As filed with the Securities and Exchange Commission on September 4, 1998
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. 48 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 50 /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)
/ / on Date pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on Date pursuant to paragraph (a)(ii)
/x / 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
or prior to March 30, 1998.
Total number of pages: ___
Index to Exhibits is located on page:
<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... *
IV. General Description of Registrant.. INVESTMENT OBJECTIVE,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT 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,
OTHER SERVICES
VIII. Redemption or Repurchase.. REDEEMING YOUR SHARES
IX. Pending Legal Proceeding .......... *
<PAGE>
CAPTION or Location in Statement
Item of Form N-1A of Additional Information
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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 Royce GiftShares Fund, a series of the Trust.
<PAGE>
[BEGIN RED HERRING]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
[END RED HERRING]
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ROYCE SELECT FUND
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PROSPECTUS -- ________ __, 1998
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ROYCE SELECT FUND (the "Fund") is a newly-created mutual fund designed
primarily for clients of registered investment advisors. The Fund's
investment objective is long-term capital appreciation, which it will seek
to achieve by investing in a limited number of common stocks and convertible
securities of small and micro-cap companies selected by its investment
adviser on a value basis. There can be no assurance that the Fund will
achieve its objective. Its only estimated operating expense will be a
performance fee equal to 12.5% of the Fund's pre-fee total return. Only
persons who are "qualified clients" within the meaning of the Securities and
Exchange Commission rule permitting such a performance fee may invest in the
Fund.
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This Prospectus sets forth concisely the information that you should know
about Royce Select Fund before you invest. It should be retained for future
reference. A Statement of Additional Information, containing further
information about the Fund and The Royce Fund (the "Trust"), has been filed
with the Securities and Exchange Commission. The Statement is dated ______
__, 1998 and has been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Trust or by calling Investor
Information at 1-800-221-4268.
TABLE OF CONTENTS
Page Page
Fund Expenses 2 Choosing a Distribution Option 9
Investment Objective 3 Important Account Information 9
Investment Policies 3 Redeeming Shares 10
Investment Risks 4 Dividends, Distributions and Taxes 12
Investment Limitations 4 Net Asset Value Per Share 13
Management of the Fund 7 Investment Performance 13
Opening an Account and General Information 14
Purchasing Shares 8
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FUND The following tables summarize the maximum
EXPENSES transaction costs and estimated expenses and fees
that you would incur as a shareholder of the Fund.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee -- on share purchases held
for less than 3 years 2%
Annual Fund Operating Expenses
------------------------------
Performance Fees 0.63%
12b-1 Fees None
Other Expenses None
----
Total Operating Expenses 0.63%
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 shares of the Fund. Performance fees of 12.5% of
the Fund's pre-fee total returns are estimated based
on an assumed 5% pre-fee annual rate of return.
"Other Expenses" are shown as "None" because the
Fund's investment adviser is responsible for paying
them. See "Management of the Fund".
The following examples illustrate the estimated
expenses that you would incur on a $1,000 investment
over various periods, assuming a 5% annual rate of
return.
1 Year 3 Years
------ -------
Assuming redemption at
end of period $27 $20
Assuming no redemption at
end of period $6 $20
NEITHER THE ANNUAL FUND OPERATING EXPENSES TABLE NOR
THESE EXAMPLES SHOULD BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. THE
FUND'S PRE-FEE ANNUAL RATES OF RETURN AND ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
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INVESTMENT The Fund's investment objective is long-term capital
OBJECTIVE appreciation. It seeks to achieve this objective
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 is fundamental and
may not be changed without the approval of a
majority of its outstanding voting shares.
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INVESTMENT Royce & Associates, Inc. ("Royce"), the Fund's
POLICIES investment adviser, uses a "value" method in
managing the Fund's assets. Royce attempts to
identify and invest in securities of companies that
are trading at a discount from its estimate of such
companies' "private worth," that is, what a
knowledgeable buyer would pay for the entire
company, with the expectation that this "value"
discount will narrow over time and thus provide
capital appreciation for investors.
The Fund will normally invest at least 80% of its
assets in a limited number of common stocks,
convertible preferred stocks and convertible bonds
of small and micro-cap companies (stock market
capitalizations below $1 billion). Such companies
represent Royce's core investment focus.
The assets of the Fund that are not invested in the
equity securities of small and micro-cap companies
may be invested in securities of companies with
higher stock market capitalizations and in non-
convertible preferred stocks and debt securities.
In its selection process, Royce puts primary
emphasis on balance sheet quality, cash flows and
various internal returns indicative of
profitability, and the relationships that these
factors have to the price of a given security.
The value methodology used by Royce seeks to
incorporate a risk-averse approach to portfolio
selection. Such an approach is especially important
for investing in small and micro-cap companies
because of the potential for greater price
volatility and their somewhat fragile nature in
general. Royce evaluates factors such as a
company's financial risk, industry risk, market risk
and valuation risk, with a goal of reducing these
risks for the Fund's portfolio taken as a whole.
There can be no assurance that Royce's risk-averse
approach will be effective.
<PAGE>
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INVESTMENT As a fund investing primarily in common stocks
RISKS 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. Because the
Fund will focus on the less liquid securities of
small and micro-capitalization companies, it may
involve considerably more risk than a fund investing
in the more liquid common stocks and convertible
securities of larger capitalization companies. The
Fund's companies may have static, cyclical or only
moderate growth prospects and/or limited product
lines, markets and financial resources. They may
also lack management depth and be more vulnerable to
adverse business developments. In addition, these
companies may not be well known to the investment
community and may be followed by relatively few
securities analysts, so that there will tend to be
less publicly available information about them, and
their securities may not be widely held or attract
significant institutional ownership. Finally, the
securities of the Fund's companies may have limited
trading volumes, wide spreads between their bid and
ask prices, prices that are subject to more abrupt
or erratic market movements than the securities of
larger capitalization companies or the market
averages in general and, in the case of securities
traded in the over-the-counter market, only a few
market makers. Accordingly, Royce's investment
method requires Fund investors to have a long-term
investment outlook.
Because the Fund will invest primarily in small and
micro-capitalization securities, it may not be able
to purchase or sell more than a limited number of
shares of a portfolio security at then quoted market
prices, and may require a considerable period of
time to acquire or dispose of its position in the
security. In addition, if other Royce-managed
accounts or other investors are seeking to purchase
or sell a portfolio security held by the Fund, this
may impact the value of that security. See "Net
Asset Value Per Share".
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
small and micro-capitalization 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.
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INVESTMENT The Fund has adopted certain fundamental
LIMITATIONS 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:
<PAGE>
(a) as to not less than 75% of its assets, invest
more than 5% of its assets in the securities of
any one issuer, excluding U.S. Government
obligations;
(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 In addition to investing primarily in the equity and
Investment fixed income securities described above, the Fund
Practices may follow a number of additional investment
practices.
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.
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.
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.
The Fund may invest up to 10% of its assets in
foreign securities, measured at the time of
purchase. The Fund may purchase foreign securities
in the form of American Depositary Receipts
("ADRs"). ADRs are certificates held in trust by a
bank or similar financial institution evidencing
ownership of shares of a foreign-based issuer.
Designed for use in U.S. securities markets, ADRs
are alternatives to the purchase of the underlying
foreign securities in their national markets and
currencies.
<PAGE>
The Fund does not expect to purchase or sell foreign
currencies to hedge against declines in the U.S.
dollar or to lock in the value of the foreign
securities it purchases, and its foreign investments
may be adversely affected by changes in foreign
currency rates. Consequently, the risks associated
with such investments may be greater than if the
Fund did engage in foreign currency transactions for
hedging purposes. Foreign investments may also be
adversely affected by exchange control regulations,
if any, in such foreign markets, and the Fund's
ability to make certain distributions necessary to
maintain eligibility as a regulated investment
company and avoid the imposition of income and
excise taxes may to that extent be limited.
There may be less information available about a
foreign company than a domestic company; foreign
companies may not be subject to accounting, auditing
and reporting standards and requirements comparable
to those applicable to domestic companies; and
foreign markets, brokers and issuers are generally
subject to less extensive government regulation than
their domestic counterparts. Foreign securities may
be less liquid and may be subject to greater price
volatility than domestic securities. Foreign
brokerage commissions and custodial fees are
generally higher than those in the United States.
Foreign markets also have different clearance and
settlement procedures, and in certain markets there
have been times when settlements have been unable to
keep pace with the volume of securities
transactions, thereby making it difficult to conduct
such transactions. Delays or problems with
settlements might affect the liquidity of the Fund's
portfolio. Foreign investments may also be subject
to local economic and political risks, political
instability and possible nationalization of issuers
or expropriation of their assets, which might
adversely affect the Fund's ability to realize on
its investment in such securities. Furthermore,
some foreign securities are subject to brokerage
taxes levied by foreign governments, which have the
effect of increasing the cost of such investment and
reducing the realized gain or increasing the
realized loss on such securities at the time of
sale.
Income earned or received by the Fund from sources
within foreign countries may be subject to
withholding and other taxes imposed by such
countries. Any such taxes paid by the Fund will
reduce its cash available for distribution to
shareholders. The Fund is required to calculate its
distributable income and capital gains for U.S.
Federal income tax purposes by reference to the U.S.
dollar. Fluctuations in applicable foreign currency
exchange rates may cause the Fund's distributable
income and capital gains for U.S. Federal income tax
purposes to differ from the value of its investments
calculated by reference to foreign currencies. If
the Fund invests in stock of a so-called passive
foreign investment company, the Fund may make
certain elections that will affect the calculation
of its net investment income and capital gains.
Although the Fund generally seeks to invest for the
long term, it retains the right to sell securities
regardless of how long they have been held. The
Fund's portfolio turnover is expected to be less
than 50% annually.
<PAGE>
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MANAGEMENT OF Royce & Associates, Inc., the Fund's investment
THE FUND adviser, is responsible for the investment of its
assets, subject to the authority of the Trust's
Board of Trustees, under whose direction the Trust's
business and affairs are managed. Charles M. Royce,
Royce's President, Chief Investment Officer and sole
voting shareholder since 1972, is primarily
responsible for managing the Fund's portfolio. He
is assisted by Royce's investment staff, including
W. Whitney George, Senior Portfolio Manager and
Managing Director, Boniface A. Zaino, Senior
Portfolio Manager and Managing Director, and Charles
R. Dreifus, Senior Portfolio Manager and Principal,
and by Jack E. Fockler, Jr., Managing Director.
As compensation for its services to the Fund and for
paying the Fund's other operating expenses as set
forth below, Royce is entitled to receive from the
Fund a performance fee of 12.5% of the Fund's pre-
fee total return. This fee is calculated and
accrued daily, based on the value of the Fund's then
current net assets. It is payable as of
December 31, 1999, for the period from the date on
which the Fund commenced operations through December
31, 1999, and as of the close of each calendar
quarter ending after December 31, 1999. See "Investment
Performance" for information as to the definition
and calculation of "total return".
Fees are payable to Royce in respect of Fund shares
outstanding throughout, or purchased or redeemed
during, the applicable period and are not
reimbursable by Royce because of negative total
returns occurring after a date as of which they are
payable. They are, however, subject to a high water
benchmark test, so that Fund shares will not bear a
fee during any period when the Fund's pre-fee
cumulative total return for the period from the date
on which the Fund commenced operations to the date
of calculation does not exceed its pre-fee
cumulative total return to the date as of which a
performance fee was last paid.
For example, assuming no share purchases or
redemptions during the periods, if the Fund's pre-
fee total return for the initial period (from the
date on which the Fund commenced operations to
December 31, 1999) was 10%, then Royce would earn a
fee equal to 1.25% for that period. No fee would
be earned in subsequent periods until the Fund had
generated a pre-fee total return of 2.5% for the
period, thereby recouping the prior period negative
return.
Royce is responsible for paying all of the Fund's
other operating expenses, except for brokerage
commissions, taxes, interest, litigation expenses
and other extraordinary expenses not incurred in the
ordinary course of the Fund's business.
<PAGE>
Royce selects the broker-dealers who execute
purchases and sales of the Fund's portfolio
securities and may place order with brokers that
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 wholly-
owned by Charles M. Royce, acts as distributor of
the Fund's shares.
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OPENING AN The Fund is designed primarily for clients of
ACCOUNT AND registered investment advisors, and only a person
PURCHASING who meets the Securities and Exchange Commission's
SHARES definition of the term "qualified client" may
purchase shares of the Fund. The term "qualified
client" includes:
(a) an individual who or a corporation,
partnership, trust or other company that Royce (and
any person acting on its behalf) reasonably
believes, immediately prior to the purchase, has a
net worth (together, in the case of an individual
with assets held jointly with a spouse) of more than
$1,500,000 at the time of the purchase; or
(b) an individual who or a company that immediately
after the purchase owns Fund shares having a net
asset value of at least $750,000.
The requirement that Fund shares be purchased only
by "qualified clients" applies to both initial and
subsequent investments in the Fund. "Qualified
clients" (or any persons acting on their behalf)
must represent to the Trust and Royce that they are
investing in the Fund for their own accounts and not
with a view to transferring their Fund shares or any
interest in them to another person. The Trust has
imposed restrictions on transfers of the Fund's
shares in order to prevent persons who are not
"qualified clients" from purchasing them. See
"Important Account Information" below.
To open a new account directly with the Fund (other
than an IRA account) either by mail or by wire,
complete and return the Account Application.
Investments in the Fund may also be made through a
registered investment advisor, broker-dealer, bank,
trust company or other financial intermediary who
has previously established a relationship with
Royce.
If you need assistance with the Account Application,
would like to open an IRA account or have any
questions about the Fund or your eligibility to
invest in it, please call Investor Information at 1-
800-221-4268. Note: For certain types of account
registrations (e.g., corporations, partnerships,
foundations, other organizations or trusts), please
call Investor Information to determine if you need
to provide additional forms with your application.
The minimum initial investment is $50,000. Minimum
subsequent
<PAGE>
investments of $1,000 may be made by
mail, wire or Express Service (a system of
electronic funds transfer from your bank account).
Checks should be made payable to Royce Select Fund
and mailed to:
The Royce Funds
P.O. Box 419012
Kansas City, MO 64141-6012
Money should be wired to:
State Street Bank and Trust Company
ABA 011000028 DDA 9904-712-8
Ref: Royce Select Fund
Order Number or Account Number____________________
Account Name ____________________________________
To ensure proper receipt, please be sure your bank
includes the name of the Fund and your account
number. If you are opening a new account, your
investment advisor or other representative must call
Investor Information to obtain an order number,
complete the Account Application and mail it to the
"New Account" address above after completing the
wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund
and its custodian are open for business.
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CHOOSING A You may select one of three distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option--Both net
investment income dividends and capital gains
distributions will be reinvested in additional
Fund shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. Cash Dividend Option--Your dividends will be
paid in cash and your capital gains distributions
will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital
gains distributions will be paid in cash.
You may change your option by calling Shareholder
Services at 1-800-841-1180.
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IMPORTANT For our mutual protection, we may require a
ACCOUNT signature guarantee on certain written transaction
INFORMATION requests. A signature guarantee verifies the
authenticity of your signature and may be obtained
from banks, broker-dealers and any other guarantor
that our transfer agent deems acceptable. A
signature guarantee cannot be provided by a notary
public.
Certificates will not be issued.
If your check or wire does not clear, the
transaction will be canceled and you
<PAGE>
will be responsible for any loss the Fund incurs.
Your trade date is the date on which share purchases
are credited to your account. If your purchase is
made by check or Federal Funds wire and is received
by the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m., Eastern time),
your trade date is the date of receipt. If your
purchase is received after the close of regular
trading on the Exchange, your trade date is the next
business day. Your shares are purchased at the net
asset value determined on your trade date.
In order to prevent lengthy processing delays caused
by the clearing of foreign checks, the Trust 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.
The Trust will not register on its books and records
or otherwise voluntarily recognize any attempted
transfer of the Fund's shares or any interest in
them to any person who is not then a "qualified
client", except in cases where the transferor or the
transferee demonstrates, to the satisfaction of the
Trust and Royce, that the transferee is (a)
acquiring the shares as a gift or bequest or
pursuant to an agreement relating to a legal
separation or divorce, (b) the estate of the
transferor or (c) a corporation, partnership, trust
or other company established by the transferor
exclusively for the benefit of (or owned exclusively
by) the transferor and the persons specified in (a)
and (b) of this sentence. A permitted transferee
will not be able to purchase additional Fund shares
unless the transferee then is a "qualified client".
The Trust reserves the right to involuntarily redeem
Fund shares in any account that falls below the
minimum initial investment due to redemptions by the
shareholder. If at any time the balance in an
account does not have a value at least equal to the
minimum initial investment, you may be notified that
the value of your account is below the Fund's
minimum account balance requirement. If you then
are a "qualified client", you would have sixty days
to increase your account balance before the account
is liquidated. Proceeds would be promptly paid to
the shareholder.
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REDEEMING You may redeem any portion of your account at any
SHARES time. Your redemption request must be made in
writing. Redemption proceeds normally will be sent
within two business days after the receipt of the
request in Good Order.
Redemption requests should be mailed to Royce Select
Fund, c/o NFDS, P.O. Box 419012, Kansas City, MO
64141-6012. (For express or registered mail, send
your request to Royce Select Fund, c/o National
Financial Data Services,
<PAGE>
1004 Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net
asset value next determined after NFDS or an
authorized service agent or sub-agent has received
all required documents in Good Order.
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. 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.
If you are redeeming shares recently purchased by
check, the proceeds of the redemption may not be
sent until payment for the purchase is collected,
which may take up to fifteen calendar days.
Otherwise, redemption proceeds must be sent to you
within seven days of receipt of your request in Good
Order.
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.
--------------------------------------------------------------
Redemption
Fee The Fund is designed for long-term investors. The
Fund will assess a redemption fee of 2% on
redemptions of share purchases held for less than
three years. Redemption fees will be paid to the
Fund, out of the redemption proceeds otherwise
payable to the shareholder.
The Fund will use the "first-in, first-out" (FIFO)
method to determine the three-year holding period.
Under this method, the date of the redemption will
be compared with the earliest purchase date of the
share purchases held in the account. If this
holding period is less than three years, the fee
will be assessed. In determining "three years," the
Fund will use the anniversary month of a
transaction. Thus, shares purchased in December
1998, for
<PAGE>
example, will be subject to the fee if
they are redeemed prior to December 2001. If they
are redeemed on or after December 1, 2001, they
will not be subject to the fee.
No redemption fee will be payable on shares acquired
through reinvestment or by shareholders who are
employees of the Trust or Royce or members of their
immediate families or employee benefit plans for
them.
- -----------------------------------------------------------------------------
DIVIDENDS, The Fund pays dividends from its net investment
DISTRIBU- income (if any) and distributes its net realized
TIONS capital gains annually in December. Dividends and
AND TAXES distributions will be automatically reinvested in
additional shares of the Fund unless the shareholder
chooses otherwise.
Shareholders receive information annually as to the
tax status of distributions made by the Fund for the
calendar year. For Federal income tax purposes, all
distributions by the Fund are taxable to
shareholders when declared, whether received in cash
or reinvested in shares. Distributions paid from
the Fund's net investment income and short-term
capital gains are taxable to shareholders as
ordinary income dividends. A portion of the Fund's
dividends may qualify for the corporate dividends
received deduction, subject to certain limitations.
The portion of the Fund's dividends qualifying for
such deduction is generally limited to the aggregate
taxable dividends received by the Fund from domestic
corporations. Distributions paid from long-term
capital gains of the Fund are treated by a
shareholder for Federal income tax purposes as long-
term capital gains, regardless of how long the
shareholder has held Fund shares.
If a shareholder disposes of shares held for six
months or less at a loss, such loss is treated as a
long-term capital loss to the extent of any long-
term capital gains reported by the shareholder with
respect to such shares. 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.
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 net
investment income or capital gains. A subsequent
distribution of these amounts by the Fund will be
taxable to the shareholder
<PAGE>
even though the distribution economically is a
return of part of the shareholder's investment.
The Fund is required to withhold 31% of taxable
dividends, capital gains distributions and
redemptions paid to non-corporate shareholders who
have not complied with Internal Revenue Service
taxpayer identification regulations. Shareholders
may avoid this withholding requirement by certifying
on the Account Application their proper Social
Security or Taxpayer Identification Number and that
they are not subject to backup withholding.
The discussion of Federal income taxes above is for
general information only. The Statement of
Additional Information includes a more detailed
description of Federal income tax aspects that may
be relevant to a shareholder. Shareholders may also
be subject to state and local taxes on income and
any gains from their investment. Investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Fund.
- -----------------------------------------------------------------------------
NET ASSET Shares are purchased and redeemed at their net asset
VALUE value per share next determined after an order is
PER SHARE 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.
- -----------------------------------------------------------------------------
INVESTMENT The Fund may include in communications to current or
PERFORMANCE 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
<PAGE>
future performance. Total returns assume
the reinvestment of all net
investment income dividends and capital gains
distributions. The figures used in such
communications (but not those used to compute the
performance fee payable by the Fund to Royce) would
reflect the Fund's redemption fee on redemptions of
share purchases held for less than three years.
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 (ii) averages,
performance rankings or other information prepared
by recognized mutual fund statistical services.
- -----------------------------------------------------------------------------
GENERAL The Royce Fund (the "Trust") is a Delaware business
INFORMATION trust, registered with the Securities and Exchange
Commission as a diversified open-end management
investment company. 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.
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.
State Street Bank and Trust Company is the custodian
of the securities, cash and other assets of the
Fund. State Street, through its agent National
Financial Data Services ("NFDS"), also serves as the
Fund's transfer agent. PricewaterhouseCoopers LLP
serves as independent accountants for the Fund.
Many computer software systems in use today cannot
properly process date-related information from and
after January 1, 2000. Should any of the computer
systems employed by the Fund or any or its major
service providers fail to process this type of
information properly, that could have a negative
impact on the Fund's operations and the services
provided to the Fund's shareholders. The Royce
Funds, Royce and RFS are reviewing all of their own
computer systems with the goal of modifying or
replacing such systems to the extent necessary to
prepare for the Year 2000. In addition, Royce has
been advised by the Fund's major service providers
that they are also in the process of reviewing their
systems with the same goal. As of the date of this
Prospectus, the Trust and Royce have no reason to
believe that these goals will not be achieved.
<PAGE>
THE ROYCE FUND
- --------------
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
INVESTMENT ADVISER
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
ROYCE
DISTRIBUTOR SELECT FUND
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 PROSPECTUS
State Street Bank and Trust ______ __, 1998
Company
P.O. Box 1713
Boston, MA 02105
OFFICERS
Charles M. Royce, President and
Treasurer
Jack E. Fockler, Jr., Vice
President
W. Whitney George, Vice
President
Daniel A. O'Byrne, Vice
President and
Assistant Secretary
John E. Denneen, Secretary
<PAGE>
ROYCE SELECT FUND ( )
ACCOUNT APPLICATION FORM
____________________________________________________________________
PLEASE READ THE INSTRUCTIONS ON THE REVERSE SIDE BEFORE YOU COMPLETE THIS
FORM
PLEASE DO NOT USE THIS APPLICATION TO OPEN A ROYCE FUND SPONSORED IRA ACCOUNT
Mail to: The Royce Funds c/o NFDS
PO Box 419012, Kansas City, MO 64141-6012
PLEASE PRINT, PREFERABLY WITH BLACK INK
1. ACCOUNT REGISTRATION (Check one box)
/ / Individual or Joint Account
___________________________________________________
Investor's Name: First, Initial, Last
________________________ ________-_______-__________
Investor's Date of Birth Owner's Social Security Number
___________________________________________________
Joint Investor's Name: First, Initial, Last
Joint accounts will be registered as joint tenants with right of survivorship
unless otherwise indicated.
/ / Trust (Including Corporate Retirement Plans)
___________________________________________________
Trustee Name(s)
___________________________________________________
Name of Trust or Retirement Plan
___________________________________________________
Date of Trust Agreement
___________________________________________________
For Benefit Of (Name)
___________________________________________
Social Security Number or Taxpayer ID Number
/ / Corporation, Partnership, Other Entity
Type: / / Corp. / / Partnership / / Other
(Specify_________________)
___________________________________________________
Name of Corporation or Other Entity
______-__________________
Taxpayer ID Number
2. MAILING ADDRESS
___________________________________________________
Street or PO Box Number
___________________________________________________
City State Zip
________________________ __________________________
Daytime Phone Evening Phone
3. ADVISER/DEALER INFORMATION
(Must be completed if Application is signed by Registered
Investment Adviser/Broker-Dealer)
___________________________________________________
Representative Name Rep. Number
___________________________________________________
Firm Phone
___________________________________________________
Address State Zip
4. INVESTOR QUALIFICATIONS
I hereby certify to The Royce Fund and to Royce & Associates, Inc.
("Royce") that the Investor is:
/ / an individual who, or a corporation, partnership, trust or other
company that, immediately prior to the initial and each subsequent
purchase of Royce Select Fund shares by or for the Investor, has a net
worth (together, in the case of an individual with assets held jointly
with a spouse) of more than $1,5000,000.
/ / an individual who, or a corporation, partnership, trust or other
company that, immediately after the initial and each subsequent
purchase by or for the Investor, owns Royce Select Fund shares having
a current net asset value of at least $750,000.
/ / a corporation, partnership, trust or other company that, immediately
prior to the initial and each subsequent purchase of Royce Select Fund
shares, manages on a discretionary basis more than $25,000,000 in
investments for its own account
and for the accounts of other "qualified purchasers" (as defined under
Section 2(a)(51) (A) of the Investment Company Act of 1940).
5. INITIAL INVESTMENT ($50,000 minimum initial investment)
Payment of initial investment:
/ / check enclosed
/ / wire investment (order #__________)
6. DIVIDEND AND CAPITAL GAIN PAYMENT OPTIONS (check one box)
If no box is checked, all net investment income dividends and capital gain
distributions will be reinvested.
/ / Reinvest both dividends and capital gain distributions
/ / Pay dividends in cash, reinvest capital gain distributions
/ / Pay dividends and capital gain distributions in cash
7. EXPRESS SERVICE
To arrange for Express Service, please provide the information below.
Passbook savings accounts are not eligible.
A VOIDED CHECK MUST BE ATTACHED
Please indicate the type of Express Service you wish to establish:
/ / Expedited Purchases and Redemptions: To purchase or redeem shares at any
time, using a bank account to clear the transaction ($100 minimum).
/ / Wire Redemptions: To have redemption proceeds wired to my commercial bank
($1,000 minimum).
8. ADDITIONAL REPRESENTATIONS/SIGNATURE
(Please be sure to carefully read and sign below)
I (We) represent and warrant to and agree with The Royce Fund and Royce that
I (we) will (a) not make any additional purchases of Royce Select Fund shares
if the response given in number 4 above is no longer accurate, (b) acquire
shares of Royce Select Fund solely for my (our) own account and not with a
view to transferring the shares and (c) not transfer any shares of Royce
Select Fund or any interest in such shares to any other individual or entity
except in those circumstances specifically permitted by the Fund's
Prospectus.
I (We) understand and have considered the fact that (a) the performance fee
payable to Royce may create an incentive for Royce to make investments that
are riskier or more speculative than would be the case in the absence of such
fee and (b) the compensation payable to Royce may result in total expenses
payable by Royce Select Fund that may be higher than the fees and other
expenses normally charged for similar services.
I am (we are) of legal age, have full capacity to make this investment, have
read the Prospectus for the Fund and agree to its terms. Neither the Fund
nor its transfer agent will be liable for any loss or expense for acting upon
written or telephone instructions reasonably believed to be genuine and in
accordance with the procedures described in the Prospectus.
As required by Federal law, I (we) certify under penalties of perjury that
(a) the Social Security or Taxpayer Identification Number provided above is
correct and (b) the IRS has never notified me (us) that I am (we are) subject
to 31% backup withholding or has notified me (us) that I am (we are) no
longer subject to such backup withholding. (Note: if part (b) of this
sentence is not true in your case, please strike out that part before
signing.)
Check One:
/ / U.S. Citizen / / Resident Alien / / Non-Resident Alien
___________________________________________________________
Signature of Investor, Trustee or Custodian Date
__________________________________________________________
Signature of Joint Investor or Co-trustee (if any) Date
___________________________________________________________
Signature of Adviser/Dealer as attorney-in-fact for Investor or
Investors
<PAGE>
ACCOUNT APPLICATION INSTRUCTIONS
If you need assistance in completing this form, please call us at (800) 221-
4268. This form cannot be used to open a Royce Fund sponsored IRA account.
Please call us to receive the appropriate retirement application forms.
1. ACCOUNT REGISTRATION
Please provide the information exactly as you wish it to appear on your
account (e.g., as your name appears on your other legal/financial records
such as your bank account, will, etc.). Please provide your Taxpayer
Identification Number to avoid withholding of taxes. For most individuals,
this is your Social Security Number.
2. MAILING ADDRESS
Please provide your complete mailing address.
3. ADVISER/DEALER INFORMATION
This section should be completed by your financial adviser or dealer if
applicable.
4. INVESTOR QUALIFICATIONS
You must meet one of the three tests for qualifying as an investor in order
to purchase shares of Royce Select Fund.
5. INITIAL INVESTMENT
Please indicate the dollar amount you wish to invest in Royce Select Fund.
Minimum initial investment in any Fund is $50,000. Checks should be made
payable to Royce Select Fund.
6. DIVIDEND AND CAPITAL GAIN PAYMENT OPTIONS
All distributions will be reinvested if a box is not checked.
7. EXPRESS SERVICE
Express Service is a convenient way to purchase or sell shares automatically
or at your discretion. You may choose from the following Express Service
options:
/ / Expedited Purchases and Redemptions - enables you to transfer up to
$200,000 on a purchase or $50,000 on a redemption between your Royce Fund
account and your bank account with a toll-free telephone call.
/ / Wire Redemptions - allows for redemption proceeds to be wired to your
commercial bank. Institutional investors must attach wire instructions in
lieu of a voided check.
To arrange for Express Service, you must check the appropriate box and attach
a voided check. Passbook accounts are not eligible for Express Service, and
your bank must be a member of the Automated Clearing House (ACH) network.
Please be sure to specify the amount of the investment/withdrawal and the
transaction date. You may not establish both an Automatic Investment Plan
and an Automatic Withdrawal Plan on the same account. Expedited Purchases
and Redemptions may be established with either of the automatic plans. A
signature guarantee may be required if your bank registration does not match
your Royce Select Fund account registration. A signature guarantee may be
obtained from a bank, broker or other guarantor that NFDS deems acceptable.
Please allow 3 weeks for set up before using Express Service.
8. ADDITIONAL REPRESENTATIONS/SIGNATURE
Please sign exactly as your name is registered in Section 1. Both investors
must sign on joint accounts. Advisers/Dealers may sign on behalf of
investors as attorney-in-fact.
Royce Select Fund
_______________________________________________________________
Account Application Form
_______________________________________________________________
<PAGE>
[BEGIN RED HERRING]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This statement of additional information does not
constitute a prospectus.
[END RED HERRING]
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 ten portfolios or series. Three of
the ten series, Pennsylvania Mutual Fund, Royce Micro-Cap Fund and Royce
GiftShares Fund, offer two classes of shares, an Investment Class and a
Consultant Class. Unless specifically noted, all references to a particular
series relate to that series' Investment 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 ten series
are:
PENNSYLVANIA MUTUAL FUND ROYCE FINANCIAL SERVICES FUND
ROYCE PREMIER FUND PMF II
ROYCE MICRO-CAP FUND ROYCE SPECIAL EQUITY FUND
ROYCE LOW-PRICED STOCK FUND ROYCE SELECT FUND
ROYCE GIFTSHARES FUND
ROYCE TOTAL RETURN FUND
This Statement of Additional Information relates to all of the
series (each a "Fund" and collectively the "Funds").
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, 1998, except for Royce Select Fund (dated September __,
1998). 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, 1997 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
, 1998
TABLE OF CONTENTS
Page Page
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS................22
LIMITATIONS............. 2 PORTFOLIO TRANSACTIONS................ 22
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS.......... 6 MATTERS...............................24
MANAGEMENT OF THE TRUST.... 11 PRICING OF SHARES BEING OFFERED...... 24
PRINCIPAL HOLDERS OF SHARES...14 REDEMPTIONS IN KIND....................25
INVESTMENT ADVISORY TAXATION...............................25
SERVICES.................. 17 DESCRIPTION OF THE TRUST...............31
DISTRIBUTOR...................19 PERFORMANCE DATA.......................33
CUSTODIAN.....................21
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement those set
forth in the Funds' Prospectuses. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of a Fund's
assets that may be invested in any security or other asset or sets forth a
policy regarding quality standards, the percentage limitation or standard
will be determined immediately after giving effect to the Fund's acquisition
of the security or other asset. Accordingly, any subsequent change in values,
net assets or other circumstances will not be considered in determining
whether the investment complies with the Fund's investment policies and
limitations.
A Fund's fundamental investment policies cannot be changed without the
approval of a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940 (the "1940 Act")) of the Fund. Except
for the fundamental investment restrictions set forth below, the investment
policies and limitations described in this Statement of Additional
Information are operating policies and may be changed by the Board of
Trustees without shareholder approval. However, shareholders will be
notified prior to a material change in an operating policy affecting their
Fund.
No Fund may, as a matter of fundamental policy:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may borrow money
from banks as 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 Financial Services Fund,
which is not subject to any such limitation, and for PMF II
and Royce Special Equity Fund, each of which may invest up to
25% of its total assets in such securities);
7. Invest in restricted securities (except for Royce Financial
Services Fund and PMF II, each of which may invest up to 15%
of its net assets in illiquid securities, including restricted
securities) or in repurchase agreements which mature in more
than seven days;
8. Invest more than 10% (15% for Royce Financial Services Fund,
PMF II and Royce Special Equity Fund) of its assets in
securities without readily available market quotations (i.e.,
illiquid securities) (except for Pennsylvania Mutual Fund,
which is not subject to any such limitation);
<PAGE>
9. Invest, with respect to 75% of its total assets, more than 5%
of its 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 (except
for Royce Financial Services Fund, which may invest more than
25% of its assets in the financial services 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, PMF II and Royce Special Equity
Fund, which may invest in such companies as set forth below,
and except for Royce Financial Services Fund, which may invest
in such 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% (15%, in the case of PMF II) 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.
<PAGE>
Royce Special Equity Fund may not, as a matter of operating policy:
1. Invest more than 5% of its assets in the securities
of foreign issuers; or
2. Invest more than 5% of its assets in securities for
which market quotations are not readily available; or
3. Invest more than 5% of its assets in the securities
of other investment companies.
As a matter of operating policy, the Trust is interpreting Fundamental
Policy No. 8 to preclude any Fund from investing more than 10% (15% for
Pennsylvania Mutual Fund, Royce Financial Services Fund, PMF II and Royce
Special Equity Fund) of its net assets in illiquid securities.
Pennsylvania Mutual Fund
PMF II
Royce Special Equity Fund
Pennsylvania Mutual Fund and PMF II may each invest up to 25%, and Royce
Special Equity Fund may invest up to 5%, of the value of their total assets
in the securities of other investment companies (open or closed-end),
including up to 5% of their total assets in the securities of any one other
investment company, provided that the Funds and all affiliated persons of the
Funds do not invest in more than 3% of the total outstanding stock of any one
such 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 from any one Fund in an amount
exceeding 1% of such issuers' total outstanding securities during any period
of less than thirty days, and Pennsylvania Mutual Fund, PMF II and Royce
Special Equity Fund 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, PMF II nor Royce Special Equity Fund
has any current intention of investing in the securities of any open-end
investment companies.
Royce Financial Services Fund
Financial Services Fund may invest in the securities of a company that
is engaged in securities related activities, such 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;
<PAGE>
(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.
Financial Services Fund is not permitted to acquire a general
partnership interest or a security issued by its investment adviser or
principal underwriter or any affiliated person of its investment adviser or
principal underwriter.
Financial Services Fund may invest up to 20% of its assets in the
securities of other investment companies, provided that (i) the Fund and all
affiliated persons of the Fund do not invest in more than 3% of the total
outstanding stock of any one such company and (ii) the Fund does not offer or
sell its shares at a public offering price which includes a sales load of
more than 1 1/2%. (The 20% and 3% limitations do not apply to securities
received as dividends, through offers of exchange or as a result of a
reorganization, consolidation or merger.) The other investment company is not
obligated to redeem those of its securities held by the Fund in an amount
exceeding 1% of its total outstanding securities during any period of less
than thirty days, and the Fund will be obligated to exercise voting rights
with respect to any such security by voting the securities held by it in the
same proportion as the vote of all other holders of the security.
Financial Services Fund does not currently intend to invest more than 5%
of its assets in the securities of any one other investment company, to
purchase securities of other investment companies (except in the open market
where no commission other than the ordinary broker's commission is paid) or
to purchase or hold securities issued by other open-end investment companies
(except for cash collateral received in connection with its securities
lending activities and invested in the money market funds of its custodian
bank).
Royce Financial Services Fund
PMF II
Financial Services Fund and PMF II will not invest more than 15% of
their net assets 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
<PAGE>
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.
<PAGE>
Securities Lending
Each Fund may lend up to 25% of its assets to brokers, dealers and other
financial institutions. Securities lending allows the Fund to retain
ownership of the securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to parties that participate in a Global
Securities Lending Program monitored by the Funds' custodian and who are
deemed by it to be of good standing. Furthermore, such loans will be made
only if, in 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% (15% for PMF II) 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 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
<PAGE>
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 Financial 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 Royce Special Equity Fund) in the securities of foreign issuers.
Foreign investments involve certain risks which typically are not present in
securities of domestic issuers. There may be less information available
about a foreign company than a domestic company; foreign companies may not be
subject to accounting, auditing and reporting standards and requirements
comparable to those applicable to domestic companies; and foreign markets,
brokers and issuers are generally subject to less extensive government
regulation than their domestic counterparts. Foreign securities may be less
liquid and may be subject to greater price volatility than domestic
securities. Foreign brokerage commissions and custodial fees are generally
higher than those in the United States. Foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, thereby making it difficult to conduct such
transactions. Delays or problems with settlements might affect the liquidity
of a Fund's portfolio. Foreign investments may also be subject to local
economic and political risks, political, economic and social instability,
military action or unrest or adverse diplomatic developments, and possible
nationalization of issuers or expropriation of their assets, which might
adversely affect a Fund's ability to realize on its investment in such
securities. There is no assurance that Royce will be able to anticipate
these potential events or counter their effects. Furthermore, some foreign
securities are subject to brokerage taxes levied by foreign governments,
which have the effect of increasing the cost of such investment and reducing
the realized gain or increasing the realized loss on such securities at the
time of sale.
Although Fund's foreign investments may be adversely affected by changes
in foreign currency rates, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to
lock in the value of any foreign securities they purchase. Consequently, the
risks associated with such investments may be greater than if the Fund were
to engage in foreign currency transactions for hedging purposes.
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.
<PAGE>
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, provided that such agreements are collateralized by cash
or securities issued by the U.S. Government or its agencies. While it does
not presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to the Fund in connection
with bankruptcy proceedings), it is the policy of the Trust to enter into
repurchase agreements only with its custodian, State Street Bank and Trust
Company, and having a term of seven days or less.
<PAGE>
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, 1997 and the period from November 19,
1996 (commencement of operations) through December 31, 1996, PMF II's
portfolio turnover rates were 77% and 1%, respectively. The Fund's portfolio
turnover rate for its start-up period in 1996 was 1% because the Fund was
then investing its initial cash and did no significant selling of portfolio
securities during this period.
* * *
Royce believes that Pennsylvania Mutual, Micro-Cap, Low-Priced Stock,
GiftShares and Financial Services Funds, PMF II and Royce Special Equity Fund
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.
<PAGE>
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee
and officer of the Trust:
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
President, Managing Director
Charles M. Royce* Trustee, (since April 1997), Secretary,
(59) President Treasurer, sole director and
1414 Avenue of and sole voting shareholder of
the Treasurer Royce & Associates, Inc.
Americas ("Royce"), formerly named Quest
New York, NY Advisory Corp., the Trust's and
10019 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") 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 Manage-ment
Company ("RMC"), formerly named
Quest Management Company, a
registered investment adviser,
and its predecessor.
Hubert L. Cafritz Trustee Financial consultant.
(75)
9421 Crosby Road
Silver Spring, MD
20910
Donald R. Dwight Trustee President of Dwight Partners,
(67) Inc.; Chairman (until 1998) and
16 Clover Mill Chairman Emeritus (since 1998)
Lane of Newspapers of New England,
Lyme, NH 03768 Inc.
Richard M. Galkin Trustee Private investor and President
(60) of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Boca Raton, FL consultants.
33487
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
Stephen L. Isaacs Trustee President of The Center for
(59) Health and Social Policy since
845 25th Avenue September 1996; President of
San Francisco, CA Stephen L. Isaacs Associates,
94121 Consultants; and Director of
Columbia University Development
Law and Policy Program;
Professor at Columbia University
until August 1996.
William L. Koke Trustee Registered investment adviser
(64) and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT
06498
David L. Meister Trustee Consultant to the communications
(58) industry.
111 Marquez Place
Pacific
Palisades, CA
90272
Jack E. Fockler, Vice Managing Director (since April
Jr.* (39) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1989; Vice
Americas President of RGT (since October
New York, NY 1996), RCF (since December 1996)
10019 and the other Royce Funds (since
April 1995); Vice President of
RFS (since November 1995); and
general partner of RMC.
W. Whitney Vice Managing Director (since April
George* (40) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1991; Vice
Americas President of RCF (since December
New York, NY 1996); Vice President of RGT
10019 (since October 1996) and of the
other Royce Funds (since April
1995); and general partner of
RMC.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (36) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the Assistant Vice President of RGT (since
Americas Secretary October 1996), of RCF (since
New York, NY December 1996) and of the other
10019 Royce Funds (since July 1994).
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
John E. Denneen* Secretary Associate General Counsel and
(31) Chief Compliance Officer of
1414 Avenue of Royce (since May 1996);
the Secretary of RGT (since October
Americas 1996), of RCF (since December
New York, NY 1996) and of the other Royce
10019 Funds (since June 1996); and
Associate of Seward & Kissel
prior 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 and RCF, and all of them (other than
Mr. Cafritz) are also directors of RGT.
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 accountants of the Funds and for conducting
post-audit reviews of the Funds' financial conditions with such auditors.
For the year ended December 31, 1997, 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:
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
- ---- ----------- ---------------------- -------------------------
Hubert L. Cafritz $37,000 N/A $37,000
Trustee
Richard M. Galkin, 37,000 N/A 65,000
Trustee
Stephen L. Isaacs, 37,000 N/A 65,000
Trustee
William L. Koke, 37,000 N/A 38,125
Trustee
<PAGE>
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
- ---- ----------- ---------------------- -------------------------
David L. Meister, 37,000 N/A 65,000
Trustee
John D. Diederich 106,590 $10,032 N/A
Director of
Administration
PRINCIPAL HOLDERS OF SHARES
As of July 31, 1998, the following persons were known to the Trust to be
the record or beneficial owners of 5% or more of the outstanding shares of
certain of its Funds:
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Pennsylvania Mutual Fund
Investment Class
Charles Schwab & Co., Inc. 10,432,768 Record 17.52%
101 Montgomery Street
San Francisco, CA 94104-4122
Laird Lorton Trust Company C/F 4,281,713 Record 7.19%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Royce Premier Fund
Charles Schwab & Co., Inc. 30,554,743 Record 48.57%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Micro-Cap Fund
Investment Class
Charles Schwab & Co., Inc. 6,774,768 Record 34.33%
101 Montgomery Street
San Francisco, CA 94104-4122
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Northern Trust TTEE 1,049,205 Record 5.07%
FBO Archdiocese of Chicago
P.O. Box 92956
Chicago, IL 60675-2956
Royce Micro-Cap Fund
Consultant Class
Donaldson Lufkin Jenrette 8,291 Record 11.70%
Securities Corp. Inc.
P.O. Box 2052
Jersey city, NJ 07303-2052
McDonald & Co. Securities Inc. 59,289 Record 83.00%
FBO James M. Varin IRA
2336 Turnberry LN
Ft. Wayne, IN 46804-9355
Royce Low-Priced Stock Fund
Charles Schwab & Co., Inc. 1,377,677 Record 42.31%
101 Montgomery Street
San Francisco, CA 94104-4122
Charles M. Royce 224,884 Record and 6.90%
Royce Management Company Beneficial
8 Soundshore Drive
Greenwich, CT 06830
Royce GiftShares Fund
Investment Class
W. Whitney George, Trustee 155,641 Record and 20.21%
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
Royal Total Return Fund
Charles Schwab & Co. Inc. 8,800,781 Record 40.15%
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Royce Financial Services Fund
Charles M. Royce 187,010 Record and 47.98%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
National City Bank PA CUST 59,388 Record 15.22%
Reed Smith Shaw & McClay PPS
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101-4777
Bruce Museum Inc. 50,088 Record and 12.84%
Museum Drive Beneficial
Greenwich, CT 06830
Charles Schwab & Co. Inc. 50,334 Record 12.90%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
PMF II
Charles Schwab & Co. Inc. 748,868 Record 15.77%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Charles M. Royce 258,859 Record 5.45%
c/o Royce Management Company
8 Sound Shore Drive
Greenwich, CT 06830-7242
Royce Special Equity Fund
Kinco & Co. FBO 5686 101,215 Record 34.40%
c/o Republic National Bank of NY
One Hanson Place
Brooklyn, NY 11243-2900
Charles R. Dreifus 65,121 Record and 22.13%
1414 Avenue of the Americas Beneficial
New York, NY 10019
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Charles M. Royce 50,100 Record 17.03%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
As of July 31, 1998 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 and Total Return Funds, approximately 1%
of the outstanding shares of Royce Micro-Cap Fund, approximately 5.7% of the
outstanding shares of Royce Low-Priced Stock Fund, approximately 20.2% of the
outstanding shares of Royce GiftShares Fund, approximately 49.7% of the
outstanding shares of Royce Financial Services Fund, approximately 8.7% of
the outstanding shares of PMF II, approximately 39.2% of the outstanding
shares of Royce Special Equity Fund and 100% of the outstanding shares of
Royce Select Fund.
INVESTMENT ADVISORY SERVICES
Services Provided by Royce
As compensation for its services under the Investment Advisory
Agreements with the Funds listed below, Royce is entitled to receive the
following fees:
Percentage Per Annum
Fund of Fund's Average Net Assets
---- ----------------------------
Pennsylvania Mutual Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Premier Fund 1.00%
Royce Micro-Cap Fund 1.50%
Royce Low-Priced Stock Fund 1.50%
Royce GiftShares Fund 1.25%
Royce Total Return Fund 1.00%
Royce Financial Services Fund 1.50%
PMF II 1.00%
Royce Special Equity Fund 1.00%
Such fees are payable monthly from the assets of the Fund involved and, in
the case of Pennsylvania Mutual Fund and Royce Micro-Cap and GiftShares
Funds, are allocated between the Investment and Consultant Classes of their
shares based on their relative net assets.
Under such 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
<PAGE>
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 with respect to the above-
listed Funds, 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.
Under the Investment Advisory Agreement for Royce Select Fund, such Fund
will pay Royce a performance fee. See "Management of the Fund" in Royce
Select Fund's prospectus for further information concerning the performance
fee and other material terms of such Investment Advisory Agreement.
For each of the three years ended December 31, 1995, 1996 and 1997, 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:
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Pennsylvania Mutual Fund
1995 $ 5,361,354 88,173
1996 4,104,694 198,074
1997 4,379,842 -
Royce Premier Fund
1995 $ 2,603,445 6,279
1996 2,838,340 65,000
1997 4,319,656 -
Royce Micro-Cap Fund
1995 $ 804,905 14,047
1996 1,792,264 96,036
1997 1,937,727 511,724
Royce Low-Priced Stock Fund
1995 $ 6,174 31,425
1996 122,045 51,828
1997 146,709 108,828
<PAGE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce GiftShares Fund
1995* $ 0 $ 86
1996 0 7,866
1997 0 19,859
Royce Total Return Fund
1995 $ 12,027 9,947
1996 12,189 28,758
1997 444,718 93,398
Royce Financial Services Fund
1995 $ 0 20,261
1996 0 29,185
1997 4,322 28,934
PMF II
1996** $ 0 $ 12,215
1997 84,743 114,508
__________
* December 27, 1995 (commencement of operations) to December 31, 1995
** November 19, 1996 (commencement of operations) to December 31, 1996
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, Royce Micro-Cap Fund's and Royce GiftShares Fund's Consultant
Classes, 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 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, Royce Micro-Cap Fund's and Royce
GiftShares Fund's Consultant Classes and of any contingent deferred sales
charges that may be imposed on redemptions of such shares. Currently each of
Pennsylvania Mutual Fund's and Royce Micro-Cap Fund's Consultant Class shares
bear a 1% contingent deferred sales charge on
<PAGE>
shares redeemed within one year of their purchase. 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 Fund, Royce Micro-Cap Fund's and Royce GiftShares Fund's
Investment Classes 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
<PAGE>
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.
RFS has temporarily waived the distribution fees payable to it by Royce
Low-Priced Stock, Total Return and Financial Services Funds and PMF II.
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.
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.
<PAGE>
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. Best price and execution is comprised
of several factors, including the liquidity of the security, the commission
charged, the promptness and reliability of execution, priority accorded the
order and other factors affecting the overall benefit obtained. 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. Brokers that provide both research and execution
services are generally paid higher commissions than those paid to brokers who
do not provide such research and execution services. Royce determines the
overall fairness 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, in accordance with 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
<PAGE>
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, generally using the average net price
obtained by accounts with the same primary portfolio manager. 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, 1995, 1996 and 1997,
the Funds paid brokerage commissions as follows:
Fund 1995 1996 1997
- ---- ---- ---- ----
Pennsylvania Mutual Fund $683,334 $935,022 $375,095
Royce Premier Fund 419,040 429,150 583,759
Royce Micro-Cap Fund 117,909 295,737 246,667
Royce Low-Priced Stock Fund 22,645 114,456 100,845
Royce GiftShares Fund 760* 3,555 8,178
Royce Total Return Fund 6,117 21,379 127,534
Royce Financial Services Fund 6,199 6,872 5,511
PMF II - 29,490** 66,857
______________
* For the period from December 27, 1995 (commencement of operations) to
December 31, 1995
** For the period from November 19, 1996 (commencement of operations) to
December 31, 1996
For the year ended December 31, 1997, 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:
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Pennsylvania Mutual Fund $ 49,578,098 $ 152,535
Royce Premier Fund 68,332,674 214,659
Royce Micro-Cap Fund 15,195,902 63,715
Royce Low-Priced Stock Fund 3,306,908 20,800
Royce GiftShares Fund 553,720 1,871
Royce Total Return Fund 16,634,611 51,345
Royce Financial Services Fund 932,935 2,381
PMF II 5,566,684 19,318
<PAGE>
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., W. Whitney George, Boniface A. Zaino and/or other Royce-related persons
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 March 31, 1998, 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 over $37 million, and Royce's and RMC's equity interests in
Royce related private investment companies totalled approximately $3.1
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, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
<PAGE>
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which would, in
the judgment of the Board of Trustees or management, make it undesirable for
a Fund to pay for all redemptions in cash. In such cases, payment may be
made in portfolio securities or other property of the Fund. However, the
Trust has obligated itself under the 1940 Act to redeem for cash all shares
presented for redemption by any one shareholder up to $250,000 (or 1% of the
Trust's net assets if that is less) in any 90-day period. Securities
delivered in payment of redemptions would be 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 has qualified and intends 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
<PAGE>
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. In the event that the Fund makes a mark to market election for the
current taxable year, then any resulting gain would be reported as ordinary
income, and any resulting loss would not be recognized. However, if such
election is made for any taxable year beginning after December 31, 1997,
then any resulting gain or loss is reportable as ordinary income or loss.
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
<PAGE>
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, during a 90 day period beginning 45 days before and ending 45 days
after the Fund is entitled to receive such dividends, 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, 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. Capital gain distributions by the Fund, although fully includible
in income currently are taxed at a lower maximum marginal Federal income tax
rate than ordinary income in the case of non-corporate shareholders. Such
long term capital gains are generally taxed at maximum marginal rates of
either 28% or 20% depending, in part, on the holding period and the date of
sale of the Fund's investments which generated the related gains.
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
<PAGE>
shareholder is not subject to back-up withholding due to notification by the
Internal Revenue Service that such shareholder has under-reported interest or
dividend income. When establishing an account, an investor must certify
under penalties of perjury that such investor's taxpayer identification
number is correct and that such investor is not subject to or is exempt from
back-up withholding.
Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities will be subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding
exemption is provided under an applicable treaty. Non-U.S. shareholders are
urged to consult their own tax advisers concerning the United States tax
consequences to them of investing in a Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, a Fund's net asset value may
reflect undistributed income or capital gains or net unrealized appreciation
of securities held by the Fund. A subsequent distribution to the investor of
such amounts, although it may in effect constitute a return of his or its
investment in an economic sense, would be taxable to the shareholder as
ordinary income or capital gain as described above. Investors should
carefully consider the tax consequences of purchasing Fund shares just prior
to a distribution, as they will receive a distribution that is taxable to
them.
Sales or Redemptions of Shares
Gain or loss recognized by a shareholder upon the sale, redemption or
other taxable disposition of Fund shares (provided that such shares are held
by the shareholder as a capital asset) will be treated as capital gain or
loss, measured by the difference between the adjusted basis of the shares and
the amount realized on the sale or exchange. For taxable dispositions of
shares after July 28, 1997, gains for noncorporate shareholders will be taxed
at a maximum Federal rate of 20% (20% rate gain) for shares held for more
than 18 months; 28% (28% rate gain) for shares held for more than 12 months
but for 18 months or less; and 39.6% (ordinary income rate) for shares held
for 12 months or less. For regular corporations, the maximum Federal rate on
all income is 35%. 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
<PAGE>
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 (i) he or she makes gifts
(including the gift of Fund shares) totaling more than the amount of the
Federal annual gift tax exclusion (currently, $10,000) to the same individual
during that year or, (ii) the Donor and his or her spouse elects to have any
gifts by either of them treated as "split gifts" (i.e. treated as having been
made one-half by each of them for gift tax purposes) or (iii) the Donor 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.
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.
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
applicable exclusion amount (currently $625,000 in 1998, $650,000 in 1999 and
eventually in uneven stages, to $1,000,000 in 2006). 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 of those that do follow the
Federal rules concerning the types of transfers subject to tax and the
availability of the annual exclusion.
<PAGE>
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. 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
"intermediate term" (12 to 18 month holding period) capital gains and long-
term capital gains equal to the highest marginal Federal income tax rate
imposed on each type of income (currently, 39.6%, 28% and 20%, 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 (subject, in
certain instances, to approval by the Beneficiary's Representative), 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
<PAGE>
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, $8,350) 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 20%. 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.
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.
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
<PAGE>
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, Royce Micro-Cap Fund, and Royce GiftShares
Fund each have 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.
On June 17, 1997, Pennsylvania Mutual Fund and Royce Total Return Fund
acquired all of the assets and assumed all of the liabilities of Royce Value
Fund and Royce Equity Income Fund, respectively. The acquisitions were
accomplished by exchanging shares of Pennsylvania Mutual Fund's Consultant
Class and of Royce Total Return Fund equal in value to the shares of Royce
Value Fund and Royce Equity Income Fund owned by each of their respective
shareholders.
On November 25, 1997, Royce Global Services Fund changed its investment
objective and, in connection therewith, its name to Royce Financial Services
Fund.
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.
<PAGE>
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.
<PAGE>
In addition to average annual total returns, a Fund's 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.
Period Ended
Fund December 31, 1997 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Pennsylvania Mutual Fund (Investment Class)
1 Year Total Return 25.0% 22.4% 33.4%
5 Year Average Annual Total Return 13.1 16.4 20.3
10 year Average Annual Total Return 13.8 15.8 18.1
Pennsylvania Mutual Fund (Consultant Class)
Cumulative Annual Total Return since 6-18-97 12.0% 12.2% 9.5%
(commencement of sale of Consultant Class
shares)
Royce Premier Fund
1 Year Total Return 18.4% 22.4% 33.4%
5 Year Average Annual Total Return 15.2 16.4 20.3
Average Annual Total Return since 12-31-91 15.3 16.7 18.1
(commencement of operations)
<PAGE>
Period Ended
Fund December 31, 1997 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Micro-Cap Fund
1 Year Total Return 24.7% 22.4% 33.4%
5 Year Average Annual Total Return 17.1 16.4 20.3
Average Annual Total Return since 12-31-91 19.0 16.7 18.1
(commencement of operations)
Royce Low-Priced Stock Fund
1 Year Total Return 19.5% 22.4% 33.4%
Average Annual Total Return since 12-15-93 16.5 16.6 23.0
(commencement of operations)
Royce GiftShares Fund (Investment Class)
1 Year Total Return 26.0% 22.4% 33.4%
Average Annual Total Return since 12-27-95 25.7 19.8 28.1
(commencement of operations)
Royce GiftShares Fund (Consultant Class)
Cumulative Annual Total Return since 9-26-97 1.5% -2.3% 3.9%
(commencement of sale of Consultant Class
shares)
Royce Total Return Fund
1 Year Total Return 23.7% 22.4% 33.4%
Average Annual Total Return since 12-15-93 19.7 16.6 23.0
(commencement of operations)
Royce Financial Services Fund
1 Year Total Return 19.4% 22.4% 33.4%
Average Annual Total Return since 12-15-94 18.6 23.5 31.1
(commencement of operations)
PMF II
1 Year Total Return 20.8% 22.4% 33.4%
Average Annual Total Return since 11-19-96 24.0 25.0 29.5
(commencement of operations)
During the applicable period ended December 31, 1997, a hypothetical
$10,000 investment in certain of the Funds would have grown as indicated
below, assuming all distributions were reinvested:
<PAGE>
Fund/Period Commencement Date Hypothetical Investment at December 31, 1997
- ----------------------------- --------------------------------------------
Pennsylvania Mutual Fund (12-31-77) $200,856
Royce Premier Fund (12-31-91) 23,461
Royce Micro-Cap Fund (12-31-91) 28,426
Royce Low-Priced Stock Fund (12-15-93) 18,551
Royce GiftShares Fund (12-27-95) 15,584
Royce Total Return Fund (12-15-93) 20,698
Royce Financial Services Fund (12-15-94) 16,790
PMF II (11-19-96) 12,795
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, 1997
were:
Fund Lipper Ranking
---- --------------
Pennsylvania Mutual Fund 163 out of 470 small-cap funds
Royce Premier Fund 298 out of 470 small-cap funds
Royce Micro-Cap Fund 21 out of 34 micro-cap funds
Royce Low-Priced Stock Fund 271 out of 470 small-cap funds
Royce GiftShares Fund 148 out of 470 small-cap funds
Royce Total Return Fund 186 out of 470 small-cap funds
Royce Financial Services Fund 35 out of 190 global funds
PMF II 239 out of 470 small-cap funds
Money market funds and municipal funds are not included in the Lipper survey.
The Lipper performance analysis ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees payable by shareholders into consideration and is prepared
without regard to tax consequences.
The Lipper General Equity Funds Average can be used to show how the
Funds' performances compare to a broad-based set of equity funds. The Lipper
General Equity Funds Average is an average of the total returns of all equity
funds (excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of December 31,
1997, the average included 248 capital appreciation funds, 944 growth funds,
284 mid-cap funds, 566 small company growth funds, 43 micro-cap funds, 710
growth and income funds, 208 equity income funds and 85 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
<PAGE>
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 November 30, 1997, DFA U.S. 9-10 Small
Company Fund contained approximately 2,881 stocks, with a median market
capitalization of about $142 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, 1997, the
weighted mean market value of a company in this Index was approximately
$923.5 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.
<PAGE>
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, 1997, the
average risk score for the 1,646 domestic equity funds rated by Morningstar
with a three-year history was 1.08; the average risk score for the 324 small
company funds rated by Morningstar with a three-year history was 1.49. For
the three years ended December 31, 1997, 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 category were as follows:
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Pennsylvania 0.70 Within lowest 22% Within lowest 11%
Mutual (In-
vestment
Class)
Premier 0.67 Within lowest 16% Within lowest 10%
Micro-Cap 0.97 Within lowest 57% Within lowest 26%
<PAGE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Low-Priced
Stock 1.24 Within lowest 72% Within lowest 42%
Total Return 0.20 Within top 1%
Financial Ser-
vices 0.86 Within lowest 49%
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
<PAGE>
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.
Return Per Unit of Risk. This is a measure of a fund's risk adjusted
return and is calculated by dividing a fund's average annual total return by
its annualized standard deviation over a designated time period.
Beta. Beta measures the sensitivity of a security's or portfolio's
returns to the market's returns. It measures the relationship between a
fund's excess return (over 3-month T-bills) and the excess return of the
benchmark index (S&P 500 for domestic equity funds). The market's beta is by
definition equal to 1. Portfolios with betas greater than 1 are more volatile
than the market, and portfolios with betas less than 1 are less volatile than
the market. For example, if a portfolio has a beta of 2, a 10% market excess
return would be expected to result in a 20% portfolio excess return, and a
10% market loss would be expected to result in a 20% portfolio loss
(excluding the effects of any firm-specific risk that has not been eliminated
through diversification).
Morningstar Risk. The Morningstar proprietary risk statistic evaluates
a fund's downside volatility relative to that of other funds in its class
based on the underperformances of the fund relative to the riskless T-bill
return. It then compares this statistic to those of other funds in the same
broad investment class.
Sharpe Ratio. Also known as the Reward-to-Variability Ratio, this is
the ratio of a fund's average return in excess of the risk-free rate of
return ("average excess return") to the standard deviation of the fund's
excess returns. It measures the returns earned in excess of those that could
have been earned on a riskless investment per unit of total risk assumed.
Treynor Ratio. Also known as the Reward-to-Volatility Ratio, this is
the ratio of a fund's average excess return to the fund's beta. It measures
the returns earned in excess of those that could have been earned on a
riskless investment per unit of market risk assumed. Unlike the Sharpe
Ratio, the Treynor Ratio uses market risk (beta), rather than total risk
(standard deviation), as the measure of risk.
Jensen's Alpha. This is the difference between a fund's actual returns
and those that could have been earned on a benchmark portfolio with the same
amount of risk - i.e., the same beta, as the portfolio. Jensen's Alpha
measures the ability of active management to increase returns above those
that are purely a reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Ratings may change monthly. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars (highest).
Morningstar ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are adjusted for fees
and sales loads. Ten percent of the funds in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive
two stars and the bottom 10% receive one star.
<PAGE>
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
<PAGE>
- ------------------------------------------------------------------------------
APPENDIX A: BOND RATINGS
- ------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment some
time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated BA are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Unrated: When no rating has been assigned or when a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the
following:
1. An application for rating for not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory analysis; if
there is no longer available reasonable up-to-date data to permit a judgment
to be formed; if a bond is called for redemption; or for other reasons.
The modifier 1 indicates that the bond ranks in the higher end of
its generic category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its rating
category.
Standard & Poor's
AAA: Bonds rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated AA have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC
<PAGE>
the highest
degree of speculation. While such bonds likely will have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C: The C rating is reserved for income bonds on which no interest
is being paid.
D: Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from AA to B may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Financial Statements Included in Prospectuses (Part A):
Financial Highlights of Pennsylvania Mutual Fund's
Investment Class for the ten years ended December 31, 1997
(audited), and Pennsylvania Mutual Fund's Consultant Class for
the period from June 18, 1997 through December 31, 1997
(audited), of Royce Premier Fund for the five years ended
December 31, 1997 (audited), of Royce Micro-Cap Fund for the
five years ended December 31, 1997 (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, 1997 (audited), of Royce
GiftShares Fund's Investment Class for the period from
December 27, 1995 through December 31, 1995 (unaudited) and
the two years ended December 31, 1997 (audited), and Royce
GiftShares Fund's Consultant Class for the period from
September 26, 1997 through December 31, 1997 (audited), of
Royce Financial Services Fund for the period from December 15,
1994 through December 31, 1994 (unaudited) and the three
years ended December 31, 1997 (audited) and of PMF II for the
period from November 19, 1996 through December 31, 1996
(audited) and the year ended December 31, 1997 (audited).
The following audited financial statements, including the schedules of
investments, and accompanying notes of the Registrant are included in the
Registrant's Annual Reports to Shareholders for the fiscal year or period
ended December 31, 1997, 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, 1997;
Pennsylvania Mutual Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Pennsylvania Mutual Fund -- Statement of Changes in
Net Assets for the years ended December 31, 1997 and 1996;
Pennsylvania Mutual Fund -- Statement of Operations
for the year ended December 31, 1997;
Pennsylvania Mutual Fund -- Financial Highlights for
the years ended December 31, 1997, 1996, 1995, 1994, and 1993;
Pennsylvania Mutual Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
Royce Premier Fund -- Schedule of Investments at December 31,
1997;
Royce Premier Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Premier Fund -- Statement of Changes in Net
Assets for the years ended December 31, 1997 and 1996;
Royce Premier Fund -- Statement of Operations for
the year ended December 31, 1997;
Royce Premier Fund -- Financial Highlights for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993;
Royce Premier Fund -- Notes to Financial Statements
-- Report of Independent Accountants dated February 10, 1998;
Royce Micro-Cap Fund -- Schedule of Investments at December
31, 1997;
Royce Micro-Cap Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Micro-Cap Fund -- Statement of Changes in Net
Assets for the years ended December 31, 1997 and 1997;
Royce Micro-Cap Fund -- Statement of Operations for
the year ended December 31, 1997;
Royce Micro-Cap Fund -- Financial Highlights for the
years ended December 31, 1997, 1996, 1995 , 1994 and 1993;
Royce Micro-Cap Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
<PAGE>
Royce Low-Priced Stock Fund -- Schedule of
Investments at December 31, 1997;
Royce Low-Priced Stock Fund -- Statement of Assets
and Liabilities at December 31, 1997;
Royce Low-Priced Stock Fund -- Statement of Changes
in Net Assets for the years ended December 31, 1997 and 1996;
Royce Low-Priced Stock Fund -- Statement of
Operations for the year ended December 31, 1997;
Royce Low-Priced Stock Fund -- Financial Highlights
for the years ended December 31, 1997, 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 10, 1998;
Royce Total Return Fund -- Schedule of Investments
at December 31, 1997;
Royce Total Return Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Total Return Fund -- Statement of Changes in Net Assets
for the year ended December 31, 1997 and 1996;
Royce Total Return Fund -- Statement of Operations
for the year ended December 31, 1997;
Royce Total Return Fund -- Financial Highlights for
the years ended December 31, 1997, 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
10, 1998;
Royce GiftShares Fund -- Schedule of Investments at
December 31, 1997;
Royce GiftShares Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce GiftShares Fund -- Statement of Changes in Net Assets
for the years ended December 31, 1997 and 1996;
Royce GiftShares Fund -- Financial Highlights for
the years ended December 31, 1997 and 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
10, 1998.
Royce Financial Services Fund -- Schedule of
Investments at December 31, 1997;
Royce Financial Services Fund -- Statement of Assets
and Liabilities at December 31, 1997;
Royce Financial Services Fund -- Statement of
Changes in Net Assets for the years ended December 31, 1997
and 1996;
Royce Financial Services Fund -- Statement of
Operations for the year ended December 31, 1997;
Royce Financial Services Fund -- Financial
Highlights for the two years ended December 31, 1997 and the
period from December 15, 1994 through December 31, 1994;
Royce Financial Services Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
PMF II -- Schedule of Investments at December 31, 1997;
PMF II -- Statement of Assets and Liabilities at December 31,
1997;
PMF II -- Statement of Changes in Net Assets for the year
ended December 31, 1997 and for the period from November 19,
1996 through December 31, 1996;
PMF II -- Statement of Operations for the year ended December
31, 1997;
PMF II -- Financial Highlights for the year ended December 31,
1997 and for the period from November 19, 1996 through
December 31, 1996;
PMF II -- Notes to Financial Statements -- Report of
Independent Accountants dated February 10, 1998.
Financial statements, schedules and historical information
other than those listed above have been omitted since they are
either inapplicable or are not required.
<PAGE>
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, 41, 42, 43, 46 and 47 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) Form of Investment Advisory Agreement between The Royce Fund (Royce
Select Fund) and Royce & Associates, Inc.
(8) Form of State Street Bank and Trust Company Custodian Fee
Schedule for Royce Select Fund.
(13) Form of Letter Agreement between the Registrant and Charles M.
Royce relating to the initial purchase of shares of Royce Select
Fund, a series of the Registrant.
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 July 31, 1998, the number of record holders of shares of each
Fund of the Registrant was as follows:
Title of Fund Number of Record Holders
------------- ------------------------
Pennsylvania Mutual Fund 20,167
Royce Premier Fund 14,206
Royce Micro-Cap Fund 7,499
Royce Low-Priced Stock Fund 968
Royce Total Return Fund 6,416
Royce Financial Services Fund 69
The REvest Growth and Income Fund 391
Royce GiftShares Fund 730
PMF II 1,013
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant provides as
follows:
<PAGE>
"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
<PAGE>
(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
<PAGE>
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
<PAGE>
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:
1997: $462,684
1996: $468,735
1995: $335,180
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
<PAGE>
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 has duly caused this Amendment
to the Registration Statement 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 4th day of September, 1998.
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933, this
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 9/4/98
Charles M. Royce Trustee
(Principal Executive,
Financial and Accounting
Officer)
/s/ Hubert L. Cafritz Trustee 8/25/98
Hubert L. Cafritz
/s/ Donald R. Dwight Trustee 9/4/98
Donald R. Dwight
/s/ Richard M. Galkin Trustee 9/4/98
Richard M. Galkin
/s/ Stephen L. Isaacs Trustee 9/4/98
Stephen L. Isaacs
/s/ William L. Koke Trustee 9/4/98
William L. Koke
/s/ David L. Meister Trustee 9/4/98
David L. Meister
NOTICE
A copy of the Trust Instrument of The Royce Fund is available for
inspection at the office of the Registrant, 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.
<PAGE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE ROYCE FUND
(ROYCE SELECT FUND)
AND
ROYCE & ASSOCIATES, INC.
Agreement made this ____ day of ______ 1998, by and between THE ROYCE
FUND, a Delaware business trust (the "Fund"), and ROYCE & ASSOCIATES, INC., a
New York corporation (the "Adviser").
The Fund and the Adviser hereby agree as follows in respect of ROYCE
SELECT FUND, a series of the Fund (the "Series"):
1. Duties of the Adviser. The Adviser shall, during the term and
subject to the provisions of this Agreement, (a) determine the composition of
the portfolio of the Series, the nature and timing of the changes therein and
the manner of implementing such changes, and (b) provide the Series with such
investment advisory, research and related services as the Series may, from
time to time, reasonably require for the investment of its funds. The
Adviser shall perform such duties in accordance with the applicable
provisions of the Fund's Declaration of Trust, By-Laws and current prospectus
and any directions it may receive from the Fund's Trustees. The Adviser shall
also furnish the services of those of its officers and employees who may be
duly elected officers or Trustees of the Fund, subject to their individual
consent to serve and to any limitations imposed by law.
2. Fund Responsibilities and Expenses Payable by the Series. The Fund
shall be responsible for effecting sales and redemptions of the Series'
shares, for determining the net asset value thereof and for all of the
Series' other operations and shall cause the Series to pay all costs and
expenses attributable to its operations and transactions that are not payable
by the Adviser under Paragraph 3 hereof.
3. Expenses Payable by the Adviser. The Adviser shall be responsible for
paying all of the Series' operating expenses, except for (a) the compensation
payable to the Adviser under Paragraph 4 hereof, (b) brokerage commissions,
interest and dividends on securities sold short, (c) distribution fees, (d)
Federal, state, local and other taxes, (e) amortization of organization
expenses and (f) litigation and indemnification expenses and any other
extraordinary expenses not incurred in the ordinary course of the Series'
business. The Adviser shall also pay all expenses which it may incur
<PAGE>
in performing its duties under Paragraph 1 hereof and shall reimburse
the Fund for any space leased by the Fund and occupied by the Adviser.
4. Compensation of the Adviser. As compensation for its services to
the Series and for agreeing to pay the Series' operating expenses as set
forth under Paragraph 3 hereof, the Fund agrees to cause the Series to pay to
the Adviser a performance fee of 12.5% of the Series' pre-fee total return.
Such fee shall be calculated and accrued daily, based on the value of the
Series' then current net assets, and shall be payable as of December 31,
1999, for the period from the date on which the Series commences operations
through December 31, 1999, and as of the close of each calendar quarter
ending after December 31, 1999. Such fees shall be payable to the Adviser
both in respect of Series shares outstanding throughout the applicable period
and in respect of Series shares purchased or redeemed during the applicable
period and shall not be reimbursable by the Adviser because of any negative
total returns occurring after the date as of which they are payable.
However, such fees shall be subject to a high water benchmark test, so that
Series shares shall not bear a fee during any period when the Series' pre-fee
cumulative total return for the period from the date on which the Series
commences operations to the date of calculation does not exceed the Series'
pre-fee cumulative total return to the date as of which a performance fee was
last payable to the Adviser.
5. Excess Brokerage Commissions. The Adviser is hereby authorized, to
the fullest extent now or hereafter permitted by law, to cause the Series to
pay a member of a national securities exchange, broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of such exchange, broker or dealer would have
charged for effecting that transaction, if the Adviser determines in good
faith that such amount of commission is reasonable in relation to the value
of the brokerage and/or research services provided by such member, broker or
dealer, viewed in terms of either that particular transaction or its overall
responsibilities with respect to its accounts.
6. Limitations on the Employment of the Adviser. The services of the
Adviser to the Series shall not be deemed exclusive, and the Adviser may
engage in any other business or render similar or different services to
others so long as its services to the Series hereunder are not impaired
thereby, and nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Adviser to engage in any other
business or to devote his time and attention in part to any other business,
whether of a similar or dissimilar nature. So long as this Agreement or any
extension or renewal remains in effect, the Adviser shall be the only
investment adviser for the Series, subject to the Adviser's right to enter
into sub-advisory agreements. The Adviser assumes no responsibility under
this Agreement other than to render the services called for hereunder, and
shall not be responsible for any action of or directed by the Fund's
Trustees, or any committee thereof, unless such action has been caused by the
Adviser's gross negligence, willful malfeasance, bad faith or reckless
disregard of its obligations and duties under this Agreement.
7. Responsibility of Dual Directors, Officers and/or Employees. If any
person who is a director, officer or employee of the Adviser is or becomes a
Trustee, officer and/or employee of the Fund and acts as such in any business
of the Fund pursuant to this Agreement, then such
<PAGE>
director, officer and/or employee of the Adviser shall be deemed to be acting
in such capacity solely for the Fund, and not as a director, officer or
employee of the Adviser or under the control or direction of the Adviser,
although paid by the Adviser.
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 (in
cluding 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.
9. Effectiveness, Duration and Termination of Agreement. This
Agreement shall become effective immediately upon approval by a majority of
the outstanding voting securities of the Series, and the Investment Advisory
Agreement made September 24, 1992 by and between the Fund and the Adviser
shall not apply as to the Series. This Agreement shall remain in effect
until April 30, 2000, and thereafter shall continue automatically for
successive annual periods, provided that such continuance is specifically
approved at least annually by (a) the vote of the Fund's
<PAGE>
Trustees, including a majority of such Trustees who are not parties to this
Agreement or "interested persons" (as such term is defined in Section
2(a)(19) of the Investment Company Act of 1940) of any such party, cast in
person at a meeting called for the purpose of voting on such approval, or (b)
the vote of a majority of the outstanding voting securities of the Series and
the vote of the Fund's Trustees, including a majority of such Trustees who
are not parties to this Agreement or "interested persons" (as so defined) of
any such party. This Agreement may be terminated at any time, without the
payment of any penalty, on 60 days' written notice by the vote of a majority
of the outstanding voting securities of the Series, or by the vote of a
majority of the Fund's Trustees or by the Adviser, and will automatically
terminate in the event of its "assignment" (as such term is defined for
purposes of Section 15(a)(4) of the Investment Company Act of 1940);
provided, however, that the provisions of Paragraph 8 of this Agreement shall
remain in full force and effect, and the Adviser shall remain entitled to the
benefits thereof, notwithstanding any such termination. The Adviser or
Charles M. Royce may, upon termination of this Agreement, require the Fund to
refrain from using the name "Royce" in any form or combination in its name or
in its business, and the Fund shall, as soon as practicable following its
receipt of any such request from the Adviser or Charles M. Royce, so refrain
from using such name.
Any notice under this Agreement shall be given in writing, addressed and
delivered or mailed, postage prepaid, to the other party at its principal
office.
10. Shareholder Liability. Notice is hereby given that this Agreement
is entered into on the Fund's behalf by an officer of the Fund in his
capacity as an officer and not individually and that the obligations of or
arising out of this Agreement are not binding upon any of the Fund's
Trustees, officers, employees, agents or shareholders individually, but are
binding only upon the assets and property of the Series.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
THE ROYCE FUND
By: _______________________________
Charles M. Royce, President
ROYCE & ASSOCIATES, INC.
By: _______________________________
Charles M. Royce, President
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
ROYCE SELECT FUND
_____________________________________________________________________
I. A. INTERNATIONAL PORTFOLIO AND FUND ACCOUNTING
Includes: Maintaining multicurrency investment ledgers, and providing
position and income reports.
Maintaining general ledger and capital stock accounts in compliance with
GAAP (FAS 52).
Preparing daily trial balances. Calculating net asset values daily.
Providing selected general ledger reports. Securities yield or market
value quotations will be provided to State Street by the fund or via
State Street's pricing service (See Section III). (The fee is
calculated using basis points per portfolio per annum: 1 basis point
= 0.01%).
First $ 50 Million (Net Asset Value) 5 bpts
Next $ 50 Million 3 bpts
Over $100 Million 1/2 bpt
B. DOMESTIC PORTFOLIO AND FUND ACCOUNTING
First $20 Million 1/ 15 of 1%
Next $80 Million 1/ 30 of 1%
Excess 1/100 of 1%
II. GLOBAL CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income.
Make cash disbursements and report cash transactions in local and base
currency. Withhold foreign taxes. File foreign tax reclaims.
Monitor corporate actions. Report portfolio positions.
A. Country Grouping
Group A Group B Group C Group D
------- ------- ------- -------
Australia Austria Botswana Argentina
Canada Belgium Brazil Bangladesh
Denmark Finland China Bolivia *
Euroclear Hong Kong Czech Republic Chile
France Indonesia Ecuador * Colombia
Germany Ireland Egypt Cyprus
Italy Malaysia Ghana Greece
Japan Mexico Israel Hungary
New Zealand Netherlands Kenya India
Spain Norway Luxembourg Jamaica *
Switzerland Philippines Morocco Jordan
U.K. Portugal South Africa Mauritus
Singapore Sri Lanka Namibia
Sweden Taiwan Pakistan
Thailand Trinidad and Tobago* Peru
Turkey Poland
Zambia Slovakia
Zimbabwe South Korea
Tunisia
Uruguay
Venezuela
* 17f-5 Ineligible at this time
<PAGE>
B. Transaction Charges
Group A Group B Group C Group D
------- ------- ------- -------
State Street Bank $25 $50 $100 $150
Repos or Euros - $7.00
C. Holding Charges in Basis Points (Annual Fee)
Group A Group B Group C Group D Group E
------- ------- ------- ------- -------
1.5 5.0 15.0 40 50
* Excludes: agent, depository and local auditing fees
** Transaction charges waived if brokerage provided by National
Securities Company.
UNITED STATES - for each line item processed
State Street Bank Repos $ 0
DTC or Fed Book Entry $ 12.00
New York Physical $ 25.00
PTC Buy/Sell $ 20.00
All other Trades $ 16.00
Maturity Collections $ 8.00
Option charge for each option written or closing contract,
per issue, per broker $ 25.00
Option expiration/Option exercised $ 15.00
Interest Rate Futures -- no security movement $ 8.00
Monitoring for calls and processing coupons --
for each coupon issue held - monthly charge $ 5.00
Holdings Charge per Security $ 0
Principal Reduction Payments Per Paydown $ 10.00
Dividend Charges (For items held at the Request of Traders
over record date in street form) $ 50.00
III. PRICING SERVICE
Monthly Base Fee per portfolio $ 200.00
Monthly Quote Charge: (based on the average
number of positions in portfolio)
- Foreign Equities and Bonds $ 6.00
- Listed Equities, OTC Equities, and Bonds $ 3.00
<PAGE>
IV. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation. Fees for tax
accounting/recordkeeping for options, financial futures, standardized
yield calculation, securities lending and other special items will be
negotiated separately.
V. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone/Telexes
Wire Charges
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Transfer Fees
Sub-custodian Out-of-Pocket Charges
(e.g., Stamp Duties, Registration, etc.)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer -- $15.00 each
*Royce Select Fund will receive custodial and related services, but will not
be obligated to pay for them. Rather, all custodian fees will be billed to,
paid by, and will be the responsibility of, the adviser Royce & Associates,
Inc.
ROYCE & ASSOCIATES, INC.
By: /s/ Dan O'Byrne
________________________
Title: Vice President
________________________
Date: 9/4/98
________________________
ROYCE SELECT FUND STATE STREET BANK & TRUST CO.
By: /s/ John D. Diederich By: Charles R. Whittemore, Jr.
____________________________ ____________________________
Title: Director of Administration Title: Vice President
____________________________ ____________________________
Date: 9/4/98 Date: September 1, 1998
____________________________ ____________________________
THE ROYCE FUND
1414 Avenue of the Americas
New York, New York 10019
_____________, 1998
Mr. Charles M. Royce
1414 Avenue of the Americas
New York, New York 10019
Dear Mr. Royce:
The Royce Fund (the "Trust") hereby accepts your offer to purchase 200
shares of beneficial interest of the Royce Select Fund, a series of the
Trust, at $5.00 per share, for an aggregate purchase price of $1,000.00,
subject to the understanding that you have no present intention of redeeming
or selling the shares so acquired.
Sincerely,
THE ROYCE FUND
By: __________________________
Charles M. Royce
President
Agreed:
I, Charles M. Royce, hereby agree to purchase the shares of beneficial
interest covered under the above letter agreement. I acknowledge that I have
no present intention of redeeming or selling any of the 200 shares of the
Royce Select Fund covered by such letter agreement.
__________________________
Charles M. Royce
