As filed with the Securities and Exchange Commission on June 6, 1997
Registration Nos. 2-80348 and 811-3599
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ______ / /
Post-Effective Amendment No. 42 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 44 /X /
(Check appropriate box or boxes)
THE ROYCE FUND
(Exact name of Registrant as specified in charter)
1414 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 355-7311
Charles M. Royce, President
The Royce Fund
1414 Avenue of the Americas, New York, New York 10019
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/x/ on June 13, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
The Royce Fund has registered an indefinite number of securities
under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. Its 24f-2 Notice for its most
recent fiscal year was filed on February 27, 1997.
Total number of pages:
Index to Exhibits is located on page:
CROSS REFERENCE SHEET
(Pursuant to Rule 481 of Regulation C)
Item of Form N-1A CAPTION or Location in Prospectus
- ----------------- ---------------------------------
Part A
I. Cover Page ................ Cover Page
II. Synopsis............... FUND EXPENSES
III. Condensed Financial Information... FINANCIAL HIGHLIGHTS
IV. General Description of Registrant.. INVESTMENT OBJECTIVES,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT LIMITATIONS,
SIZE LIMITATIONS***,
GENERAL INFORMATION
V. Management of the Fund......... MANAGEMENT OF THE TRUST,
GENERAL INFORMATION
V.A. Management's Discussion of
Fund Performance............... *
VI. Capital Stock and Other Securities. GENERAL INFORMATION,
DIVIDENDS, DISTRIBUTIONS AND
TAXES,
IMPORTANT ACCOUNT INFORMATION,
REDEEMING YOUR SHARES,
TRANSFERRING OWNERSHIP,
OTHER SERVICES
VII. Purchase of Securities Being
Offered ........ INVESTMENT POLICIES****,
NET ASSET VALUE PER SHARE,
OPENING AN ACCOUNT AND
PURCHASING SHARES,
EXCHANGE PRIVILEGE,
OTHER SERVICES
VIII. Redemption or Repurchase.. REDEEMING YOUR SHARES
IX. Pending Legal Proceeding .......... *
CAPTION or Location in
Item of Form N-1A Statement of Additional Information
- ----------------- -----------------------------------
Part B
- ------
X. Cover Page................. Cover Page
XI. Table of Contents.......... TABLE OF CONTENTS
XII. General Information and History.. *
XIII. Investment Objectives and Policies. INVESTMENT POLICIES AND
LIMITATIONS,
RISK FACTORS AND SPECIAL
CONSIDERATIONS
XIV. Management of the Fund......... MANAGEMENT OF THE TRUST
XV. Control Persons and Principal
Holders of Securities........... MANAGEMENT OF THE TRUST,
PRINCIPAL HOLDERS OF SHARES
XVI. Investment Advisory and Other
Services .......... MANAGEMENT OF THE TRUST,
INVESTMENT ADVISORY SERVICES,
CUSTODIAN,
INDEPENDENT ACCOUNTANTS
XVII. Brokerage Allocation and Other
Practices..................... PORTFOLIO TRANSACTIONS
XVIII. Capital Stock and Other Securities. DESCRIPTION OF THE TRUST
XIX. Purchase, Redemption and Pricing
of Securities Being Offered.... PRICING OF SHARES BEING OFFERED,
REDEMPTIONS IN KIND
XX. Tax Status.................... TAXATION
XXI. Underwriters..................... *
XXII. Calculation of Performance Data.... PERFORMANCE DATA
XXIII. Financial Statements........... **
* Not applicable.
** Incorporated by reference.
*** Relates only to The REvest Growth & Income Fund, a series of the Trust.
**** Relates only to Royce GiftShares Fund, a series of the Trust.
THE ROYCE FUNDS
ROYCE GIFTSHARES FUND
CONSULTANT CLASS SHARES
PROSPECTUS -- June 15, 1997
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-800-221-4268
SHAREHOLDER SERVICES -- 1-800-841-1180 FINANCIAL CONSULTANT SERVICES --
1-800-59-ROYCE
INVESTMENT
OBJECTIVE AND
POLICIES
Royce GiftShares Fund (the "Fund"), a special purpose fund designed for gifting
purposes, seeks long-term capital appreciation, primarily through
investments in a limited portfolio of common stocks and convertible securities
of small and micro-cap companies. There can be no assurance that the Fund
will achieve its objective.
The Fund is a series of The Royce Fund (the "Trust"), a diversified open-end
management investment company. The Trust is currently offering shares of 11
series. The Fund currently offers two classes of shares, and this Prospectus
relates only to the Consultant Class.
ABOUT THIS
PROSPECTUS
This Prospectus sets forth concisely the information that you should know
about the Consultant Class of Royce GiftShares Fund before you invest. It
should be retained for future reference. A Statement of Additional
Information dated June 15, 1997, containing further information about the
Consultant Class, the Fund and the Trust, has been filed with the Securities
and Exchange Commission and incorporated by reference into this Prospectus.
A copy may be obtained without charge by writing to the Trust or calling
Investor Information.
<TABLE>
TABLE OF CONTENTS
<S> <C> <C> <C>
Page Page
Fund Expenses. . . . . . . . 2 Management of the Trust . . 8
Financial Highlights . . . . 3 General Information. . . . . 9
Royce GiftShares Fund Investors. . . . 4 Dividends, Distributions and Taxes . . 9
Investment Performance . . . 5 Net Asset Value Per Share. . 10
Investment Objective . . . . 5 Purchasing Shares. . . . . . 11
Investment Policies. . . . . 5 Important Account Information. . . 11
Investment Risks . . . . . . 6 Redeeming Shares . . .. . . 12
Investment Limitations . . . 7
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND EXPENSES
The following tables summarize the maximum transaction costs and
estimated expenses and fees that you would incur as a Consultant Class
shareholder of the Fund. The Fund offers one other class of shares, not
available through brokerdealers offering Consultant Class shares to their
customers, which has a different expense structure than the Consultant Class,
resulting in different performance for that class.
Shareholder Transaction Expenses
--------------------------------
Maximum Sales Charge (as a % of offering price)(1). . . 5.00%
Maximum Initial Sales Charge Imposed on a
Purchase (as a % of offering price) . . . . . . . . . 0.00%
Maximum Contingent Deferred Sales Charge
(as a % of offering price) (1) . . . . . . . . . . . 5.00%
Annual Trustee's Fee (per trust account). . . . . . . . $50
(1) Does not apply to reinvested distributions
Annual Fund Operating Expenses
------------------------------
Management Fees (after waivers) . . . . . . . . . . . . 0.00%
12b-1 Fees. . . 1.00%
Other Expenses (after reimbursement). . . . . . . . . . 1.49%
-----
Total Operating Expenses. . . . . . . . . . . . . . . . 2.49%
-----
The purpose of the above tables is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor
in the Consultant Class. Management Fees would be 1.00%, Other Expenses would
be 1.99% and Total Operating Expenses would be 3.99% without the waiver of\
management fees and reimbursement of Fund expenses by Royce & Associates, Inc.
("Royce"), the Fund's investment adviser. Royce has voluntarily committed to
reduce its management fees and reimburse Fund expenses to the extent necessary
to maintain annual Total Operating Expenses at or below 2.49% through December
31, 1997. Long-term Consultant Class shareholders of the Fund may pay
aggregate sales charges totaling more than the economic equivalent of the
maximum initial sales charges permitted by NASD Regulation, Inc.
EXAMPLES
The following examples illustrate the expenses that you would incur on a
hypothetical $1,000 investment in the Consultant Class of shares of the Fund
for the periods specified, assuming a 5% annual return and reinvestment
of distributions.
1 Year 3 Years
------ -------
Example 1 (assumes redemption at period end) $75 $118
Example 2 (assumes no redemption) 25 78
The above examples are exclusive of the $50 annual trustee's fee per account.
For accounts opened during 1997, Royce will pay that portion of the currently
effective annual trustee's fee in excess of $50 per account and the trustee's
fees for establishing and terminating the accounts.
THESE EXAMPLES SHOULT NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN.
FINANCIAL
HIGHLIGHTS
(For a share
outstanding
throughout
the period)
The Consultant Class of the Fund was established June 15, 1997. The financial
information in these tables regarding selected per share data reflects the
performance of the Fund's Investment Class of shares. Effective June 15, 1997,
the Investment Class became subject to a Rule 12b-1 fee of .25%. Had the
Consultant Class been in existence for the time periods presented, the Fund's
performance results would have been lower because of its higher expenses. The
following financial highlights are part of the Fund's financial statements,
which have been audited by Coopers & Lybrand L.L.P., independent accountants.
The Fund's financial statements, and accompanying schedule of investments,
and Coopers & Lybrand L.L.P.'s reports on them are included in the Fund's
Annual Reports to Shareholders and are incorporated by reference into the
Statement of Additional Information and this Prospectus. Further information
about the Fund's performance is contained elsewhere in this Prospectus and in
the Fund's Annual Report to Shareholders for 1996, which may be obtained
without charge by calling Investor Information.
<TABLE>
Year ended Period ended
December 31, 1996 December 31, 1995 (1)
----------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $5.01 $5.00
----- -----
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income (2). . . . . . . 0.00 0.00
Net realized and unrealized gain
on investments . . . . . . . . . 1.27 0.01
---- ----
Total from Investment Operations 1.27 0.01
---- ----
LESS DISTRIBUTIONS
- ------------------
Dividends paid from net
investment income. . . . . . . . . (0.00) 0.00
Distributions paid from
capital gains. . . . . . . . . . . (0.45) 0.00
------ ----
Total Distributions. . . . . . . . (0.45) 0.00
------ ----
NET ASSET VALUE, END OF PERIOD . . . . . $5.83 $5.01
----- -----
TOTAL RETURN . . . . . . . . . . . . . 25.6% 0.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000's). . $1,064 $502
Ratio of Expenses to
Average Net Assets (2) . . . . . . . 1.49% 0.70%*
Ratio of Net Investment
Income to Average Net Assets . . -0.05% 0.00%
Portfolio Turnover Rate. . . . . . . 93% 0%
Average Commission Rate Paid (3) $0.0566 ---
- -------------------------------
(1) From commencement of operations on December 27, 1995.
(2) Expenses are shown after waiver of fees and reimbursement of
expenses by the adviser. Absent such waivers, the ratio of expenses
to average net assets for the year ended December 31, 1996 and for the
period ended December 31, 1995 would have been 6.53% and 1.95%,
respectively.
(3) Beginning in 1996, the Fund is required to disclose the average
commission rate paid per share for purchases and sales of investments.
* Annualized.
</TABLE>
ROYCE
GIFTSHARES
FUND
INVESTORS
A Royce GiftShares Fund investment is a unique way to make a gift
to a child (minor or adult) or another individual. (You may not open an
account in GiftShares Fund for yourself or your spouse.) A GiftShares Fund
investment is suitable for making a long-term gift which may qualify in whole
or in part for the Federal annual gift tax exclusion and which may also be
designed to help fund the beneficiary's college and post-graduate education.
To open a GiftShares Fund account, contact your financial representative or
call Investor Information (1-800-221-4268) for a GiftShares Information Packet.
(A GiftShares Fund account may also be opened by a trustee for an individual
or organization if the trust has a long-term duration, the provisions of the
trust instrument are acceptable to the Trust and the trustee has his, her
or its own tax adviser.) The minimum initial investment in GiftShares Fund
is $5,000. Additional investments may be made in amounts of $50 or more at
any time during the existence of the trust.
The shares in a GiftShares Fund account are held in trust for the beneficiary
by State Street Bank and Trust Company, as independent trustee, until the
termination date you (the donor) specify. The duration of the trust may be
as long as you wish, but generally must be at least 10 years from the time you
make the first contribution to the GiftShares Fund trust or until the
beneficiary reaches the age of majority, whichever is later. The GiftShares
Fund trust is irrevocable, and neither you nor the beneficiary may amend its
terms in any way. When the trust terminates, the beneficiary will receive the
shares in the account. The beneficiary may then continue to own the shares,
but, except for reinvestment of distributions, may not purchase additional
shares.
Options available to a donor under the Royce GiftShares Fund trust adoption
agreement are:
WITHDRAWAL OPTION:
This option will be used primarily by a donor to make a gift that may qualify
for the Federal annual gift tax exclusion or when the donor wants to allow
the beneficiary to make withdrawals from the trust to pay for higher
education and related costs.
The full amount of the gift may qualify for the Federal annual gift
tax exclusion
The trust may be designed to permit withdrawals to help fund
the beneficiary's college or post-graduate education
The beneficiary will be taxed on all of the trust's income and
capital gains, and the trustee will, if requested by the
beneficiary, redeem Fund shares in order to allow for withdrawals in
order for the beneficiary to pay these taxes
The trustee will send an information statement to the beneficiary
each year, showing the amount of income and capital gains to be
reported on his or her income tax returns for that year
ACCUMULATION OPTION:
This option should generally be used by a donor who is not concerned about
the Federal annual gift tax exclusion and who does not want the beneficiary
to be required to pay the taxes on the trust's income or capital gains or to
file tax returns.
No part of the gift qualifies for the Federal annual gift tax
exclusion
The trust will be taxed on all income and capital gains in excess
of $100 per year
The trustee of the trust will prepare and file all Federal and state
income tax returns that are required each year, and will pay the taxes
from the assets of the trust by redeeming Fund shares
SPLIT OPTION:
This option generally is for a donor who wants to use a portion of the Federal
annual gift tax exclusion and wants the trust to pay the taxes on its capital
gains.
A portion of the gift may qualify for the Federal annual gift tax
exclusion
The trust will be taxed on its capital gains, and the trustee will
pay the taxes from the assets of the trust by redeeming Fund shares;
the beneficiary will be taxed on the trust's ordinary income, which
will be distributed to the beneficiary annually
The trustee will send an information statement to the beneficiary
each year, showing the amount of income to be reported on his or her
income tax returns for that year
See "Dividends, Distributions and Taxes - Royce GiftShares Fund" below for
further information. A donor should consider consulting with an attorney
or qualified tax adviser before investing in Royce GiftShares Fund.
INVESTMENT
PERFORMANCE
Total return is the
change in value over
a given time period,
assuming reinvestment
of dividends and capital
gains distributions
The Fund may include in communications to current or prospective shareholders
figures reflecting total return over various time periods. "Total return" is
the rate of return on an amount invested in the Fund from the beginning to the
end of the stated period. "Average annual total return" is the annual
compounded percentage change in the value of an amount invested in the Fund
from the beginning until the end of the stated period. Total returns are
historical measures of past performance and are not intended to indicate
future performance. Total returns assume the reinvestment of all net investment
income dividends and capital gains distributions, and the imposition of
contingent deferred sales charges (if any) applicable to the time period
quoted.
Additionally, the performance of the Fund may be compared in publications to
i) the performance of various indices and investments for which reliable
performance data is available and to ii) averages, performance rankings or
other information prepared by recognized mutual fund statistical services.
INVESTMENT
OBJECTIVE
Royce GiftShares Fund seeks long-term capital appreciation, primarily through
investments in a limited portfolio of common stocks and convertible securities
of small and micro-cap companies. There can be no assurance that the Fund
will achieve its investment objective.
The Fund's investment objective of long-term capital appreciation is
fundamental and may not be changed without the approval of a majority of its
outstanding voting shares, as that term is defined in the Investment Company
Act of 1940 (the "1940 Act").
INVESTMENT
POLICIES
The Fund invests
on a "value" basis
The Fund invests
primarily in
small and
micro-cap
companies
Royce uses a "value" approach in managing the Fund's assets. In its selection
process, Royce puts primary emphasis on the understanding of various internal
returns indicative of profitability, balance sheet quality, cash flows and the
relationships that these factors have to the price of a given security.
Royce's value approach is based on its belief that the securities of certain
companies may sell at a discount from its estimate of such companies' "private
worth", that is, what a knowledgeable buyer would pay for the entire company.
Royce attempts to identify and invest in these securities for the Fund, with
the expectation that this "value discount" will narrow over time and thus
provide capital appreciation for the Fund.
The Fund normally invests at least 80% of its assets in a limited number of
common stocks and securities convertible into common stocks. At least 75% of
these securities will be issued by small (under $1 billion in market
capitalization) and micro-cap (under $300 million in market capitalization)
companies.
The remainder of its assets are invested in securities of companies with higher
stock market capitalizations and non-convertible preferred stocks and debt
securities.
INVESTMENT
RISKS
The Fund is subject
to certain investment
risks
As a mutual fund investing primarily in common stocks and/or securities
convertible into common stocks, the Fund is subject to market risk, that is,
the possibility that common stock prices will decline over short or even
extended periods. The Fund invests substantial portions of its assets in
securities of small and/or micro-cap companies. Such companies may not be
well-known to the investing public, may not have significant institutional
ownership and may have cyclical, static or only moderate growth prospects.
In addition, the securities of such companies may be more volatile in price,
have wider spreads between their bid and ask prices and have significantly
lower trading volumes than the larger capitalization stocks. Accordingly,
Royce's investment method requires a longterm investment horizon, and the
Fund should not be used to play short-term swings in the market.
Although the Fund is diversified within the meaning of the Investment Company
Act of 1940 (the "1940 Act"), it will normally be invested in a limited number
of securities. The Fund's relatively limited portfolio may involve more risk
than investing in a broadly diversified portfolio of common stocks of large
and well-known companies. To the extent that the Fund invests in a limited
number of securities, it may be more susceptible to any single corporate,
economic, political or regulatory occurrence than a more widely diversified
fund.
Royce may employ a more aggressive approach to investing for the Fund that
involves substantially higher than average portfolio turnover rates. In
addition, the Fund invests in micro-cap and/or low-priced securities that are
followed by relatively few securities analysts, with the result that there
tends to be less publicly available information concerning the securities.
The securities of these companies may have limited trading volumes and be
subject to more abrupt or erratic market movements than the securities of
larger, more established companies or the market averages in general, and
Royce may be required to deal with only a few market-makers when purchasing
and selling these securities. Companies in which the Fund is likely to invest
also may have limited product lines, markets or financial resources, may lack
management depth and may be more vulnerable to adverse business or market
developments. Thus, the Fund may involve considerably more risk than a mutual
fund investing in more liquid equity securities.
INVESTMENT
LIMITATIONS
The Fund has
adopted certain
fundamental
limitations
The Fund has adopted certain fundamental limitations, designed to reduce its
exposure to specific situations, which may not be changed without the approval
of a majority of its outstanding voting shares, as that term is defined in the
1940 Act. These limitations are set forth in the Statement of Additional
Information and provide, among other things, that the Fund will not:
(a) with respect to 75% of its assets, invest more than 5% of
its assets in the securities of any one issuer, excluding
obligations of the U.S. Government;
(b) invest more than 25% of its assets in any one industry; or
(c) invest in companies for the purpose of exercising control of
management.
OTHER INVESTMENT
PRACTICES
In addition to investing primarily in the equity and fixed income securities
described above, the Fund may follow a number of additional investment
practices.
Short-term fixed
income securities
The Fund may invest in short-term fixed income securities for temporary
defensive purposes, to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These securities consist of United
States Treasury bills, domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements collateralized by U.S. Government
securities. In a repurchase agreement, a bank sells a security to the Fund
at one price and agrees to repurchase it at the Fund's cost plus interest
within a specified period of seven or fewer days. In these transactions,
which are, in effect, secured loans by the Fund, the securities purchased by
the Fund will have a value equal to or in excess of the value of the
repurchase agreement and will be held by the Fund's custodian bank until
repurchased. Should the Fund implement a temporary investment policy, its
investment objective may not be achieved.
Securities lending
The Fund may lend up to 25% of its assets to qualified institutional
investors for the purpose of realizing additional income. Loans of
securities of the Fund will be collateralized by cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities. The collateral will equal at least 100% of the current
market value of the loaned securities. The risks of securities lending
include possible delays in receiving additional collateral or in recovery of
loaned securities or loss of rights in the collateral if the borrower defaults
or becomes insolvent.
Foreign securities
The Fund may invest up to 10% of its assets in debt and/or equity securities
of foreign issuers. Foreign investments involve certain risks, such as
political or economic instability of the issuer or of the country of issue,
fluctuating exchange rates and the possibility of imposition of exchange
controls. These securities may also be subject to greater fluctuations in
price than the securities of U.S. corporations, and there may be less publicly
available information about their operations. Foreign companies may not be
subject to accounting standards or governmental supervision comparable to
U.S. companies, and foreign markets may be less liquid or more volatile than
U.S. markets and may offer less protection to investors such as the Fund.
Lower-rated
debt securities
The Fund may invest no more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities, which are below investment grade.
The Fund does not expect to invest in debt securities that are rated lower
than Caa by Moody's Investors Service, Inc. or CCC by Standard & Poor's Corp.
or, if unrated, determined to be of comparable quality.
Warrants, rights
and options
The Fund may invest up to 5% of its total assets in warrants, rights
and options.
Portfolio turnover
The Fund's annual portfolio turnover rate may exceed 100%, which is higher
than that of other funds. A 100% turnover rate occurs, for example, if all
of the Fund's portfolio securities are replaced in one year. High portfolio
activity increases the Fund's transaction costs, including brokerage
commissions.
MANAGEMENT OF
THE TRUST
Royce &
Associates, Inc.
is responsible for
management of the
Fund's portfolio
Royce Fund
Services, Inc.
distributes the
Fund's shares
The Trust's business and affairs are managed under the direction of its Board
of Trustees. Royce & Associates, Inc., formerly named Quest Advisory Corp.,
the Fund's investment adviser, is responsible for the management of the Fund's
portfolio, subject to the authority of the Board of Trustees. Royce was
organized in 1967 and has been the Fund's adviser since its inception.
Charles M. Royce, Royce's President, Chief Investment Officer and sole voting
shareholder since 1972, is primarily responsible for supervising Royce's
investment management activities. He is assisted by Royce's investment staff,
including W. Whitney George, Portfolio Manager and Managing Director, and
Jack E. Fockler, Jr., Managing Director. Royce is also the investment adviser
to Pennsylvania Mutual, Royce Premier, Micro-Cap, Low-Priced Stock, Total
Return and Global Services Funds and PMF II, which are other series of the
Trust, and to other investment and non-investment company accounts.
As compensation for its services to the Fund, Royce is entitled to receive
annual advisory fees of 1.00% of the average net assets of the Fund.
Royce selects the brokers who execute the purchases and sales of the Fund's
portfolio securities and may place orders with brokers who provide brokerage
and research services to Royce. Royce is authorized, in recognition of the
value of brokerage and research services provided, to pay commissions to a
broker in excess of the amount which another broker might have charged for
the same transaction.
Royce Fund Services, Inc. ("RFS"), which is whollyowned by Charles M. Royce,
acts as distributor of the Fund's shares. Shares of the Consultant Class of
the Fund are available for new investors only through certain broker-dealers
having agreements with RFS. The Trust has adopted a distribution plan for
the Fund's Consultant Class pursuant to Rule 12b-1. The plan provides for
payment to RFS of fees not to exceed 1% per annum of the Class's average
net assets, which may be used for payment of sales commissions and other fees
to those broker-dealers who introduce investors to the Fund and various other
promotional, sales-related and servicing costs and expenses. The fees
payable by the Class to RFS have been allocated between personal service
and/or account maintenance fees and asset-based sales charges, so that not
more than .25% per annum is payable as a personal service and/or account
maintenance fee and not more than .75% per annum is payable as an asset-based
sales charge. As a result of the asset- based sales charge, total returns and
dividends will be lower on the Consultant Class than on the Investment Class,
which does not bear such a charge and bears only the 0.25% personal service
and/or account maintenance fee. Consultant Class shares automatically convert
into Investment Class shares approximately eight years after the shares were
purchased. See the Statement of Additional Information for more information.
GENERAL
INFORMATION
The Royce Fund (the "Trust") is a Delaware business trust, registered with
the Securities and Exchange Commission as a diversified open-end management
investment company. It is the successor to a Massachusetts business trust
established in October 1985 and merged into the Trust in June 1996. The
Trustees have the authority to issue an unlimited number of shares of
beneficial interest, without shareholder approval, and these shares may be
divided into an unlimited number of series and classes. Shareholders are
entitled to one vote per share. Shares vote by individual series on all
matters, except that shares are voted in the aggregate and not by individual
series or class when required by the 1940 Act and that if the Trustees
determine that a matter affects only one series or class, then only
shareholders of that series or class are entitled to vote on that matter.
The trustee of trusts holding shares of the Fund will send notices, proxy
statements and proxies for shareholder meetings to the trusts' beneficiaries
to enable them to attend meetings in person or vote by proxy. The trustee
will vote all shares in accordance with the instructions received from such
beneficiaries and will vote all shares for which instructions are not
received in the same proportion as those for which instructions are received.
Meetings of shareholders will not be held except as required by the 1940 Act
or other applicable law. A meeting will be held to vote on the removal of
a Trustee or Trustees of the Trust if requested in writing by the holders of
not less than 10% of the outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the Fund is State
Street Bank and Trust Company. State Street, through its agent National
Financial Data Services ("NFDS"), also serves as the Fund's transfer agent.
Coopers & Lybrand, L.L.P. serves as independent accountants for the Fund.
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
The Fund pays
dividends and capital
gains annually in
December
The Fund pays dividends from net investment income (if any) and distributes
its net realized capital gains annually in December. Dividends and
distributions payable to trust accounts will be automatically reinvested in
additional shares of the Fund. Upon termination of a trust, a shareholder
may contact Investor Information to select other distribution options.
Shareholders receive information annually as to the tax status of
distributions made by the Fund for the calendar year. For Federal income
tax purposes, all distributions by the Fund are taxable to shareholders when
declared. Distributions paid from the Fund's net investment income and
short-term capital gains are taxable to shareholders as ordinary income
dividends. A portion of the Fund's dividends may qualify for the corporate
dividends received deduction, subject to certain limitations. The portion of
the Fund's dividends qualifying for such deduction is generally limited to the
aggregate taxable dividends received by the Fund from domestic corporations.
Distributions paid from long-term capital gains of the Fund are treated by a
shareholder for Federal income tax purposes as long-term capital gains,
regardless of how long the shareholder has held Fund shares. A loss realized
on a taxable disposition of Fund shares may be disallowed to the extent that
additional Fund shares are purchased (including by reinvestment of
distributions) within 30 days before or after such disposition.
If a shareholder disposes of shares held for six months or less at a loss,
such loss is treated as a long-term capital loss to the extent of any long-
term capital gains reported by the shareholder with respect to such shares.
The redemption of shares is a taxable event, and a shareholder may realize a
capital gain or capital loss. The Fund will report to redeeming shareholders
the proceeds of their redemptions. However, because the tax consequences of
a redemption will also depend on the shareholder's basis in the redeemed
shares for tax purposes, shareholders should retain their account statements
for use in determining their tax liability on a redemption.
At the time of a shareholder's purchase, the Fund's net asset value may
reflect undistributed income or capital gains. A subsequent distribution of
these amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's investment.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to non-corporate shareholders who have not
complied with Internal Revenue Service taxpayer identification regulations.
Shareholders may avoid this withholding requirement by certifying their
proper Social Security Number and that they are not subject to backup
withholding.
The creation of a Royce GiftShares Fund trust account for a beneficiary and
any addition to an existing account will be subject to the reporting
requirements of Federal gift tax law, which requires, in general, that a
Federal gift tax return be filed reporting all gifts made by an individual
during any calendar year, other than gifts of present interests in property
that qualify for, and do not exceed, the amount of the Federal annual gift
tax exclusion (currently, $10,000). Whether a particular gift of Fund shares
qualifies for the annual exclusion will depend on the option selected by the
donor in the adoption agreement. A gift of Fund shares may also be subject
to state gift tax reporting requirements under the laws of the state in which
the donor of the gift resides. The discussion of Federal income taxes above
is for general information only. Shareholders may also be subject to state
and local taxes on income and gains from their investment. See "Royce
GiftShares Fund Investors" above and "Taxation Royce GiftShares Fund" in the
Statement of Additional Information for more detailed information about tax
matters applicable to an investment in Royce GiftShares Fund. Due to the
complexity of Federal and state 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.
NET ASSET VALUE
PER SHARE
Net asset value per
share (NAV) is
determined each day
the New York Stock
Exchange is open
Shares are purchased and redeemed at their net asset value per share next
determined after an order is received by the Fund's transfer agent or an
authorized service agent or sub-agent. Net asset value per share is
determined by dividing the total value of the Fund's investments plus cash
and other assets, less any liabilities, by the number of outstanding shares
of the Fund. Net asset value per share is calculated at the close of regular
trading on the New York Stock Exchange on each day the Exchange is open
for business.
In determining net asset value, securities listed on an exchange or the
Nasdaq National Market System are valued on the basis of the last reported
sale price prior to the time the valuation is made or, if no sale is reported
for that day, at their bid price for exchange-listed securities and at the
average of their bid and ask prices for Nasdaq securities. Quotations are
taken from the market where the security is primarily traded. Other
over-the-counter securities for which market quotations are readily available
are valued at their bid price. Securities for which market quotations are not
readily available are valued at their fair value under procedures established
and supervised by the Board of Trustees. Bonds and other fixed income
securities may be valued by reference to other securities with comparable
ratings, interest rates and maturities, using established independent pricing
services.
PURCHASING
SHARES
New accounts can be opened by completing a Trust Adoption Agreement and
returning it to a broker-dealer having an agreement with RFS. If you need
assistance with the Adoption Agreement or have any questions about the Fund,
please contact your financial consultant or call Investor Information
at 1-800-221-4268.
The minimum initial investment is $5,000. Subsequent investments may be made
through your broker-dealer, or by mail ($50 minimum), wire ($1,000 minimum)
or Express Service.
Consultant Class shares are offered at net asset value without an initial
sales charge, but subject to a 0.75% annual asset-based sales charge for
approximately eight years (at which time they automatically convert into
Investment Class shares, that are identical to Consultant Class shares but
that do not bear the sales charge). Consultant Class shares are also subject
to a declining contingent deferred sales charge if redeemed, other than to
pay taxes or trustee fees, within approximately six years after purchase.
The contingent deferred sales charge is a percentage of the purchase price
of the shares being redeemed and is paid to RFS. As shown below, the amount
of the contingent deferred sales charge depends on the number of years after
purchase that the redemption occurs:
Years After Purchase 0-1 1-2 2-3 3-4 4-5 5-6
--- --- --- --- --- ---
Contingent Deferred Sales Charge 5.00% 4.50% 4.00% 3.50% 2.50% 1.50%
Year one ends one year after the date on which the purchase was accepted and
so on. Shares issued upon the reinvestment of distributions are not subject
to the contingent deferred sales charge.
PURCHASING BY
EXPRESS
SERVICE
Additional purchases may be made through your brokerdealer, or directly by
mail, by telephone, or automatically through the following options:
EXPEDITED PURCHASE OPTION permits you, at your discretion, to transfer funds
($100 minimum and $200,000 maximum) from your bank account to purchase shares
by telephone or computer online access.
AUTOMATIC INVESTMENT PLAN allows you to make regular, automatic transfers
($50 minimum) from your bank account to purchase shares on the monthly or
quarterly schedule you select.
To establish the Expedited Purchase Option and/or Automatic Investment Plan,
please contact Investor Information at 1-800-221-4268.
IMPORTANT
ACCOUNT
INFORMATION
For our mutual protection, we may require a signature guarantee on certain
written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokerage firms
and any other guarantor that our transfer agent deems acceptable. A
signature guarantee cannot be provided by a notary public.
Telephone and
Online Access
Transactions
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone or computer online access that are
reasonably believed to be genuine. The transfer agent uses certain
procedures designed to confirm that telephone and computer online access
instructions are genuine, which may include requiring some form of personal
identification prior to acting on the instructions, providing written
confirmation of the transaction and/or recording incoming telephone calls,
and if it does not follow such procedures, the Fund or the transfer agent
may be liable for any losses due to unauthorized or fraudulent transactions.
Nonpayment
If your check or wire does not clear, or if payment is not received for any
telephone or computer online access purchase, the transaction will be canceled
and you will be responsible for any loss the Fund incurs.
Trade Date for
Purchases
Your trade date is the date on which share purchases are credited to your
account. If your purchase is made by check, Federal Funds wire, telephone,
computer online access or exchange and is received by the close of regular
trading on the New York Stock Exchange (generally 4:00 p.m., Eastern time),
your trade date is the date of receipt. If your purchase is received after
the close of regular trading on the Exchange, your trade date is the next
business day. Your shares are purchased at the net asset value determined on
your trade date. Certificates will not be issued.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, the Fund will accept only a foreign check which has been
drawn in U.S. dollars and has been issued by a foreign bank with a United
States correspondent bank.
The Trust reserves the right to suspend the offering of Fund shares to new
investors. The Trust also reserves the right to reject any specific purchase
request.
REDEEMING
SHARES
Until a Royce GiftShares Fund trust terminates, only the independent trustee,
as the legal owner of the shares, may redeem them. The ability of the trustee
to redeem shares, and of the beneficiary to compel redemption, is subject to
the terms and conditions of the Royce GiftShares Fund Trust Instrument. Upon
termination of the trust, the beneficiary may redeem any portion of his/her
account at any time. You may request a redemption in writing or by telephone.
Redemption proceeds normally will be sent within two business days after the
receipt of the request in Good Order.
REDEEMING BY MAIL
Redemption requests should be mailed to The Royce Funds, c/o NFDS, P.O. Box
419012, Kansas City, MO 64141-6012. (For express or registered mail, send
your request to The Royce Funds, c/o National Financial Data Services, 1004
Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net asset value (less any
contingent deferred sales charge) next determined after NFDS or an authorized
service agent or sub-agent has received all required documents in Good Order.
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in
dollars or shares).
3. Signatures of all owners exactly as they are
registered on the account.
4. Signature guarantees if the value of the shares being redeemed exceeds
$50,000 or if the payment is to be sent to an address other than the
address of record or is to be made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be required, in the
case of retirement plans, corporations, trusts, estates and certain
other accounts.
If you have any questions about what is required as it pertains to your
request, please call Shareholder Services at 1-800-841-1180.
REDEEMING BY
TELEPHONE
Upon termination of the trust, shareholders may redeem up to $50,000 of their
Fund shares by telephone, provided the proceeds are mailed to their address
of record. To redeem shares by telephone, you may call Shareholder Services
at 1800-841-1180. Redemption requests received by telephone prior to the
close of regular trading on the New York Stock Exchange (generally 4:00 p.m.,
Eastern time) are processed on the day of receipt; redemption requests
received by telephone after the close of regular trading on the Exchange
are processed on the business day following receipt.
TELEPHONE REDEMPTIONS WILL NOT BE PERMITTED FOR A PERIOD OF SIXTY DAYS AFTER
AS CHANGE IN THE ADDRESS OF RECORD. See also "Important Account Information
- - Telephone and Online Access Transactions".
REDEEMING BY
EXPRESS
SERVICE
Upon termination of the Trust, you may elect the Express Service Automatic
Withdrawal option or Expedited Redemption option by providing such
information at or after trust maturity to the transfer agent. Under the
Automatic Withdrawal option, shares will be automatically redeemed from your
Fund account and the proceeds transferred to your bank account according to
the schedule you have select. You must have at least $25,000 in your Fund
account to establish the Automatic Withdrawal option. The Expedited
Redemption option lets you redeem up to $50,000 of shares from your Fund
account by telephone and transfer the proceeds directly to your bank account.
IMPORTANT
REDEMPTION
INFORMATION
The proceeds of a redemption may not be sent until payment for any recent
purchase is collected, which may take up to fifteen calendar days. Otherwise,
redemption proceeds must be sent to you within seven days of receipt of your
request in Good Order.
If you experience difficulty in making a telephone redemption during periods
of drastic economic or market changes, your redemption request may be made
by regular or express mail. It will be processed at the net asset value next
determined after your request has been received by the transfer agent in
Good Order. The Trust reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Trust may suspend the redemption right or postpone payment at times when
the New York Stock Exchange is closed or under any emergency circumstances as
determined by the Securities and Exchange Commission.
Although the Trust will normally make redemptions in cash, it may cause the
Fund to redeem in kind under certain circumstances.
THE ROYCE FUNDS
- ---------------
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected] THE ROYCE FUNDS
---------------
INVESTMENT ADVISER
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019 ROYCE GIFTSHARES
FUND
DISTRIBUTOR CONSULTANT CLASS
Royce Fund Services, Inc.
1414 Avenue of the Americas
New York, NY 10019
TRANSFER AGENT
State Street Bank and Trust Company
c/o National Financial Data
Services P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
OFFICERS
Charles M. Royce, President and Treasurer
Thomas R. Ebright, Vice President
Jack E. Fockler, Jr., Vice President PROSPECTUS
W. Whitney George, Vice President JUNE 15, 1997
Daniel A. O'Byrne, Vice President and
Assistant Secretary
John E. Denneen, Secretary
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is
a professionally-managed open-end registered investment company,
which offers investors the opportunity to invest in twelve
portfolios or series. Two of the twelve series, Pennsylvania
Mutual Fund and Royce GiftShares Fund, offer two classes of their
shares, an Investment Class and a Consultant Class. Each series
has distinct investment objectives and/or policies, and a
shareholder's interest is limited to the series in which the
shareholder owns shares. The twelve series are:
Pennsylvania Mutual Fund Royce Value Fund
Royce Premier Fund Royce Total Return Fund
Royce Micro-Cap Fund Royce Global Services Fund
Royce Equity Income Fund PMF II
Royce Low-Priced Stock Fund Royce Financial Services Fund
Royce GiftShares Fund The REvest Growth & Income Fund
This Statement of Additional Information relates to all
of the series other than The REvest Growth & Income Fund (each a
"Fund" and collectively the "Funds"). REvest is covered by its
own separate Statement of Additional Information.
The Trust is designed for long-term investors, including
those who wish to use shares of any Fund (other than Royce
GiftShares Fund) as a funding vehicle for certain tax-deferred
retirement plans (including Individual Retirement Account (IRA)
plans), and not for investors who intend to liquidate their
investments after a short period of time.
This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Trust's
current Prospectuses each of which is dated April 30, 1997 except
for Royce GiftShares Fund Consultant Class which is dated June
15, 1997. Please retain this document for future reference. The
audited financial statements and schedules of investments
included in the Annual Reports to Shareholders of such Funds for
the fiscal year or period ended December 31, 1996 are
incorporated herein by reference. To obtain an additional copy
of the Prospectus or Annual or Semi-Annual Reports to
Shareholders for any of these Funds, please call Investor
Information at 1-800-221-4268.
INVESTMENT ADVISER TRANSFER AGENT
Royce & Associates, Inc. ("Royce") State Street Bank and Trust Company
c/o National Financial Data Services
DISTRIBUTOR CUSTODIAN
Royce Fund Services, Inc. ("RFS") State Street Bank and Trust Company
June 15, 1997
TABLE OF CONTENTS
<TABLE>
PAGE PAGE
<S> <C> <C> <C>
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS............. 22
LIMITATIONS.............. 2 PORTFOLIO TRANSACTIONS.............. 23
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS........... 6 MATTERS............................. 25
MANAGEMENT OF THE TRUST... 11 PRICING OF SHARES BEING OFFERED..... 25
PRINCIPAL HOLDERS OF SHARES... 14 REDEMPTIONS IN KIND................ 26
INVESTMENT ADVISORY TAXATION............................ 26
SERVICES................. 17 DESCRIPTION OF THE TRUST........... 33
DISTRIBUTOR............ 20 PERFORMANCE DATA................... 34
CUSTODIAN................... 22
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement
those set forth in the Funds' Prospectuses. Unless otherwise
noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any
security or other asset or sets forth a policy regarding quality
standards, the percentage limitation or standard will be
determined immediately after giving effect to the Fund's
acquisition of the security or other asset. Accordingly, any
subsequent change in values, net assets or other circumstances
will not be considered in determining whether the investment
complies with the Fund's investment policies and limitations.
A Fund's fundamental investment policies cannot be changed
without the approval of a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940
(the "1940 Act")) of the Fund. Except for the fundamental
investment restrictions set forth below, the investment policies
and limitations described in this Statement of Additional
Information are operating policies and may be changed by the
Board of Trustees without shareholder approval. However,
shareholders will be notified prior to a material change in an
operating policy affecting their Fund.
NO FUND MAY, AS A MATTER OF FUNDAMENTAL POLICY:
1. Issue any senior securities;
2. Purchase securities on margin or write call
options on its portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may
borrow money from banks as temporary measure for
extraordinary or emergency purposes in an amount
not exceeding 5% of such Fund's total assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the
securities of foreign issuers (except for Royce
Global Services Fund, which is not subject to any
such limitation, and for PMF II and Royce
Financial Services Funds, which may invest up to
25% of their respective total assets in such
securities );
7. Invest in restricted securities (except for Royce
Global Services Fund, PMF II and Royce Financial
Services Fund, which each may invest up to 15% of
its net assets in illiquid securities, including
restricted securities) or in repurchase agreements
which mature in more than seven days;
8. Invest more than 10% (15% for Royce Global
Services Fund, PMF II and Royce Financial Services
Fund) of its assets in securities without readily
available market quotations (i.e., illiquid
securities)(except for Pennsylvania Mutual Fund,
which is not subject to any such limitation);
9. Invest, with respect to Royce Value and Royce
Equity Income Funds, more than 5% of such Fund's
assets in the securities of any one issuer (except
U.S. Government securities) or, with respect to
75% of the other Funds' total assets, more than 5%
of such Fund's assets in the securities of any one
issuer (except U.S. Government securities);
10. Invest more than 25% of its assets in any one
industry;
11. Acquire (own, in the case of Pennsylvania Mutual
Fund) more than 10% of the outstanding voting
securities of any one issuer;
12. Purchase or sell real estate or real estate
mortgage loans or invest in the securities of real
estate companies unless such securities are
publicly-traded;
13. Purchase or sell commodities or commodity
contracts;
14. Make loans, except for purchases of portions of
issues of publicly- distributed bonds, debentures
and other securities, whether or not such
purchases are made upon the original issuance of
such securities, and except that each Fund may
loan up to 25% of its assets to qualified brokers,
dealers or institutions for their use relating to
short sales or other securities transactions
(provided that such loans are fully collateralized
at all times);
15. Invest in companies for the purpose of exercising
control of management;
16. Purchase portfolio securities from or sell such
securities directly to any of the Trust's
Trustees, officers, employees or investment
adviser, as principal for their own accounts;
17. Invest in the securities of other investment
companies (except for Pennsylvania Mutual Fund,
Royce Global Services Fund, PMF II and Royce
Financial Services Fund, which may invest in the
securities of other investment companies to the
extent permitted by the 1940 Act); or
18. Invest more than 5% of its total assets in
warrants, rights and options (except for
Pennsylvania Mutual Fund, which may not purchase
any warrants, rights or options).
NO FUND MAY, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its net assets in
lower-rated (high-risk) non-convertible debt
securities; or
2. Enter into repurchase agreements with
any party other than the custodian of its assets
or having a term of more than seven days.
PENNSYLVANIA MUTUAL FUND
PMF II
Pennsylvania Mutual Fund and PMF II may each invest up to
25% of the value of their total assets in the securities of
other investment companies (open or closed-end) and up to 5% of
their total assets in the securities of any one other investment
company. All such securities must be acquired in the open
market, in transactions involving no commissions or discounts to
a sponsor or dealer (other than customary brokerage commissions).
The issuers of such securities are not required to redeem them in
an amount exceeding 1% of such issuers' total outstanding
securities during any period of less than thirty days, and
Pennsylvania Mutual Fund and PMF II will vote all proxies with
respect to such securities in the same proportion as the vote of
all other holders of such securities. Except for cash collateral
received in connection with their securities lending activities
and invested in the money market funds of their custodian bank,
neither Pennsylvania Mutual Fund nor PMF II has any current
intention of investing in the securities of any open-end
investment companies.
ROYCE GLOBAL SERVICES FUND
ROYCE FINANCIAL SERVICES FUND
Global Services and Financial Services Funds may invest in
the securities of a company that is engaged in securities related
activities as a broker, a dealer, an underwriter, an investment
adviser registered under the Investment Advisers Act of 1940 or
an investment adviser to an investment company, subject to the
following limitations in the case of a company that, in its most
recent fiscal year, derived more than 15% of its gross revenues
from such activities:
(a) The purchase cannot cause more than 5% of the Fund's
assets to be invested in the securities of the company;
(b) For an equity security, the purchase cannot result in
the Fund owning more than 5% of the company's outstanding
securities of that class; and
(c) For a debt security, the purchase cannot result in the
Fund owning more than 10% of the principal amount of the
company's outstanding debt securities.
In applying the gross revenues test, a company's gross
revenues from its own securities related activities and from its
ratable share of the securities related activities of enterprises
of which it owns 20% or more of the voting or equity interest are
considered in determining the degree to which the company is
engaged in securities related activities. The limitations apply
only at the time of the Fund's purchase of the securities of such
a company. When Royce is considering purchasing or has purchased
warrants or convertible securities of a securities related
business for the Fund, the required determination is made as
though such warrants or conversion privileges had been exercised.
Global Services and Financial Services Funds are not
permitted to acquire a general partnership interest or a security
issued by their investment adviser or principal underwriter or
any affiliated person of their investment adviser or principal
underwriter.
Global Services and Financial Services Funds may each invest
up to 20% of its assets in the securities of other investment
companies, provided that (i) the Fund and all affiliated persons
of the Fund do not invest in more than 3% of the total
outstanding stock of any one such company and (ii) the Fund does
not offer or sell its shares at a public offering price which
includes a sales load of more than 1 1/2%. (The 20% and 3%
limitations do not apply to securities received as dividends,
through offers of exchange or as a result of a reorganization,
consolidation or merger.) The other investment company is not
obligated to redeem those of its securities held by the Fund in
an amount exceeding 1% of its total outstanding securities during
any period of less than thirty days, and the Fund will be
obligated to exercise voting rights with respect to any such
security by voting the securities held by it in the same
proportion as the vote of all other holders of the security.
Global Services and Financial Services Funds do not
currently intend to invest more than 5% of their assets in the
securities of any one other investment company, to purchase
securities of other investment companies (except in the open
market where no commission other than the ordinary broker's
commission is paid) or to purchase or hold securities issued by
other open-end investment companies (except for cash collateral
received in connection with their securities lending activities
and invested in the money market funds of their custodian bank).
ROYCE GLOBAL SERVICES FUND
PMF II
ROYCE FINANCIAL SERVICES FUND
Global Services Fund, PMF II and Financial Services Fund
will not invest more than 15% of their net asets in illiquid
securities, including those restricted securities that are
illiquid. Illiquid securities include securities subject to
contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities
Act") and other securities for which market quotations are not
readily available. Securities which have not been registered
under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer,
a control person of the issuer or another investor holding
such securities.
A large institutional market has developed for certain
securities that are not registered under the Securities Act,
including foreign securities. Institutional investors depend on
an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor
a demand for repayment. The fact that there are contractual or
legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows an institutional
trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act
for resales of certain securities to qualified institutional
buyers. An insufficient number of qualified institutional buyers
interested in purchasing certain restricted securities held by
the Funds, however, could adversely affect the marketability of
such portfolio securities, and the Funds might be unable to
dispose of such securities promptly or at reasonable prices.
Rule 144A produces enhanced liquidity for many restricted
securities, and market liquidity for such securities may continue
to expand as a result of this regulation.
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 Royce or the Board of Trustees determine
that such matters could have a significant effect on the value of
the Fund's investment in the company. The activities that a Fund
may engage in, either individually or in conjunction with others,
may include, among others, supporting or opposing proposed
changes in a company's corporate structure or business
activities; seeking changes in a company's board of directors or
management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of a company or a portion of
its assets; or supporting or opposing third party takeover
attempts. This area of corporate activity is prone to
litigation, and it is possible that a Fund could be involved in
lawsuits related to such activities. Royce 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
Royce and the Trust's Board of Trustees determine this to be in
the best interests of a Fund's shareholders.
SECURITIES LENDING
Each Fund may lend up to 25% of its assets to brokers,
dealers and other financial institutions. Securities lending
allows the Fund to retain ownership of the securities loaned and,
at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities or even a loss of
rights in collateral supplied should the borrower fail
financially, loans will be made only to parties that participate
in a Global Securities Lending Program monitored by the Funds'
custodian and who are deemed by it to be of good standing.
Furthermore, such loans will be made only if, in Royce's
judgment, the consideration to be earned from such loans would
justify the risk.
Royce understands that it is the current view of the staff
of the Securities and Exchange Commission that a Fund may engage
in such loan transactions only under the following conditions:
(i) the Fund must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (ii) the borrower must increase the collateral whenever
the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (iii) after
giving notice, the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest or other distributions on the securities
loaned and to any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and
(vi) the Fund must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
LOWER-RATED (HIGH-RISK) DEBT SECURITIES
Each Fund may invest up to 5% of its net assets in lower-
rated (high-risk) non-convertible debt securities. They may be
rated from Ba to Ca by Moody's Investors Service, Inc. or from BB
to D by Standard & Poor's Corporation or may be unrated. These
securities have poor protection with respect to the payment of
interest and repayment of principal and may be in default as to
the payment of principal or interest. These securities are often
considered to be speculative and involve greater risk of loss or
price changes due to changes in the issuer's capacity to pay.
The market prices of lower-rated (high-risk) debt securities may
fluctuate more than those of higher-rated debt securities and may
decline significantly in periods of general economic difficulty,
which may follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt
securities has been in existence for many years and has weathered
previous economic downturns, the 1980s brought a dramatic
increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of
the high-yield/high-risk bond market, especially during periods
of economic recession. In fact, from 1989 to 1991, the
percentage of lower-rated (high-risk) debt securities that
defaulted rose significantly above prior levels.
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, Royce'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, Royce
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. Royce's analysis may focus on relative values based on
such factors as interest or dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of
the issuer.
FOREIGN INVESTMENTS
Except for Royce Global Services Fund, which is not subject
to any such limitation, each Fund may invest up to 10% of its
total assets (25% for PMF II and Financial Services Fund) in the
securities of foreign issuers. Foreign investments can involve
significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed
to foreign currencies and of dividends and interest from such
securities can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets
can be highly volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to
obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than
U.S. markets. Foreign issuers, brokers and securities markets
may be subject to less government supervision. Foreign security
trading practices, including those involving the release of
assets in advance of payment, may involve increased risks in the
event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and
economic risks. Foreign investments may be affected by actions
of foreign governments adverse to the interests of U.S.
investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on
U.S. investment or on the ability to repatriate assets or convert
currency into U.S. dollars or other government intervention.
There may be a greater possibility of default by foreign
governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local
political, economic or social instability, military action or
unrest or adverse diplomatic developments. There is no assurance
that Royce will be able to anticipate these potential events or
counter their effects.
The considerations noted above are generally intensified for
investments in developing countries. Developing countries may
have relatively unstable governments, economies based on only a
few industries and securities markets that trade a small number
of securities.
American Depositary Receipts (ADRs) are certificates held in
trust by a bank or similar financial institution evidencing
ownership of securities of a foreign-based issuer. Designed for
use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying foreign securities in their national
markets and currencies.
ADR facilities may be established as either unsponsored or
sponsored. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them
relating to the rights and obligations of ADR holders and the
practices of market participants. A depository may establish an
unsponsored facility without participation by (or even
necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depository requests a letter
of non-objection from such issuer prior to the establishment of
the facility. Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depository usually charges fees
upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-
cash distributions and the performance of other services. The
depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities.
Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the
deposited securities enters into a deposit agreement with the
depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR
holders. With sponsored facilities, the issuer of the deposited
securities generally will bear some of the costs relating to the
facility (such as deposit and withdrawal fees). Under the terms
of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions and to
provide shareholder communications and other information to the
ADR holders at the request of the issuer of the deposited
securities.
REPURCHASE AGREEMENTS
In a repurchase agreement, a Fund in effect makes a loan by
purchasing a security and simultaneously committing to resell
that security to the seller at an agreed upon price on an agreed
upon date within a number of days (usually not more than seven)
from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the
agreed upon resale price and marked to market daily) of the
underlying security.
The Funds may engage in repurchase agreements with respect
to any U.S. Government security. While it does not presently
appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the
Fund in connection with bankruptcy proceedings), it is the policy
of the Trust to enter into repurchase agreements only with its
custodian, State Street Bank and Trust Company, and having a term
of seven days or less.
WARRANTS, RIGHTS AND OPTIONS
Each Fund, other than Pennsylvania Mutual Fund, may invest
up to 5% of its total assets in warrants, rights and options. A
warrant, right or call option entitles the holder to purchase a
given security within a specified period for a specified price
and does not represent an ownership interest. A put option gives
the holder the right to sell a particular security at a specified
price during the term of the option. These securities have no
voting rights, pay no dividends and have no liquidation rights.
In addition, their market prices do not necessarily move parallel
to the market prices of the underlying securities.
The sale of warrants, right or options held for more than
one year generally results in a long-term capital gain or loss to
the Fund, and the sale of warrants, rights or options held for
one year or less generally results in a short term capital gain
or loss. The holding period for securities acquired upon
exercise of a warrant, right or call option, however, generally
begins on the day after the date of exercise, regardless of how
long the warrant, right or option was held. The securities
underlying warrants, rights and options could include shares of
common stock of a single company or securities market indices
representing shares of the common stocks of a group of companies,
such as the S&P 600.
Investing in warrants, rights and call options on a given
security allows the Fund to hold an interest in that security
without having to commit assets equal to the market price of the
underlying security and, in the case of securities market
indices, to participate in a market without having to purchase
all of the securities comprising the index. Put options, whether
on shares of common stock of a single company or on a securities
market index, would permit the Fund to protect the value of a
portfolio security against a decline in its market price and/or
to benefit from an anticipated decline in the market price of a
given security or of a market. Thus, investing in warrants,
rights and options permits the Fund to incur additional risk
and/or to hedge against risk.
PORTFOLIO TURNOVER
For the year ended December 31, 1996 and the period from
December 27, 1995 (commencement of operations) through December
31, 1995, Royce GiftShares Fund's portfolio turnover rates were
93% and 0%, respectively. The Fund's portfolio turnover rate for
its start-up period in 1995 was zero because the Fund was then
investing its initial cash and did not sell any portfolio
securities during this period.
* * *
Royce believes that Pennsylvania Mutual, Low-Priced Stock,
Royce Value, Micro-Cap, GiftShares, Global Services, PMF II and
Financial Services Funds are suitable for investment only by
persons who can invest without concern for current income, and
that such Funds and Royce Premier Fund are suitable only for
those who are in a financial position to assume above-average
investment risks in search for long-term capital appreciation.
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to
each Trustee and officer of the Trust:
Position
Name, Address and Age Held Principal Occupations During
with the Past 5 Years
Trust
Charles M. Royce* Trustee, President, Managing Director
(57) President (since April 1997), Secretary,
1414 Avenue of and Treasurer, sole director and
the Treasurer sole voting shareholder of
Americas Royce & Associates, Inc.
New York, NY ("Royce"), formerly named Quest
10019 Advisory Corp., the Trust's and
its predecessors' principal
investment adviser; Trustee,
President and Treasurer of the
Trust and its predecessors;
Director, President and
Treasurer of Royce Value Trust,
Inc. ("RVT"), Royce Micro-Cap
Trust, Inc. ("OTCM") (since
September 1993) and, Royce
Global Trust, Inc. ("RGT")
(since October 1996), closed-end
diversified management
investment companies of which
Royce is the investment adviser;
Trustee, President and Treasurer
of Royce Capital Fund ("RCF")
(since December 1996), an open-
end diversified management
investment company of which
Royce is the investment adviser
(the Trust, RVT, OTCM, RGT and
RCF collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Royce Fund Services, Inc.
("RFS"), formerly named Quest
Distributors, Inc., the
distributor of the Trust's
shares; and managing general
partner of Royce Management
Company ("RMC"), formerly named
Quest Management Company, a
registered investment adviser,
and its predecessor.
Thomas R. Ebright*(52) Trustee Vice President of Royce; Trustee
50 Portland Pier and Vice of the Trust and one of its
Portland, ME 04101 President predecessors ; Vice President of
the Trust and one of its
predecessors; Director of RVT
and, since September 1993, OTCM;
Vice President since November
1995 (President until October
1995) and Treasurer of RFS;
general partner of RMC and its
predecessor until June 1994;
President, Treasurer and a
director and principal
shareholder of Royce, Ebright &
Associates, Inc., the investment
adviser for a series of TRF
since June 1994; director of
Atlantic Pro Sports, Inc. and of
the Strasburg Rail Road Co.
since March 1993; and President
and principal owner of Baltimore
Professional Hockey, Inc. until
May 1993.
Hubert L. Cafritz(73) Trustee Financial consultant.
9421 Crosby Road
Silver Spring, MD
20910
Richard M. Galkin(59) Trustee Private investor and President
of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Boca Raton, FL consultants.
33487
Stephen L. Isaacs(57) Trustee President of The Center for
Health and Social Policy since
60 Haven Street, September 1996; President of
Fl. B-2 Stephen L. Isaacs Associates,
New York, NY 10032 Consultants; and Director of
Columbia University Development
Law and Policy Program;
Professor at Columbia University
until August 1996.
William L. Koke(62) Trustee Registered investment adviser
and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT 06498
David L. Meister(57) Trustee Consultant to the communications
industry since January 1993; and
111 Marquez Place Executive officer of Digital
Pacific Palisades, CA Planet Inc. from April 1991 to
90272 December 1992.
Jack E. Fockler,Jr* Vice Managing Director (since April
(38) President 1997) and Vice President (since
1414 Avenue of August 1993) of Royce, having
the Americas been employed by Royce since
New York, NY 10019 October 1989; Vice President of
RGT (since October 1996), RCF
(since December 1996) and the
other Royce Funds (since April
1995); Vice President of RFS
(since November 1995); and
general partner of RMC since
July 1993.
W. Whitney Vice Managing Director (since April
George* (39) President 1997) and Vice President (since
1414 Avenue of August 1993) of Royce, having
the Americas been employed by Royce since
New York, NY 10019 October 1991; Trustee and Vice
President of RCF (since December
1996); Vice President of RGT
(since October 1996) and of the
other Royce Funds (since April
1995); and general partner of
RMC and its predecessor since
January 1992.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (35) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the Americas Assistant Vice President of RGT (since
New York, NY 10019 Secretary October 1996), of RCF (since
December 1996) and of the other
Royce Funds (since July 1994).
John E. Denneen* Secretary Associate General Counsel and
(30) Chief Compliance Officer of
1414 Avenue of Royce (since May 1996);
the Americas Secretary of RGT (since October
New York, NY 10019 1996), of RCF (since
New York, NY 10019 December 1996) and of the other
Royce Funds (since June 1996);
and Associate of Seward & Kissel
from September 1992 to May 1996.
____________________________________________________________________
*An "interested person" of the Trust and/or Royce under
Section 2(a)(19) of the 1940 Act.
All of the Trust's trustees, other than Messrs. Cafritz and
Koke, are also directors/trustees of RVT, OTCM , RGT and RCF,
except for Mr. Ebright, who is not a director of RGT or a trustee
of RCF.
The Board of Trustees has an Audit Committee, comprised of
Hubert L. Cafritz, Richard M. Galkin, Stephen L. Isaacs, William
L. Koke and David L. Meister. The Audit Committee is responsible
for recommending the selection and nomination of independent
auditors of the Funds and for conducting post-audit reviews of
their financial conditions with such auditors.
For the year ended December 31, 1996, the following trustees
and affiliated persons of the Trust received compensation from
the Trust and its predecessor and/or the other funds in the group
of registered investment companies comprising The Royce Funds:
</TABLE>
<TABLE>
Aggregate
Compensation
From Trust Pension or Retirement Total Compensation
and its Benefits Accrued As from The Royce Funds
Name Predecessor Part of Trust Expenses paid to Trustee/Directors
- ---- ----------- ---------------------- -------------------------
<S> <C> <C> <C>
Hubert L. Cafritz $ 25,750 N/A $25,750
Trustee
Richard M. Galkin, 37,000 N/A 64,000
Trustee
Stephen L. Isaacs, 37,000 N/A 64,000
Trustee
William L. Koke, 25,750 N/A 25,750
Trustee
David L. Meister, 37,000 N/A 64,000
Trustee
John D. Diederich 107,075 $9,448 N/A
Director of
Operations
Howard J. Kashner 71,491 4,731 N/A
General Counsel
</TABLE>
PRINCIPAL HOLDERS OF SHARES
As of May 20, 1997, 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:
<TABLE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
<S> <C> <C> <C>
Pennsylvania Mutual Fund
- ------------------------
Laird Lorton Trust Company C/F 4,109,649 Record 7.0%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Charles Schwab & Co., Inc. 9,500,009 Record 16.06%
101 Montgomery Street
San Francisco, CA 94104
Royce Premier Fund
- ------------------
Charles Schwab & Co., Inc. 14,429,176 Record 32.6%
101 Montgomery Street
San Francisco, CA 94104
Wheat First Securities Inc. 5,461,476 Record 12.3%
Special Custody Account
FBO Fundsource
Attn. No Load Unit
P.O. Box 6540
Glen Allen, VA 23058-6540
Royce Micro-Cap Fund
- --------------------
Charles Schwab & Co., Inc. 4,385,833 Record 25.9%
101 Montgomery Street
San Francisco, CA 94104
Royce Equity Income Fund
- ------------------------
Charles Schwab & Co., Inc. 2,165,692 Record 38.0%
101 Montgomery Street
San Francisco, CA 94104
Royce Low-Priced Stock Fund
- ---------------------------
Andrew & Company 140,781 Record 5.6%
C/O Chase Manhattan Bank NA
1211 Avenue of the Americas
New York, NY 10036
Charles Schwab & Co., Inc. 951,218 Record 37.5%
101 Montgomery Street
San Francisco, CA 94104
Royce Management Company 217,945 Record and 8.6%
8 Soundshore Drive Beneficial
Greenwich, CT 06830
Fleet National Bank, 144,987 Record 5.7%
Custodian
FBO Brown University
One East Avenue
Rochester, NY 14638
Royce GiftShares Fund
- ---------------------
W. Whitney George , Trustee 146,156 Record and 70.3%
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
Royal Total Return Fund
- -----------------------
Charles Schwab & Co. Inc. 986,640 Record 28.6%
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
FTC & Co.. 228,643 Record 6.6%
Datalynx #154
P.O. Box 173736
Denver, CO 80217-3736
Royce Global Services Fund
- --------------------------
Charles M. Royce 145,868 Record and 45.5%
1414 Avenue of the Americas Beneficial
New York, NY 10019
National City Bank 50,363 Record 15.9%
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101
Bruce Museum Inc. 46,662 Record and 14.8%
Museum Drive Beneficial
Greenwich, CT 06830
PMF II
- ------
Charles Schwab & Co. Inc. 623,708 Record 18.1 %
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Steven F. Fischer & 252,712 Record 7.3%
Frederick C. Fisher Co.
TTEES U/A/D 1/1/76
Fischer Special Manufacturing
111 Industrial Road
Cold Spring, KY 41076-9020
</TABLE>
As of May 20, 1997, all of the trustees and officers of the
Trust as a group beneficially owned less than 1% of the
outstanding shares of each of Pennsylvania Mutual, Royce Premier,
Equity Income, Total Return and Value Funds, approximately 1.1%
of the outstanding shares of Royce Micro-Cap Fund, approximately
19.9% of the outstanding shares of Royce Low-Priced Stock Fund,
approximately 70.9% of the outstandaing shares of Royce
GiftShares Fund, approximately 53.0% of the outstanding shares of
Royce Global Services Fund and approximately 2.9% of the
outstandaing shares of PMF II.
As of the date of this Statement of Additional Information,
Charles M. Royce owned 100% of the outstanding shares of Royce
Financial Services Fund.
INVESTMENT ADVISORY SERVICES
SERVICES PROVIDED BY ROYCE
As compensation for its services under the Investment
Advisory Agreements with the Funds, Royce is entitled to receive
the following fees:
Percentage PerAnnum
Fund of Fund's Average Net Assets
- ---- ----------------------------
[S] [C]
Pennsylvania Mutual Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Premier Fund 1.00%
Royce Micro-Cap Fund 1.50%
Royce Equity Income Fund 1.00%
Royce Low-Priced Stock Fund 1.50%
Royce GiftShares Fund 1.25%
Royce Value Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Total Return Fund 1.00%
Royce Global Services Fund 1.50%
PMF II 1.00%
Royce Financial Services Fund 1.00%
Such fees are payable monthly from the assets of the Fund
involved and, in the case of Pennsylvania Mutual Fund, are
allocated between the Investment and Consultant Classes of its
shares based on their relative net assets.
Under the Investment Advisory Agreements, Royce (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 assets; (iii) furnishes, without expense to the
Trust, the services of certain of its executive officers and full-
time employees; and (iv) pays such persons' salaries and
executive expenses and all expenses incurred in performing its
investment advisory duties under the Investment Advisory
Agreements.
The Trust pays all administrative and other costs and
expenses attributable to its operations and transactions,
including, without limitation, transfer agent and custodian fees;
legal, administrative and clerical services; rent for its office
space and facilities; auditing; preparation, printing and
distribution of its prospectuses, proxy statements, shareholders
reports and notices; supplies and postage; Federal and state
registration fees; Federal, state and local taxes; non-affiliated
trustees' fees; and brokerage commissions.
For each of the three years ended December 31, 1994, 1995
and 1996, as applicable, Royce received advisory fees from the
Funds (net of any amounts waived by Royce) and waived advisory
fees payable to it, as follows:
<TABLE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
<S> <C> <C>
Pennsylvania Mutual Fund
------------------------
1994 $ 6,831,793 $ -
1995 5,361,354 88,173
1996 4,104,694 198,074
Royce Premier Fund
------------------
1994 $ 1,400,394 $ -
1995 2,603,445 6,279
1996 2,838,340 65,000
Royce Micro-Cap Fund
--------------------
1994 $ 295,148 $ 20,330
1995 804,905 14,047
1996 1,792,264 96,036
Royce Equity Income Fund
------------------------
1994 $ 820,662 $ 53,626
1995 598,783 57,030
1996 360,791 25,696
Royce Low-Priced Stock Fund
---------------------------
1994 $ 0 $ 15,727
1995 6,174 31,425
1996 122,045 51,828
Royce GiftShares Fund
---------------------
1995* $ 0 $ 86
1996 0 7,866
Royce Value Fund
----------------
1994 $ 1,503,696 $ -
1995 1,424,451 16,222
1996 1,322,009 -
Royce Total Return Fund
-----------------------
1994 $ 0 10,506
1995 12,027 9,947
1996 12,189 28,758
Royce Global Services Fund
--------------------------
1994** $ 0 $ 367
1995 0 20, 261
1996 0 29,185
PMF II
------
1996*** $ 0 $ 12,215
__________
* December 27, 1995 (commencement of operations) to December 31, 1995
** December 15, 1994 (commencement of operations) to December 31, 1994
*** November 19, 1996 (commencement of operations) to December 31, 1996
</TABLE>
DISTRIBUTOR
RFS, the distributor of the shares of each Fund, has its
office at 1414 Avenue of the Americas, New York, New York 10019.
It was organized in November 1982 and is a member of the National
Association of Securities Dealers, Inc. ("NASD").
As compensation for its services and for the expenses
payable by it under the Distribution Agreement with the Trust,
RFS 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 Pennsylvania Mutual Fund's
Consultant Class, of Royce GiftShares Fund's Consultant Class,
and of Royce Value Fund's respective average net assets and .25%
per annum (consisting of an asset-based sales charge) of Royce
GiftShares Fund's Investment Class, Royce Low-Priced Stock, Total
Return, Global Services and Financial Services Funds' respective
average net assets. Except to the extent that they may be waived
by RFS, these fees are not subject to any required reductions.
RFS is also entitled to receive the proceeds of any front-end
sales loads that may be imposed on purchases of shares of
Pennsylvania Mutual Fund's Consultant Class, Royce GiftShares
Fund's Consultant Class and Royce Value Fund and of any
contingent deferred sales charges that may be imposed on
redemptions of such shares. Currently Royce GiftShares Fund's
Consultant Class shares bear a contingent deferred sales charge
which declines from 5% during the first year after purchase to
1.5% during the sixth year after purchase. No contingent
deferred sales charge is imposed after the sixth year.
Pennsylvania Mutual Fund's Investment Class, Royce Premier, Micro-
Cap, Equity Income and GiftShares Funds and PMF II do not pay any
fees to RFS under the Distribution Agreement.
Under the Distribution Agreement, RFS (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 RFS); (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 RFS
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 or class of shares 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 or class of shareholders.
The Plan may be terminated as to any Fund or class of shares
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 or class. Any change
in the Plan that would materially increase the distribution cost
to a Fund or class of shares requires approval by the
shareholders of such Fund or class; 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
or class of shares at any time on 60 days' written notice and
without payment of any penalty by RFS, by the vote of a majority
of the outstanding voting securities of such Fund or class or by
the vote of a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements
related thereto.
The Distribution Agreement and the Plan, if not sooner
terminated in accordance with their terms, will continue in
effect for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a
majority of the Trustees who are not parties to the Agreement or
interested persons of any such party and who have no direct or
indirect financial interest in the Plan or the Agreement and
(ii) either by the vote of a majority of the outstanding voting
securities of the Fund or class of shares 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.
For the year ended December 31, 1996, Royce Value Fund paid
distribution fees to RFS of $1,013,215 (net of $505,034 waived by
RFS -- 1% of its average net assets during such year before
giving effect to such waiver and 0.67% of its average net assets
after giving effect to such waiver). RFS spent the distribution
fees paid to it by and the proceeds of contingent deferred sales
charges released to it for Royce Value Fund during 1996 primarily
to compensate introducing brokers.
RFS has temporarily waived the distribution fees payable to
it by Royce Low-Priced Stock, Total Return and Global Services
Funds, PMF II and Royce Financial Services Fund .
No trustee of the Trust who was not an interested person of
the Trust had any direct or indirect financial interest in the
operation of the Plan or the Distribution Agreement. Charles M.
Royce, an interested person of the Trust, Royce and RFS, had such
an interest.
The benefits to Royce Value Fund included the receipt of net
proceeds of $3,630,516 from sales of its shares during the fiscal
year ended December 31, 1996. The value of shares redeemed by
such Fund during such year aggregated $43,873.860.
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 RFS 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
Royce 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 Royce 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, Royce 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 performance measurement and may
be written or oral. Royce 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 Royce upon the brokerage and/or research
services provided by such broker, viewed in terms of either that
particular transaction or Royce's overall responsibilities with
respect to its accounts.
Royce 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 Royce
in servicing all of its accounts and those of RMC, and not all of
such services may be used by Royce in connection with the Trust
or any one of its Funds.
Royce may also place a Fund's brokerage business with firms
which promote the sale of the Funds' shares, consistent with
achieving the best price and execution. In no event will a
Fund's brokerage business be placed with RFS.
Even though investment decisions for each Fund are made
independently from those for the other Funds and the other
accounts managed by Royce and RMC, securities of the same issuer
are frequently purchased, held or sold by more than one Royce/RMC
account because the same security may be suitable for all of
them. When the same security is being purchased or sold for more
than one Royce/RMC account on the same trading day, Royce seeks
to average the transactions as to price and allocate them as to
amount in a manner believed to be equitable to each. Such
purchases and sales of the same security are generally effected
pursuant to Royce/RMC's Trade Allocation Guidelines and
Procedures. Under such Guidelines and Procedures, unallocated
orders are placed with and executed by broker-dealers during the
trading day. The securities purchased or sold in such
transactions are then allocated to one or more of Royce's and
RMC's accounts at or shortly following the close of trading,
using the average net price obtained. Such allocations are done
based on a number of judgmental factors that Royce and RMC
believe should result in fair and equitable treatment to those of
their accounts for which the securities may be deemed suitable.
In some cases, this procedure may adversely affect the price paid
or received by a Fund or the size of the position obtained for a
Fund.
During each of the three years ended December 31, 1994, 1995
and 1996, the Funds paid brokerage commissions as follows:
Fund 1994 1995 1996
- ---- ---- ---- ----
[S] [C] [C] [C]
Pennsylvania Mutual Fund $797,686 $683,334 $935,022
Royce Premier Fund 465,986 419,040 429,150
Royce Micro-Cap Fund 41,497 117,909 295,737
Royce Equity Income Fund 218,843 119,097 80,692
Royce Low-Priced Stock Fund 12,946 22,645 114,456
Royce GiftShares Fund - 760* 3,555
Royce Value Fund 138,437 114,296 187,689
Royce Total Return Fund 6,231 6,117 21,379
Royce Global Services Fund 382** 6,199 6,872
PMF II - - 29,490***
_________________
* For the period from December 27, 1995 (commencement of
operations) to December 31, 1995
** For the period from December 15, 1994 (commencement of
operations) to December 31, 1994
*** For the period from November 19, 1996 (commencement of
operations) to December 31, 1996
For the year ended December 31, 1996, 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:
<TABLE>
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
<S> <C> <C>
Pennsylvania Mutual Fund $ 94,132,403 $ 307,755
Royce Premier Fund 49,849,078 140,207
Royce Micro-Cap Fund 11,407,913 56,499
Royce Equity Income Fund 7,044,321 27,376
Royce Low-Priced Stock Fund 2,510,264 15,390
Royce GiftShares Fund 239,455 957
Royce Value Fund 28,074,006 81,397
Royce Total Return Fund 927,710 3,075
Royce Global Services Fund 501,800 1,696
PMF II* -0- -0-
_________________
* For the period from November 19, 1996 (commencement of operations) to December 31, 1996
</TABLE>
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of
Ethics under which directors, officers, employees and partners of
Royce, RFS and RMC ("Royce-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 Royce or RMC account. Such persons are
permitted to engage in other personal securities transactions if
(i) the securities involved are United States Government debt
securities, municipal debt securities, money market instruments,
shares of affiliated or non-affiliated registered open-end
investment companies or shares acquired from an issuer in a
rights offering or under an automatic dividend reinvestment or
employer-sponsored automatic payroll-deduction cash purchase plan
or (ii) they first obtain permission to trade from Royce's
Compliance Officer and an executive officer of Royce. 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.
Royce's and RMC's clients include several private investment
companies in which Royce or RMC 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
Royce or RMC for such private investment company accounts.
Transactions for such private investment company accounts are
subject to Royce's and RMC's allocation policies and procedures.
See "Portfolio Transactions".
As of May 20, 1997, Royce-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 $27.4
million, and Royce's and RMC's equity interests in Royce related private
investment companies totalled approximately $3.3 million.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is
based on the Fund's current net asset value per share. See "Net
Asset Value Per Share" in the Funds' Prospectuses.
As set forth under "Net Asset Value Per Share", the Funds'
custodian determines the net asset value per share of each Fund
at the close of regular trading on the New York Stock Exchange on
each day that the Exchange is open. The Exchange is open on all
weekdays which are not holidays. Thus, it is closed on Saturdays
and Sundays and on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which
would, in the judgment of the Board of Trustees or management,
make it undesirable for a Fund to pay for all redemptions in
cash. In such cases, payment may be made in portfolio securities
or other property of the Fund. However, the Trust has obligated
itself under the 1940 Act to redeem for cash all shares presented
for redemption by any one shareholder up to $250,000 (or 1% of
the Trust's net assets if that is less) in any 90-day period.
Securities delivered in payment of redemptions would be selected
by Royce and valued at the same value assigned to them in
computing the net asset value per share for purposes of such
redemption. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
TAXATION
Each Fund (except Royce Financial Services Fund) has
qualified, intends to qualify and to remain qualified, and Royce
Financial Services 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 (or the Fund's actual taxable
year ending December 31, if elected) 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 maintains accounts and calculates income by
reference to the U.S. dollar for U.S. Federal income tax
purposes. Investments calculated by reference to foreign
currencies will not necessarily correspond to a Fund's
distributable income and capital gains for U.S. Federal income
tax purposes as a result of fluctuations in foreign currency
exchange rates. Furthermore, if any exchange control regulations
were to apply to a Fund's investments in foreign securities, such
regulations could restrict that Fund's ability to repatriate
investment income or the proceeds of sales of securities, which
may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirement and avoid the 4% excise
tax.
Income earned or received by a Fund from investments in
foreign securities may be subject to foreign withholding taxes
unless a withholding exemption is provided under an applicable
treaty. Any such taxes would reduce that Fund's cash available
for distribution to shareholders. It is currently anticipated
that none of the Funds will be eligible to elect to "pass
through" such taxes to their shareholders for purposes of
enabling them to claim foreign tax credits or other U.S. income
tax benefits with respect to such taxes.
If a Fund invests in stock of a so-called passive foreign
investment company ("PFIC"), such Fund may be subject to Federal
income tax on a portion of any "excess distribution" with respect
to, or gain from the disposition of, such stock. The tax would be
determined by allocating such distribution or gain ratably to
each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable
year in which the excess distribution or disposition occurs would
be taxed to the Fund at the highest marginal income tax rate in
effect for such years, and the tax would be further increased by
an interest charge. The amount allocated to the taxable year of
the distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as a
dividend to shareholders.
In lieu of being taxable in the manner described above, a
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.
The Fund may make either of these elections with respect to its
investments (if any) in PFICs.
Investments of a Fund in securities issued at a discount or
providing for deferred interest payments or payments of interest
in kind (which investments 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 Fund shares and regardless of how long a
shareholder has held his or its Fund shares. Such distributions
are not eligible for the dividends received deduction. Long-term
capital gains of non-corporate shareholders, although fully
includable in income, currently are taxed at a lower maximum
marginal Federal income tax rate than ordinary income.
Distributions by a Fund in excess of its current and
accumulated earnings and profits will reduce a shareholder's
basis in Fund shares (but, to that extent, will not be taxable)
and, to the extent such distributions exceed the shareholder's
basis, will be taxable as capital gain assuming the shareholder
holds Fund shares as capital assets.
A distribution will be treated as paid during a calendar
year if it is declared in October, November or December of the
year to shareholders of record in such month and paid by January
31 of the following year. Such distributions will be taxable to
such shareholders as if received by them on December 31, even if
not paid to them until January. In addition, certain other
distributions made after the close of a taxable year of a Fund
may be "spilled back" and treated as paid by the Fund (other than
for purposes of avoiding the 4% excise tax) during such year.
Such dividends would be taxable to the shareholders in the
taxable year in which the distribution was actually made by the
Fund.
The Trust will send written notices to shareholders
regarding the amount and Federal income tax status as ordinary
income or capital gain of all distributions made during each
calendar year.
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 PURCHASE 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 Fund shares upon the reinvestment of distributions)
within a period of 61 days, beginning 30 days before and ending
30 days after the sale of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the
disallowed loss. A loss recognized upon the sale, redemption or
other taxable disposition of shares held for 6 months or less
will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received with respect to
such shares. A shareholder's exchange of shares between Funds
will be treated for tax purposes as a redemption of the Fund
shares surrendered in the exchange, and may result in the
shareholder's recognizing a taxable gain or loss.
* * *
The foregoing relates to Federal income taxation.
Distributions, as well as any gains from a sale, redemption or
other taxable disposition of Fund shares, also may be subject to
state and local taxes. Under current law, so long as each Fund
qualifies for the Federal income tax treatment described above,
it is believed that neither the Trust nor any Fund will be liable
for any income or franchise tax imposed by Delaware.
Investors are urged to consult their own tax advisers
regarding the application to them of Federal, state and local tax
laws.
ROYCE GIFTSHARES FUND
GIFT TAXES
An investment in Royce GiftShares Fund may be a taxable gift
for Federal tax purposes, depending upon the options selected and
other gifts that the Donor and his or her spouse may make during
the year.
If the Donor selects the Withdrawal Option, the entire
amount of the gift will be a "present interest" that qualifies
for the Federal annual gift tax exclusion. In that case, the
Donor will be required to file a Federal gift tax return for the
year of the gift only if he or she makes gifts (including the
gift of Fund shares and any gifts by his or her spouse treated as
made by him or her) totaling more than $10,000 to the same
individual during that year or if he or she makes any gift of a
future interest during that year. The Trustee will notify the
Beneficiary of his or her right of withdrawal promptly following
any investment in the Fund under the Withdrawal Option.
If the Donor selects the Accumulation Option, the entire
amount of the gift will be a "future interest" for Federal gift
tax purposes, so that none of the gift will qualify for the
Federal annual gift tax exclusion (currently, $10,000).
Consequently, the Donor will have to file a Federal gift tax
return IRS (Form 709) reporting the entire amount of the gift,
even if the gift is less than $10,000.
If the Donor selects the Split Option, the portion of the
gift representing the Beneficiary's income interest will be a
"present interest" that will qualify for the Federal annual gift
tax exclusion, and the balance will be a "future interest" that
will not so qualify. The value of the income interest is the
present value of the Beneficiary's right to receive the Trust
income for the 40 year term of this Trust (without regard to the
possibility that the Trust may be terminated sooner) or until the
Beneficiary's earlier death, using actuarial tables and interest
rate assumptions prescribed by the Internal Revenue Service in
effect on the date of the gift. Using the assumptions currently
in effect, the income interest portion of Royce GiftShares Fund
Trusts using the Split Option and created for Beneficiaries aged
15, 20, 25, 30 and 35 would be 93.6%, 93.3%, 92.8%, 91.9% and
90.5%, 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
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 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
1997, $8,100) 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 1997, $8,100) 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).
CONSULTATION WITH QUALIFIED TAX ADVISER
Due to the complexity of Federal and state gift, GST and
income tax laws pertaining to all gifts in trust, prospective
Donors should consider consulting with an attorney or other
qualified tax adviser before investing in Royce GiftShares Fund.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION
The Trust was organized in April 1996 as a Delaware business
trust. It is the successor by mergers to The Royce Fund, a
Massachusetts business trust (the "Predecessor"), and
Pennsylvania Mutual Fund, a Delaware business trust. The mergers
were effected on June 28, 1996, under an Agreement and Plan of
Merger pursuant to which the Predecessor and Pennsylvania Mutual
Fund merged into the Trust, with each Fund of the Predecessor and
Pennsylvania Mutual Fund becoming an identical counterpart series
of the Trust, Royce and RE&A continuing as the Funds' investment
advisers under their pre-merger Investment Advisory Agreements
and RFS continuing as the Trust's distributor. A copy of the
Trust's Certificate of Trust is on file with the Secretary of
State of Delaware, and a copy of its Trust Instrument, its
principal governing document, is available for inspection by
shareholders at the Trust's office in New York.
The Trust has an unlimited authorized number of shares of
beneficial interest, which may be divided into an unlimited
number of series and/or classes without shareholder approval.
(Each Fund, other than Pennsylvania Mutual Fund, presently has
only one class of shares.) All shares of the Trust are entitled
to one vote per share (with proportional voting for fractional
shares). Shares vote by individual series and/or class except as
otherwise required by the 1940 Act or when the Trustees determine
that the matter affects shareholders of more than one series
and/or class.
Pennsylvania Mutual Fund has two classes of shares, an
Investment Class and a Consultant Class. The shares of each
class represent a pari passu interest in such Fund's investment
portfolio and other assets and have the same redemption and other
rights.
Each of the Trustees currently in office were elected by the
Predecessor's shareholders. There will normally be no meeting of
shareholders for the election of Trustees until less than a
majority of such Trustees remain in office, at which time the
Trustees will call a shareholders meeting for the election of
Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the
outstanding shares of the Trust and filed with the Trust's
custodian or by a vote of the holders of a majority of the
outstanding shares of the Trust at a meeting duly called for this
purpose upon the written request of holders of at least 10% of
the Trust's outstanding shares. Upon the written request of 10
or more shareholders of the Trust, who have been shareholders for
at least 6 months and who hold shares constituting at least 1% of
the Trust's outstanding shares, stating that such shareholders
wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting
to consider the removal of a Trustee, the Trust is required (at
the expense of the requesting shareholders) to provide a list of
its shareholders or to distribute appropriate materials. Except
as provided above, the Trustees may continue to hold office and
appoint their successors.
The trustee of the Royce GiftShares Fund trusts will send
notices of meetings of Royce GiftShares Fund shareholders, proxy
statements and proxies for such meetings to the trusts'
beneficiaries to enable them to attend the meetings in person or
vote by proxies. It will vote all GiftShares Fund shares held by
it which are not present at the meetings and for which no proxies
are returned in the same proportions as GiftShares Fund shares
for which proxies are returned.
Shares are freely transferable, are entitled to
distributions as declared by the Trustees and, in liquidation of
the Trust, are entitled to receive net assets of their series
and/or class. Shareholders have no preemptive rights. The
Trust's fiscal year ends on December 31.
SHAREHOLDER LIABILITY
Generally, shareholders will not be personally liable for
the obligations of their Fund or of the Trust under Delaware law.
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust is entitled to the same limited liability
extended to stockholders of private corporations for profit
organized under the Delaware General Corporation Law. No similar
statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the
extent that the Trust or a shareholder of the Trust is subject to
the jurisdiction of courts in those states, the courts may not
apply Delaware law and may thereby subject Trust shareholders to
liability. To guard against this possibility, the Trust
Instrument (i) requires that every written obligation of the
Trust contain a statement that such obligation may be enforced
only against the Trust's assets (however, the omission of this
disclaimer will not operate to create personal liability for any
shareholder); and (ii) provides for indemnification out of Trust
property of any Trust shareholder held personally liable for the
Trust's obligations. Thus, the risk of a Trust shareholder
incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (i) a
court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware
law, the nature of the Trust's business and the nature of its
assets, management believes that the risk of personal liability
to a Trust shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All
performance information supplied for the Funds is historical and
is not intended to indicate future returns. Each Fund's share
price and total returns fluctuate in response to market
conditions and other factors, and the value of a Fund's shares
when redeemed may be more or less than their original cost.
TOTAL RETURN CALCULATIONS
Total returns quoted reflect all aspects of a Fund's return,
including the effect of reinvesting dividends and capital gain
distributions and any change in the Fund's net asset value per
share (NAV) over the period. Average annual total returns are
calculated by determining the growth or decline in value of a
hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period.
For example, a cumulative return of 100% over ten years would
produce an average annual total return of 7.18%, which is the
steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total
returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance
is not constant over time, but changes from year to year, and
that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, a Fund's
unaveraged or cumulative total returns, reflecting the simple
change in value of an investment over a stated period, may be
quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments or a
series of redemptions, over any time period. Total returns may
be broken down into their components of income and capital
(including capital gains and changes in share prices) in order to
illustrate the relationship of these factors and their
contributions to total return. Total returns and other
performance information may be quoted numerically or in a table,
graph or similar illustration.
HISTORICAL FUND RESULTS
The following table shows certain of the Funds' total
returns for the periods indicated. Such total returns reflect all
income earned by each Fund, any appreciation or depreciation of
the assets of such Fund and all expenses incurred by such Fund
for the stated periods. The table compares the Funds' total
returns to the records of the Russell 2000 Index (Russell 2000)
and Standard & Poor's 500 Composite Stock Price Index (S&P 500)
over the same periods. The comparison to the Russell 2000 shows
how the Funds' total returns compared to the record of a broad
index of small capitalization stocks. The S&P 500 comparison is
provided to show how the Funds' total returns compared to the
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.
<TABLE>
Period Ended
Fund December 31, 1996 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
<S> <C> <C> <C>
Pennsylvania Mutual Fund
- ------------------------
1 Year Total Return 12.8% 16.5% 23.3%
5 Year Average Annual Total Return 11.5 15.7 15.3
10 year Average Annual Total Return 11.4 12.4 15.3
Royce Premier Fund
- ------------------
1 Year Total Return 18.1% 16.5% 23.3%
5 Year Average Annual Total Return 14.7 15.7 15.3
Royce Micro-Cap Fund
- --------------------
1 Year Total Return 15.5% 16.5% 23.3%
5 Year Average Annual Total Return 17.9 15.7 15.3
Royce Equity Income Fund
- ------------------------
1 Year Total Return 16.5% 16.5% 23.3%
5 Year Average Annual Total Return 12.1 15.7 15.3
Average Annual Total Return since 1-2-90 10.0 13.4 14.2
(commencement of operations)
Royce Low-Priced Stock Fund
- ---------------------------
1 Year Total Return 22.8% 16.5% 23.3%
Average Annual Total Return since 12-15-93 15.5 14.8 19.8
(commencement of operations)
Royce Value Fund
- ----------------
1 Year Total Return 14.0% 16.5% 23.3%
5 Year Average Annual Total Return 11.3 15.7 15.3
10 Year Average Annual Total Return 10.8 12.4 15.3
Royce Total Return Fund
- -----------------------
1 Year Total Return 25.5% 16.5% 23.3%
Average Annual Total Return since 12-15-93 18.4 14.8 19.8
(commencement of operations)
Royce Global Services Fund
- --------------------------
1 Year Total Return 14.6% 16.5% 23.3%
Average Annual Total Return since 12-15-94 18.1 24.0 30.0
(commencement of operations)
Royce GiftShares Fund
- ---------------------
1 Year Total Return 25.6% 16.5% 23.3%
Average Annual Total Return since 12-27-95 25.3 17.0 23.2
(commencement of operations)
</TABLE>
During the applicable period ended December 31, 1996, a
hypothetical $10,000 investment in certain of the Funds would
have grown as indicated below, assuming all distributions were
reinvested:
<TABLE>
Fund/Period Commencemen Date Hypothetical Investment at December 31, 1996
- ----------------------------- --------------------------------------------
<S> <C>
Pennsylvania Mutual Fund (12-31-75) $296,457
Royce Premier Fund (12-31-91) 19,813
Royce Micro-Cap Fund (12-31-91) 22,798
Royce Equity Income Fund (1-2-90) 19,523
Royce Low-Priced Stock Fund (12-15-93) 15,524
Royce Value Fund (12-31-82) 53,966
Royce Total Return Fund (12-15-93) 16,738
Royce Global Services Fund (12-15-94) 14,064
Royce GiftShares Fund (12-27-95) 12,580
</TABLE>
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,
1996 were:
<TABLE>
Fund Lipper Ranking
- ---- --------------
<S> <C>
Pennsylvania Mutual Fund 310 out of 388 small company growth funds
Royce Premier Fund 219 out of 388 small company growth funds
Royce Micro-Cap Fund 258 out of 388 small company growth funds
Royce Equity Income Fund 115 out of 163 equity income funds
Royce Low-Priced Stock Fund 132 out of 388 small company growth funds
Royce Value Fund 290 out of 388 small company growth funds
Royce Total Return Fund 70 out of 523 growth and income funds
Royce Global Services Fund 98 out of 159 global funds
Royce GiftShares Fund 97 out o 388 small company growth funds
</TABLE>
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, 1996, the average included 229 capital appreciation
funds, 777 growth funds, 192 mid-cap funds, 452 small company
growth funds, 597 growth and income funds, 187 equity income
funds and 60 S&P Index objective funds. Capital appreciation,
growth and small company growth funds usually invest principally
in common stocks, with long-term growth as a primary goal.
Growth and income and equity income funds tend to be more
conservative in nature and usually invest in a combination of
common stocks, bonds, preferred stocks and other income-producing
securities. Growth and income and equity income funds generally
seek to provide their shareholders with current income as well as
growth of capital, unlike growth funds which may not produce
income. S&P 500 Index objective funds seek to replicate the
performance of the S&P 500.
The Lipper Growth & Income Fund Index can be used to show
how the Total Return Fund's performance compares to a set of
growth and income funds. The Lipper Growth & Income Fund Index is
an equally-weighted performance index, adjusted for capital gains
distributions and income dividends, of the 30 largest qualifying
funds within Lipper's growth and income investment objective
category.
The Lipper Global Fund Index can be used to show how the
Global Services Fund's performance compares to a set of global
funds. The Lipper Global Fund Index is an equally-weighted
performance index, adjusted for capital gains distributions and
income dividends, of the 30 largest qualifying funds in Lipper's
global investment objective category.
Ibbotson Associates (Ibbotson) provides historical returns
of the capital markets in the United States. The Funds'
performance may be compared to the long-term performance of the
U.S. capital markets in order to demonstrate general long-term
risk versus reward investment scenarios. Performance comparisons
could also include the value of a hypothetical investment in
common stocks, long-term bonds or U.S. Treasury securities.
Ibbotson calculates total returns in the same manner as the
Funds.
The capital markets tracked by Ibbotson are common stocks,
small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds,
U.S. Treasury bills and the U.S. rate of inflation. These
capital markets are based on the returns of several different
indices. For common stocks, the S&P 500 is used. For small
capitalization stocks, return is based on the return achieved by
Dimensional Fund Advisors (DFA) U.S. 9-10 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, 1996, DFA U.S. 9-10
Small Company Fund contained approximately 2,675 stocks, with a
median market capitalization of about $121 million.
The S&P 500 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 approximately 600 domestic stocks chosen for
market size, liquidity and industry group representation. As of
December 31, 1996, the weighted mean market value of a company in
this Index was approximately $790 million.
The Russell 2000, prepared by the Frank Russell Company,
tracks the return of the common stocks of approximately 2,000 of
the 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.
Royce 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,
1996, the average risk score for the 1,826 domestic equity funds
rated by Morningstar with a three-year history was 1.00; the
average risk score for the 242 small company funds rated by
Morningstar with a three-year history was 1.29; and the average
risk score for the 91 equity income funds rated by Morningstar
with a three-year history was .71. For the three years ended
December 31, 1996, 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:
<TABLE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds Equity Income Funds
- ---- ----------- ------------ --------------------- -------------------
<S> <C> <C> <C> <C>
Pennsylvania 0.75 Within lowest 35% Within lowest 10% -
Mutual
Premier 0.56 Within lowest 10% Within lowest 5% -
Micro-Cap 0.83 Within lowest 50% Within lowest 20% -
Equity 0.62 Within lowest 15% - Within lowest 15%
Income
Low-Priced
Stock 0.96 Within lowest 65% Within lowest 30% -
Value 0.80 Within lowest 35% Within lowest 10% -
Total Return 0.27 Within lowest 56% Lowest risk score -
</TABLE>
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.
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.
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Financial Statements Included in Prospectuses (Part A):
Financial Highlights or Selected Per
Share Data and Ratios of Pennsylvania Mutual Fund
for the ten years ended December 31, 1996
(audited), of Royce Premier Fund for the five
years ended December 31, 1996 (audited), of Royce
Micro-Cap Fund for the five years ended December
31, 1996 (audited), of Royce Equity Income Fund
for the seven years ended December 31, 1996
(audited), of Royce Low-Priced Stock Fund and
Royce Total Return Fund for the period from
December 15, 1993 through December 31, 1993
(audited) and the three years ended December 31,
1996 (audited), of Royce GiftShares Fund for the
period from December 27, 1995 through December 31,
1995 (audited) and the year ended December 31,
1996 (audited), of Royce Value for the ten years
ended December 31, 1996 (audited), of Royce
Global Services Fund for the period from December
15, 1994 through December 31, 1994 (audited) and
the two years ended December 31, 1996 (audited)
and of PMF II for the period from November 19,
1996 through December 31, 1996 (audited).
The following audited financial statements and schedules
of investments of the Registrant are included in the Registrant's
Annual Reports to Shareholders for the fiscal year or period
ended December 31, 1996, filed with the Securities and Exchange
Commission under Section 30(b)(1) of the Investment Company Act
of 1940, and have been incorporated in Part B hereof by
reference:
Pennsylvania Mutual Fund -- Schedule of
Investments at December 31, 1996;
Pennsylvania Mutual Fund -- Statement of
Assets and Liabilities at December 31, 1996;
Pennsylvania Mutual Fund -- Statement of
Changes in Net Assets for the years ended
December 31, 1996 and 1995;
Pennsylvania Mutual Fund -- Statement of
Operations for the year ended December 31, 1996;
Pennsylvania Mutual Fund -- Financial
Highlights for the years ended December 31, 1996,
1995, 1994, 1993, and 1992 ;
Pennsylvania Mutual Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997;
Royce Premier Fund -- Schedule of Investments at
December 31, 1996;
Royce Premier Fund -- Statement of
Assets and Liabilities at December 31, 1996
Royce Premier Fund -- Statement of
Changes in Net Assets for the years ended December
31, 1996 and 1995;
Royce Premier Fund -- Statement of
Operations for the year ended December 31, 1996;
Royce Premier Fund -- Financial
Highlights for the years ended December 31, 1996,
1995, 1994, 1993 and 1992
Royce Premier Fund -- Notes to Financial
Statements -- Report of Independent Accountants
dated February 14, 1997;
Royce Micro-Cap Fund -- Schedule of Investments at
December 31, 1996;
Royce Micro-Cap Fund -- Statement of
Assets and Liabilities at December 31, 1996;
Royce Micro-Cap Fund -- Statement of
Changes in Net Assets for the years ended December
31, 1996 and 1995;
Royce Micro-Cap Fund -- Statement of
Operations for the year ended December 31, 1996;
Royce Micro-Cap Fund -- Financial
Highlights for the years ended December 31, 1996,
1995 , 1994, 1993 and 1992;
Royce Micro-Cap Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997;
Royce Equity Income Fund -- Schedule of
Investments at December 31, 1996;
Royce Equity Income Fund -- Statement of
Assets and Liabilities at December 31, 1996;
Royce Equity Income Fund -- Statement of
Changes in Net Assets for the years ended
December 31, 1996 and 1995;
Royce Equity Income Fund -- Statement of
Operations for the year ended December 31, 1996;
Royce Equity Income Fund -- Financial
Highlights for the years ended December 31, 1996,
1995, 1994, 1993, 1992 and 1991;
Royce Equity Income Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997;
Royce Low-Priced Stock Fund -- Schedule
of Investments at December 31, 1996;
Royce Low-Priced Stock Fund -- Statement
of Assets and Liabilities at December 31, 1996;
Royce Low-Priced Stock Fund -- Statement
of Changes in Net Assets for the years ended
December 31, 1996 and 1995;
Royce Low-Priced Stock Fund -- Statement
of Operations for the year ended December 31,
1996;
Royce Low-Priced Stock Fund -- Financial
Highlights for the years ended December 31, 1996,
1995, 1994 and for the period from December 15,
1993 through December 31, 1993;
Royce Low-Priced Stock Fund -- Notes to
Financial Statements -- Report
of Independent Accountants dated
February 14, 1997;
Royce Total Return Fund -- Schedule of
Investments at December 31, 1996;
Royce Total Return Fund -- Statement of
Assets and Liabilities at December 31, 1996;
Royce Total Return Fund -- Statement of Changes in
Net Assets for the year ended December 31, 1996
and 1995;
Royce Total Return Fund -- Statement of
Operations for the year ended December 31, 1996;
Royce Total Return Fund -- Financial
Highlights for the years ended December 31, 1996,
1995 and 1994 and the period from December 15,
1993 through December 31, 1993;
Royce Total Return Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997;
Royce GiftShares Fund -- Schedule of
Investments at December 31, 1996;
Royce GiftShares Fund -- Statement of
Assets and Liabilities at December 31, 1996;
Royce GiftShares Fund -- Statement of Changes in
Net Assets for the year ended December 31, 1996
and the period from December 27, 1995 through
December 31, 1995;
Royce GiftShares Fund -- Financial
Highlights for the year ended December 31, 1996
and the period from December 27, 1995 through
December 31, 1995;
Royce GiftShares Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997.
Royce Value Fund -- Schedule of Investments at
December 31, 1996;
Royce Value Fund -- Statement of Assets
and Liabilities at December 31, 1996;
Royce Value Fund -- Statement of Changes
in Net Assets for the years ended December 31,
1996 and 1995;
Royce Value Fund -- Statement of
Operations for the year ended December 31, 1996;
Royce Value Fund -- Financial Highlights
for the years ended December 31, 1996, 1995, 1994,
1993 and 1992;
Royce Value Fund -- Notes to Financial
Statements -- Report of Independent Accountants
dated February 14, 1997;
Royce Global Services Fund -- Schedule
of Investments at December 31, 1996;
Royce Global Services Fund -- Statement
of Assets and Liabilities at December 31, 1996;
Royce Global Services Fund -- Statement
of Changes in Net Assets for the years ended
December 31, 1995 and the period from December 15,
1994 through December 31, 1994;
Royce Global Services Fund -- Statement
of Operations for the year ended December 31,
1996;
Royce Global Services Fund -- Financial
Highlights for the two years ended December 31,
1996 and the period from December 15, 1994 through
December 31, 1994;
Royce Global Services Fund -- Notes to
Financial Statements -- Report of Independent
Accountants dated February 14, 1997;
PMF II -- Schedule of Investments at December 31,
1996;
PMF II -- Statement of Assets and Liabilities at
December 31, 1996;
PMF II -- Statement of Changes in Net Assets for
the period from November 19, 1996 through December
31, 1996;
PMF II -- Statement of Operations for the period
from November 19, 1996 through December 31, 1996;
PMF II -- Financial Highlights for the period from
November 19, 1996 through December 31, 1996;
PMF II -- Notes to Financial Statements -- Report
of Independent Accountants dated February 14,
1997.
Financial statements, schedules and historical
information other than those listed above have been
omitted since they are either inapplicable or are not
required.
b. Exhibits:
The exhibits required by Items (1) through (3),
(6), (7), (9) through (12) and (14) through (16), to
the extent applicable to the Registrant, have been
filed with Registrant's initial Registration Statement
(No. 2-80348) and Post-Effective Amendment Nos. 4, 5,
6, 8, 9, 11, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23,
24, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 38, 40 and
41 thereto and, with respect to Pennsylvania Mutual
Fund, its initial Registration Statement (No. 2-19995)
and Post-Effective Amendment Nos. 43, 45, 46, 47, 48,
49, 51, 52, 53, 56, and 58, and are incorporated by
reference herein.
(5) Amendment to Investment Advisory Agreement between
Royce & Associates, Inc. and The Royce Fund on behalf
of Royce GiftShares Fund dated May 28, 1997.
(10) (a) Distribution Fee Schedule Agreement for
the Consultant Class of Royce GiftShares Fund
(b) Form of Agreement between Royce & Associates, Inc.
and introducing brokers.
(11) Consent of Coopers & Lybrand L.L.P.
(17) Royce GiftShares Fund Rule 18f-3 Plan
Item 25. Persons Controlled by or Under Common Control With
Registrant
There are no persons directly or indirectly controlled
by or under common control with the Registrant.
Item 26. Number of Holders of Securities
As of May 20, 1997, the number of record holders of
shares of each Fund of the Registrant was as follows:
Title of Fund Number of Record Holders
------------- ------------------------
[S] [C]
Pennsylvania Mutual Fund 16,354
Royce Value Fund 6,274
Royce Premier Fund 10,512
Royce Equity Income Fund 1,446
Royce Micro-Cap Fund 6,733
Royce Low-Priced Stock Fund 2,034
Royce Total Return Fund 1,782
Royce Global Services Fund 136
The REvest Growth and Income Fund 544
Royce GiftShares Fund 58
PMF II 1,034
Royce Financial Services Fund 1
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant
provides as follows:
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons
contracting with or having any claim against the Trust
or a particular Series shall look only to the assets of
the Trust or such Series for payment under such
contract or claim; and neither the Trustees nor any
other Trust's officers, employees or agents, whether
past, present or future, shall be personally liable
therefor. Every written instrument or obligation on
behalf of the Trust or any Series shall contain a
statement to the foregoing effect, but the absence of
such statement shall not operate to make any Trustee or
officers of the trust liable thereunder. None of the
Trustees or officers of the Trust shall be responsible
or liable for any act or omission or for neglect or
wrongdoing by him or any agent, employee, investment
adviser or independent contractor of the Trust, but
nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of
the Trust against liability to the Trust or to
Shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved
in the conduct of his or her office.
INDEMNIFICATION
Section 2.
(a) Subject to the exceptions and
limitations contained in Section 2(b) below:
(i) Every person who is, or has been,
a Trustee or officer of the Trust (including persons
who serve at the Trust's request as directors, officers
or trustees of another entity in which the Trust has
any interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") shall
be indemnified by the appropriate Fund to the fullest
extent not prohibited by law against liability and
against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred
by him in the settlement thereof; and
(ii) The words "claim", "action",
"suit" or "proceeding" shall apply to all claims, actions, suits
or proceedings (civil, criminal, administrative, investigatory or
other, including appeals), actual or threatened, while in office
or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided
hereunder to a Covered Person:
(i) Who shall, in respect of
the matter or matters involved, have been
adjudicated by a court or body before which
the proceeding was brought (A) to be liable
to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross
negligence in the performance of his duties
or reckless disregard of the obligations and
duties involved in the conduct of his office
or (B) not to have acted in the belief that
his action was in the best interest of the
Trust; or
(ii) In the event of a settlement,
unless there has been a determination that such Trustee
or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office,
(A) By the court or other body
approving the settlement;
(B) By a majority of those
Trustees who are neither Interested Persons of the
Trust nor are parties to the matter, based upon a
review of readily available facts (as opposed to a full
trial-type inquiry); or
(C) By written opinion of
independent legal counsel, based upon a review of
readily available facts (as opposed to a full
trial-type inquiry).
(c) The rights of indemnification herein
provided may be insured against by policies maintained
by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of
the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel,
other than Trustees and officers, and other persons may
be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation
and presentation of a defense to any claim, action, suit or
proceeding of the type described in subsection (a) of this
Section 2 may be paid by the applicable Fund from time to time
prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be
paid over by him to the applicable Fund if and when it is
ultimately determined that he is not entitled to indemnification
under this Section 2; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out
of any such advance payments or (iii) either a majority of the
Trustees who are neither Interested Persons of the Trust nor
parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this
Section 2."
(b)(1) Paragraph 8 of the Investment Advisory
Agreements by and between the Registrant and Royce &
Associates, Inc. (formerly named Quest Advisory Corp.)
provides as follows:
"8. Protection of the Adviser. The Adviser shall
not be liable to the Fund or to any portfolio series thereof for
any action taken or omitted to be taken by the Adviser in
connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series, and the Fund or each
portfolio series thereof involved, as the case may be, shall
indemnify the Adviser and hold it harmless from and against all
damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement)
incurred by the Adviser in or by reason of any pending,
threatened or completed action, suit, investigation or other
proceeding (including an action or suit by or in the right of the
Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Adviser in
connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the
preceding sentence of this Paragraph 8 to the contrary, nothing
contained herein shall protect or be deemed to protect the
Adviser against or entitle or be deemed to entitle the Adviser to
indemnification in respect of, any liability to the Fund or to
any portfolio series thereof or its security holders to which the
Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of its reckless disregard of its duties
and obligations under this Agreement.
Determinations of whether and the extent to which the
Adviser is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or
other proceeding was brought that the Adviser was not liable by
reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of such a
decision, a reasonable determination, based upon a review of the
facts, that the Adviser was not liable by reason of such
misconduct by (i) the vote of a majority of a quorum of the
Trustees of the Fund who are neither "interested persons" of the
Fund (as defined in Section 2(a)(19) of the Investment Company
Act of 1940) nor parties to the action, suit or other proceeding
or (ii) an independent legal counsel in a written opinion."
(b)(2) Paragraph 8 of the Investment Advisory
Agreement by and between the Registrant and Royce, Ebright &
Associates, Inc. provides as follows:
"8. Protection of the Adviser. The Adviser
shall not be liable to the Fund or to any portfolio
series thereof for any action taken or omitted to be
taken by the Adviser in connection with the performance
of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the
Fund or such series, and the Fund or each portfolio
series thereof involved, as the case may be, shall
indemnify the Adviser and hold it harmless from and
against all damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts
reasonably paid in settlement) incurred by the Adviser
in or by reason of any pending, threatened or completed
action, suit, investigation or other proceeding
(including an action or suit by or in the right of the
Fund or any portfolio series thereof or its security
holders) arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be
taken by the Adviser in connection with the performance
of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the
Fund or such series. Notwithstanding the preceding
sentence of this Paragraph 8 to the contrary, nothing
contained herein shall protect or be deemed to protect
the Adviser against or entitle or be deemed to entitle
the Adviser to indemnification in respect of, any
liability to the Fund or to any portfolio series
thereof or its security holders to which the Adviser
would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless
disregard of its duties and obligations under this
Agreement.
Determinations of whether and the extent to which
the Adviser is entitled to indemnification hereunder
shall be made by reasonable and fair means, including
(a) a final decision on the merits by a court or other
body before whom the action, suit or other proceeding
was brought that the Adviser was not liable by reason
of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence
of such a decision, a reasonable determination, based
upon a review of the facts, that the Adviser was not
liable by reason of such misconduct by (i) the vote of
a majority of a quorum of the Trustees of the Fund who
are neither "interested persons" of the Fund (as
defined in Section 2(a)(19) of the Investment Company
Act of 1940) nor parties to the action, suit or other
proceeding or (ii) an independent legal counsel in a
written opinion."
(c) Paragraph 9 of the Distribution Agreement
made October 31, 1985 by and between the Registrant and
Royce Fund Services, Inc. (formerly named Quest
Distributors, Inc.) provides as follows:
"9. Protection of the Distributor. The
Distributor shall not be liable to the Fund or to any
series thereof for any action taken or omitted to be
taken by the Distributor in connection with the
performance of any of its duties or obligations under
this Agreement or otherwise as an underwriter of the
Shares, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the
Distributor and hold it harmless from and against all
damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid
in settlement) incurred by the Distributor in or by
reason of any pending, threatened or completed action,
suit, investigation or other proceeding (including an
action or suit by or in the right of the Fund or any
series thereof or its security holders) arising out of
or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the
Distributor in connection with the performance of any
of its duties or obligations under this Agreement or
otherwise as an underwriter of the Shares.
Notwithstanding the preceding sentences of this
Paragraph 9 to the contrary, nothing contained herein
shall protect or be deemed to protect the Distributor
against, or entitle or be deemed to entitle the
Distributor to indemnification in respect of, any
liability to the Fund or to any portfolio series
thereof or its security holders to which the
Distributor would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of its
reckless disregard of its duties and obligations under
this Agreement.
Determinations of whether and to the extent to
which the Distributor is entitled to indemnification
hereunder shall be made by reasonable and fair means,
including (a) a final decision on the merits by a court
or other body before whom the action, suit or other
proceeding was brought that the Distributor was not
liable by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties or
(b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that
the Distributor was not liable by reason of such
misconduct by (a) the vote of a majority of a quorum of
the Trustees of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of
the 1940 Act) nor parties to the action, suit or other
proceeding or (b) an independent legal counsel in a
written opinion."
Item 28. Business and Other Connections of Investment Advisers
Reference is made to the filings on Schedule D to
the Applications on Form ADV, as amended, of Royce &
Associates, Inc. and Royce, Ebright & Associates, Inc. for
Registration as Investment Advisers under the Investment
Advisers Act of 1940.
Item 29. Principal Underwriters
Inapplicable. The Registrant does not have any
principal underwriters.
Item 30. Location of Accounts and Records
The accounts, books and other documents required
to be maintained by the Registrant pursuant to the
Investment Company Act of 1940, are maintained at the
following locations:
The Royce Fund
1414 Avenue of the Americas
10th Floor
New York, New York 10019
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Item 31. Management Services
State Street Bank and Trust Company, a
Massachusetts trust company ("State Street"), provides
certain management-related services to the Registrant
pursuant to a Custodian Contract made as of December 31,
1985 between the Registrant and State Street. Under such
Custodian Contract, State Street, among other things, has
contracted with the Registrant to keep books of accounts and
render such statements as agreed to in the then current
mutually-executed Fee Schedule or copies thereof from time
to time as requested by the Registrant, and to assist
generally in the preparation of reports to holders of shares
of the Registrant, to the Securities and Exchange Commission
and to others, in the auditing of accounts and in other
ministerial matters of like nature as agreed to between the
Registrant and State Street. All of these services are
rendered pursuant to instructions received by State Street
from the Registrant in the ordinary course of business.
Registrant paid the following fees to State Street
for services rendered pursuant to the Custodian Contract, as
amended, for each of the three (3) fiscal years ended
December 31:
1996: $468,735
1995: $335,180
1994: $309,492
Item 32. Undertakings
Registrant hereby undertakes to furnish each
person to whom a prospectus for any series of the Registrant
is delivered with a copy of the latest annual report
including schedule of investments to shareholders of such
series upon request and without charge.
Registrant hereby undertakes to call a special
meeting of the Registrant's shareholders upon the written
request of shareholders owning at least 10% of the
outstanding shares of the Registrant for the purpose of
voting upon the question of the removal of a trustee or
trustees and, upon the written request of 10 or more
shareholders of the Registrant who have been such for at
least 6 months and who own at least 1% of the outstanding
shares of the Registrant, to provide a list of shareholders
or to disseminate appropriate materials at the expense of
the requesting shareholders.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective Amendment to
the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
New York, and State of New York, on the 3rd day of June, 1997.
The Registrant represents that this Post-Effective Amendment is filed
solely for one or more of the purposes set forth in paragraph (b)(1) of
Rule 485 under the Securities Act of 1933 and that no material event
requiring disclosure in the prospectus, other than on listed in paragraph
(b)(1) of such Rule or one for which the Commission has approved a filing
under paragraph (b)(1)(ix) of the Rule, has occurred since the latest of
the following three dates: (i) the effective date of the Registrant's
Registration Statement; (ii) the effective date of the Registrant's most
recent Post-Effective Amendment to its Registration Statement which
included a prospectus; or (iii) the filing date of a post-effective
amendment filed under paragraph (a) of Rule 485 which has not become
effective.
THE ROYCE FUND
By: S/CHARLES M. ROYCE
---------------------------
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post-Effective Amendment to the
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
S/CHARLES M. ROYCE President, Treasurer and
- ------------------ Trustee
Charles M. Royce (Principal Executive, 6/3/97
Accounting
and Financial Officer)
S/HUBERT L. CAFRITZ Trustee 6/3/97
- -------------------
Hubert L. Cafritz
S/THOMAS R. EBRIGHT Trustee 6/3/97
- -------------------
Thomas R. Ebright
S/RICHARD M. GALKIN Trustee 6/3/97
- -------------------
Richard M. Galkin
S/STEPHEN L. ISAACS Trustee 6/3/97
- -------------------
Stephen L. Isaacs
S/WILLIAM L. KOKE Trustee 6/3/97
- -----------------
William L. Koke
S/DAVID L. MEISTER Trustee 6/3/97
- ------------------
David L. Meister
NOTICE
A copy of the Declaration of Trust of The Royce Fund is on file with
the Secretary of State of the State of Delaware, and notice is hereby given
that this instrument is executed on behalf of the Registrant by an officer
of the Registrant as an officer and not individually and that the
obligations of or arising out of this instrument are not binding upon any
of the Trustees or shareholders individually but are binding only upon the
assets and property of the Registrant.
THE ROYCE FUND
(ROYCE GIFTSHARES FUND)
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT for Royce
GiftShares Fund (the "Series") made this 28th day of May,
1997, by and between The Royce Fund (the "Fund") and Royce &
Associates, Inc. (the "Adviser").
The Fund and the Adviser hereby agree that Section 4 of
the Investment Advisory Agreement for the Series is hereby
amended, effective as of and from June 15, 1997, to read as
follows:
"Compensation of the Adviser. The Fund agrees to
cause the Series to pay to the Adviser, and the Adviser
agrees to accept, as compensation for the services provided
by the Adviser hereunder, a fee equal to 1% per annum of the
average net assets of the Series at the close of business on
each day that the value of its net assets is computed during
the year. However, the Fund and the Adviser may agree in
writing to temporarily or permanently reduce such fee. Such
compensation shall be accrued on the Series' books at the
close of business on each day that the value of its net
assets is computed during each year and shall be payable to
the Adviser monthly, on the last day of each month, and
adjusted as of year-end if required."
All other terms of such Investment Advisory Agreement
shall remain the same.
Dated this 28th day of May, 1997.
ROYCE & ASSOCIATES, INC.
By: S/CHARLES M. ROYCE
------------------
THE ROYCE FUND
By: S/CHARLES M. ROYCE
------------------
DISTRIBUTION FEE AGREEMENT
FOR
ROYCE GIFTSHARES FUND
The Royce Fund, a Delaware business trust (the "Trust"), and
Royce Fund Services, Inc., a New York corporation ("RFS"), hereby
agree that as compensation for RFS's services and for the
expenses payable by RFS under the Distribution Agreement made
October 31, 1985 by and between the parties hereto, RFS shall
receive, for and from the assets of Royce GiftShares Fund (the
"Fund"), a series of the Trust, a monthly fee equal to .25% per
annum of the Fund's average net assets.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the 28th day of May, 1997.
THE ROYCE FUND
S/CHARLES M. ROYCE
------------------
ROYCE FUND SERVICES, INC.
S/JOHN D. DIEDERICH
-------------------
_________, 1997
<<Company>>
<<Address1>>
<<Address2>>
<<City>>, <<State>> <<Postal Code>>
Attention: <<First Name>> <<Last Name>>,
<<Title>>
Dear Mr. <<Last Name>>:
Royce Fund Services, Inc., a New York corporation
("RFS"), is the distributor of the shares
of various series (each, a "Fund" and collectively, the
"Funds") of The Royce Fund, a Delaware
business trust (the "Trust"). RFS may receive 12b-1 fees
from one or more of the Funds, as set forth
in their current prospectuses, copies of which have been
provided to you. This letter will confirm our
agreement as to the terms and conditions on which
_______________ ("you") will receive
compensation from RFS in connection with sales of the shares
of one or more of the Funds to
investors introduced by you and for your servicing such
investors as shareholders of the Fund(s)
involved. Such terms and conditions are as follows:
1. You may, from time to time during the term of
this Agreement, introduce prospective
investors to a Fund. In connection therewith, you will
furnish each of such investors with a copy of
the Fund's then current prospectus, but not with any other
material concerning the Fund unless such
material shall have been approved in writing, or furnished,
by RFS. All sales of the Fund's shares
shall be effected and processed in accordance with the
applicable provisions of the Fund's then current
prospectus and its account application form.
2(a). You may be entitled to receive a commission for
shares purchased by an investor so
introduced by you to any Fund(s) listed on Schedule A to
this Agreement. Such commissions would
be payable at the rate(s) and time(s) set forth in Schedule
A. For these purposes, an exchange of
shares of one Fund for shares of another Fund or an
investor's reinvestment of a Fund distribution
would not be treated as a compensable purchase.
(b). For each shareholder of a Fund so introduced by
you and who remains a shareholder
of such Fund during the term of this Agreement, we may also
make periodic payments to you as
authorized by the Trust's Rule 12b-1 distribution plan for
such Fund (the "Plan"). RFS may waive its
right to receive payments under the Plan, so that you would
become entitled to receive any such
payments in respect of the investor(s) involved only after
RFS has actually received its 12b-1 fee from
such Fund. Any such payments to you would be made only for
the Fund(s) listed on Schedule B to
this Agreement, and at the rate(s) and times set forth in
it. (Such Schedule B may be amended from
time to time by written notice from RFS to you.) Each such
payment will be deemed to include a
service fee at the rate set forth in Schedule B, which
represents payment for personal service to the
investor(s) involved and/or for your maintenance of their
account(s).
(c). In no event would you be entitled to receive
any compensation under subparagraphs
(a) or (b) above for (i) any month for which the aggregate
amount payable to you is less than $10 or
(ii) any period after the month in which the term of this
Agreement ends.
(d). Notwithstanding the preceding provisions of this
Paragraph 2 to the contrary, RFS
would not be obligated to pay you any compensation
thereunder so long as RFS's receipt or retention
of any compensation in respect of the investor(s) involved
or its receipt or retention of any
compensation under the Plan would, for any reason
whatsoever, constitute a violation by RFS or you
of any then applicable rule or regulation of the National
Association of Securities Dealers, Inc.
("NASD").
3. You represent, warrant and agree that you are
(and will continue to be during the term
of this Agreement) a broker-dealer registered and in good
standing with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of
1934, as amended (the "1934 Act"),
and a member of and in good standing with the NASD; that you
and your agents have obtained (and
will continue to have during the term of this Agreement) all
state and other broker-dealer, agent and
similar licenses and registrations necessary for the conduct
of your business and for offers and sales
of each Fund's shares by you and such agents; and that you
and your agents will offer and sell the
Funds' shares in a manner consistent with the provisions of
the 1934 Act and the rules and regulations
thereunder and all other applicable securities laws.
4. You will indemnify and hold harmless each of
the Funds, the Trust and RFS, and each
of its trustees, principals, employees, agents and
affiliates, from and against any and all claims,
damages, liabilities, losses, costs and expenses, including
reasonable attorneys' fees and amounts paid
in settlement, which they or any of them may incur or
sustain on account of or in any way arising out
of or relating to your breach of any of the representations,
warranties, covenants or other provisions of
this Agreement and/or any actual or alleged violation by you
or by any of your agents of any of the
provisions of the Securities Act of 1933, as amended (the
"1933 Act"), or the 1934 Act or any of the
rules or regulations under any of such statutes, the
securities laws of any state or other jurisdiction or
any other law, rule or regulation which may be applicable to
your or their activities hereunder.
5. RFS represents, warrants and agrees that it is
(and will continue to be during the term
of this Agreement) a broker-dealer registered and in good
standing with the SEC under the 1934 Act
and a member of and in good standing with the NASD; that it
and its agents have obtained (and will
continue to have during the term of this Agreement) all
state and other broker-dealer, agent and
similar licenses and other registrations necessary for the
conduct of its business; that the Trust is
registered with the SEC as an open-end investment company
under the Investment Company Act of
1940, as amended; that shares of the Funds are registered
with the SEC for sale under the 1933 Act;
that shares of the Funds may be publicly offered and sold
only in those states where such shares are
currently qualified and/or registered (a list of which is
available from the Trust's office); and that the
current prospectuses of the Funds do not contain a
misstatement of any material fact or omit to state
any material fact necessary in order to make the statements
contained therein not misleading.
6. RFS will indemnify you and hold you
harmless from and against any and all claims,
damages, liabilities, losses, costs and expenses, including
reasonable attorneys' fees and amounts paid
in settlement, which you may incur or sustain on account of
or in any way arising out of or relating to
its breach of any of the representations, warranties,
covenants or other provisions of this Agreement
and/or any actual or alleged violation by RFS or any of its
agents or by the Trust of any of the
provisions of the 1933 Act or the 1934 Act or any of the
rules or regulations under any of such
statutes, the securities laws of any state or other
jurisdiction or any other law, rule or regulation which
may be applicable to its or their activities hereunder.
7. The term of this Agreement shall commence on
the date hereof and shall end as of the
last day of any calendar month in which you give RFS written
notice for any reason of your intent to
terminate this Agreement, RFS or the Trust gives you written
notice for any reason of its intent to
terminate this Agreement, or the Plan Distribution
Agreement(s) between TRF and RFS shall be
terminated for any reason whatsoever. Notwithstanding the
foregoing, no such ending of the term of
this Agreement shall affect any of the rights or obligations
of RFS or you with respect to any matter
which may have occurred prior thereto.
8. This Agreement, including the Schedules to it,
constitutes our entire agreement and
understanding with respect to the subject matter hereof and
supercedes all prior agreements,
negotiations and understandings with respect thereto; may
not be changed, waived or terminated
orally or by course of dealing, and any change, waiver or
termination of any of the provisions hereof
shall be binding and effective only if made in writing and
signed by you and us (except for changes in
such Schedules made by us); and shall be governed by and
construed in accordance with the laws of
the State of New York.
Sincerely,
ROYCE FUND SERVICES, INC.
By:
John D. Diederich,
President
Agreed to and accepted:
By: ------------------------
Name
_________________________
Title
Date: ___________
SCHEDULE A
Commmissions (Subparagraph 2(a))
Fund Name Commission Rate Time of Payment
--------- --------------- ----------------
SCHEDULE B
Trail Fee Payment (Subparagraph 2(b))
Trail Fee Rate Service Fee
Fund Name (including Service Fee Component) Component Time of Payment
- --------- --------------------------------- ----------- ---------------
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Royce Fund and Shareholders of
Royce GiftShares Fund:
We consent to the reference to our Firm under the caption
"Financial Highlights" in Post-Effective Amendment No. 42 to the
Registration Statement of Royce GiftShares Fund, a series of The
Royce Fund on Form N-1A (File No. 2-80348) under the Securities
Act of 1933 and Amendment No. 44 under the Investment Company Act
of 1940 (File No. 811-3599). We further consent to the reference
to our Firm under the headings "General Information" in the
Prospectus and "Independent Accountants" in the Statement of
Additional Information.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
June 4, 1997
ROYCE GIFTSHARES FUND
RULE 18f-3 PLAN
Rule 18f-3 under the Investment Company Act of 1940 (the
"Investment Company Act") permits mutual funds to issue multiple
classes of shares. Under Rule 18f-3(d), each mutual fund that
seeks to rely upon Rule 18f-3 is required to (i) create a plan (a
"18f-3 Plan") setting forth the differences among each class of
its shares, (ii) receive the approval of a majority of its Board
of Trustees (including a majority of the non-interested trustees)
that the 18f-3 Plan, including the expense allocation between
each class of shares, is in the best interests of each class
individually and the fund as a whole and (iii) file a copy of the
18f-3 Plan with the Securities and Exchange Commission (the
"Commission") as an exhibit to the fund's registration statement.
The following 18f-3 Plan is for Royce GiftShares Fund (the
"Fund"), a series of The Royce Fund, and describes the
differences between the classes of the Fund's shares.
The Fund offers two classes of its shares--Consultant Class
shares and Investment Class shares. The shares of each class may
be purchased at a price equal to the next determined net asset
value per share of such class, subject to any sales loads and
ongoing asset-based charges described below.
Consultant Class shares (i) are sold to investors who are
customers of certain broker-dealers that have entered into
agreements with, and that are compensated by the distributor of,
The Royce Fund's shares, (ii) are subject to a contingent
deferred sales charge ("CDSC"), unless redeemed in order to make
tax payments, payable to such distributor in an amount equal to a
percentage of the purchase price of the shares being redeemed,
ranging from 5% during approximately the first year after
purchase and declining to 1.5% during approximately the sixth
year after purchase, as described in the Prospectus for such
shares,(iii) are subject to 12b-1 fees of up to 1% of the average
net assets of such shares and (iv) automatically convert into
Investment Class shares approximately eight years after purchase.
Investment Class shares (i) are generally not distributed
through such broker-dealers and (ii) are subject to 12b-1 fees of
up to .25% of the average net assets of such shares. All such
12b-1 fees are paid to such distributor under The Royce Fund's
distribution plan pursuant to Rule 12b-1 under the Investment
Company Act (the "12b-1 Plan"). Consultant Class and/or
Investment Class shares sold to new investors after a future date
set by The Royce Fund's Board of Trustees may bear a front-end
sales load, and Investment Class shares sold to new investors
after such a future date may bear a contingent deferred sales
charge, as set forth in the 12b-1 Plan. Information regarding
the 12b-1 Plan and the 12b-1 fees payable by the Consultant Class
and the Investment Class is or will be set forth in the Fund's
current Prospectuses for such classes and in the Statement of
Additional Information for The Royce Fund.
Each Consultant Class and Investment Class share of the Fund
represents a pari passu interest in the Fund's investment
portfolio and other assets and has the same redemption, voting
and other rights. Each class bears those identifiable expenses
incurred solely for shareholders of such class, including (but
not limited to) (i) printing and distributing prospectuses,
periodic reports and proxy statements to such shareholders,(ii)
Commission and Blue Sky registration fees, (iii) transfer agency
and other shareholder services and (iv) litigation or other legal
expenses. Thus, each class' shares bear the expenses of its
ongoing 12b-1 fees and have exclusive voting rights with respect
to the 12b-1 Plan as applied to such class, and the 12b-1 fees
that are imposed on each class' shares are imposed directly
against that class and not against all of the Fund's assets, so
that such fees will not affect the net asset value of any other
class.
Net investment income dividends and capital gains
distributions paid by the Fund on each class of its shares will
be calculated in the same manner at the same time and will differ
only to the extent that 12b-1 fees relating to a particular class
or any other expenses incurred solely for a particular class are
borne exclusively by that class.
Exchange Privilege. Only shareholders of the Investment
Class have an exchange privilege with the other series of The
Royce Fund. There is currently no limitation on the number of
times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Allocation of Income, Gains, Losses and Expenses. Income,
gains and losses of the Fund are allocated pro rata according to
the net assets of each class. Expenses not incurred by a
specific class of the Fund are allocated according to the net
assets or number of shareholder accounts, each on a pro rata
basis, of each class.
Amending 12b-1 Plan. The Fund will not implement any
amendment to its 12b-1 Plan for either the Consultant Class or
the Investment Class that would materially increase the amount
that may be borne by such class unless the holders of such class
of shares voting separately as a class and, in the case of such
an amendment applicable to the Investment Class, Consultant Class
shareholders also voting separately as a class, approve the
proposal.
Conversion of Consultant Class Shares to Investment Class
Shares. After the applicable CDSC period has expired, Consultant
Class shares will automatically convert into Investment Class
shares of the Fund on the basis of the relative net asset values
per share of the two classes, without the imposition of any front-
end sales load, fee or other charge.
Shareholders holding Consultant Class shares in certificate
form will not receive Investment Class share certificates until
the shareholder tenders the Consultant Class share certificate(s)
to the Fund's transfer agent. Until Consultant Class share
certificates are exchanged for Investment Class share
certificates, the Consultant Class share certificates will
represent the shareholder's interest in the Investment Class
shares received upon conversion.
This Plan shall become effective on the date on which The
Royce Fund's post-effective amendment including a Prospectus for
the Fund's Consultant Class shares shall become effective.
THE ROYCE FUND
May 28, 1997 By: S/CHARLES M. ROYCE
------------------
