<PAGE>
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ROYCE
EQUITY INCOME
FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
THE ROYCE FUNDS
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<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Shareholder:
After a left foot start in January, small company stocks, as measured by the
Russell 2000 Index, outperformed their large company brethren (S&P 500) in
February, March, April and May (15.2% versus 6.2%), but were unable to continue
their winning ways in June (-4.1% versus 0.4%). June's downturn in performance
was the first sign of potentially higher volatility for small-cap issues. In
fact, the Nasdaq Composite closed the second quarter off over 5% from the high
it established on June 5th, its largest decline since a 13.8% drop in the second
quarter of 1994. In spite of June's downturn, and because of the February-May
surge, the Russell 2000 Index of small-cap stocks won the first half performance
derby with a 10.4% total return versus a 10.2% total return for the large-cap
oriented S&P 500.
Within small-cap, 'growth' finished ahead of 'value' with the Russell 2000
Growth Index providing an 11.9% return versus an 8.7% gain for the Russell 2000
Value Index. A similar performance relationship, but with wider disparity, was
also present in the Wilshire Target Small Cap Index Funds, as the Small Cap
Growth Fund (+13.2%) handily outperformed the Small Cap Value Fund (+3.9%).
ROYCE EQUITY INCOME FUND'S ('REI') income oriented small-cap value approach
produced a 7.9% total return, in line with the two small-cap value proxies and
ahead of the Lipper Equity Income Average which was up 7.5% for the first six
months. Two sectors, consumer durables (which had been a mediocre performer in
1995) and technology, contributed to the fund's first half performance.
Although REI's investment approach rarely leads in the short-term, its
longer-term results are competitive on an absolute and risk adjusted basis.
Average annual total return for the last five years was 12.1%. One of REI's
additional attributes is its low risk profile. According to independent mutual
fund evaluation service Morningstar, REI was one of the lowest risk equity
income funds for the three years ended June 30, 1996, as measured by standard
deviation (4th lowest out of 78 funds), beta (3rd lowest out of 78 funds) and
Morningstar's risk ratio (10th lowest out of 78 funds). WE BELIEVE THAT OUR
APPROACH OF INVESTING IN HIGH QUALITY, INCOME ORIENTED, SMALL-CAP COMPANIES,
USING ABSOLUTE VALUATION STANDARDS, IS AN APPROPRIATE STRATEGY FOR GENERATING
ABOVE AVERAGE RESULTS.
FIREWORKS IN JULY [GRAPHIC]
Louis Pasteur once
said, 'Chance favors the prepared mind.' Although everyone was prepared for the
fireworks of July 4th, few were prepared for the market fireworks which began in
June and intensified throughout July. Double digit gains in small-cap indices
were erased and many investors now find themselves starting over at mid-year.
2
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Performance Update Through July 31
<TABLE>
<CAPTION>
% Decline July '96 YTD Return
From High* Return thru 7/31/96
--------- -------- ------------
<S> <C> <C> <C>
REI -3.3% -2.8% +4.9%
Russell 2000 -13.1% -8.7% +0.7%
Nasdaq Comp. -13.4% -8.8% +2.7%
</TABLE>
* Russell 2000 high was made on 5/22/96.
We view the current pyrotechnics of July from the vantage point that these
fluctuations are inevitable and desirable, and part of the normal rhythm of the
market. We are prone to keep ourselves at a distance. This is largely common
sense -- no special preparation needed.
WORTH REPEATING
To be quoted is flattering. To quote oneself presents the dual risk of boring
our readers and tooting our own horn. Nevertheless, we want to repeat some of
our comments from the 1995 Annual Report. (We promise we won't do this again.)
IN OUR LAST REPORT WE SAID:
'An interesting aspect of this five year rise in both
stocks and bonds is the ever increasing participation
of individual investors . . . In fact, it is that very same
demand which is believed to ensure future success
and prevent any major reversal in market
fortunes . . . The suggestion that continued success is
nearly guaranteed by demand is a scary
proposition . . . We remain most astonished, not with
the magnitude of investor appetite for stocks, but the
nearly universal assumption of its permanence.'
WE NOW THINK:
In a perverse way, the least informed (the purchasing public) now appear to
be dictating investment policy to those presumed most knowledgeable (portfolio
managers). Normally prudent professionals have taken comfort in the fact that
the public is pouring money into equity mutual funds. As one of our shareholders
commented, 'The inmates are running the asylum.'
ALSO IN THE 1995 ANNUAL REPORT WE SAID:
'We are certain, particularly in a global
economy, that an ample supply of securities can
be created to meet and even exceed investors'
demands.'
AND NOW:
The $132 billion of new investments in equity mutual funds for the first half
of 1996 has eclipsed the prior annual record set in 1993 ($130 billion for the
full year). Yet, the dramatic upward progress that this commitment was expected
to produce has not materialized. A move up in long-term interest rates and
increased corporate insider selling activity are partly to blame, as well as a
surge in IPO activity. By late June, roughly 80 new offerings a week were
producing a fresh supply of securities at the rate of approximately $20 billion
a month.
3
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[GRAPHIC]
One of the most instructive offerings of the recent IPO boom was the creation
and issuance of Berkshire Hathaway Inc. Class B shares. Berkshire Hathaway's
Chairman, Warren Buffett, is perhaps the best known investor of our time.
Multiple warnings on the front page of the prospectus included: 'Neither Mr.
Buffett nor Mr. Munger (Vice Chairman) would currently buy Berkshire shares (at
the current price), nor would they recommend that their families or friends do
so' and 'Berkshire has attempted to assess the current demand for Class B shares
and has tailored the size of this offering to fully satisfy that demand (and)
therefore, buyers hoping to capture quick profits are almost certain to be
disappointed.' Yet, despite the warnings, over $500 million was raised. WALL
STREET HAS BEEN SUCCESSFUL IN CREATING AN AMPLE SUPPLY OF NEW AND SECONDARY
OFFERINGS TO FULLY SATISFY DEMAND. HOWEVER, IT PROVIDES NO SIMILAR 'WARNING
LABELS.'
ADDITIONALLY WE SAID:
'The magnitude of the decline in interest rates
is virtually not repeatable. Consequently, a
further decline in interest rates will not have the
same favorable impact on stock prices, no
matter how bullish one is on rates.'
AND NOW:
The consensus expectations of lower rates (then at 6%) in an election year
have proved to be wrong. Long-term government bond yields rose by over 20% in
the first half to a current yield of over 7.0%. While this surprise has not
ended the party, it's getting hard to find the punch bowl.
AND FINALLY WE SAID:
'THE NEXT FIVE YEARS WILL BE DIFFERENT! It's
not likely that the next five years will rival the
previous five in terms of ideal wind conditions
or spectacular performance. History tells us
that periods of high valuation and high return
are usually followed by periods of lower, less
dynamic returns . . . . We see no reason why
performance should not revert to the mean and,
thus, a period of lower five year returns is
likely. Very simply, the last five years was a
period in which risk and reward were
synonymous and one in which risk management
provided virtually no benefit. It's likely that we
have completed the best five year performance
period for this decade.'
AND NOW?
Enough said.
4
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THE VALUE IN VALUE INVESTING
A basic premise of value investing is that stocks, like other goods and
services, should be purchased at the most attractive prices possible, preferably
at a discount to their 'intrinsic worth.' The reality for most investors is just
the opposite. In other words, investor comfort levels and, therefore, demand
increase when prices rise, and diminish as prices decline. The higher a stock
rises, the greater the perceived opportunity.
Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION MAKING . . .
THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK. Its basic
premise is that the price one pays for an investment makes a significant
difference in the return one receives.
WHAT WE DO
[GRAPHIC] Royce Equity Income Fund uses a risk-averse approach to
invest in above average dividend paying securities of
small-cap companies. Experience tells us that paying
attention to risk does not diminish long-term results, although individual
market phases may not always confirm this.
Our approach attempts to understand and value a company's private
worth -- what we believe an enterprise would sell for in a private transaction
between rational parties. The price we will pay for a security must be
significantly under our appraisal of its private worth. The consistent use of
this discipline, applied to less well-known securities, is the source of our
performance.
NO OTHER PLACE WE WOULD RATHER BE
While the Fund focuses on companies with market caps below $1 billion, our
weighted average and median market caps are actually much lower: $388 million
and $297 million, respectively, at June 30, 1996.
Although our orientation is small-cap stocks, our picking universe is by no
means small, with over 10,000 companies valued at more than $900 billion in
total market capitalization. It is both robust and perpetuating; IPO's, spin-
offs and reorganizations create hundreds of new prospects each year. The
small-cap sector is rich in opportunity and easily accommodates our strategy
given the size of the investable universe.
Not long ago we had a conversation with a highly successful and respected
fund manager about diversification. His contention was that statistical
diversification could be achieved with just 13 holdings. His own portfolio was
concentrated in a mere 20 selections. We were impressed. Yet, upon further
examination, we discovered his 20 large-cap holdings were involved in 61
different businesses. As defined by Standard Industrial Classification codes
(SICs), Philip Morris has seven different business groups, Pepsi has six,
Johnson & Johnson has five and so on. In contrast, the vast majority of our
holdings have single lines of business. When one adds up the numbers, there's
really not much difference in terms of diversification between our approach and
that of 'focused' managers.
5
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HOW IT WORKS
Our approach to investing in individual small-cap [GRAPHIC]
companies has proven historical benefits, but can be both
unpredictable and frustrating in the near-term. We believe that the stock market
in the short-term is a polling place, and in the long-term, a highly efficient
weighing device. While our ultimate success will continue to be driven by the
process of 'weighing the true value' of the small companies in which we have
invested, the following provides a brief glimpse of some of this year's
'election results.'
FALLING IN LOVE
[GRAPHIC] Despite a generally rising market, there were
numerous opportunities for us to either add new
positions or increase our investment in some old
favorites. The following companies represent our most
significant commitments in 1996's first half. More importantly, they represent
examples of works in progress which we hope will build future performance.
<TABLE>
<CAPTION>
SECURITY NET INVESTED
- ----------------------------------------- ------------
<S> <C>
Oregon Steel Mills, Inc. $391,313
Arthur J. Gallagher & Co. 367,960
Arnold Industries, Inc. 293,840
The Commerce Group, Inc. 281,892
International Aluminum Corporation 247,941
</TABLE>
Our largest new purchase, Oregon Steel Mills, came to us through a poorly
received secondary offering, and we purchased the stock below book value. This
company has just completed a major capital expenditure program and should grow
quickly as a low cost producer. In the meantime, Oregon Steel pays a generous
dividend. We bought two insurance companies, Arthur J. Gallagher, which sells
brokerage and risk management, and The Commerce Group, which underwrites
property and casualty insurance in Massachusetts. The Commerce Group is
conservatively capitalized, generates lots of operating cash, and excels in its
market niche. Gallagher brokers a wide variety of insurance products and has
demonstrated steady growth and outstanding management. Rising interest rates and
continuing price competition in the insurance industry have provided us with the
opportunity to increase our ownership in these two well managed companies on
very favorable terms. Arnold Industries, which provides trucking services to
contract customers, produces piles of cash. International Aluminum is a
California based supplier of specialty aluminum and glass products in the
building materials market. This leading company did a remarkable job of managing
itself through a California building depression and now appears poised for
recovery.
HARVEST SEASON
Selling stocks is always difficult for the value [GRAPHIC]
investor for it requires either parting with success or
admitting mistakes. So far this year we have done both. The following is a list
of our five largest divestitures during 1996's first half.
<TABLE>
<CAPTION>
SECURITY NET PROCEEDS
- ----------------------------------------- ------------
<S> <C>
Hilb, Rogal & Hamilton Company $1,009,250
NCH Corporation 976,183
Waban Inc. (6.5% Cv. Sb. Db. 7/01/02) 906,699
Cliffs Drilling Company 898,086
Comdisco, Inc. 856,440
</TABLE>
While Hilb, Rogal & Hamilton Company has been a good holding for us in the
insurance
6
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<PAGE>
sector, we have replaced HRH with more compelling opportunities. NCH
Corporation, on the other hand, may have been a mistake. While we suffered no
material loss, our confidence of future gain had diminished to the point where
our patience ran out. Improving fortunes in energy and retailing resulted in
full and fair valuations for one of our retailing holdings, Waban Inc. and one
of our energy companies, Cliffs Drilling. Both stocks have performed well for
us. Finally, we reduced our position in Comdisco due to rising valuations.
VOLATILITY IS A FRIEND
Recently, stock market volatility has generated a great deal of attention
from the financial press. While large changes (100 point or greater moves) in
the Dow Jones Industrial Average make interesting reading in the morning papers,
their significance is exaggerated. The table below depicts the Russell 2000's
yearly price variation using the index's annual range as a percentage of the
beginning year's price.
[GRAPHIC]
It's interesting to note how tame the markets have remained in the last four
and a half years relative to the prior thirteen. TO US, VOLATILITY IS A FRIEND
IN THAT IT CREATES IRRATIONAL PRICING OF SECURITIES AND, THEREFORE,
OPPORTUNITIES FOR US TO CAPITALIZE ON OUR RISK MANAGEMENT SKILLS.
ARE THERE ANY REAL INVESTORS LEFT?
The term 'investor' denotes [GRAPHIC]
a long-term supplier of capital.
In contrast, a 'speculator' is one
who takes opportunistic risk in hopes of generating quick
profits. In essence, investors expect
to get paid by the correct assessment of underlying business fundamentals,
whereas speculators count on others (often referred to as greater fools) to buy
them out profitably.
In the current bull market, it has become very difficult to tell the
difference between investors and speculators. For example, what exactly is
'momentum investing?' The term seems oxymoronic. While equities represent a
permanent ownership position in an enterprise, in many fund portfolios, they are
reviewed and replaced more frequently than three month Treasury Bills. Wall
Street brokerage firms publish 'Buy' and 'Sell' recommendations based on a
company's quarterly progress down to the penny per share; and the country's
largest equity mutual fund lost its star manager after a short period of
underperformance, which may have contributed to the decision by that fund's
investors to withdraw in excess of $1 billion.
Only time and more difficult market conditions will separate the true
investors from disappointed speculators. GIVEN THAT WE BELIEVE THAT EQUITIES
REPRESENT LONG-TERM INTERESTS IN BUSINESSES, THE TERM 'INVESTOR' SUITS US JUST
FINE.
7
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WHAT DO WE DO NOW?
Given our belief that the next phase of the market will include lower equity
returns and greater volatility -- the need for basic blocking and tackling, in
the form of commitment, focus and experience, is paramount. We remain committed
to investing in high quality, small-cap companies using absolute valuation
standards; our focus remains sharp, and exclusively on small-cap companies; and
our 20+ years of investment experience ensures that our vigilance and discipline
remain constant. Your continued confidence is appreciated.
Yours faithfully,
<TABLE>
<S> <C>
/s/ CHARLES M. ROYCE
Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
</TABLE>
August 1, 1996
P.S. Our 'new era' fund will wait for the 'new era.'
Morningstar proprietary risk ratio, beta and standard deviation are measures of
a fund's relative risk and are calculated for the trailing 36-month period.
Morningstar risk ratio measures a fund's downside volatility relative to all
equity funds which have an average score of 1.00. Beta is a measure of
sensitivity to market movements compared to the unmanaged S&P 500 index, with
the beta of the S&P 500 equal to 1.00. Standard deviation is a statistical
measure within which a fund's total return falls. The average Morningstar risk
ratio, beta and standard deviation for the 78 equity-income funds with a
three-year history as of 6/30/96 were: 0.63, 0.81 & 7.41, respectively. The
Morningstar risk ratio, beta and standard deviation for Royce Equity Income Fund
over the same period were: 0.53, 0.47 & 5.57, respectively. Source: Morningstar,
Inc.
The Russell 2000, Russell 2000 Growth, Russell 2000 Value and S&P 500 indices
are unmanaged and include the reinvestment of dividends. The Lipper Equity
Income Average is the average total return of the 158 funds within Lipper's
equity income investment objective. The Nasdaq Composite is an unmanaged index.
The Wilshire Target Small Company Value and Growth Funds attempt to replicate
the performance of the Wilshire Next 1750 Small Company Value and Growth
Indices, respectively.
8
<PAGE>
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
TOTAL
PERIOD RETURN
- ------------------------------- ------
<S> <C>
1996 (through 6/30)............ 7.9%
1995........................... 16.4%
1994........................... (3.3%)
1993........................... 13.1%
1992........................... 19.4%
1991........................... 30.3%
1990*.......................... (15.4%)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------------------
(THROUGH 6/30/96)
<S> <C>
1-year......................... 13.2%
5-Year......................... 12.1%
Since Inception*............... 9.6%
</TABLE>
<TABLE>
<CAPTION>
Royce Equity Income Fund versus S&P 500
Value of 10,000 Invested on 1/2/90
- ------------------------------------------------------
<S> <C> <C>
1/ 2/90 10000 10000
3/31/90 9920 9525
6/30/90 9961 10125
9/30/90 8361 8728
12/31/90 8465 9512
3/31/91 10190 10896
6/30/91 10273 10874
9/30/91 10638 11459
12/31/91 11030 12417
3/31/92 11902 12100
6/30/92 11789 12338
9/30/92 12315 12721
12/31/92 13168 13371
3/31/93 14199 13947
6/30/93 14249 14015
9/30/93 14494 14376
12/31/93 14888 14708
3/31/94 14672 14147
6/30/94 14430 14202
9/30/94 14810 14900
12/31/94 14402 14901
3/31/95 14966 16353
6/30/95 15986 17911
9/30/95 16816 19342
12/31/95 16760 20491
3/31/96 17203 21608
6/30/96 18092 22589
</TABLE>
* Inception Date - January 2, 1990
The results presented in this report should not be considered
representative of the total return from an investment in the Fund today. They
are provided only to give an historical perspective of the Fund. The investment
return and principal value of Fund shares will fluctuate, so that shares may be
worth more or less than their original cost when redeemed. Redemption fees are
not included because they apply only to purchases held for less than one year.
9
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the REI
portfolio. For a more complete picture, the full portfolio and accompanying
financial statements should be read in their entirety.
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION VALUE % OF NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Common Stocks $28,300,865 76.4%
Corporate Bonds 6,591,767 17.8
Cash & Other Net Assets 2,102,925 5.8
----------- -----
-----
Total Net Assets $36,995,557 100.0%
----------- -----
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PORTFOLIO DIAGNOSTICS
- -----------------------------------------------------------------------------------------------------------
Weighted Average Market Capitalization $388 Million
Median Market Capitalization $297 Million
Weighted Average P/E Ratio 14.3x
Weighted Average P/B Ratio 1.5x
Weighted Average Portfolio Yield 4.7%
COMMON STOCK SECTORS % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Industrial Cyclicals 24.1%
Consumer Durables 14.7
Financial 14.6
Services 11.8
Retail 5.1
Consumer Staples 3.8
Technology 1.3
Energy 1.0
TOP TWENTY POSITIONS VALUE % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------
1. Central Steel & Wire Company $1,466,444 4.0%
2. Zenith National Insurance Corp. 1,023,825 2.8
3. The Standard Register Company 920,975 2.5
4. Kimball International, Inc. Cl. B 845,325 2.3
5. Crawford & Company Cl. A & B 812,725 2.2
6. Lilly Industries, Inc. Cl. A 737,800 2.0
7. Richardson Electronics, Ltd. 7.25% Conv. Sub. Deb. due
12/15/06 726,750 2.0
8. New England Business Service, Inc. 713,700 1.9
9. Family Dollar Stores, Inc. 705,425 1.9
10. Garan Incorporated 674,900 1.8
11. Stanhome, Inc. 665,150 1.8
12. Ennis Business Forms, Inc. 664,300 1.8
13. National Education Corporation 6.50% Conv. Sub. Deb. due
5/15/11 635,880 1.7
14. P.H. Glatfelter Company 632,100 1.7
15. Woodward Governor Company 624,800 1.7
16. Flexsteel Industries, Inc. 611,000 1.7
17. Figgie International, Inc. 9.875% Sr. Note due 10/01/99 586,920 1.6
18. Juno Lighting, Inc. 566,100 1.5
19. CalMat Co. 551,000 1.5
20. Sequa Corporation 9.375% Sr. Sub. Deb. due 12/15/03 535,310 1.4
</TABLE>
10
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<PAGE>
ROYCE EQUITY INCOME FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS - 76.4%
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
CONSUMER DURABLES - 14.7%
10,000 Bassett Furniture
Industries,
Incorporated............. $ 267,500
8,300 Burnham Corporation Cl.
A........................ 213,725
60,000 *Delta Woodside Industries,
Inc...................... 307,500
52,000 Flexsteel Industries,
Inc...................... 611,000
39,700 Garan Incorporated......... 674,900
33,300 Juno Lighting, Inc......... 566,100
30,600 Kimball International, Inc.
Cl. B.................... 845,325
11,700 La-Z-Boy Chair Company..... 352,463
13,300 National Presto Industries,
Inc...................... 505,400
14,300 The Ryland Group, Inc...... 214,500
18,700 Skyline Corporation........ 467,500
22,900 The Stride Rite
Corporation.............. 188,925
5,000 Sturm, Ruger & Company,
Inc...................... 232,500
-----------
5,447,338
-----------
CONSUMER STAPLES - 3.8%
3,359 Block Drug Company, Inc.
Cl. A.................... 141,078
15,100 A.T. Cross Company Cl. A... 268,025
7,000 Genesee Corporation Cl.
B........................ 322,000
25,100 Stanhome Inc............... 665,150
-----------
1,396,253
-----------
ENERGY - 1.0%
18,200 Lufkin Industries, Inc. ... 373,100
-----------
FINANCIAL - 14.6%
15,700 Argonaut Group, Inc........ 490,625
16,100 E.W. Blanch Holdings,
Inc...................... 319,988
10,700 Comdisco, Inc.............. 284,888
13,300 The Commerce Group, Inc.... 277,637
38,200 Crawford & Company Cl. A... $ 649,400
9,400 Crawford & Company Cl. B... 163,325
14,000 Arthur J. Gallagher &
Co....................... 448,000
20,500 Guaranty National
Corporation.............. 369,000
26,600 The Newhall Land and
Farming Company.......... 438,900
10,400 Vornado Realty Trust....... 425,100
43,600 `D'Willis Corroon Group
plc...................... 517,750
37,400 Zenith National Insurance
Corp..................... 1,023,825
-----------
5,408,438
-----------
INDUSTRIAL CYCLICALS - 24.1%
14,700 Calgon Carbon
Corporation.............. 198,450
30,400 CalMat Co.................. 551,000
2,324 Central Steel & Wire
Company.................. 1,466,444
11,700 CLARCOR Inc................ 289,575
17,800 Crompton & Knowles
Corporation.............. 298,150
6,800 Curtiss-Wright
Corporation.............. 367,200
20,400 Florida Rock Industries,
Inc...................... 527,850
34,400 P. H. Glatfelter Company... 632,100
17,900 International Aluminum
Corporation.............. 451,975
36,100 Lawter International,
Inc...................... 451,250
43,400 Lilly Industries, Inc. Cl.
A........................ 737,800
12,500 Minuteman International,
Inc...................... 106,250
1,300 NCH Corporation............ 83,525
30,000 Oregon Steel Mills, Inc.... 412,500
24,900 Oshkosh Truck Corporation
Cl. B.................... 351,712
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
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<PAGE>
ROYCE EQUITY INCOME FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
INDUSTRIAL CYCLICALS (continued)
<C> <S> <C>
11,000 Quaker Chemical
Corporation.............. $ 140,250
18,400 The L. S. Starrett Company
Cl. A.................... 478,400
66,700 Tab Products Co............ 491,912
14,800 Watts Industries, Inc. Cl.
A........................ 275,650
7,100 Woodward Governor
Company.................. 624,800
-----------
8,936,793
-----------
RETAIL - 5.1%
17,100 Blair Corporation.......... 403,988
40,600 Family Dollar Stores,
Inc...................... 705,425
18,250 Nash Finch Company......... 292,000
12,000 ShopKo Stores, Inc......... 193,500
17,600 Strawbridge & Clothier Cl.
A........................ 286,000
-----------
1,880,913
-----------
SERVICES - 11.8%
2,090 Aceto Corporation.......... 32,918
21,000 Arnold Industries, Inc..... 299,250
15,200 Bowne & Co., Inc........... 313,500
30,800 Ecology and Environment,
Inc. Cl. A............... 254,100
58,400 Ennis Business Forms,
Inc...................... 664,300
29,200 Gilbert Associates, Inc.
Cl. A.................... 372,300
10,000 John H. Harland Company.... 246,250
36,600 New England Business
Service, Inc............. 713,700
24,400 Piccadilly Cafeterias,
Inc...................... 256,200
12,500 REFAC Technology
Development
Corporation.............. 95,312
37,400 The Standard Register
Company.................. 920,975
22,500 Super Food Services,
Inc...................... 213,750
-----------
4,382,555
-----------
TECHNOLOGY - 1.3%
3,400 Landauer Inc............... $ 71,825
23,400 Scitex Corporation
Limited.................. 403,650
-----------
475,475
-----------
Total Common Stocks (Cost
$26,124,610)............. 28,300,865
-----------
Principal
Amount
- -----------
CORPORATE BONDS - 17.8%
$ 423,000 AnnTaylor Stores
Corporation 8.75% Sub.
Deb. due 6/15/00......... 401,850
611,000 J. Baker, Inc. 7.00% Conv.
Sub. Deb. due 6/01/02.... 504,075
290,000 Continental Pacific Bank
Var. Rate Conv. Deb. due
4/30/03.................. 290,000
601,000 Dixie Yarns, Inc. 7.00%
Conv. Sub. Deb. due
5/15/12.................. 456,760
510,000 Fieldcrest Cannon, Inc.
6.00% Conv. Sub. Deb. due
3/15/12.................. 404,175
584,000 Figgie International Inc.
9.875% Sr. Note due
10/01/99................. 586,920
317,000 Marsh Supermarkets, Inc.
7.00% Conv. Sub. Deb. due
2/15/03.................. 305,905
757,000 National Education
Corporation 6.50% Conv.
Sub. Deb. due 5/15/11.... 635,880
209,000 Orchard Supply Hardware
Stores Corp. 9.375% Sr.
Note due 2/15/02......... 202,208
430,000 Playtex Family Products
Corp 9.00% Sr. Sub. Note
due 12/15/03............. 400,975
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------- -----------
CORPORATE BONDS (continued)
<C> <S> <C>
$ 331,000 RLI Corp. 6.00% Conv. Sub.
Deb. due 7/15/03......... $ 346,722
523,000 Reliance Group Holdings,
Inc. 9.00% Sr. Note due
11/15/00................. 521,692
855,000 Richardson Electronics,
Ltd. 7.25% Conv. Sub.
Deb. due 12/15/06........ 726,750
538,000 Sequa Corporation 9.375%
Sr. Sub. Deb. due
12/15/03................. 535,310
599,000 Shoney's, Inc. 0% Sub.
Conv. Deb. due 4/11/04... 272,545
-----------
Total Corporate Bonds (Cost
$5,929,809).............. 6,591,767
-----------
REPURCHASE AGREEMENT - 5.7%
State Street Bank and Trust Company,
4.90% due 7/01/96, collateralized by
U.S. Treasury Notes, 5.25%, due
12/31/97, valued at $2,114,786
(Cost $2,100,000)..................... $ 2,100,000
-----------
TOTAL INVESTMENTS - 99.9% (COST
$34,154,419).......................... 36,992,632
CASH AND OTHER ASSETS LESS
LIABILITIES - .1%..................... 2,925
-----------
NET ASSETS - 100.0%..................... $36,995,557
-----------
-----------
</TABLE>
* Non-income producing.
`D' American Depository Receipt.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $34,247,843. At June 30, 1996, net unrealized appreciation for all
securities amounted to $2,744,789, consisting of aggregate unrealized
appreciation of $3,888,905 and aggregate gross unrealized depreciation of
$1,144,116.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $34,154,419)................................................ $36,992,632
Cash.............................................................................................. 16,989
Receivable for investments sold................................................................... 310,971
Receivable for shares of beneficial interest sold................................................. 27,538
Receivable for dividends and interest............................................................. 162,210
Prepaid expenses and other assets................................................................. 2,465
-----------
TOTAL ASSETS.................................................................................... 37,512,805
-----------
LIABILITIES:
Payable for investments purchased................................................................. 485,391
Payable for shares of beneficial interest redeemed................................................ 7,872
Payable for investment advisory fees.............................................................. 5,000
Accrued expenses.................................................................................. 18,985
-----------
TOTAL LIABILITIES............................................................................... 517,248
-----------
NET ASSETS...................................................................................... $36,995,557
-----------
-----------
ANALYSIS OF NET ASSETS:
Distributions in excess of net investment income.................................................. $ (23,509)
Accumulated net realized gain on investments...................................................... 2,586,285
Net unrealized appreciation on investments........................................................ 2,838,213
Shares of beneficial interest..................................................................... 6,111
Additional paid-in capital........................................................................ 31,588,457
-----------
NET ASSETS...................................................................................... $36,995,557
-----------
-----------
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($36,995,557 [div] 6,111,313 shares outstanding)................................................ $6.05
-----
-----
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
---------------- -----------------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income................................................... $ 628,302 $ 2,289,102
Net realized gain on investments........................................ 2,518,316 2,816,539
Net change in unrealized appreciation on investments.................... (264,206) 5,050,556
---------------- -----------------
Net increase in net assets resulting from investment operations....... 2,882,412 10,156,197
DIVIDENDS AND DISTRIBUTIONS:
From net investment income.............................................. (651,811) (2,310,331)
From net realized gain on investments................................... -- (394,120)
---------------- -----------------
Total dividends and distributions..................................... (651,811) (2,704,451)
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets from capital share transactions.............. (21,412,226) (28,405,230)
---------------- -----------------
NET DECREASE IN NET ASSETS................................................ (19,181,625) (20,953,484)
NET ASSETS:
Beginning of period..................................................... 56,177,182 77,130,666
---------------- -----------------
End of period (including distributions in excess of
net investment income of $23,509 and $0, respectively)................ $ 36,995,557 $56,177,182
---------------- -----------------
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends....................................................................................... $ 519,099
Interest........................................................................................ 366,137
----------
Total Income............................................................................... 885,236
----------
Expenses:
Investment advisory fees........................................................................ 204,689
Custodian and transfer agent fees............................................................... 23,206
Professional fees............................................................................... 12,122
Administrative and office facilities expenses................................................... 10,969
Trustees' fees.................................................................................. 1,234
Other expenses.................................................................................. 30,410
----------
Total Expenses............................................................................. 282,630
Fees waived by investment adviser.......................................................... (25,696)
----------
Net Expenses............................................................................... 256,934
----------
Net Investment Income................................................................. 628,302
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................................................... 2,518,316
Net change in unrealized appreciation on investments................................................ (264,206)
----------
Net realized and unrealized gain on investments................................................. 2,254,110
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $2,882,412
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Fund's
performance.
<TABLE>
<CAPTION>
Six Months
ended Years ended December 31,
June 30, 1996 ---------------------------------------------------
(unaudited) 1995 1994 1993 1992 1991
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 5.70 $ 5.12 $ 5.58 $ 5.49 $ 4.93 $ 4.03
------------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS:
Net investment income (a).............. 0.10 0.21 0.19 0.21 0.22 0.22
Net realized and unrealized gain(loss)
on investments....................... 0.35 0.62 (0.37) 0.50 0.72 0.99
------------- ------- ------- ------- ------- -------
Total from investment operations.. 0.45 0.83 (0.18) 0.71 0.94 1.21
------------- ------- ------- ------- ------- -------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income.................. (0.10) (0.21) (0.18) (0.21) (0.22) (0.22)
Net realized gain on investments....... -- (0.04) (0.10) (0.41) (0.16) (0.09)
------------- ------- ------- ------- ------- -------
Total dividends and
distributions................... (0.10) (0.25) (0.28) (0.62) (0.38) (0.31)
------------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD........... $6.05 $5.70 $5.12 $5.58 $5.49 $4.93
------------- ------- ------- ------- ------- -------
------------- ------- ------- ------- ------- -------
TOTAL RETURN............................. 7.9% 16.4% (3.3%) 13.1% 19.4% 30.3%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in
thousands)............................. $36,996 $56,177 $77,131 $84,661 $54,101 $41,063
Ratio of Expenses to Average Net Assets
(b).................................... 1.23%* 1.24% 1.27% 1.00% 0.99% 0.99%
Ratio of Net Investment Income to Average
Net Assets............................. 3.00%* 3.49% 3.43% 3.79% 4.31% 4.58%
Portfolio Turnover Rate.................. 12% 29% 47% 100% 59% 72%
Average Commission Rate Paid+............ $0.0604 -- -- -- -- --
</TABLE>
- ------------
(a) Net investment income is shown after fee waivers by the investment adviser
and distributor. The per share effect of these waivers is $.01 for the
period ended June 30, 1996; $0.01 for each of the years ended December 31,
1995, 1994 and 1993 and $.02 for each of the years ended December 31, 1992
and 1991.
(b) Expenses are shown after waivers by the investment adviser and distributor.
For the period ended June 30, 1996 and for the years ended December 31,
1995, 1994, 1993, 1992 and 1991, expense ratios before the waivers would
have been 1.35%, 1.33%, 1.33%, 1.39%, 1.30%, and 1.30%, respectively.
* Annualized.
+ For fiscal years beginning on or after October 1, 1995, the Fund is required
to disclose its average commission rate paid per share for purchases and
sales of investments.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Equity Income Fund (the 'Fund'), is a series of The Royce Fund (the
'Trust'), a diversified open-end management investment company. The Trust,
originally established as a business trust under the laws of Massachusetts,
converted to a Delaware business trust at the close of business on June 28,
1996. The Fund commenced operations on January 2, 1990.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
a. Valuation of investments:
Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked prices
for Nasdaq securities. Quotations are taken from the market where the security
is primarily traded. Other over-the-counter securities for which market
quotations are readily available are valued at their bid price. Securities for
which market quotations are not readily available are valued at their fair value
under procedures established 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.
b. Investment transactions and related investment income:
Investment transactions are accounted for on the trade date and dividend
income is recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation of investments are determined on the
basis of identified cost for book and tax purposes.
c. Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal year.
The Schedule of Investments includes information regarding income taxes under
the caption 'Income Tax Information'.
At December 31, 1995, the Fund had a net tax basis capital loss
carryforward of approximately $643,266, of which $214,422 may be applied
annually against any realized net taxable capital gains until December 31, 1998,
the expiration date.
d. Distributions:
The Fund declares dividends on a quarterly basis and capital gain
distributions annually. These distributions are recorded on the ex-dividend date
and are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid-in capital and may affect net investment income per
share. Undistributed net investment income may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
17
<PAGE>
<PAGE>
ROYCE EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
e. Repurchase agreements:
The Fund enters into repurchase agreements with respect to its portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of its assets. The Fund restricts repurchase agreements to maturities
of no more than seven days. Securities pledged as collateral for repurchase
agreements are held by SSB&T until maturity of the repurchase agreements.
Repurchase agreements could involve certain risks in the event of default or
insolvency of SSB&T, including possible delays or restrictions upon the ability
of the Fund to dispose of the underlying securities.
2. INVESTMENT ADVISER:
Under the Trust's investment advisory agreement with Quest Advisory Corp.
('Quest'), the Fund accrued and paid Quest fees totaling $178,993 (net of
$25,696 voluntarily waived by Quest) for the six months ended June 30, 1996. The
agreement provides for fees equal to 1.0% per annum of the Fund's average net
assets. Such fees are computed daily and are payable monthly to Quest.
3. FUND SHARES:
The Board of Trustees has authority to issue an unlimited number of shares
of beneficial interest of the Fund, with a par value of $.001. Share
transactions were as follows:
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sold............................................ 656,968 $ 3,828,674 1,556,253 $ 8,488,920
Issued as reinvested dividends and
distributions................................. 88,128 520,756 336,962 1,878,994
Redeemed........................................ (4,492,668) (25,761,656) (7,105,688) (38,773,144)
</TABLE>
Shares redeemed within one year of purchase are subject to a 1% redemption
fee, payable to the Fund, which is used to offset costs associated with the
redemption.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
For the six months ended June 30, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
amounted to $4,867,177 and $24,940,439, respectively.
18
<PAGE>
<PAGE>
At the Special Meeting of Shareholders held on June 26, 1996, Trust
shareholders approved a conversion of the Trust to a Delaware business
trust, elected Trustees and ratified the Board's selection of the Trust's
independent public accountants, and the Fund shareholders approved a
proposal to permit investment in warrants, rights and options.
<TABLE>
<CAPTION>
Proposal/ Votes Votes Votes Cast Votes
Name of Trustee Cast For Withheld Against Abstained
- -------------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Convert the Trust to a Delaware business trust.......... 37,472,360 N/A 845,090 3,121,147
Proposal to change the Fund's investment policy
concerning warrants, rights and options............... 2,728,997 N/A 152,759 256,454
Ratification of independent public accountants.......... 51,370,026 N/A 442,499 2,816,187
Charles M. Royce........................................ 52,309,497 2,319,215 N/A N/A
Thomas R. Ebright....................................... 52,314,207 2,314,505 N/A N/A
Hubert L. Cafritz....................................... 52,219,769 2,408,943 N/A N/A
Richard M. Galkin....................................... 52,305,456 2,323,256 N/A N/A
Stephen L. Isaacs....................................... 52,258,406 2,370,306 N/A N/A
William L. Koke......................................... 52,300,723 2,327,989 N/A N/A
David L. Meister........................................ 52,282,477 2,346,235 N/A N/A
</TABLE>
19
<PAGE>
<PAGE>
POSTSCRIPT: NEW ERA DEFINITIONS
A by-product of any new era is a change in its language. The use of new
words and definitions typically signifies the emergence of a new culture. For
example, the acceptance of popular slang words 'cool' and 'hip' in the '60s
ushered in an era known as 'pop culture.'
The protracted bull market of the last five years has many believing that
we have entered into a new age of investing. Just as 'bad' came to mean 'good'
in the slang of the '70s, Steve Leuthold, stock market researcher and money
manager, with further corroboration from USA Today 'Money Talk' columnist,
Daniel Kadlec, has suggested, with tongue firmly in cheek, that the following
'new definitions for a new era' have replaced those established by Mr. Webster:
BEAR MARKET: When stocks decline for a week.
MAJOR CORRECTION: When stocks decline for a day.
OLD-TIMER: A person who knows someone who lost money in the stock market.
CYNIC: Anyone reminding you stocks can go down.
CONSERVATIVE: Anyone without a margin account.
RISK: How much you can lose being out of the market.
INFLATION: Historical phenomena that used to adversely affect stocks.
CONTRARIAN: Someone with nothing to talk about at parties.
IPO: Instant profit opportunity.
SHORT SALE: Temporary condition associated with memory failure.
GRAHAM & DODD: Ancient philosophers who believed the book value of a
company was too much to pay. It's widely assumed they also believed the world
was flat.
MUTUAL FUND: A pool of money guaranteed to grow because it has lots of
contributors, and you just know that many people can't be wrong.
As conservative cynics, we can only hope that when the current market is no
longer 'hip,' it will not find too many people feeling 'bad,' as it was
originally defined.
------------------------------------------------------
THE ROYCE FUNDS
General Information and Telephone Purchases ....... 1 (800) 221-4268
Shareholder Account Services ...................... 1 (800) 841-1180
Investment Advisor Services ......................... 1 (800) 33-ROYCE
The Royce Funds InfoLine ............................ 1 (800) 78-ROYCE
E-mail Address ................................ [email protected]
Internet Homepage .......................... http://www.roycefunds.com
1414 Avenue of the Americas, New York, New York 10019
This report must be accompanied by or preceded by a current prospectus of the
Fund.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as..... `D'
The division sign shall be expressed as..... [div]
GRAPHIC APPENDIX
On page 2 of the paper format Royce Equity Income report:
Picture of firecracker exploding
On page 4 of the paper format Royce Equity Income report:
A picture of a Prospectus cover of Berkshire Hathaway Inc.
On page 5 of the paper format Royce Equity Income report:
A picture of a scale balancing a dollar sign and a factory.
On page 6 of the paper format Royce Equity Income report:
A picture of a man in long white coat pointing with a pointer.
A picture of Cupid shooting an arrow with two hearts around him.
A picture of a basket of fruit at harvest time.
On page 7 of the paper format Royce Equity Income report:
A bar graph of the Russell 2000 price variations from 1979 to 1996.
A picture of a ticker tape machine.
