STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Massachusetts business trust, is a
professionally managed, open-end registered investment company, which offers
investors the opportunity to invest in nine portfolios or series ("Funds").
Each Fund has distinct investment objectives and/or policies, and a
shareholder's interest is limited to the Fund in which the shareholder owns
shares. The nine Funds are:
Royce Value Fund
Royce Premier Fund
Royce Equity Income Fund
Royce Micro-Cap Fund (formerly named Royce OTC Fund)
Royce Low-Priced Stock Fund
Royce GiftShares Fund
Royce Total Return Fund
Royce Global Services Fund
REvest Growth and Income Fund
This Statement of Additional Information relates to all of the Funds other
than REvest Growth and Income Fund, which 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 May 2,
1995 for Royce Value Fund, dated December 22, 1995 for Royce Premier, Equity
Income, Micro-Cap, Low-Priced Stock and GiftShares Funds, dated May 2, 1995,
as amended September 14, 1995 for Royce Total Return Fund and dated July 31,
1995 for Royce Global 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 Royce GiftShares Fund) for the fiscal
year or period ended December 31, 1994 and the unaudited financial statements
included in the Semi-Annual Report to Shareholders of Royce Global Services
Fund for the six months ended June 30, 1995 are incorporated herein by
reference. To obtain an additional copy of the Prospectus or Annual or
Semi-Annual Report 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
December 22, 1995
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND LIMITATIONS . . . . . . . . 2
RISK FACTORS AND SPECIAL CONSIDERATIONS . . . . . . 5
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . 8
PRINCIPAL HOLDERS OF SHARES . . . . . . . . . . . . 10
INVESTMENT ADVISORY SERVICES. . . . . . . . . . . . 12
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . 14
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . 17
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . 17
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . 17
CODE OF ETHICS AND RELATED MATTERS. . . . . . . . . 19
PRICING OF SHARES BEING OFFERED . . . . . . . . . . 19
REDEMPTIONS IN KIND . . . . . . . . . . . . . . . . 20
TAXATION. . . . . . . . . . . . . . . . . . . . . . 20
DESCRIPTION OF THE TRUST. . . . . . . . . . . . . . 26
PERFORMANCE DATA. . . . . . . . . . . . . . . . . . 27
<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 other than Royce Value Fund 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);
7.Invest in restricted securities (except for Royce Global Services Fund,
which 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) of its assets in
securities without readily available market quotations (i.e., illiquid
securities);
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 more than 10% of the outstanding voting securities of any one
issuer;
<PAGE>
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 Royce Equity Income, Low-Priced Stock, GiftShares, Total Return
and Global Services Funds may loan up to 25% of their respective 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 Royce
Global Services Fund, which may invest in the securities of other investment
companies to the extent permitted by the 1940 Act); or
18.Purchase any warrants, rights or options, except that (i) all of the Funds
other than Royce Value Fund may, if no value is assigned thereto, acquire
warrants in units with or attached to debt securities or non-convertible
preferred stock, and (ii) Royce Low-Priced Stock, GiftShares, Total Return
and Global Services Funds may also invest up to 5% of their respective net
assets in warrants, valued at the lower of cost or market, provided that
warrants that are not listed on the New York or American Stock Exchanges
shall not exceed 2% of such Funds' respective net assets.
No Fund may, as a matter of operating policy:
1.Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years;
2.Invest in oil, gas or other mineral leases or development programs;
3.Invest more than 5% of its net assets in lower-rated (high-risk)
non-convertible debt securities; or
4.Enter into repurchase agreements with any party other than the custodian of
its assets or having a term of more than seven days.
<PAGE>
Royce Global Services Fund
The Global Services Fund 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 Global Services Fund's
assets to be invested in the securities of the company;
(b) For an equity security, the purchase cannot result in the Global Services
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 Global Services
Fund owning more than 10% of the principal amount of the company's
outstanding debt securities.
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 Global Services Fund's purchase of
the securities of such a company. When the Global Services Fund is
considering purchasing or has purchased warrants or convertible securities of
a securities related business, the required determination is made as though
such warrants or conversion privileges had been exercised.
The Global Services Fund is not permitted to acquire a general
partnership interest or a security issued by its investment adviser or
principal underwriter or any affiliated person of its investment adviser or
principal underwriter.
The Global Services Fund may 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.
The Global Service Fund does not currently intend to invest more than 5%
of its 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.
<PAGE>
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 increasingly 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.
Securities Lending
Royce Equity Income, Low-Priced Stock, GiftShares, Total Return and
Global Services Funds may lend up to 25% of their respective 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
<PAGE>
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.
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 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.
<PAGE>
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 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 Receipt (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 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.
<PAGE>
* * *
Quest believes that Royce Value, Micro-Cap, Low-Priced Stock, GiftShares
and Global 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 Held
Name, Address and Age with the Trust Principal Occupations During Past 5 Years
Charles M. Royce* (56) Trustee, President, Secretary, Treasurer and sole
1414 Avenue of the President and director and sole voting shareholder of
Americas Treasurer Quest Advisory Corp. ("Quest"), the
New York, NY 10019 Trust's principal investment adviser;
Trustee, President and Treasurer of
Pennsylvania Mutual Fund ("PMF"), an
open-end diversified management
investment company of which Quest is
the investment adviser; 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;
Secretary and sole director and
shareholder of Quest Distributors, Inc.
("QDI"), the distributor of the Trust's
shares; and managing general partner of
Quest Management Company ("QMC"), a
registered investment adviser, and its
predecessor.
Richard M. Galkin (57) Trustee Private investor and President of
5284 Boca Marina Circle Richard M. Galkin Associates, Inc.,
South telecommunications consultants.
Boca Raton, FL 33487
Stephen L. Isaacs (56) Trustee Attorney; Director of Columbia
60 Haven Street, Fl. B-2 University Development Law and Policy
New York, NY 10032 Program; Professor at Columbia
University; President of Stephen L.
Isaacs Associates, Consultants; and
counsel to Kaplan & Kilsheimer from
January 1988 to February 1991.
<PAGE>
Position Held
Name, Address and Age with the Trust Principal Occupations During Past 5 Years
David L. Meister (56) Trustee Consultant to the communications
111 Marquez Place industry since January 1993; Executive
Pacific Palisades, CA officer of Digital Planet Inc. from
90272 April 1991 to December 1992; and
consultant to the communications and
television industry from August 1990 to
April 1991.
Jack E. Fockler, Jr.* (37) Vice President (since August 1993) and
1414 Avenue of the Vice President senior associate of Quest, having been
Americas employed by Quest since October 1989;
New York, NY 10019 Vice President of the Trust, PMF, RVT
and OTCM since April 1995; Vice
President of QDI since November 1995;
and general partner of QMC since July
1993.
W. Whitney George* (37) Vice President (since August 1993) and
1414 Avenue of the Vice President senior analyst of Quest, having been
Americas employed by Quest since October 1991;
New York, NY 10019 Vice President of the Trust, PMF, RVT
and OTCM since April 1995; and general
partner of QMC and its predecessor
since January 1992.
Daniel A. O'Byrne* (33) Vice President of Quest since May 1994,
1414 Avenue of the Vice President having been employed by Quest since
Americas and Assistant October 1986; and Vice President of the
New York, NY 10019 Secretary Trust, PMF, RVT and OTCM since July
1994.
Susan I. Grant* (42) Secretary Compliance Officer and Senior Counsel of
1414 Avenue of the Quest and Secretary of the Trust, PMF,
Americas RVT and OTCM since August 1994; and
New York, NY 10019 Assistant Counsel of First Investors
Corporation from July 1989 to August
1994.
________________________________
*An "interested person" under Section 2(a)(19) of the 1940 Act.
All of the Trust's trustees are also trustees of PMF and directors of RVT
and OTCM.
The Board of Trustees has an Audit Committee, comprised of Richard M.
Galkin, Stephen L. Isaacs and David L. Meister. The Audit Committee is
responsible for the selection and nomination of independent auditors for the
Funds and for conducting post-audit reviews of their financial conditions
with such auditors.
For the year ended December 31, 1994, the following trustees received
compensation from the Trust and the three other funds in the group of
registered investment companies comprising The Royce Funds for services as a
trustee/director on such funds' Boards:
<PAGE>
Aggregate Compensation Total Compensation
Name from Trust from The Royce Funds
Richard M. Galkin $17,500 $60,000
Stephen L. Isaacs 17,500 60,000
David L. Meister 17,500 60,000
PRINCIPAL HOLDERS OF SHARES
As of November 17, 1995, 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:
Type of
Fund Number of Shares Ownership Percentage of Outstanding Shares
Royce Premier Fund
Charles Schwab & Co., Inc.14,807,971 Record 37.2%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
Royce Equity Income Fund
Charles Schwab & Co., Inc. 5,045,942 Record 50.3%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
Royce Micro-Cap Fund
Charles Schwab & Co., Inc. 3,246,320 Record 29.2%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
Donaldson, Lufkin Jenrette 833,999 Record 7.5%
Securities Corp.
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
National Financial Services 736,631 Record 6.6%
200 Liberty Street
New York, NY 10281
Royce Low-Priced Stock Fund
Charles M. Royce 207,775 Record and 41.8%
1414 Avenue of the Americas beneficial
New York, NY 10019
Charles Schwab & Co., Inc. 123,814 Record 23.1%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
<PAGE>
Type of
Fund Number of Shares Ownership Percentage of Outstanding Shares
Royce Low-Priced Stock Fund
Bruce Museum Inc. 92,145* Beneficial 17.3%
Museum Drive
Greenwich, CT 06830
National Financial Services 73,815 Record 13.8%
200 Liberty Street
New York, NY 10281
W. Whitney George, Trustee 63,640 Record 11.9%
The Royce 1992 GST Trust
1414 Avenue of the Americas
New York, NY 10019
Royce Total Return Fund
Integra Trust Company 98,474 Record 24.9%
National Assn.
300 Fourth Avenue
Pittsburgh, PA 15278
James M. Novak 74,340 Record 18.8%
Mark Stadler Trustees
Cindrich & Titus Profit
Sharing Plan
FBO Thomas O. Arbogast
2000 Gateway Center
Pittsburgh, PA 15222
State Street Bank & Trust Co. 71,653 Record 18.1%
Custodian for IRA of
Becky L. O'Connor
10 St. James Place
Pittsburgh, PA 15215
Charles M. Royce, Trustee 45,294 Record 11.4%
N. Holmes Clare Trust
FBO Barbara K. Clare
c/o Quest Advisory Corp.
1414 Avenue of the Americas
New York, NY 10019
Delaware Charter Guarantee Trust Co.
FBO Alice M. Harvey 24,827 Record 6.2%
P.O. Box 8963
Wilmington, DE 19899
_______
* These shares are held of record by Charles Schwab & Co., Inc.
<PAGE>
Type of
Fund Number of Shares Ownership Percentage of Outstanding Shares
Royce Global Services Fund
Charles M. Royce 173,132 Record and 64.7%
1414 Avenue of the Americas beneficial
New York, NY 10019
Bruce Museum Inc. 40,015 Record 14.9%
Museum Drive
Greenwich, CT 06830
Integra Trust Company 27,780 Record 10.3%
National Assn.
300 Fourth Avenue
Pittsburgh, PA 15278
As of November 17, 1995, all of the trustees and officers of the Trust as
a group beneficially owned less than 1% of the outstanding shares of each of
Royce Value, Royce Equity Income, Royce Premier and Royce Micro-Cap Funds,
approximately 53.7% of the outstanding shares of Royce Low- Priced Stock
Fund, approximately 13.8% of the outstanding shares of Royce Total Return Fund
and approximately 63.4% of the outstanding shares of Royce Global Services
Fund.
As of the date of this Statement of Additional Information, W. Whitney
George, as trustee for members of Charles M. Royce's immediate family, owned
100% of the outstanding shares of Royce GiftShares Fund.
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:
Fund Percentage Per Annum of Fund's Average Net Assets
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 Equity Income Fund 1.00%
Royce Premier Fund 1.00%
Royce Micro-Cap Fund 1.50%
Royce Low-Priced Stock Fund1.50%
Royce GiftShares Fund 1.25%
Royce Total Return Fund 1.00%
Royce Global Services Fund1.50%
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.
<PAGE>
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 such
members of its organization as may be duly elected executive officers or
Trustees of the Trust; and (iv) pays all executive officers' 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 fiscal years ended December 31, 1992, 1993 and
1994, 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:
Advisory Fees Amounts
Received by Quest Waived by Quest
Royce Value Fund
1992 $1,460,910 -
1993 1,568,398 -
1994 1,503,696 -
Royce Equity Income Fund
1992 $ 322,488 $ 137,825
1993 488,816 229,166
1994 820,662 53,626
Royce Premier Fund
1992 $ 2,496 $ 12,279
1993 124,020 8,461
1994 1,400,394 -
Royce Micro-Cap Fund
1992 $ 3,473 $ 15,138
1993 83,095 19,063
1994 295,148 20,330
Royce Low-Priced Stock Fund
1993* $ 0 $ 294
1994 0 15,272
Royce Total Return Fund
1993* $ 0 $ 294
1994 0 10,506
_______
* December 15, 1993 (commencement of operations) to December 31, 1993
<PAGE>
Advisory Fees Amounts
Received by Quest Waived by Quest
Royce Global Services Fund
1994** $ 0 $ 367
_______
**December 15, 1994 (commencement of operations) to December 31, 1994
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
Thomas R. Ebright, Jack E. Fockler, Jr. and W. Whitney George, Vice
Presidents of Quest, all 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". Set forth below is certain
information concerning Mr. Ebright.
Principal Occupations
Name and Other Affiliations During Last 5 Years
Thomas R. Ebright Vice President and member of the senior investment staff of
Quest; Trustee/Director of PMF, 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; President,
Treasurer and a director and principal shareholder of
Royce, Ebright & Associates, Inc., the investment adviser
for REvest Growth and Income Fund, 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.
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".
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").
<PAGE>
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 and Global 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. The Distribution Agreement has been terminated as to Royce Premier,
Equity Income, Micro-Cap and GiftShares Funds.
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.
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.
<PAGE>
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, 1994.
For the year ended December 31, 1994, Royce Value Fund paid distribution
fees to QDI of $1,109,175 (net of $650,642 waived by QDI -- 1% of its
average net assets during such year before giving effect to such waiver and
0.63% of its average net assets after giving effect to such waiver). QDI
spent the distribution fees paid to it by and the proceeds of contingent
deferred sales charges released to it for Royce Value Fund during 1994 in the
following manner:
(i)Promotion, literature and advertising$ 54,808
(ii)Printing and mailing of prospectuses
to other than current shareholders 5,477
(iii) Compensation paid or to be paid to introducing
brokers, investment advisers and others 1,201,833
(iv) Registration fees, accounting and legal 10,690
(v) Administration and other 11,789
Total $ 1,284,597
As of January 1, 1994, $336,642 was held by QDI in such separate reserve
accounts for Royce Value Fund. For the year ended December 31, 1994, $12,992
of proceeds of contingent deferred sales charges on account of redemptions of
shares of Royce Value Fund during such year were added to such reserve
accounts, and $162,902 was released to QDI from such reserve accounts for
Royce Value Fund. Thus, as of January 1, 1995, $186,732 was held by QDI in
such reserve accounts for Royce Value Fund, and no proceeds of contingent
deferred sales charges on account of redemptions of shares of Royce Value
Fund during the year ended December 31, 1990 remained in the reserve account
for such proceeds because all of the monies in such reserve account had been
previously released by the Board of Trustees to QDI.
QDI has temporarily waived the distribution fees payable to it by Royce
Low-Priced Stock, Total Return and Global Services Funds
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.
<PAGE>
The benefits to Royce Value Fund included the receipt of net proceeds of
$7,367,068 from sales of its shares during the fiscal year ended December 31,
1994. The cost of shares redeemed by such Fund during such year aggregated
$7,591,915.
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.
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.
<PAGE>
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.
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 Fund's 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 of the other accounts managed by Quest and
its affiliate, securities of the same issuer are frequently purchased, held
or sold by more than one Fund and the other accounts because the same
security may be suitable for all of them. When more than one Fund and/or such
other accounts are simultaneously engaged in the purchase or sale of the same
security, Quest seeks to average the transactions as to price and allocate
them as to amount in a manner believed to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by a
Fund or the size of the position obtainable for a Fund.
During each of the three years ended December 31, 1992, 1993 and 1994,
the Funds paid brokerage commissions as follows:
Fund 1992 1993 1994
Royce Value Fund $181,211 $123,987 $138,437
Royce Premier Fund 6,079 87,723 465,986
Royce Equity Income Fund 145,385 283,374 218,843
Royce Micro-Cap Fund 14,603 39,013 41,497
Royce Low-Priced Stock Fund - 632* 12,946
Royce Total Return Fund - 0* 6,231
Royce Global Services Fund - - 382**
_________________
* For the period from December 15, 1993 (commencement of operations) to
December 31, 1993.
** For the period from December 15, 1994 (commencement of operations) to
December 31, 1994.
For the year ended December 31, 1994, 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:
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
Royce Value Fund $ 35,290,829 $115,592
Royce Premier Fund 111,406,730 348,875
Royce Equity Income Fund 42,720,179 171,128
Royce Micro-Cap Fund 1,514,807 7,296
Royce Low-Priced Stock Fund 999,173 7,001
Royce Total Return Fund 961,777 3,845
Royce Global Services Fund 39,899 147*
_________________
* For the period from December 15, 1994 (commencement of operations) to
December 31, 1994.
<PAGE>
Certain of the Funds acquired securities of their respective "regular
brokers" (as such term is defined in Rule 10b-1 under the 1940 Act) or of the
parent of their "regular brokers" during the year ended December 31, 1994,
and their respective aggregate holdings of such securities had market values
at December 31, 1994, as follows: Royce Value Fund -- A.G. Edwards, Inc. --
$55,800, Lehman Brothers Holdings Inc. -- $529,525, PaineWebber Group --
$471,000, and Piper Jaffray Companies Inc. -- $348,600; and Royce Global
Services Fund -- Merrill Lynch & Co., Inc. -- $3,575 and Morgan Stanley Group
Inc. -- $11,800.
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 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 October 31, 1995, Quest-related persons, interested
trustees/directors, officers and employees of The Royce Funds and members of
their immediate families beneficially owned shares of The Royce Funds having
a total value of approximately $16.5 million, and Quest's and QMC's equity
interests in such private investment companies totalled approximately $4.4
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, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
<PAGE>
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 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 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
<PAGE>
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
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.
<PAGE>
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.
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
<PAGE>
as a long-term capital loss to the extent of any long-term capital gain
distributions received with respect to such shares.
* * *
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 Massachusetts.
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.
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
<PAGE>
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
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
<PAGE>
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 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).
<PAGE>
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 established as a Massachusetts business trust by a
Declaration of Trust, effective October 22, 1985. A copy of the Declaration
of Trust, as amended, is on file with the Secretary of the Commonwealth of
Massachusetts. 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.
Three of the four Trustees currently in office were elected by the
Trust's predecessor's stockholders. 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
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable for the
obligations of the Trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such
<PAGE>
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Trust or the Trustees. The Declaration of Trust provides
for indemnification out of a series' property for all losses and expenses of
any shareholder of that series held liable on account of being or having been
a shareholder. Thus, the risk of shareholders incurring financial loss on
account of shareholder liability is limited to circumstances in which their
particular series was unable to meet its obligations.
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 record 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 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.
<PAGE>
Period Ended
Fund December 31, 1994 Russell 2000 S&P 500
Royce Value Fund
1 Year Total Return - 1.64% - 1.81% + 1.32%
5 Year Average Annual Total Return+ 7.38 +10.20 + 8.69
10 Year Average Annual Total Return +10.82 +11.54 +14.28
Royce Premier Fund
1 Year Total Return + 3.28% - 1.81% + 1.32%
Average Annual Total Return since 1-1-92 +12.50 +11.40 + 6.27
(commencement of operations)
Royce Equity Income Fund
1 Year Total Return - 3.26% - 1.81% + 1.32%
Average Annual Total Return since 1-2-90+ 7.57 + 9.99 + 8.31
(commencement of operations)
Royce Micro-Cap Fund
1 Year Total Return + 3.55% - 1.81% + 1.32%
Average Annual Total Return since 1-1-92 +18.34 +11.40 + 6.27
(commencement of operations)
Royce Low-Priced Stock Fund
1 Year Total Return + 2.98% - 1.81% + 1.32%
Average Annual Total Return since 12-15-93+ 3.05+ 1.56 + 2.23
(commencement of operations)
Royce Total Return Fund
1 Year Total Return + 5.13% - 1.81% + 1.32%
Average Annual Total Return since 12-15-93+ 4.91 + 1.56 + 2.23
(commencement of operations)
During the applicable period ended December 31, 1994, 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, 1994
Royce Value Fund (1-1-85) $ 27,925
Royce Premier Fund (1-1-92) 14,236
Royce Equity Income Fund (1-2-90) 14,402
Royce Micro-Cap Fund (1-1-92) 16,572
Royce Low-Priced Stock Fund (12-15-93) 10,300
Royce Total Return Fund (12-15-93) 10,513
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, 1994
were:
<PAGE>
Fund Lipper Ranking
Royce Value Fund 130 out of 283 small company growth funds
Royce Premier Fund 46 out of 283 small company growth funds
Royce Equity Income Fund 60 out of 120 equity income funds
Royce Micro-Cap Fund 42 out of 283 small company growth funds
Royce Low-Priced Stock Fund 51 out of 283 small company growth funds
Royce Total Return Fund 18 out of 412 growth and income 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.
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 December 31,
1994, the average included 155 capital appreciation funds, 564 growth funds,
283 small company growth funds, 412 growth and income funds and 120 equity
income 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) 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 December 31, 1994, DFA contained
approximately 2,000 stocks, with a median market capitalization of about $80
million.
<PAGE>
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.
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, 1995, the weighted mean market
value of a company in this Index was approximately $530 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 December 31, 1994, the average risk
score for the 1,311 equity funds rated by Morningstar with a three-year
history was 0.97; the average risk score for the 119 small company funds rated
by Morningstar with a three-year history was 1.09; and the average risk score
for the 54 equity income funds rated by Morningstar with a three-year history
was 0.63. For the three years ended December 31, 1994, 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:
<PAGE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds Equity Income Funds
Value 0.54 Within lowest 10% Within lowest 10% -
Premier 0.25 Within lowest 5% Lowest risk score -
Equity Income 0.38 Within lowest 5% - Lowest risk score
Micro-Cap 0.43 Within lowest 5% Within lowest 5%-
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 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.
<PAGE>
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.
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.
