
General Information. . . . . 7
Dividends, Distributions and Taxes . . 7
Net Asset Value Per Share. . 8
Page
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares . . . . 9
Choosing a Distribution Option . . . . 11
Important Account Information. . . 11
Redeeming Your Shares. . . . 12
Exchange Privilege . . . . . 14
Transferring Ownership . . . 14
Other Services . . . . . . . 14
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EX- CHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FUND EXPENSES
The Fund is
no-load and has
no 12b-1 fees
The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends. . . . . .
. None
Deferred Sales Load . . . . . . . . . . . . . .
. . . . None Redemption Fee -- on share
purchases held for 1 year or more. . . None
Early Redemption Fee -- on share purchases held for less
than 1 year 1%
Annual Fund Operating Expenses
Management Fees (after waivers) . . . . . .00%
Other Expenses (after reimbursement). . . .99%
Total Operating Expenses. . . . . . . . . .99%
The purpose of the above tables is to assist you in understanding
the various costs and expenses that you would bear directly or
indirectly as an investor in the Fund. Management Fees would be
1.00%, Other expenses would be 1.99% and Total
Operating Expenses would be 2.99% without the waivers
of management fees and reimbursement of Fund expenses
by Quest Advisory Corp. ("Quest"), the Fund's
investment adviser. Quest has voluntarily committed to reduce
its management fees and reimburse Fund expenses to the extent
necessary to maintain annual Total Operating Expenses at or
below .99% through December 31, 1997.
The following examples illustrate the expenses that you would
incur on a $1,000 investment over various periods, assuming a 5%
annual rate of return and redemption at the end of each period.
1 Year 3 Years
$10 $32
These examples should not be considered a
representation of past or future expenses or
performance. Actual expenses may be higher or lower
than those shown.
INVESTMENT
PERFORMANCE
Total return is the
change in value over
a given time period,
assuming
reinvestment of
dividends and capital
gains distributions
The Fund may include in communications to current or prospective
shareholders figures reflecting total return over various time periods.
"Total return" is the rate of return on an amount invested in the Fund
from the beginning to the end of the stated period. "Average annual
total return" is the annual compounded percentage change in the value of
an
amount invested in the Fund from the beginning until the end of the
stated period. Total returns are historical measures of past
performance and are not intended to indicate future performance. Total
returns assume the reinvestment of all net investment income
dividends and capital gains distributions. The figures do not
reflect the Fund's early redemption fee because this fee applies
only to redemptions of share purchases held for less than one
year. Additionally, the performance of the Fund may be compared
in publications to i) the performance of various indices and
investments for which reliable performance data is available and
to ii) averages, performance rankings or other information
prepared by recognized mutual fund statistical services.
INVESTMENT
OBJECTIVE
The investment objective of PMF II is long-term capital
appreciation. It seeks to achieve this objective primarily through
investments in common stocks and securities convertible into common
<PAGE>
stocks of small and micro-cap companies. There can be no assurance
that
the Fund will achieve its investment objective.
The Fund's investment objective of long-term capital appreciation
is fundamental and may not be changed without the approval of a
majority of its outstanding voting shares, as that term is
defined in the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT
POLICIES
The Fund invests
on a "value" basis
Quest uses a "value" method in managing the Fund's assets. In
its selection process, Quest puts primary emphasis on the
understanding of various internal returns indicative
of profitability, balance sheet quality, cash flows and the
relationships that these factors have to the price of a given
security.
Quest's value method is based on its belief that the securities of
certain companies may sell at a discount from its estimate of such
companies' "private worth", that is, what a knowledgeable buyer would
pay for the entire company. Quest attempts to identify and
invest in these securities for the Fund, with the expectation that this
"value discount" will narrow over time and thus provide capital
appreciation for the Fund.
The Fund invests
primarily in
small and
micro-cap
companies
The Fund normally invests at least 65% of its assets in the common
stocks, securities
convertible into common stocks and warrants of domestic and foreign
small and micro-cap companies (stock market
capitalizations below $1 billion).
In the upper end of this range, $300 million to $1 billion in stock
market capitalization, the Fund focuses on a limited number of companies
with superior
financial characteristics and/or unusually attractive business
prospects, companies Quest classifies as "premier." The Fund also
focuses on companies in the lower end of the range, below $300
million, the sector known as "micro-cap."
Other securities
The assets of the Fund that are not required to be invested in the equity
securities of domestic and foreign small and micro-cap companies may be
invested in securities of domestic and foreign companies with higher
stock market capitalizations and non-convertible preferred
stocks and debt securities.
INVESTMENT
RISKS
The Fund is subject
to certain investment
risks
As a mutual fund investing primarily in common stocks and/or
securities convertible into common stocks, the Fund is subject to
market risk, that is, the possibility that common stock prices will
decline over short or even extended periods. The Fund will invest
substantial portions of its assets in securities of small and/or
micro-cap companies. Such companies may not be well-known to the
investing public, may not have significant institutional ownership
and may have cyclical, static or only moderate growth prospects. In
addition, the securities of such companies may be more volatile in
price, have wider spreads between their bid and ask prices and have
significantly lower trading volumes than the larger capitalization
stocks included in the S&P 500 Index. Accordingly, Quest's
investment method requires a long-term investment horizon and the
Fund should not be
used to play short-term swings in the market.
In addition, the Fund invests in micro-cap and/or low-priced
securities that are followed by relatively few securities analysts,
with the result that there tends to be less publicly available
information concerning the securities. The securities of these
companies may have limited trading volumes and be subject to more
abrupt or erratic market movements than the securities of larger,
more established companies or the market averages in general, and
Quest may be required to deal with only a few market-makers when
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purchasing and selling these securities. Companies in which the Fund
is likely to invest also may have limited product lines, markets or
financial resources, may lack
management depth and may be more vulnerable to adverse business
or market developments. Thus, the Fund may involve
considerably more risk than a mutual fund investing in the more
liquid equity securities of companies traded on the New York or
American Stock Exchanges.
Up to 25% of the Fund's assets, measured at the time of purchase, may
be invested in foreign securities. American Depositary Receipts
("ADRs") are not subject to this 25% limitation. ADRs are
certificates held in trust by a bank or similar financial institution
evidencing ownership of shares of a foreign-based issuer. Designed
for use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying foreign securities in their national
markets and currencies.
The Fund does not expect to purchase or sell foreign currencies to
hedge against declines in the U.S. dollar or to lock in the value of
the foreign securities it purchases, and its foreign investments may
be adversely affected by changes in foreign currency rates.
Consequently, the risks associated with such investments may be
greater than if the Fund did engage in foreign currency transactions
for hedging purposes. Foreign investments may also be adversely
affected by exchange control regulations, if any, in such foreign
markets, and the Fund's ability to make certain distributions
necessary to maintain eligibility as a regulated investment company
and avoid the imposition of income and excise taxes may to that
extent be limited.
There may be less information available about a foreign company than
a domestic
company; foreign companies may not be subject to accounting,
auditing and reporting standards and requirements comparable to
those applicable to domestic companies; and foreign markets,
brokers and issuers are generally subject to less extensive
government regulation than their domestic counterparts. Foreign
securities may be less liquid and may be subject to greater price
volatility than domestic securities. Foreign brokerage
commissions and custodial fees are generally higher than those in
the United States. Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the
volume of securities transactions, thereby making it difficult to
conduct such transactions. Delays or problems with settlements might
affect the liquidity of the Fund's portfolio. Foreign investments may
also be subject to local economic and political risks, political
instability and possible nationalization of issuers or expropriation of
their assets, which might adversely affect the Fund's ability to
realize on its investment in such securities. Furthermore, some foreign
securities are subject to brokerage taxes levied by foreign
governments, which have the effect of increasing the cost of such
investment and
reducing the realized gain or increasing the realized loss on such
securities at the time of sale.
Income earned or received by the Fund from sources within foreign
countries may be
subject to withholding and other taxes imposed by such countries.
Any such taxes paid by the Fund will reduce its cash available for
distribution to shareholders. The Fund is required to calculate its
distributable income and capital gains for U.S. Federal income tax
purposes by reference to the U.S. dollar. Fluctuations in
applicable foreign currency exchange rates may cause the Fund's
distributable income and capital gains for U.S. Federal income tax
purposes to differ from the value of its investments calculated by
reference to foreign currencies. If the Fund invests in stock of a so-
called passive foreign investment company, the Fund may make certain
elections that will affect the calculation
of its net investment income and capital gains.
<PAGE>
INVESTMENT
LIMITATIONS
The Fund has adopted
certain
fundamental
limitations
The Fund has adopted certain fundamental limitations, designed to
reduce its exposure
to specific situations, which may not be changed without the
approval of a majority of its outstanding voting shares, as that
term is defined in the 1940 Act. These limitations are set forth in
the Statement of Additional Information and provide, among other
things, that the Fund will not:
(a) with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer, excluding obligations of
the U.S. Government;
(b) invest more than 25% of its assets in any one industry; or
(c) invest in companies for the purpose of exercising control of
management.
The 1940 Act contains certain limitations applicable to the Fund's
investments in the securities of a company that is a broker, a
dealer, an underwriter, an investment adviser registered under the
Investment Advisers Act of 1940 or an investment adviser to an
investment company. These limitations are set forth in the
Statement of Additional Information.
Other Investment
Practices
In addition to investing primarily in the equity and fixed
income securities described above, the Fund may follow a number
of additional investment practices.
Restricted and
illiquid securities
The Fund will not invest more than 15% of its net assets in illiquid
securities, including those restricted securities that are illiquid.
Restricted securities are securities which, if publicly sold,
might cause the Fund to be deemed an "underwriter" under the
Securities Act of 1933 (the "1933 Act") or which are subject to
contractual restrictions on resale. Restricted securities which
the Fund may purchase include securities which have not been
registered under the 1933 Act, but are eligible for purchase and
sale pursuant to Rule 144A under the 1933 Act. This Rule
permits certain qualified institutional buyers to trade in privately
placed securities even though such securities are not registered under
the 1933 Act. Investing in Rule 144A securities could have the effect
of increasing the amount of investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such
securities. For more information concerning Rule 144A securities, see
"Investment Policies and Restrictions " in the Statement of Additional
Information.
Short-term fixed
income securities
The Fund may invest in short-term fixed income securities for
temporary defensive purposes, to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities consist of United States Treasury
bills, domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements collateralized by
U.S. Government securities. In a repurchase agreement, a
bank sells a security to the Fund at one price and agrees to repurchase
it at the Fund's cost plus interest within a specified period of seven
or fewer days. In these transactions, which are, in effect, secured
loans by the Fund, the securities purchased by the Fund will have a
value equal to or in excess of the value of the repurchase agreement
and will be held by the Fund's custodian bank until repurchased.
Should the Fund implement a
temporary investment policy, its investment objective may not be
achieved.
Securities lending
The Fund may lend up to 25% of its assets to qualified
institutional investors for the purpose of realizing additional
income. Loans of securities of the
Fund will be
collateralized by cash or securities issued or guaranteed by the
United States Government
<PAGE>
or its agencies or instrumentalities. The collateral will equal at least
100% of the current market value of the loaned securities. The risks of
securities lending include possible delays in receiving additional
collateral or in recovery of loaned securities or loss of rights in the
collateral if the borrower defaults or becomes insolvent.
Lower-rated debt securities
The Fund may invest no more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities, which are below investment
grade. The Fund does not expect to invest in debt securities that are
rated lower than Caa by Moody's Investors Service,
Inc. or CCC by Standard & Poor's Corp. or, if unrated, determined to be
of comparable quality.
Warrants, rights and
options
The Fund may invest up to 5% of its total assets in
warrants, rights and options.
Portfolio turnover
Although the Fund generally seeks to invest for the long term, it
retains the right to sell securities regardless of how long they have
been held. The Fund's annual portfolio turnover rate may exceed
100%, which is higher than that of other funds. A 100%
turnover rate occurs, for example, if all of the Fund's portfolio
securities are replaced in one year. High portfolio activity
increases the Fund's transaction costs, including brokerage
commissions.
MANAGEMENT OF
THE TRUST
Quest Advisory Corp.
is responsible for
management of the
Fund's portfolio
The Trust's business and affairs are managed under the direction of
its Board of Trustees. Quest, the Fund's investment adviser, is
responsible for the management of the Fund's portfolio, subject to
the authority of the Board of Trustees. Quest was organized in 1967
and has been the Fund's adviser since its inception. Charles M.
Royce, Quest's President, Chief Investment Officer and sole voting
shareholder since 1972, is primarily responsible for supervising
Quest's investment management activities. Mr. Royce is assisted by
Jack E. Fockler, Jr. and W. Whitney George, Vice Presidents of Quest,
both of whom
participate in its investment management activities, with their
specific responsibilities varying from time to time. Quest is also
the investment adviser to Pennsylvania Mutual, Royce Premier, Micro-
Cap, Equity Income, Low-Priced Stock, Total Return, Global Services,
Value, GiftShares and Financial Services Funds, which are other
series of the Trust, and to other investment and non-investment
company accounts.
As compensation for its services to the Fund, Quest is entitled to
receive annual advisory fees of 1.0% of the average net assets of
the Fund. These fees are payable monthly from the assets of the
Fund and are higher than those paid by most other mutual funds with
a similar investment objective.
Quest selects the brokers who execute the purchases and sales of the
Fund's portfolio securities and may place orders with brokers who
provide brokerage and research services to Quest. Quest is
authorized, in recognition of the value of brokerage and research
services provided, to pay commissions to a broker in excess of the
amount which another broker might have charged for the same
transaction.
Quest Distributors, Inc. ("QDI"), which is wholly-owned by Charles
M. Royce, acts as distributor of the Fund's shares.
<PAGE>
GENERAL
INFORMATION
The Royce Fund (the "Trust") is a Delaware business trust,
registered with the Securities and Exchange Commission as a
diversified open-end management investment company.
It is the successor to a Massachusetts business trust established in
October 1985 and merged into the Trust in June 1996. The Trustees
have the authority to issue an unlimited number of shares of
beneficial interest, without shareholder approval, and these shares
may be divided into an unlimited number of series and classes.
Shareholders are entitled to one vote per share. Shares vote by
individual series on all matters, except that shares are voted in
the aggregate and not by individual series when required by the 1940
Act and
that if the Trustees determine that a matter affects only one series,
then only shareholders of that series are entitled to vote on that
matter.
Meetings of shareholders will not be held except as required by the
1940 Act or other applicable law. A meeting will be held to vote on
the removal of a Trustee or Trustees
of the Trust if requested in writing by the holders of not less than
10% of the outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the Fund
is State Street Bank and Trust Company. State Street, through its
agent National Financial Data Services ("NFDS"), also serves as the
Fund's transfer agent. Coopers & Lybrand, L.L.P. serves
as independent accountants for the Fund.
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
The Fund pays
dividends and capital
gains annually in
December
The Fund pays dividends from net investment income (if any) and
distributes its net realized capital gains annually in December.
Dividends and distributions will be automatically reinvested in
additional shares of the Fund unless the shareholder chooses
otherwise.
Shareholders receive information annually as to the tax status of
distributions made by the Fund for the calendar year. For Federal
income tax purposes, all distributions by the Fund are taxable to
shareholders when declared, whether received in cash or reinvested
in shares. Distributions paid from the Fund's net investment income
and short-term capital gains are taxable to shareholders as ordinary
income dividends. A portion of the Fund's dividends may qualify for
the corporate dividends received deduction, subject to certain
limitations. The portion of the Fund's dividends qualifying for
such deduction is generally limited to the aggregate taxable
dividends received by the Fund from domestic corporations.
Distributions paid from long-term capital gains of the Fund are
treated by a shareholder for Federal income tax purposes as long-
term capital gains, regardless of how long the shareholder has held
Fund shares. If a shareholder disposes of shares held for six
months or less at a loss, such loss is treated as a long-term capital
loss to the extent of any long-term capital gains reported by the
shareholder with respect to such shares.
The redemption of shares is a taxable event, and a shareholder may
realize a capital gain
or capital loss. The Fund will report to redeeming shareholders
the proceeds of their redemptions. However, because the tax
consequences of a redemption will also depend
on the shareholder's basis in the redeemed shares for tax purposes,
shareholders should retain their account statements for use in
determining their tax liability on a redemption.
At the time of a shareholder's purchase, the Fund's net asset value
may reflect undistributed income or capital gains. A subsequent
distribution of these amounts by the Fund will be taxable to the
<PAGE>
shareholder even though the distribution economically is a return of
part of the shareholder's investment.
The Fund is required to withhold 31% of taxable dividends, capital
gains distributions and redemptions paid to non-corporate
shareholders who have not complied with Internal Revenue Service
taxpayer identification regulations. Shareholders may avoid this
withholding requirement by certifying on the Account Application
their proper Social Security or Taxpayer Identification Number and
that they are not subject to backup withholding.
The discussion of Federal income taxes above is for general
information only. The Statement of Additional Information includes an
additional description of Federal income tax aspects that may be
relevant to a shareholder. Shareholders may also be subject to state
and local taxes on their investment. Investors should consult their
own tax advisers concerning the tax consequences of an investment in
the Fund.
NET ASSET
VALUE
PER SHARE
Net asset value per
share (NAV) is
determined each day
the New York Stock
Exchange is open
Fund shares are purchased and redeemed at their net asset value per
share next
determined after an order is received by the Fund's transfer agent or
an authorized service agent or sub-agent. Net asset value per share
is determined by dividing the total value of the Fund's investments
and other assets, less any liabilities, by the number of outstanding
shares of the Fund. Net asset value per share is calculated at the
close of regular trading on the New York Stock Exchange on each day
the Exchange is open for business.
In determining net asset value, securities listed on an exchange or
the Nasdaq National Market System are valued on the basis of the last
reported sale price prior to the time the
valuation is made or, if no sale is reported for that day, at their
bid price for exchange-listed securities and at the average of their
bid and ask 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 and supervised by
the Board of Trustees. 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.
<PAGE>
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES
The Fund's shares are offered on a no-load basis. New accounts
(other than IRA or 403(b)(7) accounts) can be opened either by
mail, by telephone or by wire. An Account Application must be
completed and returned, regardless of the method selected. If
you need assistance with the Account Application or have any
questions about the Fund, please call Investor Information at 1-
800-221-4268.
Note: For certain types of account registrations (e.g.,
corporations, partnerships,
foundations, associations, other organizations, trusts or powers of
attorney), please call Investor Information to determine if you need
to provide additional forms with your application.
Type of Account Minimum
Regular accounts $2,000
IRAs * 500
Accounts established with Automatic 500
Investment Plan or Direct Deposit Plan
401(k) and 403(b)(7) accounts * None
* Separate forms must be used for opening IRAs or 403(b)(7) accounts; please
call Investor Information if you need these forms.
Subsequent investments may be made by mail ($50 minimum), telephone ($500
minimum), wire ($1,000 minimum) or Express Service (a
system of electronic funds transfer from your bank
account).
Purchasing By Mail
Complete and sign the
enclosed Account
Application
NEW ACCOUNT
Please
include the amount of your initial investment on the
Account Application,
make your check payable to The Royce
Fund, and mail to:
The Royce Fund
P.O. Box 419012
Kansas City, MO 64141-6012
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-
Mail remittance form attached to
your Fund account confirmation statements. Please
make your check payable to The Royce Fund, write
your account number on your check and, using the
return envelope provided, mail to the address
indicated on the Invest-by-Mail form.
For express or
registered mail,
send to:
The Royce Funds
c/o National Financial Data Services 1004 Baltimore,
5th Floor
Kansas City, MO 64105
All written requests should be mailed to one of the
addresses indicated for new accounts.
<PAGE>
Purchasing By
Telephone
NEW ACCOUNT
To open an account by telephone, you
should call Investor Information (1-800-221-4268) before
4:00 p.m., Eastern time. You will be given a confirming
order number for your purchase. This number
must be placed on your completed
Account Application before mailing. If a completed
and signed Account Application is not received on an
account opened by telephone, the account may be
subject to backup withholding of Federal income
taxes.
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Subsequent telephone purchases ($500
minimum) may also be made by calling Investor
Information. For all telephone purchases, payment
is due within three business days and may be made by
wire or personal, business or bank check, subject to
collection.
Purchasing By Wire
Before Wiring:
For a new account,
please contact Investor
Information at 1-800-221-4268
Money should be wired to:
State Street Bank and Trust Company ABA
011000028 DDA 9904-712-8 Ref: PMF II
Order Number or Account
Number____________________ Account Name
____________________________________
To ensure proper receipt, please be sure your bank includes the
name of the Fund and your order number (for telephone purchases)
or account number. If you are opening a new account, you must
call Investor Information to obtain an order number, and complete
the Account Application and mail it to the "New Account" address
above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the Fund
and its custodian are open for business.
Purchasing By
Express
Service
You can purchase shares automatically or at your discretion
through the following options:
Expedited Purchase Option permits you, at your discretion, to
transfer funds ($100 minimum and $200,000 maximum) from your
bank account to purchase shares in your Royce Fund account by
telephone or computer online access.
Automatic Investment Plan allows you to make regular,
automatic transfers ($50 minimum) from your bank account to
purchase shares in your Royce Fund account on the monthly or
quarterly schedule you select.
To establish the Expedited Purchase Option and/or Automatic
Investment Plan, please provide the appropriate information on
the Account Application and attach a voided
check. We will send you a confirmation of Express Service
activation. Please wait three weeks before using the service.
To make an Expedited Purchase, other than through computer online
access, please call Shareholder Services at 1-800-841-1180 before
4:00 p.m., Eastern time.
Payroll Direct Deposit Plan and Government Direct Deposit Plan let
you have investments ($50 minimum) made from your net payroll or
government check into your existing Royce Fund account each pay
period. Your employer must have direct deposit capabilities
through ACH (Automated Clearing House) available to its employees.
You may terminate participation in these programs by giving
written notice to your employer or government agency, as
appropriate. The Fund is not responsible for the efficiency of
the employer or government agency making the payment or any
financial institution transmitting payments.
<PAGE>
To initiate a Direct Deposit Plan, you must complete an
Authorization for Direct Deposit form which may be obtained from
Investor Information by calling 1-800-221-4268.
CHOOSING A
DISTRIBUTION
OPTION
You may select one of three distribution options:
1. Automatic Reinvestment Option--Both net investment income
dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and
your capital gains
distributions will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains distributions
will be paid in cash.
You may change your option by calling Shareholder Services at 1-800-
841-1180.
IMPORTANT
ACCOUNT
INFORMATION
The easiest way to establish optional services on your account is to
select the options you desire when you complete your Account
Application. If you want to add or change shareholder options later,
you may need to provide additional information and a signature
guarantee. Please call Shareholder Services at 1-800-841-1180 for
further assistance.
Signature Guarantees
For our mutual protection, we may require a signature guarantee on
certain written transaction requests. A signature guarantee verifies
the authenticity of your signature and may be obtained from banks,
brokerage firms and any other guarantor that our transfer agent deems
acceptable. A signature guarantee cannot be provided by a notary
public.
Certificates
Certificates for whole shares will be issued upon request. If a
certificate is lost, stolen or destroyed, you may incur an expense to
replace it.
Purchases Through
Service Providers
If you purchase shares of the Fund through a program of services
offered or administered by a broker-dealer, financial institution
or other service provider, you should read the program materials
provided by the service provider, including information regarding
fees which may be charged, in conjunction with this Prospectus.
Certain shareholder servicing features of the Fund may not be
available or may be modified in connection with the program of
services offered. When shares of the Fund are purchased in this
way, the
service provider, rather than the customer, may be the shareholder of
record of the shares. Certain service providers may receive
compensation from the Fund, QDI and/or Quest
for providing such services.
Telephone and
Online Access
Transactions
Neither the Fund nor its transfer agent will be liable for
following instructions communicated by telephone or computer online
access that are reasonably believed to be genuine. The transfer
agent uses certain procedures designed to confirm that telephone
and computer online access instructions are genuine, which may
include requiring some form of personal identification prior to
acting on the instructions, providing written confirmation of the
transaction and/or recording incoming telephone calls, and if it
does not follow such procedures, the Fund or the transfer agent may
be liable for any losses due to unauthorized or fraudulent
transactions.
Nonpayment
If your check or wire does not clear, or if payment is not received
for any telephone or computer online access purchase, the
transaction will be canceled and you will be responsible for any
loss the Fund incurs. If you are already a shareholder, the Fund
<PAGE>
can redeem shares from any identically registered account in the
Fund as reimbursement for any loss incurred.
Trade Date for
Purchases
Your trade date is the date on which share purchases are
credited to your account. If your purchase is made by check,
Federal Funds wire, telephone, computer online access or
exchange and is received by the close of regular trading on the
New York Stock
Exchange (generally 4:00 p.m., Eastern time), your trade date is the
date of receipt. If your purchase is received after the close of
regular trading on the Exchange, your trade date is the next business
day. Your shares are purchased at the net asset value determined on
your trade date.
In order to prevent lengthy processing delays caused by the clearing
of foreign checks, the Fund will accept only a foreign check which
has been drawn in U.S. dollars and has been issued by a foreign bank
with a United States correspondent bank.
The Trust reserves the right to suspend the offering of Fund shares
to new investors. The Trust also reserves the right to reject any
specific purchase request.
REDEEMING
YOUR
SHARES
You may redeem any portion of your account at any time. You
may request a redemption in writing or by telephone.
Redemption proceeds normally will be sent within two business
days after the receipt of the request in Good Order.
Redeeming By Mail
Redemption requests should be mailed to The Royce Funds,
c/o NFDS, P.O. Box 419012, Kansas City, MO 64141-6012.
(For express or registered mail, send your
request to The Royce Funds, c/o National Financial Data Services,
1004 Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net asset value next
determined after NFDS or an authorized service agent or sub-agent
has received all required documents in Good Order.
Definition of
Good Order
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. Signatures of all owners exactly as they are registered on the
account.
4. Signature guarantees if the value of the shares being redeemed
exceeds $50,000 or if
the payment is to be sent to an address other than the address of
record or is to be
made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be required, in
the case of retirement
plans, corporations, trusts, estates and certain other accounts.
If you have any questions about what is required as it pertains to
your request, please call Shareholder Services at 1-800-841-1180.
Redeeming By
Telephone
Shareholders who have not established Express Service may
redeem up to $50,000 of their Fund shares by telephone,
provided the proceeds are mailed to their address of record.
If pre-approved, higher minimums may apply for institutional
accounts. To redeem shares by telephone, you or your pre-
authorized representative may call Shareholder Services at 1-
800-841-1180. Redemption requests received by telephone prior
to the close of regular trading on the New York Stock Exchange
(generally 4:00
<PAGE>
p.m., Eastern time) are processed on the day of receipt; redemption
requests received by telephone after the close of regular trading on
the Exchange are processed on the business day following receipt.
Telephone redemption service is not available for Trust-sponsored
retirement plan accounts or if certificates are held. Telephone
redemptions will not be permitted for
a period of sixty days after a change in the address of
record. See also "Important Account Information - Telephone
and Online Access Transactions".
Redeeming By
Express
Service
If you select the Express Service Automatic Withdrawal option,
shares will be automatically redeemed from your Fund account and
the proceeds transferred to your bank account according to the
schedule you have selected. You must have at least $25,000 in
your Fund account to establish the Automatic Withdrawal option.
The Expedited Redemption option lets you redeem up to $50,000 of
shares from your Fund account by telephone and transfer the
proceeds directly to your bank account. You
may elect Express Service on the Account Application or call
Shareholder Services at 1-800-841-1180 for an
Express Service application.
Important
Redemption
Information
If you are redeeming shares recently purchased by check, Express
Service Expedited Purchase or Automatic Investment Plan, the
proceeds of the redemption may not be sent until payment for the
purchase is collected, which may take up to fifteen calendar days.
Otherwise, redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption
request may be made by regular or express mail. It will be
processed at the net asset value next determined after your request
has been received by the transfer agent in Good Order. The Trust
reserves the right to revise or terminate the telephone redemption
privilege at any time.
The Trust may suspend the redemption right or postpone payment at
times when the New York Stock Exchange is closed or under any
emergency circumstances as determined by
the Securities and Exchange Commission.
Although the Trust will normally make redemptions in cash, it
may cause the Fund to redeem in kind under certain
circumstances.
Early Redemption
Fee
In order to discourage short-term trading, the Fund assesses an
early redemption fee of 1% on redemptions of share purchases held
for less than one year. Redemption fees will be paid to the Fund,
out of the redemption proceeds otherwise payable to the
shareholder, to help offset transaction costs.
The Fund will use the "first-in, first-out" (FIFO) method to
determine the one-year holding period. Under this method, the date
of the redemption will be compared with the
earliest purchase date of the share purchases held in the account.
If this holding period
is less than one year, the fee will be assessed. In determining "one
year, the Fund will use the anniversary month of a transaction. Thus,
shares purchased in October 1996, for example, will be subject to the
fee if they are redeemed prior to October 1997. If they are redeemed
on or after October 1, 1997, they will not be subject to the fee.
<PAGE>
No redemption fee will be payable on shares acquired through
reinvestment, on an exchange into another Royce Fund or by
shareholders who are (a) employees of the Trust or Quest or
members of their immediate families or employee benefit plans for
them, (b) current participants in an Automatic Investment Plan or
an Automatic Withdrawal Plan, (c) certain Trust-approved Group
Investment Plans and charitable organizations, (d) profit-sharing
trusts, corporations or other institutional investors who are
investment
advisory clients of Quest or (e) omnibus or similar account customers
of certain Trust-approved broker-dealers
and other institutions.
Minimum Account
Balance
Requirement
Due to the relatively high cost of maintaining smaller accounts, the
Trust reserves the right to involuntarily redeem shares in any Fund
account that falls below the minimum initial investment due to
redemptions by the shareholder. If at any time the balance in an
account does not have a value at least equal to the minimum initial
investment or, if an Automatic Investment Plan is discontinued before
an account reaches the minimum initial investment that would
otherwise be required, you may be notified that the value of your
account is below the Fund's minimum account balance requirement. You
would then
have sixty days to increase your account balance before the
account is liquidated. Proceeds would be promptly paid to the
shareholder.
EXCHANGE
PRIVILEGE
Exchanges between series of the Trust and with other open-end
Royce funds are permitted by telephone, computer online access
or mail. An exchange is treated as a redemption and purchase;
therefore, you could realize a taxable gain or loss on the
transaction. Exchanges are accepted only if the registrations and
the tax identification numbers of the two accounts are identical.
Minimum investment requirements must be
met when opening a new account by exchange, and exchanges may be made
only for
shares of a series or fund then offering its shares for sale in your
state of residence. The Trust reserves the right to revise or
terminate the exchange privilege at any time.
TRANSFERRING
OWNERSHIP
You may transfer the ownership of any of your Fund shares to
another person by writing to: The Royce Funds, c/o NFDS, P.O.
Box 419012, Kansas City, MO 64141-6012. The request must be in
Good Order (see "Redeeming Your Shares - Definition of Good
Order"). Before mailing your request, please contact Shareholder
Services (1-800-841-1180)
for full instructions.
OTHER SERVICES
For more information about any of these services, please call Investor
Information at 1-800-221-4268.
Statements and
Reports
A confirmation statement will be sent to you each time you have
a transaction in your account and semi-annually. PMF II
reports are mailed semi-annually. To reduce expenses, only one
copy of most shareholder reports may be mailed to a household.
Please call Investor Information if you need additional copies.
Tax-sheltered
Retirement Plans
Shares of the Fund are available for purchase in connection with
certain types of tax-sheltered retirement plans, including Individual
Retirement Accounts (IRA's) for individuals and 403(b)(7) Plans for
employees of certain tax-exempt organizations.
These plans should be established with the Trust only after an investor
has consulted with
a tax adviser or attorney. Information about the plans and the
appropriate forms may be obtained from Investor Information at 1-
800-221-4268.
<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
Investment Adviser
Quest Advisory Corp.
1414 Avenue of the Americas
New York, NY 10019
Distributor
Quest Distributors, Inc.
1414 Avenue of the Americas
New York, NY 10019
Transfer Agent
State Street Bank and Trust Company c/o National
Financial Data Services P.O. Box 419012
Kansas City, MO 64141-6012 1-800-841-1180
Custodian
State Street Bank and Trust Company P.O. Box 1713
Boston, MA 02105
Officers
Charles M. Royce, President and Treasurer Thomas R.
Ebright, Vice President
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President Daniel A. O'Byrne,
Vice President and
Assistant Secretary
John E. Denneen, Secretary
The Royce Funds
PMF II
A No-Load Mutual Fund
Prospectus November 1, 1996
<PAGE>
The Royce Funds
Royce Financial Services Fund PROSPECTUS -- November
1, 1996
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-
800-221-4268 SHAREHOLDER SERVICES -- 1-800-841-1180 INVESTMENT
ADVISOR SERVICES -- 1-800-33-ROYCE
INVESTMENT
OBJECTIVE AND
POLICIES
Royce Financial Services Fund (the "Fund") seeks long-term capital
appreciation by investing primarily in common stocks and securities
convertible into common stocks of companies principally engaged in the
financial services business sector. The Fund's securities are selected on a
value basis. There can be no assurance that the Fund will achieve its
objective.
The Fund is a no-load series of The Royce Fund (the "Trust"), a diversified
open-end management investment company. The Trust is currently offering
shares of twelve series. This Prospectus relates to Royce Financial
Services Fund only.
ABOUT THIS
PROSPECTUS
This Prospectus sets forth concisely the information that you should know
about the Fund before you invest. It should be retained for future
reference. A "Statement of Additional Information,"
containing further information about the Fund and the Trust, has been filed
with the Securities and Exchange Commission. The Statement is dated November
1, 1996 and has been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Trust or calling Investor
Information.
If you are viewing the electronic version of this Prospectus through an on-
line computer service, you may request a printed version free of charge by
calling Investor Information. The E-mail address for The Royce Funds is
[email protected] and the Internet Home Page is
http://www.roycefunds.com
TABLE OF CONTENTS
Page
Fund Expenses. . . . . . . 2
Investment Performance . . . 3
Investment Objective . . . . 3
Investment Policies. . . . . 3
Investment Risks . . . . . . 4
Investment Limitations . . . 5
Management of the Trust . . 7
General Information. . . . . 7
Dividends, Distributions and Taxes . . 8
NetAsset Value Per Share. . 9
Page
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares . . . . 10
Choosing a Distribution Option . . . . 12
Important Account Information. . . 12
Redeeming Your Shares. . . . 13
Exchange Privilege . . . . . 15
Transferring Ownership . . . 15
Other Services . . . . . . . 15
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES
The Fund is
no-load and no
12b-1 fees are
being charged
The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends. . .
. . . . None
Deferred Sales Load . . . . . . . . . . . . . .
. . . . None
Redemption Fee -- on share purchases held for 1
year or more. . . None
Early Redemption Fee -- on share purchases held for less
than 1 year 1%
Annual Fund Operating Expenses
Management Fees (after waivers) . . . . . .00%
12b-1 Fees (after waivers). . . . . . . . .00%
Other Expenses. . . . . . . . . . . . . . 1.99%
Total Operating Expenses. . . . . . . . . 1.99%
The purpose of the above tables is to assist you in understanding
the various costs and expenses that you would bear directly or
indirectly as an investor in the Fund. Management Fees would be
1.00%, 12b-1 fees would be .25% and
Total Operating
Expenses would be 3.22% without the waivers of management fees by
Quest Advisory Corp. ("Quest"), the Fund's investment adviser,
and of the 12b-1 fees by Quest Distributors, Inc. ("QDI"), the
Fund's distributor. Quest has voluntarily committed to reduce
its management fees to the extent necessary to maintain annual
Total Operating Expenses at or below 1.99% through December 31,
1997.
The following examples illustrate the expenses that you would
incur on a $1,000 investment over various periods, assuming a 5%
annual rate of return and redemption at the end of each period.
1 Year 3 Years
$20 $62
These examples should not be considered a
representation of past or future expenses or
performance. Actual expenses may be higher or lower
than those shown.
<PAGE>
INVESTMENT
PERFORMANCE
Total return is the
change in value over
a given time period,
assuming
reinvestment of
dividends and capital
gains distributions
The Fund may include in communications to current or prospective
shareholders figures reflecting total return over various time periods.
"Total return" is the rate of return on an amount invested in the Fund
from the beginning to the end of the stated period. "Average annual
total return" is the annual compounded percentage change in the value of
an
amount invested in the Fund from the beginning until the end of the
stated period. Total returns are historical measures of past
performance and are not intended to indicate future performance. Total
returns assume the reinvestment of all net investment income
dividends and capital gains distributions. The figures do not
reflect the Fund's early redemption fee because this fee applies
only to redemptions of share purchases held for less than one
year. Additionally, the performance of the Fund may be compared
in publications to i) the performance of various indices and
investments for which reliable performance data is available and
to ii) averages, performance rankings or other information
prepared by recognized mutual fund statistical services.
INVESTMENT
OBJECTIVE
Royce Financial Services Fund's investment objective is long-term
capital appreciation. It seeks to achieve this objective primarily
through investments in common stocks and securities convertible
into common stocks of companies principally engaged in the
financial services business sector. There can be no assurance that
the Fund will achieve its investment objective.
The Fund's investment objective of long-term capital appreciation
is fundamental and may not be changed without the approval of a
majority of its outstanding voting shares, as that term is defined
in the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT
POLICIES
The Fund invests
on a "value" basis
Quest uses a "value" method in managing the Fund's assets. In
its selection process, Quest puts primary emphasis on the
understanding of various internal returns indicative
of profitability, balance sheet quality, cash flows and the
relationships that these factors have to the price of a given
security.
Quest's value method is based on its belief that the securities of
certain companies may sell at a discount from its estimate of such
companies' "private worth", that is, what a knowledgeable buyer would
pay for the entire company. Quest attempts to identify and
invest in these securities for the Fund, with the expectation that this
"value discount" will narrow over time and thus provide capital
appreciation for the Fund.
The Fund invests
primarily in
financial services
companies
The Fund normally invests at least 65% of its assets in the common
stocks, securities convertible into common stocks and warrants of
domestic and foreign companies "principally" engaged in the
financial services business sector. The financial services business
sector may include: commercial and industrial banks, savings and
loan associations, consumer and industrial finance, leasing,
insurance, securities brokerage, investment management, companies
that serve these industries, and other industries as Quest may from
time to time determine to be in the financial services business
sector. For these purposes, a company is deemed to be principally
engaged in the financial services business sector if at least 50% of
its consolidated assets, revenues or net income are committed to, or
are derived from, financial services-related activities, or if,
based on available financial information, a question exists whether
a company meets one of these standards, Quest determines that the
company's principal activities are within the financial services
business sector.
<PAGE>
Other securities
The assets of the Fund that are not required to be invested in the
equity securities of domestic and foreign companies principally
engaged in the financial services business sector may be invested
in the common stocks, securities convertible into common stocks and
warrants of domestic and foreign companies engaged in non-financial
services industries and/or in the non-convertible preferred stocks
and debt securities of domestic and foreign companies engaged in
service or non-service industries.
Other investment
companies
The Fund may also indirectly invest in the securities of domestic
and foreign service and non-service companies by investing up to
20% of its assets in the securities of other investment companies
that invest primarily in such companies. The other investment
companies in which the Fund may invest may be domestic companies
registered under the 1940 Act or foreign companies that are not so
registered or otherwise regulated. They usually have their own
management fees and expenses, and Quest will also earn its fee on
Fund assets invested in such other companies, which would result in
a duplication of
fees to the extent of any such investment. However, Quest will
waive its management fee on any Fund assets invested in other open-
end investment companies, and no sales charge will be incurred on
such an investment.
INVESTMENT
RISKS
The Fund is subject
to certain investment
risks
As a mutual fund investing primarily in common stocks and
securities convertible into common stocks, the Fund is subject to
market risk -- that is, the possibility that common stock prices
will decline over short or even extended periods. Because of
Quest's value method, the Fund may invest in securities of
companies that have cyclical, static or only moderate growth
prospects. Quest's investment method requires a long-term
investment horizon, and the Fund should not be used to play short-
term swings in the market or as a complete investment program.
Financial service
companies are subject
to certain risks
Many financial services industries are subject to extensive
governmental regulation. This may limit both the amounts and
types of loans and other financial commitments that banks, broker-
dealers and insurance companies are permitted to make, and, in
the case of banks and insurance companies, the interest, fees and
premiums they are permitted to
charge. Insurance companies are particularly subject to rate
setting, potential anti-trust and tax law changes and industry-wide
pricing and competition cycles and may be
affected by catastrophes and/or reinsurance carrier failures. Also,
the profitability of many types of financial service companies is
largely dependent on the availability and cost of capital funds and
may fluctuate significantly when interest rates change. General
economic conditions are important to the operation of most financial
services companies, and credit losses resulting from financial
difficulties of borrowers may negatively impact some of them.
Changes in regulations, brokerage commission structure and securities
market activities, together with the leverage and trading strategies
employed by broker-dealers and investment banks, may produce erratic
returns for
them over time. Finally, most types of financial services companies
are subject to substantial price and other
competition.
Prices of the securities of domestic and foreign financial services
companies may be more
volatile than those of more broadly diversified investments, and the
Fund's performance will be tied to the financial services business
sector in particular and the United States and world economies in
general. The securities of financial services companies may react
similarly to market conditions.
Foreign securities
Up to 25% of the Fund's assets, measured at the time of purchase, may
be invested in foreign securities. American Depositary Receipts
("ADRs") are not subject to this 25% limitation. ADRs are
<PAGE>
certificates held in trust by a bank or similar financial institution
evidencing ownership of shares of a foreign-based issuer. Designed
for use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying foreign securities in their national
markets and currencies.
The Fund does not expect to purchase or sell foreign currencies to
hedge against declines in the U.S. dollar or to lock in the value of
the foreign securities it purchases, and its foreign investments may
be adversely affected by changes in foreign currency rates.
Consequently, the risks associated with such investments may be
greater than if the Fund did engage in foreign currency transactions
for hedging purposes. Foreign investments may also be adversely
affected by exchange control regulations, if any, in such foreign
markets, and the Fund's ability to make certain distributions
necessary to maintain eligibility as a regulated investment company
and avoid the imposition of income and excise taxes may to that
extent be limited.
There may be less information available about a foreign company than
a domestic
company; foreign companies may not be subject to accounting,
auditing and reporting standards and requirements comparable to
those applicable to domestic companies; and foreign markets,
brokers and issuers are generally subject to less extensive
government regulation than their domestic counterparts. Foreign
securities may be less liquid and may be subject to greater price
volatility than domestic securities. Foreign brokerage
commissions and custodial fees are generally higher than those in
the United States. Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the
volume of securities transactions, thereby making it difficult to
conduct such transactions. Delays or problems with settlements might
affect the liquidity of the Fund's portfolio. Foreign investments may
also be subject to local economic and political risks, political
instability and possible nationalization of issuers or expropriation of
their assets, which might adversely affect the Fund's ability to
realize on its investment in such securities. Furthermore, some foreign
securities are subject to brokerage taxes levied by foreign
governments, which have the effect of increasing the cost of such
investment and
reducing the realized gain or increasing the realized loss on such
securities at the time of sale.
Income earned or received by the Fund from sources within foreign
countries may be
subject to withholding and other taxes imposed by such countries.
Any such taxes paid by the Fund will reduce its cash available for
distribution to shareholders. The Fund is required to calculate its
distributable income and capital gains for U.S. Federal income tax
purposes by reference to the U.S. dollar. Fluctuations in
applicable foreign currency exchange rates may cause the Fund's
distributable income and capital gains for U.S. Federal income tax
purposes to differ from the value of its investments calculated by
reference to foreign currencies. If the Fund invests in stock of a so-
called passive foreign investment company, the Fund may make certain
elections that will affect the calculation
of its net investment income and capital gains.
INVESTMENT
LIMITATIONS
The Fund has adopted
certain
fundamental
limitations
The Fund has adopted certain fundamental limitations, designed to
reduce its exposure
to specific situations, which may not be changed without the approval
of a majority of its outstanding voting shares, as that term is
defined in the 1940 Act. These limitations are
<PAGE>
set forth in the Statement of Additional Information and provide,
among other things, that the Fund will not:
(a) with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer, excluding obligations of
the U.S. Government;
(b) invest more than 25% of its assets in any one industry; or
(c) invest in companies for the purpose of exercising control of
management.
The 1940 Act contains certain limitations applicable to the Fund's
investments in the securities of a company that is a broker, a
dealer, an underwriter, an investment adviser registered under the
Investment Advisers Act of 1940 or an investment adviser to an
investment company. These limitations are set forth in the
Statement of Additional Information.
Other Investment
Practices
In addition to investing primarily in the equity and fixed
income securities described above, the Fund may follow a number
of additional investment practices.
Restricted and
illiquid securities
The Fund will not invest more than 15% of its net assets in illiquid
securities, including those restricted securities that are illiquid.
Restricted securities are securities which, if publicly sold,
might cause the Fund to be deemed an "underwriter" under the
Securities Act of 1933 (the "1933 Act") or which are subject to
contractual restrictions on resale. Restricted securities which
the Fund may purchase include securities which have not been
registered under the 1933 Act, but are eligible for purchase and
sale pursuant to Rule 144A under the 1933 Act. This Rule
permits certain qualified institutional buyers to trade in privately
placed securities even though such securities are not registered under
the 1933 Act. Investing in Rule 144A securities could have the effect
of increasing the amount of investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such
securities. For more information concerning Rule 144A securities, see
"Investment Policies and Restrictions " in the Statement of Additional
Information.
Short-term fixed
income securities
The Fund may invest in short-term fixed income securities for
temporary defensive purposes, to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities consist of United States Treasury
bills, domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements collateralized by
U.S. Government securities. In a repurchase agreement, a
bank sells a security to the Fund at one price and agrees to repurchase
it at the Fund's cost plus interest within a specified period of seven
or fewer days. In these transactions, which are, in effect, secured
loans by the Fund, the securities purchased by the Fund will have a
value equal to or in excess of the value of the repurchase agreement
and will be held by the Fund's custodian bank until repurchased.
Should the Fund implement a
temporary investment policy, its investment objective may not be
achieved.
Securities lending
The Fund may lend up to 25% of its assets to qualified
institutional investors for the purpose of realizing additional
income. Loans of securities of the
Fund will be
collateralized by cash or securities issued or guaranteed by the
United States Government
or its agencies or instrumentalities. The collateral will equal at least
100% of the current market value of the loaned securities. The risks of
securities lending include possible delays in receiving additional
collateral or in recovery of loaned securities or loss of rights in the
collateral if the borrower defaults or becomes insolvent.
<PAGE>
Lower-rated
debt securities
The Fund may invest no more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities, which are below investment
grade.
The Fund does not expect to invest in debt securities that are rated
lower than Caa by Moody's Investors Service,
Inc. or CCC by Standard & Poor's Corp. or, if unrated, determined to
be of comparable
quality.
Warrants, rights
and options
The Fund may invest up to 5% of its total assets in
warrants, rights and options.
Portfolio turnover
Although the Fund generally seeks to invest for the long term, it
retains the right to sell securities regardless of how long they have
been held. The Fund's annual portfolio turnover rate may exceed
100%, which is higher than that of other funds. A 100%
turnover rate occurs, for example, if all of the Fund's portfolio
securities are replaced in one year. High portfolio activity
increases the Fund's transaction costs, including brokerage
commissions.
MANAGEMENT OF
THE TRUST
Quest Advisory Corp.
is responsible for
management of the
Fund's portfolio
The Trust's business and affairs are managed under the direction of
its Board of Trustees. Quest, the Fund's investment adviser, is
responsible for the management of the Fund's portfolio, subject to
the authority of the Board of Trustees. Quest was organized in 1967
and has been the Fund's adviser since its inception. Charles M.
Royce, Quest's President, Chief Investment Officer and sole voting
shareholder since 1972, is primarily responsible for supervising
Quest's investment management activities. Mr. Royce is assisted by
Jack E. Fockler, Jr. and W. Whitney George, Vice Presidents of Quest,
both of whom
participate in its investment management activities, with their
specific responsibilities varying from time to time. Quest is also
the investment adviser to Pennsylvania Mutual, Royce Premier, Micro-
Cap, Equity Income, Low-Priced Stock, Total Return, Global Services,
Value and GiftShares Funds and PMF II, which are other series of the
Trust,
and to other investment and non-investment company accounts.
As compensation for its services to the Fund, Quest is entitled to
receive annual advisory fees of 1.0% of the average net assets of
the Fund. These fees are payable monthly from the assets of the
Fund and are higher than those paid by most other mutual funds with
a similar investment objective.
Quest selects the brokers who execute the purchases and sales of the
Fund's portfolio securities and may place orders with brokers who
provide brokerage and research services to Quest. Quest is
authorized, in recognition of the value of brokerage and research
services provided, to pay commissions to a broker in excess of the
amount which another broker might have charged for the same
transaction.
Quest Distributors, Inc. ("QDI"), which is wholly-owned by Charles
M. Royce, acts as distributor of the Fund's shares. The Trust has
adopted a distribution plan for the Fund pursuant to Rule 12b-1.
The plan provides for payment to QDI of .25% per annum of
the average net assets of the Fund, which may be used for
payment of sales commissions and other fees to those who
introduce investors to the Fund and for various other
promotional, sales-related and servicing costs and expenses.
QDI has voluntarily committed to waive its fees through April
30, 1997.
GENERAL
INFORMATION
The Royce Fund (the "Trust") is a Delaware business trust,
registered with the Securities and Exchange Commission as a
diversified open-end management investment company.
<PAGE>
It is the successor to a Massachusetts business trust established in
October 1985 and merged into the Trust in June 1996. The Trustees
have the authority to issue an unlimited number of shares of
beneficial interest, without shareholder approval, and these shares
may be divided into an unlimited number of series and classes.
Shareholders are entitled to one vote per share. Shares vote by
individual series on all matters, except that shares are voted in
the aggregate and not by individual series when required by the 1940
Act and
that if the Trustees determine that a matter affects only one series,
then only shareholders of that series are entitled to vote on that
matter.
Meetings of shareholders will not be held except as required by the
1940 Act or other applicable law. A meeting will be held to vote on
the removal of a Trustee or Trustees
of the Trust if requested in writing by the holders of not less than
10% of the outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the Fund
is State Street Bank and Trust Company. State Street, through its
agent National Financial Data Services ("NFDS"), also serves as the
Fund's transfer agent. Coopers & Lybrand, L.L.P. serves
as independent accountants for the Fund.
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
The Fund pays
dividends and capital
gains annually in
December
The Fund pays dividends from net investment income (if any) and
distributes its net realized capital gains annually in December.
Dividends and distributions will be automatically reinvested in
additional shares of the Fund unless the shareholder chooses
otherwise.
Shareholders receive information annually as to the tax status of
distributions made by the Fund for the calendar year. For Federal
income tax purposes, all distributions by the Fund are taxable to
shareholders when declared, whether received in cash or reinvested
in shares. Distributions paid from the Fund's net investment income
and short-term capital gains are taxable to shareholders as ordinary
income dividends. A portion of the Fund's dividends may qualify for
the corporate dividends received deduction, subject to certain
limitations. The portion of the Fund's dividends qualifying for
such deduction is generally limited to the aggregate taxable
dividends received by the Fund from domestic corporations.
Distributions paid from long-term capital gains of the Fund are
treated by a shareholder for Federal income tax purposes as long-
term capital gains, regardless of how long the shareholder has held
Fund shares. If a shareholder disposes of shares held for six
months
or less at a loss, such loss is treated as a long-term capital loss
to the extent of any long-term capital gains reported by the
shareholder with
respect to such shares.
The redemption of shares is a taxable event, and a shareholder may
realize a capital gain
or capital loss. The Fund will report to redeeming shareholders
the proceeds of their redemptions. However, because the tax
consequences of a redemption will also depend
on the shareholder's basis in the redeemed shares for tax purposes,
shareholders should retain their account statements for use in
determining their tax liability on a redemption.
At the time of a shareholder's purchase, the Fund's net asset value
may reflect undistributed income or capital gains. A subsequent
distribution of these amounts by the Fund will be taxable to the
shareholder even though the distribution economically is a return of
part of the shareholder's investment.
The Fund is required to withhold 31% of taxable dividends, capital
<PAGE>
gains distributions and redemptions paid to non-corporate
shareholders who have not complied with Internal Revenue Service
taxpayer identification regulations. Shareholders may avoid this
withholding requirement by certifying on the Account Application
their proper Social Security or Taxpayer Identification Number and
that they are not subject to backup withholding.
The discussion of Federal income taxes above is for general
information only. The Statement of Additional Information includes an
additional description of Federal income tax aspects that may be
relevant to a shareholder. Shareholders may also be subject to state
and local taxes on their investment. Investors should consult their
own tax advisers concerning the tax consequences of an investment in
the Fund.
NET ASSET VALUE
PER SHARE
Net asset value per
share (NAV) is
determined each day
the New York Stock
Exchange is open
Fund shares are purchased and redeemed at their net asset value per
share next
determined after an order is received by the Fund's transfer agent or
an authorized service agent or sub-agent. Net asset value per share
is determined by dividing the total value of the Fund's investments
and other assets, less any liabilities, by the number of outstanding
shares of the Fund. Net asset value per share is calculated at the
close of regular trading on the New York Stock Exchange on each day
the Exchange is open for business.
In determining net asset value, securities listed on an exchange or
the Nasdaq National Market System are valued on the basis of the last
reported sale price prior to the time the
valuation is made or, if no sale is reported for that day, at their
bid price for exchange-listed securities and at the average of their
bid and ask 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 and supervised by
the Board of Trustees. 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.
<PAGE>
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES
The Fund's shares are offered on a no-load basis. New accounts
(other than IRA or 403(b)(7) accounts) can be opened either by
mail, by telephone or by wire. An Account Application must be
completed and returned, regardless of the method selected. If
you need assistance with the Account Application or have any
questions about the Fund, please call Investor Information at 1-
800-221-4268. Note: For certain types of account registrations
(e.g., corporations, partnerships, foundations, associations,
other
organizations, trusts or powers of attorney), please call Investor
Information to determine if you need to provide additional forms with
your application.
Type of Account Minimum
Regular accounts $2,000
IRAs * 500
Accounts established with Automatic 500
Investment Plan or Direct Deposit Plan
401(k) and 403(b)(7) accounts * None
* Separate forms must be used for opening IRAs or 403(b)(7) accounts; please
call Investor Information if you need these forms.
Subsequent investments may be made by mail ($50 minimum), telephone ($500
minimum), wire ($1,000 minimum) or Express Service (a
system of electronic funds transfer from your bank
account).
Purchasing By Mail
Complete and sign the
enclosed Account
Application
NEW ACCOUNT
Please
include the amount of your initial investment on the
Account Application,
make your check payable to The Royce
Fund, and mail to:
The Royce Fund
P.O. Box 419012
Kansas City, MO 64141-6012
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-
Mail remittance form attached to
your Fund account confirmation statements. Please
make your check payable to The Royce Fund, write
your account number on your check and, using the
return envelope provided, mail to the address
indicated on the Invest-by-Mail form.
For express or
registered mail,
send to:
The Royce Funds
c/o National Financial Data Services 1004 Baltimore,
5th Floor
Kansas City, MO 64105
All written requests should be mailed to one of the
addresses indicated for new accounts.
<PAGE>
Purchasing By
Telephone
NEW ACCOUNT
To open an account by telephone, you
should call Investor Information (1-800-221-4268) before
4:00 p.m., Eastern time. You will be given a confirming
order
number for your purchase. This number
must be placed on your completed
Account Application before mailing. If a completed
and signed Account Application is not received on an
account opened by telephone, the account may be
subject to backup withholding of Federal income
taxes.
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Subsequent telephone purchases ($500
minimum) may also be made by calling Investor
Information. For all telephone purchases, payment
is due within three business days and may be made by
wire or personal, business or bank check, subject to
collection.
Purchasing By Wire
Before Wiring:
For a new account,
please contact Investor
Information at 1-800-221-4268
Money should be wired to:
State Street Bank and Trust Company ABA
011000028 DDA 9904-712-8 Ref: Royce
Financial Services Fund
Order Number or Account Number____________________
Account Name ____________________________________
To ensure proper receipt, please be sure your bank includes the
name of the Fund and your order number (for telephone purchases)
or account number. If you are opening a new account, you must
call Investor Information to obtain an order number, and complete
the Account Application and mail it to the "New Account" address
above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the Fund
and its custodian are open for business.
Purchasing By
Express
Service
You can purchase shares automatically or at your discretion
through the following options:
Expedited Purchase Option permits you, at your discretion, to
transfer funds ($100 minimum and $200,000 maximum) from your
bank account to purchase shares in your Royce Fund account by
telephone or computer online access.
Automatic Investment Plan allows you to make regular,
automatic transfers ($50 minimum) from your bank account to
purchase shares in your Royce Fund account on the monthly or
quarterly schedule you select.
To establish the Expedited Purchase Option and/or Automatic
Investment Plan, please provide the appropriate information on
the Account Application and attach a voided
check. We will send you a confirmation of Express Service
activation. Please wait three weeks before using the service.
To make an Expedited Purchase, other than through computer online
access, please call Shareholder Services at 1-800-841-1180 before
4:00 p.m., Eastern time.
Payroll Direct Deposit Plan and Government Direct Deposit Plan let
you have investments ($50 minimum) made from your net payroll or
government check into your existing Royce Fund account each pay
period. Your employer must have direct deposit capabilities
<PAGE>
through ACH (Automated Clearing House) available to its employees.
You may terminate participation in these programs by giving
written notice to your employer or government agency, as
appropriate. The Fund is not responsible for the efficiency of
the employer or government agency making the payment or any
financial institution transmitting payments.
To initiate a Direct Deposit Plan, you must complete an
Authorization for Direct Deposit form which may be obtained from
Investor Information by calling 1-800-221-4268.
CHOOSING A
DISTRIBUTION
OPTION
You may select one of three distribution options:
1. Automatic Reinvestment Option--Both net investment income
dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and
your capital gains
distributions will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains distributions
will be paid in cash.
You may change your option by calling Shareholder Services at 1-800-
841-1180.
IMPORTANT
ACCOUNT
INFORMATION
The easiest way to establish optional services on your account is to
select the options you desire when you complete your Account
Application. If you want to add or change shareholder options later,
you may need to provide additional information and a signature
guarantee. Please call Shareholder Services at 1-800-841-1180 for
further assistance.
Signature Guarantees
For our mutual protection, we may require a signature guarantee on
certain written transaction requests. A signature guarantee verifies
the authenticity of your signature and may be obtained from banks,
brokerage firms and any other guarantor that our transfer agent deems
acceptable. A signature guarantee cannot be provided by a notary
public.
Certificates
Certificates for whole shares will be issued upon request. If a
certificate is lost, stolen or destroyed, you may incur an expense to
replace it.
Purchases Through
Service Providers
If you purchase shares of the Fund through a program of services
offered or administered by a broker-dealer, financial institution
or other service provider, you should read the program materials
provided by the service provider, including information regarding
fees which may be charged, in conjunction with this Prospectus.
Certain shareholder servicing features of the Fund may not be
available or may be modified in connection with the program of
services offered. When shares of the Fund are purchased in this
way, the
service provider, rather than the customer, may be the shareholder of
record of the shares. Certain service providers may receive
compensation from the Fund, QDI and/or Quest
for providing such services.
Telephone and
Online Access
Transactions
Neither the Fund nor its transfer agent will be liable for
following instructions communicated by telephone or computer online
access that are reasonably believed to be genuine. The transfer
agent uses certain procedures designed to confirm that telephone
and computer online access instructions are genuine, which may
include requiring some form of personal identification prior to
acting on the instructions, providing written confirmation of the
transaction and/or recording incoming telephone calls, and if it
does not follow such procedures, the Fund or the transfer agent may
<PAGE>
be liable for any losses due to unauthorized or fraudulent
transactions.
Nonpayment
If your check or wire does not clear, or if payment is not received
for any telephone or computer online access purchase, the
transaction will be canceled and you will be responsible for any
loss the Fund incurs. If you are already a shareholder, the Fund
can redeem shares from any identically registered account in the
Fund as reimbursement for any loss incurred.
Trade Date for
Purchases
Your trade date is the date on which share purchases are
credited to your account. If your purchase is made by check,
Federal Funds wire, telephone, computer online access or
exchange and is received by the close of regular trading on the
New York Stock
Exchange (generally 4:00 p.m., Eastern time), your trade date is the
date of receipt. If your purchase is received after the close of
regular trading on the Exchange, your trade date is the next business
day. Your shares are purchased at the net asset value determined on
your trade date.
In order to prevent lengthy processing delays caused by the clearing
of foreign checks, the Fund will accept only a foreign check which
has been drawn in U.S. dollars and has been issued by a foreign bank
with a United States correspondent bank.
The Trust reserves the right to suspend the offering of Fund shares
to new investors. The Trust also reserves the right to reject any
specific purchase request.
REDEEMING
YOUR
SHARES
You may redeem any portion of your account at any time. You
may request a redemption in writing or by telephone.
Redemption proceeds normally will be sent within two business
days after the receipt of the request in Good Order.
Redeeming By Mail
Redemption requests should be mailed to The Royce Funds,
c/o NFDS, P.O. Box 419012, Kansas City, MO 64141-6012.
(For express or registered mail, send your
request to The Royce Funds, c/o National Financial Data Services,
1004 Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net asset value next
determined after NFDS or an authorized service agent or sub-agent
has received all required documents in Good Order.
Definition of
Good Order
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. Signatures of all owners exactly as they are registered on the
account.
4. Signature guarantees if the value of the shares being redeemed
exceeds $50,000 or if
the payment is to be sent to an address other than the address of
record or is to be
made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be required, in
the case of retirement
plans, corporations, trusts, estates and certain other accounts.
If you have any questions about what is required as it pertains to
your request, please call Shareholder Services at 1-800-841-1180.
<PAGE>
Redeeming By
Telephone
Shareholders who have not established Express Service may
redeem up to $50,000 of their Fund shares by telephone,
provided the proceeds are mailed to their address of record.
If pre-approved, higher minimums may apply for institutional
accounts. To redeem shares by telephone, you or your pre-
authorized representative may call Shareholder Services at 1-
800-841-1180. Redemption requests received by telephone prior
to the close of regular trading on the New York Stock Exchange
(generally 4:00
p.m., Eastern time) are processed on the day of receipt; redemption
requests received by telephone after the close of regular trading on
the Exchange are processed on the business day following receipt.
Telephone redemption service is not available for Trust-sponsored
retirement plan accounts or if certificates are held. Telephone
redemptions will not be permitted for
a period of sixty days after a change in the address of
record. See also "Important Account Information - Telephone
and Online Access Transactions".
Redeeming By
Express
Service
If you select the Express Service Automatic Withdrawal option,
shares will be automatically redeemed from your Fund account and
the proceeds transferred to your bank account according to the
schedule you have selected. You must have at least $25,000 in
your Fund account to establish the Automatic Withdrawal option.
The Expedited Redemption option lets you redeem up to $50,000 of
shares from your Fund account by telephone and transfer the
proceeds directly to your bank account. You
may elect Express Service on the Account Application or call
Shareholder Services at 1-800-841-1180 for an
Express Service application.
Important
Redemption
Information
If you are redeeming shares recently purchased by check, Express
Service Expedited Purchase or Automatic Investment Plan, the
proceeds of the redemption may not be sent until payment for the
purchase is collected, which may take up to fifteen calendar days.
Otherwise, redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption
request may be made by regular or express mail. It will be
processed at the net asset value next determined after your request
has been received by the transfer agent in Good Order. The Trust
reserves the right to revise or terminate the telephone redemption
privilege at any time.
The Trust may suspend the redemption right or postpone payment at
times when the New York Stock Exchange is closed or under any
emergency circumstances as determined by
the Securities and Exchange Commission.
Although the Trust will normally make redemptions in cash, it
may cause the Fund to redeem in kind under certain
circumstances.
Early Redemption
Fee
In order to discourage short-term trading, the Fund assesses an
early redemption fee of 1% on redemptions of share purchases held
for less than one year. Redemption fees will be paid to the Fund,
out of the redemption proceeds otherwise payable to the
shareholder, to help offset transaction costs.
<PAGE>
The Fund will use the "first-in, first-out" (FIFO) method to
determine the one-year holding period. Under this method, the date
of the redemption will be compared with the earliest purchase date
of the share purchases held in the account. If this holding period
is less than one year, the fee will be assessed. In determining
"one year," the Fund will use the anniversary month of a
transaction. Thus, shares purchased in October 1996, for
example, will be subject to the fee if they are redeemed prior to
October 1997. If they are redeemed on or after October 1, 1997, they
will not be subject to the fee.
No redemption fee will be payable on shares acquired through
reinvestment, on an
exchange into another Royce Fund or by shareholders who are (a)
employees of the Trust or Quest or members of their immediate
families or employee benefit plans for them, (b) current
participants in an Automatic Investment Plan or an Automatic
Withdrawal Plan, (c) certain Trust-approved Group Investment
Plans and charitable organizations, (d) profit-sharing trusts,
corporations or other institutional investors who are investment
advisory clients of Quest or (e) omnibus or similar account customers
of certain Trust-approved broker-dealers
and other institutions.
Minimum Account
Balance
Requirement
Due to the relatively high cost of maintaining smaller accounts, the
Trust reserves the right to involuntarily redeem shares in any Fund
account that falls below the minimum initial investment due to
redemptions by the shareholder. If at any time the balance in an
account does not have a value at least equal to the minimum initial
investment or, if an Automatic Investment Plan is discontinued before
an account reaches the minimum initial investment that would
otherwise be required, you may be notified that the value of your
account is below the Fund's minimum account balance requirement. You
would then
have sixty days to increase your account balance before the
account is liquidated. Proceeds would be promptly paid to the
shareholder.
EXCHANGE
PRIVILEGE
Exchanges between series of the Trust and with other open-end
Royce funds are permitted by telephone, computer online access
or mail. An exchange is treated as a redemption and purchase;
therefore, you could realize a taxable gain or loss on the
transaction. Exchanges are accepted only if the registrations and
the tax identification numbers of the two accounts are identical.
Minimum investment requirements must be
met when opening a new account by exchange, and exchanges may be made
only for
shares of a series or fund then offering its shares for sale in your
state of residence. The Trust reserves the right to revise or
terminate the exchange privilege at any time.
TRANSFERRING
OWNERSHIP
You may transfer the ownership of any of your Fund shares to
another person by writing to: The Royce Funds, c/o NFDS, P.O.
Box 419012, Kansas City, MO 64141-6012. The request must be in
Good Order (see "Redeeming Your Shares - Definition of Good
Order"). Before mailing your request, please contact Shareholder
Services (1-800-841-1180)
for full instructions.
OTHER SERVICES
For more information about any of these services, please call Investor
Information at 1-800-221-4268.
Statements and
Reports
A confirmation statement will be sent to you each time you have
a transaction in your account and semi-annually. Financial
reports are mailed semi-annually. To reduce expenses, only one
copy of most shareholder reports may be mailed to a household.
Please call Investor Information if you need additional copies.
<PAGE>
Tax-sheltered
Retirement Plans
Shares of the Fund are available for purchase in connection with
certain types of tax-sheltered retirement plans, including Individual
Retirement Accounts (IRA's) for individuals and 403(b)(7) Plans for
employees of certain tax-exempt organizations.
These plans should be established with the Trust only after an
investor has consulted with
a tax adviser or attorney. Information about the plans and the
appropriate forms may be obtained from Investor Information at 1-
800-221-4268.
<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
Investment Adviser
Quest Advisory Corp.
1414 Avenue of the Americas
New York, NY 10019
Distributor
Quest Distributors, Inc.
1414 Avenue of the Americas
New York, NY 10019
Transfer Agent
State Street Bank and Trust Company c/o National
Financial Data Services P.O. Box 419012
Kansas City, MO 64141-6012 1-800-841-1180
Custodian
State Street Bank and Trust Company P.O. Box 1713
Boston, MA 02105
Officers
Charles M. Royce, President and Treasurer Thomas R.
Ebright, Vice President
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President Daniel A. O'Byrne,
Vice President and
Assistant Secretary
John E. Denneen, Secretary
The Royce Funds
Royce Financial Services Fund
A No-Load Mutual Fund
Prospectus
November 1, 1996
<PAGE>
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is
a professionally managed, open-end registered investment company,
which offers investors the opportunity to invest in twelve
portfolios or series. Each series has distinct investment
objectives and/or policies, and a shareholder's interest is
limited to the series in which the shareholder owns shares. The
twelve series are:
Pennsylvania Mutual Fund
Royce Premier Fund
Royce Micro-Cap Fund
Royce Equity Income Fund
Royce Low-Priced Stock Fund
Royce GiftShares Fund
Royce Value Fund
Royce Total Return Fund
Royce Global Services Fund
PMF II
Royce Financial Services Fund
The REvest Growth & Income Fund
This Statement of Additional Information relates to all
of the series other than REvest Growth & Income Fund ("Funds").
REvest is covered by its own separate Statement of Additional
Information.
The Trust is designed for long-term investors, including
those who wish to use shares of any Fund (other than Royce
GiftShares Fund) as a funding vehicle for certain tax-deferred
retirement plans (including Individual Retirement Account (IRA)
plans), and not for investors who intend to liquidate their
investments after a short period of time.
This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Trust's
current Prospectuses dated July 1, 1996 for Pennsylvania Mutual,
Royce Premier, Micro-Cap, Equity Income, Low-Priced Stock and
GiftShares Funds, dated April 30, 1996 for Royce Value, Total
Return and Global Services Funds and for The REvest Growth Income
Fund and dated November 1, 1996 for PMF II and Royce Financial
Services Fund . Please retain this document for future
reference. The audited financial statements included in the
Annual Reports to Shareholders of such Funds (other than PMF II
and Royce Financial Services Fund) for the fiscal year or period
ended December 31, 1995 and the unaudited financial statements
included in the Semi-Annual Report to Shareholders of Royce
GiftShares Fund for the six months ended June 30, 1996 are
incorporated herein by reference. To obtain an additional copy
of the Prospectus or Annual or Semi-Annual Reports to
Shareholders for any of these Funds, please call Investor
Information at 1-800-221-4268.
Investment Adviser Transfer Agent
Quest Advisory Corp. ("Quest") State Street Bank and Trust Company
c/o National Financial Data Services
Distributor Custodian
Quest Distributors, Inc. ("QDI") State Street Bank and Trust Company
November 1, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND LIMITATIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 6
MANAGEMENT OF THE TRUST 11
PRINCIPAL HOLDERS OF SHARES 14
INVESTMENT ADVISORY SERVICES 17
DISTRIBUTOR 21
CUSTODIAN 24
INDEPENDENT ACCOUNTANTS 24
PORTFOLIO TRANSACTIONS 24
CODE OF ETHICS AND RELATED MATTERS 26
PRICING OF SHARES BEING OFFERED 27
REDEMPTIONS IN KIND 27
TAXATION 27
DESCRIPTION OF THE TRUST 34
PERFORMANCE
DATA................................................. 36
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement
those set forth in the Funds' Prospectuses. Unless otherwise
noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any
security or other asset or sets forth a policy regarding quality
standards, the percentage limitation or standard will be
determined immediately after giving effect to the Fund's
acquisition of the security or other asset. Accordingly, any
subsequent change in values, net assets or other circumstances
will not be considered in determining whether the investment
complies with the Fund's investment policies and limitations.
A Fund's fundamental investment policies cannot be changed
without the approval of a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940
(the "1940 Act")) of the Fund. Except for the fundamental
investment restrictions set forth below, the investment policies
and limitations described in this Statement of Additional
Information are operating policies and may be changed by the
Board of Trustees without shareholder approval. However,
shareholders will be notified prior to a material change in an
operating policy affecting their Fund.
No Fund may, as a matter of fundamental policy:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may borrow money
from banks as a temporary measure for extraordinary or
emergency
purposes in an amount not exceeding 5% of such Fund's total
assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the securities
of foreign issuers (except for Royce Global Services Fund,
which
is not subject to any such limitation, and for PMF II and
Royce
Financial Services Funds which may invest up to 25% of their
respective total assets in such securities );
7. Invest in restricted securities (except for Royce Global
Services Fund, PMF II and Royce Financial Services Fund, which
each may invest up to 15% of its net assets in illiquid
securities, including restricted securities) or in repurchase
agreements which mature in more than seven days;
8. Invest more than 10% (15% for Royce Global Services Fund,
PMF II and Royce Financial Services Fund) of its assets in
securities without readily available market quotations (i.e.,
illiquid securities)(except for Pennsylvania Mutual Fund, which
is not subject to any such limitation);
<PAGE>
9. Invest, with respect to Royce Value and Royce Equity Income
Funds, more than 5% of such Fund's assets in the securities of
any one issuer (except U.S. Government securities) or, with
respect to 75% of the other Funds' total assets, more than 5% of
such Fund's assets in the securities of any one issuer (except
U.S. Government securities);
10. Invest more than 25% of its assets in any one industry;
11. Acquire (own, in the case of Pennsylvania Mutual Fund) more
than 10% of the outstanding voting securities of any one issuer;
12. Purchase or sell real estate or real estate mortgage loans
or invest in the securities of real estate companies unless such
securities are publicly-traded;
13. Purchase or sell commodities or commodity contracts;
14. Make loans, except for purchases of portions of issues of
publicly- distributed bonds, debentures and other securities,
whether or not such purchases are made upon the original
issuance
of such securities, and except that each Fund may loan up to 25%
of its assets to qualified brokers, dealers or institutions for
their use relating to short sales or other securities
transactions (provided that such loans are fully collateralized
at all times);
15. Invest in companies for the purpose of exercising control of
management;
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees or
investment adviser, as principal for their own accounts;
17. Invest in the securities of other investment companies
(except for Pennsylvania Mutual Fund, Royce Global Services Fund,
PMF II and Royce Financial Services Fund which may invest in the
securities of other investment companies to the extent permitted
by the 1940 Act); or
18. Invest more than 5% of its total assets in warrants, rights
and options (except for Pennsylvania Mutual Fund, which may not
purchase any warrants, rights or options).
<PAGE>
No Fund may, as a matter of operating policy:
1. Invest more than 5% of its net assets in
lower-rated (high-risk) non-convertible debt
securities; or
2. Enter into repurchase agreements with
any party other than the custodian of its assets
or having a term of more than seven days.
Pennsylvania Mutual Fund
PMF II
Pennsylvania Mutual Fund and PMF II may each invest up to
25% of the value of their total assets in the securities of
other investment companies (open or closed-end) and up to 5% of
their total assets in the securities of any one other investment
company. All such securities must be acquired in the open
market, in transactions involving no commissions or discounts to
a sponsor or dealer (other than customary brokerage commissions).
The issuers of such securities are not required to redeem them in
an amount exceeding 1% of such issuers' total outstanding
securities during any period of less than 30 days, and
Pennsylvania Mutual Fund and PMF II will vote all proxies with
respect to such securities in the same proportion as the vote of
all other holders of such securities. Pennsylvania Mutual Fund
has not, during the past 5 years, invested in the securities of
any open-end investment companies and neither it nor PMF II have
any intention of doing so in the future.
Royce Global Services Fund
Royce Financial Services Fund
Global Services and Financial Services Funds may invest in
the securities of a company that is engaged in securities related
activities as a broker, a dealer, an underwriter, an investment
adviser registered under the Investment Advisers Act of 1940 or
an investment adviser to an investment company, subject to the
following limitations in the case of a company that, in its most
recent fiscal year, derived more than 15% of its gross revenues
from such activities:
(a) The purchase cannot cause more than 5% of the Fund's
assets to be invested in the securities of the company;
(b) For an equity security, the purchase cannot result in
the Fund owning more than 5% of the company's outstanding
securities of that class; and
(c) For a debt security, the purchase cannot result in the
Fund owning more than 10% of the principal amount of the
company's outstanding debt securities.
<PAGE>
In applying the gross revenues test, a company's gross
revenues from its own securities related activities and from its
ratable share of the securities related activities of enterprises
of which it owns 20% or more of the voting or equity interest are
considered in determining the degree to which the company is
engaged in securities related activities. The limitations apply
only at the time of the Fund's purchase of the securities of such
a company. When Quest is considering purchasing or has purchased
warrants or convertible securities of a securities related
business for the Fund, the required determination is made as
though such warrants or conversion privileges had been exercised.
Global Services and Financial Services Funds are not
permitted to acquire a general partnership interest or a security
issued by their investment adviser or principal underwriter or
any affiliated person of their investment adviser or principal
underwriter.
Global Services and Financial Services Funds may each invest
up to 20% of its assets in the securities of other investment
companies, provided that (i) the Fund and all affiliated persons
of the Fund do not invest in more than 3% of the total
outstanding stock of any one such company and (ii) the Fund does
not offer or sell its shares at a public offering price which
includes a sales load of more than 1 1/2%. (The 20% and 3%
limitations do not apply to securities received as dividends,
through offers of exchange or as a result of a reorganization,
consolidation or merger.) The other investment company is not
obligated to redeem those of its securities held by the Fund in
an amount exceeding 1% of its total outstanding securities during
any period of less than thirty days, and the Fund will be
obligated to exercise voting rights with respect to any such
security by voting the securities held by it in the same
proportion as the vote of all other holders of the security.
Global Service and Financial Services Funds do not currently
intend to invest more than 5% of their assets in the securities
of any one other investment company, to purchase securities of
other investment companies, except in the open market where no
commission other than the ordinary broker's commission is paid,
or to purchase or hold securities issued by other open-end
investment companies.
Royce Global Services Fund
PMF II
Royce Financial Services Fund
Global Services Fund, PMF II and Financial Services Fund
will not invest more than 15% of their net asets in illiquid
securities, including those restricted securities that are
illiquid. Illiquid securities include securities subject to
contractual or legal restrictions on resale because they have not
been registered under the Seurities Act of 1933, as amended
("Securities Act"), and other securities for which market
quotations are not readily available. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer, a control person of the issuer or
another investor holding such securities.
A large institutional market has developed for certain
securities that are not registered under the Securities Act,
including foreign securities. Institutional investors depend on
<PAGE>
an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor
a demand for repayment. The fact that there are contractual or
legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows an institutional
trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act
for resales of certain securities to qualified institutional
buyers. An insufficient number of qualified institutional buyers
interested in purchasing certain restricted securities held by
the Funds, however, could affect adversely the marketability of
such portfolio securities, and the Funds might be unable to
dispose of such securities promptly or at reasonable prices.
Rule 144A produces enhanced liquidity for many restricted
securities, and market liquidity for such securities may continue
to expand as a result of this regulation and the consequent
inception of the PORTAL System sponsored by the National
Association of Securities Dealers, Inc., an automated system for
the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Funds' Rights as Stockholders
As noted above, no Fund may invest in a company for the
purpose of exercising control of management. However, a Fund may
exercise its rights as a stockholder and communicate its views on
important matters of policy to management, the board of directors
and/or stockholders if Quest or the Board of Trustees determine
that such matters could have a significant effect on the value of
the Fund's investment in the company. The activities that a Fund
may engage in, either individually or in conjunction with others,
may include, among others, supporting or opposing proposed
changes in a company's corporate structure or business
activities; seeking changes in a company's board of directors or
management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of a company or a portion of
its assets; or supporting or opposing third party takeover
attempts. This area of corporate activity is prone to
litigation, and it is possible that a Fund could be involved in
lawsuits related to such activities. Quest will monitor such
activities with a view to mitigating, to the extent possible, the
risk of litigation against the Funds and the risk of actual
liability if a Fund is involved in litigation. However, no
guarantee can be made that litigation against a Fund will not be
undertaken or liabilities incurred.
A Fund may, at its expense or in conjunction with others,
pursue litigation or otherwise exercise its rights as a security
holder to seek to protect the interests of security holders if
Quest and the Trust's Board of Trustees determine this to be in
the best interests of a Fund's shareholders.
<PAGE>
Securities Lending
Each Fund may lend up to 25% of its assets to brokers,
dealers and other financial institutions. Securities lending
allows the Fund to retain ownership of the securities loaned and,
at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities or even a loss of
rights in collateral supplied should the borrower fail
financially, loans will be made only to parties that participate
in a Global Securities Lending Program monitored by the Funds'
custodian and who are deemed by it to be of good standing.
Furthermore, such loans will be made only if, in Quest's
judgment, the consideration to be earned from such loans would
justify the risk.
Quest understands that it is the current view of the staff
of the Securities and Exchange Commission that a Fund may engage
in such loan transactions only under the following conditions:
(i) the Fund must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (ii) the borrower must increase the collateral whenever
the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (iii) after
giving notice, the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest or other distributions on the securities
loaned and to any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and
(vi) the Fund must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Lower-Rated (High-Risk) Debt Securities
Each Fund may invest up to 5% of its net assets in lower-
rated (high-risk) non-convertible debt securities. They may be
rated from Ba to Ca by Moody's Investors Service, Inc. or from BB
to D by Standard & Poor's Corporation or may be unrated. These
securities have poor protection with respect to the payment of
interest and repayment of principal and may be in default as to
the payment of principal or interest. These securities are often
considered to be speculative and involve greater risk of loss or
price changes due to changes in the issuer's capacity to pay.
The market prices of lower-rated (high-risk) debt securities may
fluctuate more than those of higher-rated debt securities and may
decline significantly in periods of general economic difficulty,
which may follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt
securities has been in existence for many years and has weathered
previous economic downturns, the 1980s brought a dramatic
increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of
the high-yield/high-risk bond market, especially during periods
of economic recession. In fact, from 1989 to 1991, the
percentage of lower-rated (high-risk) debt securities that
defaulted rose significantly above prior levels.
<PAGE>
The market for lower-rated (high-risk) debt securities may
be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which the
former are sold. If market quotations cease to be readily
available for a lower-rated (high-risk) debt security in which a
Fund has invested, the security will then be valued in accordance
with procedures established by the Board of Trustees. Judgment
plays a greater role in valuing lower-rated (high-risk) debt
securities than is the case for securities for which more
external sources for quotations and last sale information are
available. Adverse publicity and changing investor perceptions
may affect a Fund's ability to dispose of lower-rated (high-risk)
debt securities.
Since the risk of default is higher for lower-rated (high-
risk) debt securities, Quest's research and credit analysis may
play an important part in managing securities of this type for
the Funds. In considering such investments for the Funds, Quest
will attempt to identify those issuers of lower-rated (high-risk)
debt securities whose financial condition is adequate to meet
future obligations, has improved or is expected to improve in the
future. Quest's analysis may focus on relative values based on
such factors as interest or dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of
the issuer.
Foreign Investments
Except for Royce Global Services Fund, which is not subject
to any such limitation, each Fund may invest up to 10% of its
total assets (25% for PMF II and Financial Services Fund) in the
securities of foreign issuers. Foreign investments can involve
significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed
to foreign currencies and of dividends and interest from such
securities can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets
can be highly volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to
obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than
U.S. markets. Foreign issuers, brokers and securities markets
may be subject to less government supervision. Foreign security
trading practices, including those involving the release of
assets in advance of payment, may involve increased risks in the
event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and
economic risks. Foreign investments may be affected by actions
of foreign governments adverse to the interests of U.S.
investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on
U.S. investment or on the ability to repatriate assets or convert
currency into U.S. dollars or other government intervention.
There may be a greater possibility of default by foreign
governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local
<PAGE>
political, economic or social instability, military action or
unrest or adverse diplomatic developments. There is no assurance
that Quest will be able to anticipate these potential events or
counter their effects.
The considerations noted above are generally intensified for
investments in developing countries. Developing countries may
have relatively unstable governments, economies based on only a
few industries and securities markets that trade a small number
of securities.
American Depositary Receipts (ADRs) are certificates held in
trust by a bank or similar financial institution evidencing
ownership of securities of a foreign-based issuer. Designed for
use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying foreign securities in their national
markets and currencies.
ADR facilities may be established as either unsponsored or
sponsored. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them
relating to the rights and obligations of ADR holders and the
practices of market participants. A depository may establish an
unsponsored facility without participation by (or even
necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depository requests a letter
of non-objection from such issuer prior to the establishment of
the facility. Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depository usually charges fees
upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-
cash distributions and the performance of other services. The
depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities.
Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the
deposited securities enters into a deposit agreement with the
depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR
holders. With sponsored facilities, the issuer of the deposited
securities generally will bear some of the costs relating to the
facility (such as deposit and withdrawal fees). Under the terms
of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions and to
provide shareholder communications and other information to the
ADR holders at the request of the issuer of the deposited
securities.
Repurchase Agreements
In a repurchase agreement, a Fund in effect makes a loan by
purchasing a security and simultaneously committing to resell
that security to the seller at an agreed upon price on an agreed
upon date within a number of days (usually not more than seven)
from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in
<PAGE>
effect secured by the value (at least equal to the amount of the
agreed upon resale price and marked to market daily) of the
underlying security.
The Funds may engage in repurchase agreements with respect
to any U.S. Government security. While it does not presently
appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the
Fund in connection with bankruptcy proceedings), it is the policy
of the Trust to enter into repurchase agreements only with its
custodian, State Street Bank and Trust Company, and having a term
of seven days or less.
Warrants, Rights and Options
Each Fund, other than Pennsylvania Mutual Fund, may invest
up to 5% of its total assets in warrants, rights and options. A
warrant, right or call option entitles the holder to purchase a
given security within a specified period for a specified price
and does not represent an ownership interest. A put option gives
the holder the right to sell a particular security at a specified
price during the term of the option. These securities have no
voting rights, pay no dividends and have no liquidation rights.
In addition, their market prices do not necessarily move parallel
to the market prices of the underlying securities.
The sale of warrants, right or options held for more than
one year generally results in a long-term capital gain or loss to
the Fund, and the sale of warrants, rights or options held for
one year or less generally results in a short term capital gain
or loss. The holding period for securities acquired upon
exercise of a warrant, right or call option, however, generally
begins on the day after the date of exercise, regardless of how
long the warrant, right or option was held. The securities
underlying warrants, rights and options could include shares of
common stock of a single company or securities market indices
representing shares of the common stocks of a group of companies,
such as the S&P 600.
Investing in warrants, rights and call options on a given
security allows the Fund to hold an interest in that security
without having to commit assets equal to the market price of the
underlying security and, in the case of securities market
indices, to participate in a market without having to purchase
all of the securities comprising the index. Put options, whether
on shares of common stock of a single company or on a securities
market index, would permit the Fund to protect the value of a
portfolio security against a decline in its market price and/or
to benefit from an anticipated decline in the market price of a
given security or of a market. Thus, investing in warrants,
rights and options permits the Fund to incur additional risk
and/or to hedge against risk.
Portfolio Turnover
For the year ended December 31, 1995 and the period from
December 15, 1994 (commencement of operations) through December
31, 1994, Royce Global Services Fund's portfolio turnover rates
were 106% and 0%, respectively. The Fund's portfolio turnover
rate for its two-week start-up period in 1994 was zero because
the Fund was then investing its initial cash and did not sell any
portfolio securities during this period.
<PAGE>
* * *
Quest believes that Pennsylvania Mutual, Low-Priced Stock,
Royce Value, Micro-Cap, GiftShares, Global Services, PMF II and
Financial Services Funds are suitable for investment only by
persons who can invest without concern for current income, and
that such Funds and Royce Premier Fund are suitable only for
those who are in a financial position to assume above-average
investment risks in search for long-term capital appreciation.
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to
each Trustee and officer of the Trust:
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
Charles M. Royce* Trustee, President, Secretary, Treasurer,
(57) President sole director and sole voting
1414 Avenue of and shareholder of Quest Advisory
the Treasurer Corp. ("Quest"), the Trust's and
Americas its predecessors' principal
New York, NY investment adviser; Trustee,
10019 President and Treasurer of the
Trust and its predessors;
Director, President and
Treasurer of Royce Value Trust,
Inc. ("RVT") and, since
September 1993, Royce Micro-Cap
Trust, Inc. ("OTCM"), closed-end
diversified management
investment companies of which
Quest is the investment adviser
(The Trust, RVT and OTCM
collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Quest Distributors, Inc.
Trustee ("QDI"), the distributor of the
and Vice Trust's shares; and managing
Thomas R. Ebright President general partner of Quest
* Management Company ("QMC"), a
(52) registered investment adviser,
50 Portland Pier, and its predecessor.
Portland, ME
04101
Vice President of Quest; Trustee
of TRF and one of its
predecessors ; Vice President of
TRF and one of its
predecessors; Director of RVT
and, since September 1993, OTCM;
Vice President since November
1995 (President until October
1995) and Treasurer of QDI;
general partner of QMC and its
predecessor until June 1994;
<PAGE>
President, Treasurer and a
director and principal
shareholder of Royce, Ebright &
Associates, Inc., the investment
adviser for a series of TRF
since June 1994; director of
Atlantic Pro Sports, Inc. and of
the Strasburg Rail Road Co.
since March 1993; and President
and principal owner of Baltimore
Professional Hockey, Inc. until
May 1993.
Hubert L. Cafritz Trustee Financial consultant.
(73)
9421 Crosby Road
Silver Spring, MD
20910
Richard M. Galkin Trustee Private investor and President
(58) of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Boca Raton, FL consultants.
33487
Stephen L. Isaacs Trustee Director of Columbia University
(57) Development Law and Policy
60 Haven Street, Program; Professor at Columbia
Fl. B-2 University; and President of
New York, NY Stephen L. Isaacs Associates,
10032 Consultants.
William L. Koke Trustee Registered investment adviser
(62) and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT
06498
David L. Meister Trustee Consultant to the communications
(56) industry since January 1993; and
111 Marquez Place Executive officer of Digital
Pacific Planet Inc. from April 1991 to
Palisades, CA December 1992.
90272
Jack E. Fockler, Vice Vice President (since August
Jr.* (37) President 1993) and senior associate of
1414 Avenue of Quest, having been employed by
the Quest since October 1989; Vice
Americas President of The Royce Funds
New York, NY since April 1995; Vice President
10019 of QDI since November 1995; and
general partner of QMC since
July 1993.
W. Whitney Vice Vice President (since August
George* (38) President 1993) and senior analyst of
1414 Avenue of Quest, having been employed by
the Quest since October 1991; Vice
Americas President of The Royce Funds
New York, NY since April 1995; and general
10019 partner of QMC and its
predecessor since January 1992.
<PAGE>
Daniel A. Vice Vice President of Quest since
O'Byrne* (34) President May 1994, having been employed
1414 Avenue of and by Quest since October 1986; and
the Assistant Vice President of The Royce
Americas Secretary Funds since July 1994.
New York, NY
10019
John E. Denneen* Secretary Associate General Counsel and
(29) Chief Compliance Officer of
1414 Avenue of Quest since May 1996; Secretary
the of The Royce Funds since
Americas June 1996; and Associate of
New York, NY Seward & Kissel from September
10019 1992 to May 1996.
_________________________________________________________________
______________
*An "interested person" of the Trust and/or Quest under
Section 2(a)(19) of the 1940 Act.
All of the Trust's trustees, other than Messr. Cafritz and
Koke, are also directors of RVT and OTCM.
The Board of Trustees has an Audit Committee, comprised of
Hubert L. Cafritz, Richard M. Galkin, Stephen L. Isaacs, William
L. Koke and David L. Meister. The Audit Committee is responsible
for recommending the selection and nomination of independent
auditors of the Funds and for conducting post-audit reviews of
their financial conditions with such auditors.
For the year ended December 31, 1995, the following trustees
received compensation from the Trust's predecessor and/or the
other funds in the group of registered investment companies
comprising The Royce Funds:
<PAGE>
Aggregate
Compensation Pension or Retirement Total Compensation
From Trust's Benefits Accrued As from The Royce Funds
Name Predecessor Part of Trust Expenses paid to Trustee/Directors
Hubert L. Cafritz $ -0- N/A $17,500
Trustee
Richard M. Galkin, 17,500 N/A 60,000
Trustee
Stephen L. Isaacs, 17,500 N/A 60,000
Trustee
William L. Koke, -0- N/A 17,500
Trustee
David L. Meister, 17,500 N/A 60,000
Trustee
PRINCIPAL HOLDERS OF SHARES
As of October 22, 1996, the following persons were known to
the Trust to be the record or beneficial owners of 5% or more of
the outstanding shares of certain of its Funds:
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
Pennsylvania Mutual Fund
Laird Lorton Trust Company C/F 3,443,310 Record 5.6%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Charles Schwab & Co., Inc. 6,808,261 Record 11.08%
101 Montgomery Street
San Francisco, CA 94104
Royce Premier Fund
Charles Schwab & Co., Inc. 12,747,923 Record 35.4%
101 Montgomery Street
San Francisco, CA 94104
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
Charles Schwab & Co., Inc. 3,719,067 Record 22.4%
101 Montgomery Street
San Francisco, CA 94104
Royce Equity Income Fund
Charles Schwab & Co., Inc. 2,121,155 Record 35.9%
101 Montgomery Street
San Francisco, CA 94104
Royce Low-Priced Stock Fund
Andrew & Company 133,023 Record 5.9%
C/O Chase Manhattan Bank NA
1211 Avenue of the Americas
New York, NY 10036
Charles Schwab & Co., Inc. 489,100 Record 21.8%
101 Montgomery Street
San Francisco, CA 94104
Quest Management Company 198,938 Beneficial 8.9%
8 Soundshore Drive
Greenwich, CT 06830
Fleet National Bank, 191,615 Record 8.5%
Custodian
FBO Brown University
One East Avenue
Rochester, NY 14638
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
Royce GiftShares Fund
W Whitney George Trustee 100,200 Record 87.5%
The Royce 1992 GST Trust
1414 Avenue of the Americas
New York, NY 10019
Royce Total Return Fund
Fleet National Bank, 63,980 Record 8.4%
Custodian
FBO Brown University
One East Avenue
Rochester, NY 14638
James M. Novak 83,827 Record 11.1%
Mark Stadler Trustees
Cindrich & Titus Profit
Sharing Plan
200 Gateway Center
Pittsburgh, PA 15222
State Street Bank & Trust Co. 80,798 Record 10.6%
Custodian for IRA of
Becky L. O'Connor
10 St. James Place
Pittsburgh, PA 15215
Charles M. Royce, Trustee 54,360 Record 7.2%
N. Holmes Clare Trust
FBO Barbara K. Clare
1414 Avenue of the Americas
New York, NY 10019
National City Bank 118,650 Record 15.6%
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101
Harold Reed, Trustee 61,784 Record 8.1%
Reed, Luce, Tosh & McGregor
Salary Red. Profit Sharing Plan
804 Turnpike Street
Beaver, PA 15009
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
Royce Global Services Fund
Charles M. Royce 61,228 Beneficial 18.8%
Quest Advisory Corp. Money (Voting Power)
Purchase Pension Plan
1414 Avenue of the Americas
New York, NY 10019
Charles M. Royce 107,993 Beneficial 33.2%
1414 Avenue of the Americas
New York, NY 10019
Integra Trust Company 47,391 Beneficial 14.5%
National Assn.
300 Fourth Avenue
Pittsburgh, PA 15278
Bruce Museum Inc. 43,213 Beneficial 13.3%
Museum Drive
Greenwich, CT 06830
As of September 30, 1996, all of the trustees and officers
of the Trust as a group beneficially owned less than 1% of the
outstanding shares of each of Pennsylvania Mutual, Royce Premier,
Royce Micro-Cap, Royce Equity Income and Royce Value Funds,
approximately 22.5% of the outstanding shares of Royce Low-Priced
Stock Fund, approximately 87.5% of the outstanding shares of
Royce GiftShares Fund, approximately 12.2% of the outstanding
shares of Royce Total Return Fund, and approximately 54.9% of the
outstanding shares of Royce Global Services Fund.
As of the date of this Statement of Additional Information,
Charles M. Royce owned 100% of the outstanding shares of each of
PMF II and Royce Financial Services Fund, respectively.
INVESTMENT ADVISORY SERVICES
Services Provided by Quest
As compensation for its services under the Investment
Advisory Agreements with the Funds, Quest is entitled to receive
the following fees:
Percentage Per Annum
Fund of Fund's Average Net Assets
Pennsylvania Mutual Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Premier Fund 1.00%
Royce Micro-Cap Fund 1.50%
<PAGE>
Royce Equity Income Fund 1.00%
Royce Low-Priced Stock Fund 1.50%
Royce GiftShares Fund 1.25%
Royce Value Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Total Return Fund 1.00%
Royce Global Services Fund 1.50%
PMF II 1.00%
Royce Financial Services Fund 1.00%
Such fees, which are payable monthly from the assets of the Fund
involved, are higher
(substantially higher, in the case of Royce Micro-Cap, Low-Priced
Stock, GiftShares and Global Services Funds) than those paid by
most other mutual funds with similar investment objectives.
Under the Investment Advisory Agreements, Quest (i)
determines the composition of each Fund's portfolio, the nature
and timing of the changes in it and the manner of implementing
such changes, subject to any directions it may receive from the
Trust's Board of Trustees; (ii) provides each Fund with
investment advisory, research and related services for the
investment of its funds; (iii) furnishes, without expense to the
Trust, the services of certain of its executive officers and full-
time employees; and (iv) pays such persons' salaries and
executive expenses and all expenses incurred in performing its
investment advisory duties under the Investment Advisory
Agreements.
The Trust pays all administrative and other costs and
expenses attributable to its operations and transactions,
including, without limitation, transfer agent and custodian fees;
legal, administrative and clerical services; rent for its office
space and facilities; auditing; preparation, printing and
distribution of its prospectuses, proxy statements, shareholders
reports and notices; supplies and postage; Federal and state
registration fees; Federal, state and local taxes; non-affiliated
trustees' fees; and brokerage commissions.
For each of the three years ended December 31, 1993, 1994
and 1995, as applicable, Quest received advisory fees from the
Funds (net of any amounts waived by Quest) and waived
advisory fees payable to it, as follows:
Net Advisory Fees Amounts
Received by Quest Waived by Quest
Pennsylvania Mutual Fund
1993 $ 8,172,494 -
1994 6,831,793 -
1995 5,361,35 $ 88,173
<PAGE>
Net Advisory Fees Amounts
Received by Quest Waived by Quest
Royce Premier Fund
1993 $ 124,020 $ 8,461
1994 1,400,394 -
1995 2,603,445 6,279
Royce Micro-Cap Fund
1993 $ 83,095 $ 19,063
1994 295,148 20,330
1995 804,905 14,047
Royce Equity Income Fund
1993 $ 488,816 $ 229,166
1994 820,662 53,626
1995 598,783 57,030
Royce Low-Priced Stock Fund
1993* $ 0 $ 294
1994 0 15,727
1995 6,174 31,425
Royce GiftShares Fund
1995** $ 0 $ 86
Royce Value Fund
1993 $ 1,568,398 -
1994 1,503,696 -
1995 1,424,451 $ 16,222
Royce Total Return Fund
1993* $ 0 $ 294
1994 0 10,506
1995 12,027 9,947
Royce Global Services Fund
1994*** $ 0 367
1995 0 $ 20, 261
_______
* December 15, 1993 (commencement of operations) to December
31, 1993
** December 27, 1995 (commencement of operations) to December
31, 1995
*** December 15, 1994 (commencement of operations) to December
31, 1994
<PAGE>
Portfolio Management
The Funds' portfolios and the portfolios of Quest's other
accounts are managed by Quest's senior investment staff,
including Charles M. Royce, Quest's Chief Investment Officer, who
is primarily responsible for supervising its investment
management activities. Mr. Royce is assisted by Jack E. Fockler,
Jr. and W. Whitney George, Vice Presidents of Quest, both of whom
participate in such activities, with their specific
responsibilities varying from time to time. In the event of any
significant change in Quest's senior investment staff, the
members of the Trust's Board of Trustees who are not interested
persons of the Trust will consider what action, if any, should be
taken in connection with the Funds' management arrangements.
Certain information concerning Messrs. Royce, Fockler and
George is set forth above under "MANAGEMENT OF THE TRUST".
Limitation on Fund Expenses
Quest has agreed, in connection with the Trust's
qualification of shares of each Fund for sale in California, to
reduce its investment advisory fee for each Fund monthly to the
extent that such Fund's "aggregate annual expenses" (as defined)
exceed 2 1/2% of the first $30 million, 2% of the next $70
million and 1 1/2% of any remaining average net assets of such
Fund for any fiscal year. All or a portion of the distribution
fee payable to QDI may be excludable from such "aggregate annual
expenses".
<PAGE>
DISTRIBUTOR
QDI, the distributor of the shares of each Fund, has its
principal office at 1414 Avenue of the Americas, New York, New
York 10019. It was organized in November 1982 and is a member of
the National Association of Securities Dealers, Inc. ("NASD").
As compensation for its services and for the expenses
payable by it under the Distribution Agreement with the Trust,
QDI is entitled to receive, for and from the assets of the Fund
involved, a monthly fee equal to 1% per annum (consisting of an
asset-based sales charge of .75% and a personal service and/or
account maintenance fee of .25%) of Royce Value Fund's average
net assets and .25% per annum (consisting of an asset-based sales
charge) of Royce Low-Priced Stock, Total Return, Global Services,
and Financial Services Funds' respective average net assets.
Except to the extent that they may be waived by QDI, these fees
are not subject to any required reductions and, in the case of
Royce Value Fund, are higher than the fees paid by most other
mutual funds which use their own assets to promote the sale of
their shares. QDI is also entitled to receive the proceeds of
any front-end sales loads that may be imposed on purchases of
shares of Royce Value Fund and of any contingent deferred sales
charges that may be imposed on redemptions of such Fund's shares.
Pennsylvania Mutual, Royce Premier, Micro-Cap, Equity Income and
GiftShares Funds and PMF II do not pay any fees to QDI under The
Distribution Agreement.
Under the Distribution Agreement, QDI (i) seeks to promote
the sale and/or continued holding of shares of such Funds through
a variety of activities, including advertising, direct marketing
and servicing investors and introducing parties on an on-going
basis; (ii) pays sales commissions and other fees to those
broker-dealers, investment advisers and others (excluding banks)
who have introduced investors to such Funds (which commissions
and other fees may or may not be the same amount as or otherwise
comparable to the distribution fees payable to QDI); (iii) pays
the cost of preparing, printing and distributing any advertising
or sales literature and the cost of printing and mailing the
Funds' prospectuses to persons other than shareholders of the
Funds; and (iv) pays all other expenses incurred by it in
promoting the sale and/or continued holding of the shares of such
Funds and in rendering such services under the Distribution
Agreement. The Trust bears the expense of registering its shares
with the Securities and Exchange Commission and the cost of
qualifying and maintaining the qualification of its shares for
sale under the securities laws of the various states.
The Trust entered into the Distribution Agreement with QDI
pursuant to a Distribution Plan which, among other things,
permits each Fund that remains covered by the Plan to pay the
monthly distribution fee out of its net assets. As required by
Rule 12b-1 under the 1940 Act, the Plan has been approved by the
shareholders of each Fund that remains covered by the Plan and by
the Trust's Board of Trustees (which also approved the
Distribution Agreement pursuant to which the distribution fees
are paid), including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or the
Distribution Agreement.
In approving the Plan, the Trustees, in accordance with the
requirements of Rule 12b-1, considered various factors (including
the amount of the distribution fees) and determined that there is
a reasonable likelihood that the Plan will benefit each Fund and
its shareholders.
<PAGE>
The Plan may be terminated as to any Fund by vote of a
majority of the non-interested Trustees who have no direct or
indirect financial interest in the Plan or in the Distribution
Agreement or by vote of a majority of the outstanding voting
securities of such Fund. Any change in the Plan that would
materially increase the distribution cost to a Fund requires
approval by the shareholders of such Fund; otherwise, the Plan
may be amended by the Trustees, including a majority of the
non-interested Trustees, as described above.
The Distribution Agreement may be terminated as to any Fund
at any time on 60 days' written notice and without payment of any
penalty, by QDI, by the vote of a majority of the outstanding
voting securities of such Fund or by the vote of a majority of
the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of
the Plan or in any agreements related thereto.
The Distribution Agreement and the Plan, if not sooner
terminated in accordance with their terms, will continue in
effect for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a
majority of the Trustees who are not parties to the Agreement or
interested persons of any such party and who have no direct or
indirect financial interest in the Plan or the Agreement and
(ii) either by the vote of a majority of the outstanding voting
securities of the Fund involved or by the vote of a majority of
the entire Board of Trustees.
While the Plan is in effect, the selection and nomination of
those Trustees who are not interested persons of the Trust will
be committed to the discretion of the Trustees who are not
interested persons.
The Board of Trustees has adopted resolutions pursuant to
which the proceeds of all contingent deferred sales charges for
redeemed shares of Royce Value Fund received from January 1, 1990
through April 7, 1994 (when the contingent deferred sales charge
was terminated) will be held in separate reserve accounts for the
year involved, to be spent by QDI only upon the approval of the
Board of Trustees for the specific purposes set forth in the
Plan. If the proceeds received in a particular year have not
been spent within the four year period following the close of the
year in which they were received, the proceeds are to be paid by
QDI to Royce Value Fund, the shareholders of which bore such
contingent deferred sales charges. See Note 2 of Notes to
Financial Statements of Royce Value Fund contained in such Fund's
Annual Report to Shareholders for the year ended December 31,
1995.
<PAGE>
For the year ended December 31, 1995, Royce Value Fund paid
distribution fees to QDI of $1,052,321 (net of $619,074 waived by
QDI -- 1% of its average net assets during such year before
giving effect to such waiver and 0.63% of its average net assets
after giving effect to such waiver). QDI spent the distribution
fees paid to it by and the proceeds of contingent deferred sales
charges released to it for Royce Value Fund during 1995 in the
following manner:
(I) Promotion, literature and advertising $ 23,319
(ii) Printing and mailing of prospectuses 3,593
to other than current shareholders
(iii) Compensation paid or to be paid to introducing 1,085,257
brokers, investment advisers and others
(iv) Registration fees, accounting and legal 11,560
(v) Administration and other 34,709
Total $ 1,158,438
As of January 1, 1995, $186,732 was held by QDI in such
separate reserve accounts for Royce Value Fund, and $101,437 was
released to QDI from such reserve accounts for Royce Value Fund
during the year ended December 31, 1995. Thus, as of January 1,
1996, $85,295 was held by QDI in such reserve accounts for Royce
Value Fund.
QDI has temporarily waived the distribution fees payable to
it by Royce Low-Priced Stock, Total Return and Global Services
Funds, PMF II and Royce Financial Services Fund .
No trustee of the Trust who was not an interested person of
the Trust had any direct or indirect financial interest in the
operation of the Plan or the Distribution Agreement. Charles M.
Royce, an interested person of the Trust, Quest and QDI, had such
an interest.
The benefits to Royce Value Fund included the receipt of net
proceeds of $5,233,818 from sales of its shares during the fiscal
year ended December 31, 1995. The value of shares redeemed by
such Fund during such year aggregated $33,282,011.
Under the Rules of Fair Practice of the NASD, the front-end
sales loads, asset-based sales charges and contingent deferred
sales charges payable by any Fund and/or the shareholders thereof
to QDI are limited to (i) 6.25% of total new gross sales
occurring after July 7, 1993 plus interest charges on such amount
at the prime rate plus 1% per annum, increased by (ii) 6.25% of
total new gross sales occurring after such Fund first adopted the
Plan until July 7, 1993 plus interest charges on such amount at
the prime rate plus 1% per annum less any front-end, asset-based
or deferred sales charges on such sales or net assets resulting
from such sales.
<PAGE>
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the
custodian for the securities, cash and other assets of each Fund
and the transfer agent and dividend disbursing agent for the
shares of each Fund, but it does not participate in any Fund's
investment decisions. The Trust has authorized State Street to
deposit certain domestic and foreign portfolio securities in
several central depository systems and to use foreign sub-
custodians for certain foreign portfolio securities, as allowed
by Federal law. State Street's main office is at 225 Franklin
Street, Boston, Massachusetts 02107. All mutual fund transfer,
dividend disbursing and shareholder service activities are
performed by State Street's agent, National Financial Data
Services, at 1004 Baltimore, Kansas City, Missouri 64105.
State Street is responsible for the calculation of each
Fund's daily net asset value per share and for the maintenance of
its portfolio and general accounting records and also provides
certain shareholder services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office
Square, Boston, Massachusetts 02109, are the independent
accountants of the Trust.
PORTFOLIO TRANSACTIONS
Quest is responsible for selecting the brokers who effect
the purchases and sales of each Fund's portfolio securities. No
broker is selected to effect a securities transaction for a Fund
unless such broker is believed by Quest to be capable of
obtaining the best price and execution
for the security involved in the transaction. In addition to
considering a broker's execution capability, Quest generally
considers the brokerage and research services which the broker
has provided to it, including any research relating to the
security involved in the transaction and/or to other securities.
Such services may include general economic research, market and
statistical information, industry and technical research,
strategy and company research, and may be written or oral. Quest
determines the overall reasonableness of brokerage commissions
paid, after considering the amount another broker might have
charged for effecting the transaction and the value placed by
Quest upon the brokerage and/or research services provided by
such broker, viewed in terms of either that particular
transaction or Quest's overall responsibilities with respect to
its accounts.
Quest is authorized, under Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreements
with the Trust, to pay a brokerage commission in excess of that
which another broker might have charged for effecting the same
transaction, in recognition of the value of brokerage and
research services provided by the broker.
<PAGE>
Brokerage and research services furnished by brokers through
whom a Fund effects securities transactions may be used by Quest
in servicing all of its accounts and those of QMC, and not all of
such services may be used by Quest in connection with the Trust
or any one of its Funds.
Quest may also place a Fund's brokerage business with firms
which promote the sale of the Funds' shares, consistent with
achieving the best price and execution. In no event will a
Fund's brokerage business be placed with QDI.
Even though investment decisions for each Fund are made
independently from those for the other Funds and the other
accounts managed by Quest and QMC, securities of the same issuer
are frequently purchased, held or sold by more than one Quest/QMC
account because the same security may be suitable for all of
them. When the same security is being purchased or sold for more
than one Quest/QMC account on the same trading day, Quest seeks
to average the transactions as to price and allocate them as to
amount in a manner believed to be equitable to each. Such
purchases and sales of the same security are generally effected
pursuant to Quest/QMC's Trade Allocation Guidelines and
Procedures. Under such Guidelines and Procedures, unallocated
orders are placed with and executed by broker-dealers during the
trading day. The securities purchased or sold in such
transactions are then allocated to one or more of Quest's and
QMC's accounts at or shortly following the close of trading,
using the average net price obtained. Such allocations are done
based on a number of judgmental factors that Quest and QMC
believe should result in fair and equitable treatment to those of
their accounts for which the securities may be deemed suitable.
In some cases, this procedure may adversely affect the price paid
or received by a Fund or the size of the position obtained for a
Fund.
During each of the three years ended December 31, 1993, 1994
and 1995, the Funds paid brokerage commissions as follows:
Fund 1993 1994 1995
Pennsylvania Mutual Fund $594,831 $ 797,686 $ 683,334
Royce Premier Fund 87,723 465,986 419,040
Royce Micro-Cap Fund 39,013 41,497 117,909
Royce Equity Income Fund 283,374 218,843 119,097
Royce Low-Priced Stock Fund 632* 12,946 22,645
Royce GiftShares Fund - - 760**
Royce Value Fund $123,987 $ 138,437 $ 114,296
Royce Total Return Fund 0* 6,231 6,117
Royce Global Services Fund - 382*** 6,199
_________________
* For the period from December 15, 1993 (commencement of
operations) to December 31, 1993.
** For the period from December 27, 1995 (commencement of
operations) to December 31, 1995.
***For the period from December 15, 1994 (commencement of
operations) to December 31, 1994.
For the year ended December 31, 1995, the aggregate amount
of brokerage transactions of each Fund having a research
component and the amount of commissions paid by each Fund for
such transactions were as follows:
<PAGE>
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
Pennsylvania Mutual Fund $ 160,117,031 $ 531,498
Royce Premier Fund 109,101,274 315,291
Royce Micro-Cap Fund 9,698,494 45,514
Royce Equity Income Fund 23,176,764 83,276
Royce Low-Priced Stock Fund 1,558,238 12,149
Royce GiftShares Fund* 61,901 294
Royce Value Fund 30,609,149 91,719
Royce Total Return Fund 49,918 4,102
Royce Global Services Fund 1,314,585 4,123
_________________
* For the period from December 27, 1995 (commencement of
operations) to December 31, 1995.
During the year ended December 31, 1995, Royce Global
Services Fund purchased and sold securities of Merrill Lynch &
Co., Inc., the parent of one of its "regular brokers" (as such
term is defined in Rule 10b-1 under the 1940 Act).
CODE OF ETHICS AND RELATED MATTERS
Quest, QDI, QMC and The Royce Funds have adopted a Code of
Ethics under which directors, officers, employees and partners of
Quest, QDI and QMC ("Quest-related persons") and interested
trustees/directors, officers and employees of The Royce Funds are
prohibited from personal trading in any security which is then
being purchased or sold or considered for purchase or sale by a
Royce Fund or any other Quest or QMC account. Such persons are
permitted to engage in other personal securities transactions if
(i) the securities involved are United States Government debt
securities, municipal debt securities, money market instruments,
shares of affiliated or non-affiliated registered open-end
investment companies or shares acquired from an issuer in a
rights offering or under an automatic dividend reinvestment or
employer-sponsored automatic payroll-deduction cash purchase plan
or (ii) they first obtain permission to trade from Quest's
Compliance Officer and an executive officer of Quest. The Code
contains standards for the granting of such permission, and it is
expected that permission to trade will be granted only in a
limited number of instances.
Quest's and QMC's clients include several private investment
companies in which Quest or QMC has (and, therefore, Charles M.
Royce, Jack E. Fockler, Jr. and/or W. Whitney George may be
deemed to beneficially own) a share of up to 15% of the company's
realized and unrealized net capital gains from securities
transactions, but less than 5% of the company's equity interests.
The Code of Ethics does not restrict transactions effected by
Quest or QMC for such private investment company accounts.
Transactions for such private investment company accounts are
subject to Quest's and QMC's allocation policies and procedures.
See "Portfolio Transactions".
As of September 30, 1996, Quest-related persons, interested
trustees/directors, officers and employees of The Royce Funds and
members of their immediate families beneficially owned shares of
<PAGE>
The Royce Funds having a total value of approximately $21.2
million, and Quest's and QMC's equity interests in such private
investment companies totalled approximately $3.4 million.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is
based on the Fund's current net asset value per share. See "Net
Asset Value Per Share" in the Funds' Prospectuses.
As set forth under "Net Asset Value Per Share", the Funds'
custodian determines the net asset value per share of each Fund
at the close of regular trading on the New York Stock Exchange on
each day that the Exchange is open. The Exchange is open on all
weekdays which are not holidays. Thus, it is closed on Saturdays
and Sundays and on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which
would, in the judgment of the Board of Trustees or management,
make it undesirable for a Fund to pay for all redemptions in
cash. In such cases, payment may be made in portfolio securities
or other property of the Fund. However, the Trust has obligated
itself under the 1940 Act to redeem for cash all shares presented
for redemption by any one shareholder up to $250,000 (or 1% of
the Trust's net assets if that is less) in any 90-day period.
Securities delivered in payment of redemptions would be selected
by Quest and valued at the same value assigned to them in
computing the net asset value per share for purposes of such
redemption. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
TAXATION
Each Fund (except Royce GiftShares) has qualified and
intends to remain qualified, and Royce GiftShares Fund intends to
qualify and to remain qualified, each year for the tax treatment
applicable to a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code").
To so qualify, a Fund must comply with certain requirements of
the Code relating to, among other things, the source of its
income and the diversification of its assets.
By so qualifying, a Fund will not be subject to Federal
income taxes to the extent that its net investment income and
capital gain net income are distributed, so long as the Fund
distributes, as ordinary income dividends, at least 90% of its
investment company taxable income.
A non-deductible 4% excise tax will be imposed on a Fund to
the extent that the Fund does not distribute (including by
declaration of certain dividends), during each calendar year, (i)
98% of its ordinary income for such calendar year, (ii) 98% of
its capital gain net income for the one-year period ending
<PAGE>
October 31 of such calendar year and (iii) certain other amounts
not distributed in previous years. To avoid the application of
this tax, each Fund intends to distribute substantially all of
its net investment income and capital gain net income at least
annually to its shareholders.
Each Fund will maintain accounts and calculate income by
reference to the U.S. dollar for U.S. Federal income tax
purposes. Investments calculated by reference to foreign
currencies will not necessarily correspond to a Fund's
distributable income and capital gains for U.S. Federal income
tax purposes as a result of fluctuations in foreign currency
exchange rates. Furthermore, if any exchange control regulations
were to apply to a Fund's investments in foreign securities, such
regulations could restrict that Fund's ability to repatriate
investment income or the proceeds of sales of securities, which
may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirement and avoid the 4% excise
tax.
Income earned or received by a Fund from investments in
foreign securities may be subject to foreign withholding taxes
unless a withholding exemption is provided under an applicable
treaty. Any such taxes would reduce that Fund's cash available
for distribution to shareholders. It is currently anticipated
that none of the Funds will be eligible to elect to "pass
through" such taxes to their shareholders for purposes of
enabling them to claim foreign tax credits or other U.S. income
tax benefits with respect to such taxes.
If a Fund invests in stock of a so-called passive foreign
investment company ("PFIC"), such Fund may be subject to Federal
income tax on a portion of any "excess distribution" with respect
to, or gain from the disposition of, such stock. The tax would be
determined by allocating such distribution or gain ratably to
each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable
year in which the excess distribution or disposition occurs would
be taxed to the Fund at the highest marginal income tax rate in
effect for such years, and the tax would be further increased by
an interest charge. The amount allocated to the taxable year of
the distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as a
dividend to shareholders. In lieu of being taxable in the manner
described above, such Fund may be able to elect to include
annually in income its pro rata share of the ordinary earnings
and net capital gain (whether or not distributed) of the PFIC. In
order to make this election, the Fund would be required to obtain
annual information from the PFICs in which it invests, which in
many cases may be difficult to obtain. Alternatively, if
eligible, the Fund may be able to elect to mark to market its
PFIC stock, resulting in the stock being treated as sold at fair
market value on the last business day of each taxable year. Any
resulting gain would be reported as ordinary income, and any
resulting loss would not be recognized.
Investments of a Fund in securities issued at a discount or
providing for deferred interest payments or payments of interest
in kind (which investment are subject to special tax rules under
the Code) will affect the amount, timing and character of
distributions to shareholders. For example, a Fund which acquires
securities issued at a discount will be required to accrue as
ordinary income each year a portion of the discount (even though
the Fund may not have received cash interest payments equal to
the amount included in income) and to distribute such income each
year in order to maintain its qualification as a regulated
investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and
<PAGE>
excise taxes, the Fund may have to dispose of securities that it
would otherwise have continued to hold.
Distributions
For Federal income tax purposes, distributions by each Fund
from net investment income and from any net realized short-term
capital gain are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares.
Ordinary income generally cannot be offset by capital losses.
For corporate shareholders, distributions of net investment
income (but not distributions of short-term capital gains) may
qualify in part for the 70% dividends received deduction for
purposes of determining their regular taxable income. (However,
the 70% dividends received deduction is not allowable in
determining a corporate shareholder's alternative minimum taxable
income.) The amount qualifying for the dividends received
deduction generally will be limited to the aggregate dividends
received by the Fund from domestic corporations. The dividends
received deduction for corporate shareholders may be further
reduced or eliminated if the shares with respect to which
dividends are received by the Fund are treated as debt-financed
or are deemed to have been held for fewer than 46 days, or under
other generally applicable statutory limitations.
So long as a Fund qualifies as a regulated investment
company and satisfies the 90% distribution requirement,
distributions by such Fund from net capital gains will be taxable
as long-term capital gains, whether received in cash or
reinvested in shares and regardless of how long a shareholder has
held his or its Fund shares. Such distributions are not eligible
for the dividends received deduction. Long-term capital gains of
non-corporate shareholders, although fully includable in income,
currently are taxed at a lower maximum marginal Federal income
tax rate than ordinary income.
Distributions by a Fund in excess of its current and
accumulated earnings and profits will reduce a shareholder's
basis in Fund shares (but, to that extent, will not be taxable)
and, to the extent such distributions exceed the shareholder's
basis, will be taxable as capital gain assuming the shareholder
holds Fund shares as capital assets.
A distribution will be treated as paid during a calendar
year if it is declared in October, November or December of the
year to shareholders of record in such month and paid by January
31 of the following year. Such distributions will be taxable to
such shareholders as if received by them on December 31, even if
not paid to them until January. In addition, certain other
distributions made after the close of a taxable year of a Fund
may be "spilled back" and treated as paid by the Fund (other than
for purposes of avoiding the 4% excise tax) during such year.
Such dividends would be taxable to the shareholders in the
taxable year in which the distribution was actually made by the
Fund.
The Trust will send written notices to shareholders
regarding the amount and Federal income tax status as ordinary
income or capital gain of all distributions made during each
calendar year.
<PAGE>
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders may be
subject to 31% withholding on reportable dividends, capital gains
distributions and redemption payments ("back-up withholding").
Generally, shareholders subject to back-up withholding will be
those for whom a taxpayer identification number and certain
required certifications are not on file with the Trust or who, to
the Trust's knowledge, have furnished an incorrect number. In
addition, the Trust is required to withhold from distributions to
any shareholder who does not certify to the Trust that such
shareholder is not subject to back-up withholding due to
notification by the Internal Revenue Service that such
shareholder has under-reported interest or dividend income. When
establishing an account, an investor must certify under penalties
of perjury that such investor's taxpayer identification number is
correct and that such investor is not subject to or is exempt
from back-up withholding.
Ordinary income distributions paid to shareholders who are
non-resident aliens or which are foreign entities will be subject
to 30% United States withholding tax unless a reduced rate of
withholding or a withholding exemption is provided under an
applicable treaty. Non-U.S. shareholders are urged to consult
their own tax advisers concerning the United States tax
consequences to them of investing in a Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, a Fund's net asset
value may reflect undistributed income or capital gains or net
unrealized appreciation of securities held by the Fund. A
subsequent distribution to the investor of such amounts, although
it may in effect constitute a return of his or its investment in
an economic sense, would be taxable to the shareholder as
ordinary income or capital gain as described above. Investors
should carefully consider the tax consequences of purchasing Fund
shares just prior to a distribution as they will receive a
distribution that is taxable to them.
Sales or Redemptions of Shares
Gain or loss recognized by a shareholder upon the sale,
redemption or other taxable disposition of Fund shares (provided
that such shares are held by the shareholder as a capital asset)
will be treated as capital gain or loss, measured by the
difference between the adjusted basis of the shares and the
amount realized on the sale or exchange. Such gain or loss will
be long-term capital gain or loss if the shares disposed of were
held for more than one year. A loss will be disallowed to the
extent that the shares disposed of are replaced (including by
receiving shares upon the reinvestment of distributions) within a
period of 61 days, beginning 30 days before and ending 30 days
after the sale of the shares. In such a case, the basis of the
shares acquired will be increased to reflect the disallowed loss.
A loss recognized upon the sale, redemption or other taxable
disposition of shares held for 6 months or less will be treated
as a long-term capital loss to the extent of any long-term
capital gain distributions received with respect to such shares.
* * *
<PAGE>
The foregoing relates to Federal income taxation.
Distributions, as well as any gains from a sale, redemption or
other taxable disposition of Fund shares, also may be subject to
state and local taxes. Under current law, so long as each Fund
qualifies for the Federal income tax treatment described above,
it is believed that neither the Trust nor any Fund will be liable
for any income or franchise tax imposed by Delaware.
Investors are urged to consult their own tax advisers
regarding the application to them of Federal, state and local tax
laws.
Royce GiftShares Fund
Gift Taxes
An investment in Royce GiftShares Fund may be a taxable gift
for Federal tax purposes, depending upon the options selected and
other gifts that the Donor and his or her spouse may make during
the year.
If the Donor selects the Withdrawal Option, the entire
amount of the gift will be a "present interest" that qualifies
for the Federal annual gift tax exclusion. In that case, the
Donor will be required to file a Federal gift tax return for the
year of the gift only if he or she makes gifts (including the
gift of Fund shares and any gifts by his or her spouse treated as
made by him or her) totaling more than $10,000 to the same
individual during that year or if he or she makes any gift of a
future interest during that year. The Trustee will notify the
Beneficiary of his or her right of withdrawal promptly following
any investment in the Fund under the Withdrawal Option.
If the Donor selects the Accumulation Option, the entire
amount of the gift will be a "future interest" for Federal gift
tax purposes, so that none of the gift will qualify for the
Federal annual gift tax exclusion (currently, $10,000).
Consequently, the Donor will have to file a Federal gift tax
return IRS (Form 709) reporting the entire amount of the gift,
even if the gift is less than $10,000.
If the Donor selects the Split Option, the portion of the
gift representing the Beneficiary's income interest will be a
"present interest" that will qualify for the Federal annual gift
tax exclusion, and the balance will be a "future interest" that
will not so qualify. The value of the income interest is the
present value of the Beneficiary's right to receive the Trust
income for the 40 year term of this Trust (without regard to the
possibility that the Trust may be terminated sooner) or until the
Beneficiary's earlier death, using actuarial tables and interest
rate assumptions prescribed by the Internal Revenue Service in
effect on the date of the gift. Using the assumptions currently
in effect, the income interest portion of Royce GiftShares Fund
Trusts using the Split Option and created for Beneficiaries aged
15, 20, 25, 30 and 35 would be 92.8%, 92.4%, 91.9%, 91.0% and
89.5%, respectively. Nevertheless, the Donor will have to file a
Federal gift tax return reporting the gift and identifying the
portion that does not represent a present interest, no matter how
small. The Donor should consult with his or her tax adviser to
determine the manner in which the gift must be reported for
Federal gift tax purposes.
<PAGE>
No Federal gift tax will be payable by the Donor until his
or her cumulative taxable gifts (i.e., gifts other than those
qualifying for the annual exclusion or other exclusions) exceed
the Federal gift and estate tax exclusion equivalent amount
(currently, $600,000). Any gift of Fund shares that does not
qualify as a present interest will reduce the amount of the
Federal gift and estate tax exemption that would otherwise be
available for future gifts or to the Donor's estate. All gifts
of Fund shares qualify for "gift splitting" with the Donor's
spouse, meaning that the Donor and his or her spouse may elect to
treat the gift as having been made one-half by each of them.
The Donor's gift of Fund shares may also have to be reported
for state gift tax purposes, if the state in which the Donor
resides imposes a gift tax. Many states do not impose such a
tax. Some do follow the Federal rules concerning the types of
transfers subject to tax and the availability of the annual
exclusion.
Generation-Skipping Transfer Taxes
If the Beneficiary of a gift of Royce GiftShares Fund shares
is a grandchild or more remote descendant of the Donor or is
assigned, under Federal tax law, to the generation level of the
Donor's grandchildren or more remote descendants, any part of the
gift that does not qualify for the Federal annual gift tax
exclusion will be a taxable transfer for purposes of the Federal
generation-skipping transfer tax ("GST tax"). The Donor may
protect these gifts from the GST tax by allocating his or her GST
exemption until his or her cumulative gifts (other than certain
gifts qualifying for the annual exclusion or other exclusions) to
individuals assigned, under Federal tax law, to the generation
level of the Donor's grandchildren or more remote descendants
exceed the GST tax exemption (currently, $1,000,000). The tax
rate on transfers subject to GST tax is the maximum Federal
estate tax rate (currently, 55%). Gifts subject to GST tax,
whether or not covered by the GST tax exemption, must be reported
on the Donor's Federal gift tax return. Whether, and the extent
to which, an investment in Royce GiftShares Fund will qualify for
the Federal annual gift tax exclusion will depend upon the
options selected and other gifts that the Donor and his or her
spouse may have made during the year. See "Gift Taxes" above.
Income Taxes
The Internal Revenue Service has taken the position in
recent rulings that a trust beneficiary who is given a power of
withdrawal over contributions to the trust should be treated as
the "owner" of the portion of the trust that was subject to the
power for Federal income tax purposes. Accordingly, if the Donor
selects the Withdrawal Option, the Beneficiary may be treated as
the "owner" of all of the Fund shares in the account for Federal
income tax purposes, and will be required to report all of the
income and capital gains earned in the Trust on his or her
personal Federal income tax return. The Trust will not pay
Federal income taxes on any of the Trust's income or capital
gains, and the "throwback rules" of the Code will not apply when
the Trust terminates. The Trustee will prepare and file the
Federal income tax information returns that are required each
year (and any state income tax returns that may be required), and
will send the Beneficiary a statement following each year showing
the amounts (if any) that the Beneficiary must report on his or
her income tax returns for that year. If the Beneficiary is under
fourteen years of age, these amounts may be subject to Federal
income taxation at the marginal rate applicable to the
<PAGE>
Beneficiary's parents. The Beneficiary will have the option to
require the Trustee to pay him or her a portion of the Trust's
income and capital gains annually to provide funds with which to
pay any resulting income taxes, which the Trustee will do by
redeeming Fund shares. The amount distributed will be a fraction
of the Trust's ordinary income and short-term capital gains and
the Trust's long-term capital gains equal to the highest marginal
Federal income tax rate imposed on each type of income
(currently, 39.6% and 28%, respectively). If the Beneficiary
selects this option, he or she will receive those fractions of
his or her Trust's income and capital gains annually for the
duration of the Trust.
Under the Withdrawal Option, the Beneficiary will also be
able to require the Trustee to pay his or her tuition, room and
board and other expenses of his or her college or post-graduate
education, and the Trustee will raise the cash necessary to fund
these distributions by redeeming Fund shares. Any such
redemption will result in the realization of capital gain or loss
on the shares redeemed, which will be reportable by the
Beneficiary on his or her income tax returns for the year in
which the shares are redeemed, as described above.
If the Donor selects the Accumulation Option, the Trust that
he or she creates will be subject to Federal income tax on all
income and capital gains earned by the Trust, less a $100 annual
exemption (in lieu of the personal exemption allowed to
individuals). The amount of the tax will be determined under the
tax rate schedule applicable to estates and trusts, which is more
sharply graduated than the rate schedule for individuals,
reaching the same maximum marginal rate for ordinary income
(currently, 39.6%), but at a much lower taxable income level (for
1996, $7,900) than would apply to an individual. It is
anticipated, however, that most of the income generated by Fund
shares will be long-term capital gains, on which the Federal
income tax rate is currently limited to 28 %. The Trustee will
raise the cash necessary to pay any Federal or state income taxes
by redeeming Fund shares. The Beneficiary will not pay Federal
income taxes on any of the Trust's income or capital gains,
except those earned in the year when the Trust terminates. If
the Trust terminates after the Beneficiary reaches age 21, the
distribution of the balance of the trust fund may be treated as
an "accumulation distribution" under the so-called "throwback
rules" of the Code, which could result in the imposition of
additional income tax on the Beneficiary. The Trustee will
prepare and file all Federal and state income tax returns that
are required each year, and will send the Beneficiary an
information statement for the year in which the Trust terminates
showing the amounts (if any) that the Beneficiary must report on
his or her Federal and state income tax returns for that year and
the amount (if any) of any accumulation distribution subject to
the "throwback rules" of the Code.
If the Donor selects the Split Option, the Trust will be
subject to Federal income tax only on capital gains earned by the
Trust (which would include all capital gains distributions on the
shares of the Fund held in the Trust), less a $300 exemption (in
lieu of the personal exemption allowed to individuals). The
amount of the tax will be determined under the tax rate schedule
applicable to estates and trusts, which is more sharply graduated
than the rate schedule used for individuals, reaching the same
maximum marginal rate for ordinary income (currently, 39.6%) but
at a much lower taxable income level (for 1996, $7,900) than
would apply to an individual. It is anticipated, however, that
most of the income generated by Fund shares will be long-term
capital gains, on which the Federal tax rate is currently limited
to 28%. The Trustee will raise the cash necessary to pay any
Federal or state income tax by redeeming Fund shares. The Trust
will receive any net investment income dividends paid by the Fund
<PAGE>
in cash, the Trustee will distribute all of the Trust's net
income to the Beneficiary and the Beneficiary will be subject to
Federal income tax on all ordinary income received from the Trust
each year. The Beneficiary will not pay Federal income taxes on
any of the Trust's capital gains, except those earned in the year
of the Trust's termination, and the "throwback rules" of the Code
will not apply when the Trust terminates. The Trustee will
prepare and file all Federal and state income tax returns that
are required each year, and will send the Beneficiary an
information statement each year showing the amounts (if any) that
the Beneficiary must report on his or her Federal and state
income tax returns for that year.
When the Trust terminates, the distribution of the remaining
Fund shares held in the Trust to the Beneficiary will not be
treated as a taxable disposition, and no capital gain or loss
will be realized by the Beneficiary (or, if he or she has died,
by his or her estate) at that time. Any Fund shares received by
the Beneficiary will have the same cost basis as they had in the
Trust at the time of termination. Any Fund shares received by
the Beneficiary's estate will have a basis equal to the value of
the shares at the Beneficiary's death (or the alternative
valuation date for Federal estate tax purposes, if elected).
Consultation With Qualified Tax Adviser
Due to the complexity of Federal and state gift, GST and
income tax laws pertaining to all gifts in trust, prospective
Donors should consider consulting with an attorney or other
qualified tax adviser before investing in Royce GiftShares Fund.
DESCRIPTION OF THE TRUST
Trust Organization
The Trust was organized in April 1996 as a Delaware business
trust. It is the successor by mergers to The Royce Fund, a
Massachusetts business trust (the "Predecessor"), and
Pennsylvania Mutual Fund, a Delaware business trust. The mergers
were effected on June 28, 1996, under an Agreement and Plan of
Merger pursuant to which the Predecessor and Pennsylvania Mutual
Fund merged into the Trust, with each Fund of the Predecessor and
Pennsylvania Mutual Fund becoming an identical counterpart series
of the Trust, Quest and RE&A continuing as the Funds' investment
advisers under their pre-merger Investment Advisory Agreements
and QDI continuing as the Trust's distributor. A copy of the
Trust's Certificate of Trust is on file with the Secretary of
State of Delaware, and a copy of its Trust Instrument, its
principal governing document, is available for inspection by
shareholders at the Trust's office in New York.
The Trust has an unlimited authorized number of shares of
beneficial interest, which may be divided into an unlimited
number of series and/or classes without shareholder approval.
(Each Fund presently has only one class of shares.) These shares
are entitled to one vote per share (with proportional voting for
fractional shares). Shares vote by individual series except as
otherwise required by the 1940 Act or when the Trustees determine
that the matter affects shareholders of more than one series.
<PAGE>
Each of the Trustees currently in office were elected by the
Trust's predecessor's shareholders. There will normally be no
meeting of shareholders for the election of Trustees until less
than a majority of such Trustees remain in office, at which time
the Trustees will call a shareholders' meeting for the election
of Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the
outstanding shares of the Trust and filed with the Trust's
custodian or by a vote of the holders of a majority of the
outstanding shares of the Trust at a meeting duly called for this
purpose upon the written request of holders of at least 10% of
the Trust's outstanding shares. Upon the written request of 10
or more shareholders of the Trust, who have been shareholders for
at least 6 months and who hold shares constituting at least 1% of
the Trust's outstanding shares, stating that such shareholders
wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting
to consider the removal of a Trustee, the Trust is required (at
the expense of the requesting shareholders) to provide a list of
its shareholders or to distribute appropriate materials. Except
as provided above, the Trustees may continue to hold office and
appoint their successors.
The trustee of the Royce GiftShares Fund trusts will send
notices of meetings of Royce GiftShares Fund shareholders, proxy
statements and proxies for such meetings to the trusts'
beneficiaries to enable them to attend the meetings in person or
vote by proxies. It will vote all GiftShares Fund shares held by
it which are not present at the meetings and for which no proxies
are returned in the same proportions as GiftShares Fund shares
for which proxies are returned.
Shares are freely transferable, are entitled to
distributions as declared by the Trustees and, in liquidation of
the Trust, are entitled to receive net assets of their series.
Shareholders have no preemptive rights. The Trust's fiscal year
ends on December 31.
Shareholder Liability
Generally, shareholders will not be personally liable for
the obligations of their Fund or of the Trust under Delaware law.
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust is entitled to the same limited liability
extended to stockholders of private corporations for profit
organized under the Delaware General Corporation Law no similar
statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the
extent that the Trust or a shareholder of the Trust is subject to
the jurisdiction of courts in those states, the courts may not
apply Delaware law and may thereby subject Trust shareholders to
liability. To guard against this possibility, the Trust
Instrument (i) requires that every written obligation of the
Trust contain a statement that such obligation may be enforced
only against of the Trust's assets (however, the omission of this
disclaimer will not operate to create personal liability for any
shareholder); and (ii) provides for indemnification out of Trust
property of any Trust shareholder held personally liable for the
Trust's obligations. Thus, the risk of a Trust shareholder
incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (i) a
court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware
law, the nature of the Trust's business and the nature of its
assets, management believes that the risk of personal liability
to a Trust shareholder is extremely remote.
<PAGE>
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All
performance information supplied for the Funds is historical and
is not intended to indicate future returns. Each Fund's share
price and total returns fluctuate in response to market
conditions and other factors, and the value of a Fund's shares
when redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return,
including the effect of reinvesting dividends and capital gain
distributions and any change in the Fund's net asset value per
share (NAV) over the period. Average annual total returns are
calculated by determining the growth or decline in value of a
hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period.
For example, a cumulative return of 100% over ten years would
produce an average annual total return of 7.18%, which is the
steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total
returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance
is not constant over time, but changes from year to year, and
that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, a Fund's
unaveraged or cumulative total returns, reflecting the simple
change in value of an investment over a stated period, may be
quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments or a
series of redemptions, over any time period. Total returns may
be broken down into their components of income and capital
(including capital gains and changes in share prices) in order to
illustrate the relationship of these factors and their
contributions to total return. Total returns and other
performance information may be quoted numerically or in a table,
graph or similar illustration.
Historical Fund Results
The following table shows certain of the Funds' total
returns for the periods indicated. Such total returns reflect all
income earned by each Fund, any appreciation or depreciation of
the assets of such Fund and all expenses incurred by such Fund
for the stated periods. The table compares the Funds' total
returns to the records of the Russell 2000 Index (Russell 2000)
and Standard & Poor's 500 Composite Stock Price Index (S&P 500)
over the same periods. The comparison to the Russell 2000 shows
how the Funds' total returns compared to the record of a broad
index of small capitalization stocks. The S&P 500 comparison is
provided to show how the Funds' total returns compared to the
<PAGE>
record of a broad average of common stock prices over the same
period. The Funds have the ability to invest in securities not
included in the indices, and their investment portfolios may or
may not be similar in composition to the indices. Figures for
the indices are based on the prices of unmanaged groups of
stocks, and, unlike the Funds, their returns do not include the
effect of paying brokerage commissions and other costs and
expenses of investing in a mutual fund.
Period Ended
Fund December 31, 1995 Russell 2000 S&P 500
Pennsylvania Mutual Fund
1 Year Total Return 18.7% 28.4% 37.5%
5 Year Average Annual
Total Return 15.0 21.1 16.6
10 year Average Annual
Total Return 11.3 11.3 14.8
Royce Premier Fund
1 Year Total Return 17.8% 28.4% 37.5%
Average Annual Total
Return since 12-31-91 13.8 15.4 13.3
(commencement of operations)
Royce Micro-Cap Fund
1 Year Total Return 19.1% 28.4% 37.5%
Average Annual Total
Return since 12-31-91 18.5 15.4 13.3
(commencement of operations)
Royce Equity Income Fund
1 Year Total Return 16.4% 28.4% 37.5%
5 Year Average Annual
Total Return 14.6 21.0 16.6
Average Annual Total
Return since 1-2-90 9.0 12.9 12.7
(commencement of operations)
Royce Low-Priced Stock Fund
1 Year Total Return 22.5% 28.4% 37.5%
Average Annual Total
Return since 12-15-93 12.2 13.9 18.2
(commencement of operations)
Royce Value Fund
1 Year Total Return 18.7% 28.4% 37.5%
5 Year Average Annual
Total Return 14.4 21.1 16.6
10 Year Average Annual
Total Return 10.0 11.3 14.8
Royce Total Return Fund
1 Year Total Return 26.9% 28.4% 37.5%
Average Annual Total
Return since 12-15-93 15.1 13.9 18.2
(commencement of operations)
<PAGE>
Period Ended
Fund December 31, 1995 Russell 2000 S&P 500
Royce Global Services Fund
1 Year Total Return 21.2% 28.4% 37.5%
Average Annual Total
Return since 12-15-94 21.7 31.7 36.8
(commencement of operations)
During the applicable period ended December 31, 1995, a
hypothetical $10,000 investment in certain of the Funds would
have grown as indicated below, assuming all distributions were
reinvested:
Fund/Period Commencement Date Hypothetical Investment at December 31, 1995
Pennsylvania Mutual Fund (12-31-75) $262,700
Royce Premier Fund (12-31-91) 16,774
Royce Micro-Cap Fund (12-31-91) 19,731
Royce Equity Income Fund (1-2-90) 16,760
Royce Low-Priced Stock Fund (12-15-93) 12,642
Royce Value Fund (12-31-82) 47,325
Royce Total Return Fund (12-15-93) 13,339
Royce Global Services Fund (12-15-94) 12,269
The Funds' performances may be compared in advertisements to
the performance of other mutual funds in general or to the
performance of particular types of mutual funds, especially those
with similar investment objectives. Such comparisons may be
expressed as mutual fund rankings prepared by Lipper Analytical
Services, Inc. ("Lipper"), an independent service that monitors
the performance of registered investment companies. The Funds'
rankings by Lipper for the one year period ended December 31,
1995 were:
Fund Lipper Ranking
Pennsylvania Mutual Fund 264 out of 304 small company growth Funds
Royce Premier Fund 273 out of 304 small company growth funds
Royce Micro-Cap Fund 263 out of 304 small company growth funds
Royce Equity Income Fund 114 out of 129 equity income funds
Royce Low-Priced Stock Fund 226 out of 304 small company growth funds
Royce Value Fund 265 out of 304 small company growth funds
Royce Total Return Fund 358 out of 439 growth and income funds
Royce Global Services Fund 23 out of 127 global funds
Money market funds and municipal funds are not included in the
Lipper survey. The Lipper performance analysis ranks funds on
the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees
payable by shareholders into consideration and is prepared
without regard to tax consequences.
<PAGE>
The Lipper General Equity Funds Average can be used to show
how the Funds' performances compare to a broad-based set of
equity funds. The Lipper General Equity Funds Average is an
average of the total returns of all equity funds (excluding
international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of
June 30, 1996, the average included 220 capital appreciation
funds, 705 growth funds, 161 Mid-Cap Funds, 414 small company
growth funds, 553 growth and income funds, 162 equity income
funds, and 48 S&P Index objective funds. Capital appreciation,
growth and small company growth funds usually invest principally
in common stocks, with long-term growth as a primary goal.
Growth and income and equity income funds tend to be more
conservative in nature and usually invest in a combination of
common stocks, bonds, preferred stocks and other income-producing
securities. Growth and income and equity income funds generally
seek to provide their shareholders with current income as well as
growth of capital, unlike growth funds which may not produce
income.
The Lipper Growth & Income Fund Index can be used to show
how the Total Return Fund's performance compares to a set of
growth and income funds. The Lipper Growth & Income Fund Index is
an equally-weighted performance index, adjusted for capital gains
distributions and income dividends, of the 30 largest qualifying
funds within Lipper's growth and income investment objective
category.
The Lipper Global Fund Index can be used to show how the
Global Services Fund's performance compares to a set of global
funds. The Lipper Global Fund Index is an equally-weighted
performance index, adjusted for capital gains distributions and
income dividends, of the 30 largest qualifying funds in Lipper's
global investment objective category.
Ibbotson Associates (Ibbotson) provides historical returns
of the capital markets in the United States. The Funds'
performance may be compared to the long-term performance of the
U.S. capital markets in order to demonstrate general long-term
risk versus reward investment scenarios. Performance comparisons
could also include the value of a hypothetical investment in
common stocks, long-term bonds or U.S. Treasury securities.
Ibbotson calculates total returns in the same manner as the
Funds.
The capital markets tracked by Ibbotson are common stocks,
small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds,
U.S. Treasury bills and the U.S. rate of inflation. These
capital markets are based on the returns of several different
indices. For common stocks, the S&P 500 is used. For small
capitalization stocks, return is based on the return achieved by
Dimensional Fund Advisors (DFA) U.S. Growth and Income Small
Company Fund. This fund is a market-value-weighted index of the
ninth and tenth deciles of the New York Stock Exchange (NYSE),
plus stocks listed on the American Stock Exchange (AMEX) and over-
the-counter (OTC) with the same or less capitalization as the
upper bound of the NYSE ninth decile. As of August 31, 1996 DFA
contained approximately 2,700 stocks, with a median market
capitalization of about $114 million.
The S&P 500 Composite Stock Price Index is an unmanaged
index of common stocks frequently used as a general measure of
stock market performance. The Index's performance figures reflect
changes of market prices and quarterly reinvestment of all
distributions.
<PAGE>
The S&P SmallCap 600 Index is an unmanaged market-weighted
index consisting of 600 domestic stocks chosen for market size,
liquidity and industry group representation. As of June 30,
1996, the weighted mean market value of a company in this Index
was approximately $671 million.
The Russell 2000, prepared by the Frank Russell Company,
tracks the return of the common stocks of the 2,000 smallest out
of the 3,000 largest publicly traded U.S.-domiciled companies by
market capitalization. The Russell 2000 tracks the return on
these stocks based on price appreciation or depreciation and
includes dividends.
U.S. Treasury bonds are securities backed by the credit and
taxing power of the U.S. government and, therefore, present
virtually no risk of default. Although such government
securities fluctuate in price, they are highly liquid and may be
purchased and sold with relatively small transaction costs
(direct purchase of U.S. Treasury securities can be made with no
transaction costs). Returns on intermediate-term government
bonds are based on a one-bond portfolio constructed each year,
containing a bond that is the shortest non-callable bond
available with a maturity of not less than five years. This bond
is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond that meets several
criteria, including having a term of approximately 20 years. The
bond is held for the calendar year and returns are recorded.
Returns on U.S. Treasury bills are based on a one-bill portfolio
constructed each month, containing the shortest term bill having
not less than one month to maturity. The total return on the
bill is the month-end price divided by the previous month-end
price, minus one. Data up to 1976 is from the U.S. Government
Bond file at the University of Chicago's Center for Research in
Security Prices; The Wall Street Journal is the source
thereafter. Inflation rates are based on the Consumer Price
Index.
Quest may, from time to time, compare the performance of
common stocks, especially small capitalization stocks, to the
performance of other forms of investment over periods of time.
From time to time, in reports and promotional literature,
the Funds' performances also may be compared to other mutual
funds tracked by financial or business publications and
periodicals, such as KIPLINGER's, INDIVIDUAL INVESTOR, MONEY,
FORBES, BUSINESS WEEK, BARRON's, FINANCIAL TIMES, FORTUNE, MUTUAL
FUNDS MAGAZINE and THE WALL STREET JOURNAL. In addition,
financial or business publications and periodicals, as they
relate to fund management, investment philosophy and investment
techniques, may be quoted.
Morningstar, Inc.'s proprietary risk ratings may be quoted
in advertising materials. For the three years ended August 31,
1996, the average risk score for the 1,666 equity funds rated by
Morningstar with a three-year history was 1.00; the average risk
score for the 204 small company funds rated by Morningstar with a
three-year history was 1.11 and the average risk score for the 82
equity income funds rated by Morningstar with a three-year
history was 0.64. For the three years ended December 31, 1995,
the risk scores for the Funds with a three-year history, and
their ranks within Morningstar's equity funds category and either
its small company or equity income funds categories, as
applicable, were as follows:
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Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds Equity Income Funds
Pennsylvania 0.62 Within lowest 10% Within lowest 10% -
Mutual
Premier 0.36 Within lowest 5% Lowest risk score -
Micro-Cap 0.56 Within lowest 10% Within lowest 5% -
Equity 0.51 Within lowest 15% - Within lowest 15%
Income
Value 0.62 Within lowest 10% Within lowest 10% -
The Funds' performances may also be compared to those of
other compilations or indices.
Advertising for the Funds may contain examples of the
effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit
or guard against loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
The Funds may be available for purchase through retirement
plans or other programs offering deferral of or exemption from
income taxes, which may produce superior after-tax returns over
time. For example, a $2,000 annual investment earning a taxable
return of 8% annually would have an after-tax value of $177,887
after thirty years, assuming tax was deducted from the return
each year at a 28% rate. An equivalent tax-deferred investment
would have a value of $244,692 after thirty years.
Risk Measurements
Quantitative measures of "total risk," which quantify the
total variability of a portfolio's returns around or below its
average return, may be used in advertisements and in
communications with current and prospective shareholders. These
measures include standard deviation of total return and the
Morningstar risk statistic. Such communications may also include
market risk measures, such as beta, and risk-adjusted measures of
performance such as the Sharpe Ratio, Treynor Ratio, Jensen's
Alpha and Morningstar's star rating system.
Standard Deviation. The risk associated with a fund or
portfolio can be viewed as the volatility of its returns,
measured by the standard deviation of those returns. For
example, a fund's historical risk could be measured by computing
the standard deviation of its monthly total returns over some
<PAGE>
prior period, such as three years. The larger the standard
deviation of monthly returns, the more volatile - i.e., spread
out around the fund's average monthly total return, the fund's
monthly total returns have been over the prior period. Standard
deviation of total return can be calculated for funds having
different objectives, ranging from equity funds to fixed income
funds, and can be measured over different time frames. The
standard deviation figures presented are annualized statistics
based on the trailing 36 monthly returns. Approximately 68% of
the time, the annual total return of a fund will differ from its
mean annual total return by no more than plus or minus the
standard deviation figure. 95% of the time, a fund's annual total
return will be within a range of plus or minus 2x the standard
deviation from its mean annual total return.
Beta. Beta measures the sensitivity of a security's or
portfolio's returns to the market's returns. It measures the
relationship between a fund's excess return (over 3-month T-
bills) and the excess return of the benchmark index (S&P 500 for
domestic equity funds). The market's beta is by definition equal
to 1. Portfolios with betas greater than 1 are more volatile than
the market, and portfolios with betas less than 1 are less
volatile than the market. For example, if a portfolio has a beta
of 2, a 10% market excess return would be expected to result in a
20% portfolio excess return, and a 10% market loss would be
expected to result in a 20% portfolio loss (excluding the effects
of any firm-specific risk that has not been eliminated through
diversification).
Morningstar Risk. The Morningstar proprietary risk
statistic evaluates a fund's downside volatility relative to that
of other funds in its class based on the underperformances of the
fund relative to the riskless T-bill return. It then compares
this statistic to those of other funds in the same broad
investment class.
Sharpe Ratio. Also known as the Reward-to-Variability
Ratio, this is the ratio of a fund's average return in excess of
the risk-free rate of return ("average excess return") to the
standard deviation of the fund's excess returns. It measures the
returns earned in excess of those that could have been earned on
a riskless investment per unit of total risk assumed.
Treynor Ratio. Also known as the Reward-to-Volatility
Ratio, this is the ratio of a fund's average excess return to the
fund's beta. It measures the returns earned in excess of those
that could have been earned on a riskless investment per unit of
market risk assumed. Unlike the Sharpe Ratio, the Treynor Ratio
uses market risk (beta), rather than total risk (standard
deviation), as the measure of risk.
Jensen's Alpha. This is the difference between a fund's
actual returns and those that could have been earned on a
benchmark portfolio with the same amount of risk - i.e., the same
beta, as the portfolio. Jensen's Alpha measures the ability of
active management to increase returns above those that are purely
a reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund
rating service that rates mutual funds on the basis of risk-
adjusted performance. Ratings may change monthly. Funds with at
least three years of performance history are assigned ratings
from one star (lowest) to five stars (highest). Morningstar
ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are
adjusted for fees and sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars and the bottom
10% receive one star.
<PAGE>
None of the quantitative risk measures taken alone can be
used for a complete analysis and, when taken individually, can be
misleading at times. However, when considered in some
combination and with the total returns of a fund, they can
provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will
change over time and are not necessarily predictive of future
performance or risk.
