As filed with the Securities and Exchange Commission on February 26, 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. 44 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 46 /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)
/ x / 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)
/ / 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 will be filed on or
prior to March 31, 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
- ----------------- ---------------------------------
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..................... *
<PAGE>
XXII. Calculation of Performance Data.... PERFORMANCE DATA
XXIII. Financial Statements........... **
* Not applicable.
** Incorporated by reference.
<PAGE>
The REvest Growth & Income Fund
PROSPECTUS -- February 27, 1998
________________________________________________________________________
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-800-221-4268
________________________________________________________________________
INVESTMENT ADVISER INFORMATION -- 1-800-277-5573
________________________________________________________________________
SHAREHOLDER SERVICES -- 1-800-841-1180
________________________________________________________________________
INVESTMENT
OBJECTIVES AND
POLICIES
The REvest Growth & Income Fund (the "Fund") primarily seeks long-term growth
and secondarily current income by investing in a broadly diversified portfolio
of common stocks and convertible securities of small and medium-sized companies
viewed by the Fund's investment adviser as having attractive financial
characteristics and/or growth prospects and selected on a value basis. There
can be no assurance that the Fund will achieve its objectives.
The Fund is a no-load series of The Royce Fund (the "Trust"), a diversified
open-end investment management company. The Trust is currently offering shares
of nine series. This Prospectus relates to The REvest Growth & Income Fund only.
ABOUT THIS
PROSPECTUS
This Prospectus sets forth concisely the information that you should know about
the Fund before you invest. It should be retained for future reference. A
"Statement of Additional Information," containing further information about the
Fund and the Trust, has been filed with the Securities and Exchange Commission.
The Statement is dated February 27, 1998 and has been incorporated by reference
into this Prospectus. A copy may be obtained without charge by writing to the
Trust or calling Investor Information.
TABLE OF CONTENTS
Page Page
Fund Expenses 2 Dividends, Distributions and Taxes 6
Financial Highlights 2 Net Asset Value Per Share 7
Investment Performance 2 SHAREHOLDER GUIDE
Investment Objectives 3 Opening an Account and Purchasing Shares 8
Investment Policies 3 Choosing a Distribution Option 9
Investment Risks 4 Important Account Information 9
Investment Limitations 4 Redeeming Your Shares 10
Management of the Trust 5 Exchange Privilege 12
Size Limitations 6 Transferring Ownership 12
General Information 6 Other Services 12
________________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
______________________________________________
FUND EXPENSES
The Fund is no-load and has no 12b-1 fees
The following table illustrates all expenses and fees that you would incur as a
shareholder of the Fund.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fee --
1 Year or More After Initial Purchase None
Early Redemption Fee --
Less Than 1 Year After Initial Purchase 1%
Annual Fund Operating Expenses
Management Fees 1.00%
Other Expenses .26%
Total Operating Expenses 1.26%
___________________
The purpose of the above table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor in
the Fund.
The following examples illustrate the expenses that you would incur on a $1,000
investment over various periods, assuming a 5% annual rate of return and
redemption at the end of each period.
1 Year 3 Years 5 Years 10 Years
$13 $40 $69 $152
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE
SHOWN.
______________________________________________
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The following financial highlights are part of the Fund's financial statements,
which have been audited by Coopers & Lybrand L.L.P., independent accountants.
Such financial statements and accompanying notes and Coopers & Lybrand L.L.P.'s
reports on them are included in the Fund's Annual Report to Shareholders for
1997 and are incorporated by reference into the Statement of Additional
Information and this Prospectus. Further information about the Fund's
performance is contained elsewhere in this Prospectus and in the Fund's Annual
Report to Shareholders for 1997, which may be obtained without charge by calling
Investor Information.
YEAR YEAR YEAR 8/1/94
ENDED ENDED ENDED TO
12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- --------
NET ASSET VALUE, BEGINNING
OF PERIOD $12.21 $10.73 $9.66 $10.00
INVESTMENT OPERATIONS
- ---------------------
Net investment income 0.21 0.21 0.18 0.04
Net realized and unrealized
gain (loss) on investments 2.64 2.16 1.38 (0.33)
Total from Investment
Operations 2.85 2.37 1.56 (0.29)
DIVIDENDS AND DISTRIBUTIONS
- ---------------------------
Net investment income (0.19) (0.21) (0.17) (0.05)
Net realized gain on
investments (1.87) (0.68) (0.32) -
Total Dividends and
Distributions (2.06) (0.89) (0.49) (0.05)
NET ASSET VALUE,
END OF PERIOD $13.00 $12.21 $10.73 $9.66
TOTAL RETURN 23.5% 22.3% 16.2% -2.9%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000Os) $38,886 $42,099 $35,804 $21,676
Ratio of Expenses to
Average Net Assets (a) 1.26% 1.29% 1.30% 1.42%*
Ratio of Net Investment
Income to Average
Net Assets 1.60% 1.78% 1.73% 1.45%*
Portfolio Turnover Rate 54% 64% 53% 5%
Average Commission
Rate Paid+ $0.0594 $0.0580 - -
__________________
* Annualized.
(a) Expenses for 1994 are shown after fee waiver by the adviser. Absent such
waiver, the ratio of expenses to average net assets for the Fund would have been
1.78%.
+For fiscal years beginning on or after October 1, 1995, the Fund is required to
disclose its average commission rate paid per share for purchases and sales of
investments.
______________________________________________
INVESTMENT PERFORMANCE
Total return is the change in value over a given period for a continuous
shareholder, assuming reinvestment of dividends and capital gains
<PAGE>
From time to time, the Fund may include in communications to current or
prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in the Fund
from the beginning to the end of the stated period and assumes redemption at the
end of the period. "Average annual total return" is the annual compounded
percentage change in the value of an amount invested in the Fund from the
beginning until the end of the stated period.
Total returns are historical measures of past performance and are not intended
to indicate future performance. Both rates of return assume the reinvestment of
all net investment income dividends and capital gains distributions. The
figures do not reflect the Fund's early redemption fee because it applies only
to redemptions in accounts open for less than one year.
The Fund's average annual total return for the periods ended December 31, 1997
were:
One Year Three Year Since Inception*
23.5% 20.6% 16.9%
*August 1, 1994
______________________________________________
INVESTMENT OBJECTIVES
The REvest Growth & Income Fund primarily seeks long-term growth and secondarily
current income by investing in a broadly diversified portfolio of common stocks
and convertible securities of small and medium-sized companies viewed by the
Fund's investment adviser as having attractive financial characteristics and/or
growth prospects and selected on a value basis. Since certain risks are
inherent in owning any security, there can be no assurance that the Fund will
achieve its objectives.
The investment objectives of primarily long-term growth and secondarily current
income are fundamental and may not be changed without the approval of a majority
of the Fund's voting shares, as that term is defined in the Investment Company
Act of 1940 (the "1940 Act").
______________________________________________
INVESTMENT POLICIES
The Fund invests on a "value" basis
Royce, Ebright & Associates, Inc. ("RE&A"), the Fund's investment adviser, uses
a "value" method in managing the Fund's assets. In its selection process, RE&A
considers a company's cash flows, its balance sheet quality, an understanding of
various internal returns indicative of profitability and its growth prospects in
trying to relate such factors to the price of a given security. With regard to
each portfolio security in which the Fund invests, RE&A seeks to identify a
"valuation discrepancy" between the security's then current market price and its
"business worth," that is, what a knowledgeable buyer would pay for the entire
company, based on an appraisal of its financial characteristics and/or growth
prospects.
After this appraisal of value process is completed, RE&A then, in addition,
seeks to identify and evaluate "vitality factors," which are those
characteristics of a portfolio company that could result in the building of
future value for shareholders. Examples of such "vitality factors" include
research and development efforts, new products, new market development efforts,
the redeployment of underutilized assets, an active acquisition program, stock
buy-back programs, cost reduction programs and investments in new technologies
or processes.
The portfolio, therefore, is a collection of securities that RE&A believes have
all been purchased at a discount to their real "business worth" and possess, in
addition, "vitality factors" that should allow them to build future incremental
value for shareholders. RE&A believes that profits can come both from the
continued success and growth of each portfolio company as well as the eventual
elimination of each security's valuation discrepancy.
The Fund invests primarily in small and medium-sized companies
The Fund invests primarily in small and medium-sized companies. RE&A believes
that there are many high quality companies in the "small-cap" and "mid-cap"
sectors that have above average growth prospects but are not widely followed or
understood by investors. RE&A seeks
<PAGE>
to identify and invest in such companies when their securities can be purchased
at appropriate discounts to RE&AOs assessment of their "business worth."
In accordance with its objectives of seeking primarily long-term growth
(realized and unrealized) and secondarily current income, the Fund will normally
invest at least 90% of its assets in common stocks, convertible preferred stocks
and convertible bonds. At least 80% of these securities will be income-
producing, and 80% of these securities will be issued by companies with stock
market capitalizations between $200 million and $2 billion at the time of
investment. The Fund will normally have a weighted average market capitalization
size in excess of $500 million. The remainder of the FundOs assets may be
invested in securities with lower or higher market capitalizations, non-dividend
paying common stocks and non-convertible fixed income securities. The securities
in which the Fund invests may be traded on securities exchanges or in the over-
the-counter market. While most of the Fund's securities will be income-
producing, the composite yield of the Fund's securities may be either higher or
lower than the composite yield of the stocks in the S&P 500 Index.
______________________________________________
INVESTMENT RISKS
The Fund is subject to certain investment risks
As a mutual fund investing primarily in common stocks and/or securities
convertible into common stocks, the Fund is subject to market risk, that is, the
possibility that common stock prices will decline over short or even extended
periods. The Fund may invest in securities of companies that are not well-known
to the investing public, may not have significant institutional ownership and
may have cyclical, static or only moderate growth prospects. The stocks of such
companies may be more volatile in price and have lower trading volumes than the
larger capitalization stocks included in the S&P 500 Index. Accordingly, RE&A's
investment method requires a long-term investment horizon. The Fund should not
be used to play short-term swings in the market.
______________________________________________
INVESTMENT LIMITATIONS
The Fund has adopted a number of fundamental policies
The Fund has adopted a number of fundamental policies, 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 policies are set forth in the Statement of Additional
Information and provide, among other things, that the Fund will not:
(a) with respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer, excluding obligations of the U.S. Government;
(b) invest more than 25% of its assets in any one industry; or
(c) invest in companies for the purpose of exercising control of management.
Other Investment Practices:
In addition to investing primarily in the equity and fixed income securities
described above, the Fund may follow a number of additional investment
practices.
Short-term fixed income securities
The Fund may invest in short-term fixed income securities for temporary
defensive purposes, to invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions These securities consist of United States
Treasury bills, domestic bank certificates of deposit, high-quality commercial
paper and repurchase agreements collateralized by U.S. Government securities.
In a repurchase agreement, a bank sells a security to the Fund at one price and
agrees to repurchase it at the Fund's cost plus interest within a specified
period of seven or fewer days. In these transactions, which are, in effect,
secured loans by the Fund, the securities purchased by the Fund will have a
value equal to or in excess of the value of the repurchase agreement and will be
held by the Fund's custodian bank until repurchased. Should the Fund implement
a temporary defensive investment policy, its investment objectives may not be
achieved.
<PAGE>
Foreign securities
The Fund may invest up to 5% of its net assets in debt and/or equity securities
of foreign issuers. Foreign investments involve certain risks, such as
political or economic instability of the issuer or of the country of issue,
fluctuating exchange rates and the possibility of imposition of exchange
controls. These securities may also be subject to greater fluctuations in price
than the securities of U.S. corporations, and there may be less publicly
available information about their operations. Foreign companies may not be
subject to accounting standards or governmental supervision comparable to U.S.
companies, and foreign markets may be less liquid or more volatile than U.S.
markets and may offer less protection to investors such as the Fund.
Lower-rated debt securities
The Fund may also 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 non-convertible debt securities that are rated
lower than Caa by Moody,s Investors Service, Inc. or CCC by Standard & Poor's
Corporation or, if unrated, determined to be of comparable quality.
Portfolio turnover
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held.
______________________________________________
MANAGEMENT OF THE TRUST
Royce, Ebright & Associates, Inc. is responsible for the management of the
Fund's portfolio
The Trust's business and affairs are managed under the direction of its Board of
Trustees. Royce, Ebright & Associates, Inc. (RE&A), the Fund's investment
adviser, is responsible for the management of the Fund's portfolio, subject to
the authority of the Board of Trustees. RE&A was organized in June 1994, and
became the fund's investment adviser on August 1, 1994, when the Fund commenced
operations. The FundOs portfolio is managed by Mrs. Jennifer E. Goff, President
of RE&A, who is solely responsible for RE&A's investment management activities.
Mrs. Goff has been a director and a shareholder of RE&A since its inception.
Prior to assuming the office of President in July 1997, upon the death of her
father, Thomas R. Ebright, Mrs. Goff was Vice President and Assistant Portfolio
Manager. Mr. Ebright had been the President and Treasurer, a director of and the
principal shareholder of RE&A since its inception. Mrs. Goff completed her
undergraduate education at Dartmouth College (BA '93), worked full-time as a
securities analyst at Royce & Associates, Inc. from July 1993 to August 1994,
and completed her graduate studies in Finance at Columbia University (MBA '96).
The Estate of Thomas R. Ebright and Ellen S. Ebright, Mrs. Goff's sister, are
also shareholders of RE&A.
As compensation for its services to the Fund, RE&A is entitled to receive
advisory fees equal to 1.00% per annum of the first $50 million of the Fund's
average net assets and 0.75% per annum of any additional average net assets over
$50 million. These fees are payable monthly from the assets of the Fund. For
1997, the fees paid to RE&A by the Fund were 1.00% of its average net assets.
Proposed Joint Venture
On December 30, 1997, RE&A signed a Letter of Intent with Gouws Capital
Management, Inc. ("GCMI") and Acadia Trust, N.A. ("AT") to share resources in
managing and growing the Fund. The proposed transaction, which is described
below, is subject to both Board of Trustee and shareholder approvals which are
expected to be solicited in March and June 1998, respectively.
The Letter of Intent contemplates that RE&A would remain the investment adviser
to the Fund, with GCMI becoming a sub-adviser. GCMI would be responsible for
providing sub-investment advisory services and marketing support to RE&A in
exchange for a sub-advisory fee and an ownership stake in RE&A. There would be
no change in the investment objectives, strategies or policies of the Fund. The
Letter of Intent also contemplates a reorganization of the Fund, so that it
would become a series of a newly organized Delaware business trust and no longer
a series of The Royce Fund. A new Board of Trustees would be elected, and new
service providers would be employed (including AT as the Fund's custodian).
<PAGE>
GCMI is a registered investment adviser, and AT is an affiliated national bank.
GCMI provides investment advisory services to its own clients and to AT, who
acts as custodian for GCMI's approximately $1 billion in client assets. Not
unlike RE&A, GCMI has a value orientation, and emphasizes in-depth analysis and
company visitation. Both GCMI and AT are based in Portland, Maine.
Brokerage Allocation
RE&A selects the brokers who execute the purchases and sales of the Fund's
portfolio securities and may place orders with brokers who provide brokerage and
research services to RE&A. RE&A is authorized, in recognition of the value of
brokerage and research services provided, to pay commissions to a broker in
excess of the amounts which another broker might have charged for the same
transaction.
Distribution
Royce Fund Services, Inc., which is wholly-owned by Charles M. Royce, acts as
distributor of the Fund's shares. RE&A and/or the Fund may pay, to unaffiliated
broker-dealers, financial institutions or other service providers who introduce
investors to the Fund and/or provide certain administrative services to those of
their customers who are Fund shareholders, up to 0.25% of the assets invested in
the Fund by their customers. Compensation paid in connection with such programs
may include payments from the Fund for certain shareholder-related services
being provided to the Fund. When shares of the Fund are purchased in this way,
the service provider, rather than its customer, may be the shareholder of record
of the Fund's shares. Investors should read the program materials provided by
the service provider, including information regarding fees which may be charged,
in conjunction with this Prospectus. Certain shareholder servicing features of
the Fund may not be available or may be modified in connection with the program
of services offered.
______________________________________________
SIZE LIMITATIONS
If the Fund's assets total $350 million or more on December 31 of any year, then
the Fund will, commencing on March 1 of the next year, cease selling shares to
any new investors. It will not resume selling its shares to new investors unless
and until its assets total $250 million or less on the last day of any
subsequent calendar quarter, in which case it may resume sales to new investors
on the first day of the next calendar quarter and continue them subject to the
$350 million limitation.
______________________________________________
GENERAL INFORMATION
The Royce Fund (the "Trust") is a Delaware business trust registered with the
Securities and Exchange Commission as an open-end, diversified investment
management 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. Shareholders are
entitled to one vote per share. Shares vote by individual series on all matters,
except that shares are voted in the aggregate and not by individual series when
required by the 1940 Act and that if the Trustees determine that a matter
affects only one series, then only shareholders of that series are entitled to
vote on that matter.
Meetings of shareholders will not be held except as required by the 1940 Act or
other applicable law. A meeting will be held to vote on the removal of a
Trustee or Trustees of the Trust if requested in writing by the holders of not
less than 10% of the outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the Fund is State
Street Bank and Trust Company. State Street, through its agent National
Financial Data Services ("NFDS"), also serves as the Fund's Transfer Agent.
Coopers & Lybrand L.L.P. serves as independent accountants for the Fund.
______________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends are paid quarterly and capital gain distributions are made in December
The Fund pays dividends from net investment income quarterly and distributes its
net realized capital gains annually in December. Dividends and distributions
will be
<PAGE>
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 FundOs 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. Capital gains distributions 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 will be treated as a long-term capital loss to the extent any capital gains
distributions were received 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 income or capital gains. A subsequent distribution of these
amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's investment.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to non-corporate shareholders who have not
complied with Internal Revenue Service taxpayer identification regulations.
Shareholders may avoid this withholding requirement by certifying on the Account
Application Form their proper Social Security or Taxpayer Identification Number
and certifying that they are not subject to backup withholding.
The discussion of Federal income taxes above is for general information only.
The Statement of Additional Information includes an additional description of
Federal income tax aspects that may be relevant to a shareholder. Shareholders
may also be subject to state and local taxes on their investment. Investors
should consult their own tax advisers concerning the tax consequences of an
investment in the Fund.
______________________________________________
NET ASSET VALUE PER SHARE
Net asset value per share (NAV) is determined each day the New York Stock
Exchange is open
Fund shares are purchased and redeemed at their net asset value per share next
determined after an order is received by the Fund's transfer agent. The net
asset value per share is determined by dividing the total value of the Fund's
investments and other assets, less any liabilities, by the number of outstanding
shares of the Fund. Net asset value per share is calculated at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business.
In determining net asset value, securities listed on an exchange or the Nasdaq
National Market System are valued on the basis of the last reported sale price
prior to the time the valuation is made or, if no sale is reported for that day,
at their bid price for exchange-listed securities and at the average of their
bid and ask prices for Nasdaq securities. Quotations are taken from the market
where the security is primarily traded. Other over-the counter securities for
which market quotations are readily available are valued at their bid price.
Securities for which market quotations are not readily available are valued at
their fair value under procedures established and supervised by the Board of
Trustees. Bonds and other fixed income securities may be valued by reference to
other securities with comparable ratings, interest rates and maturities, using
established independent pricing services.
<PAGE>
______________________________________________
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
The FundOs shares are offered on a no-load basis. To open a new account other
than an IRA or 403(b)(7) account, either by mail, by telephone, by wire or
through broker-dealers, simply complete and return the Account Application.
Separate forms must be used for opening IRA's or 403(b)(7) accounts; please call
Investor Information at 1-800-221-4268 if you need these forms. Please indicate
the amount you wish to invest. Your initial purchase must be at least $2,000,
except for IRA's and accounts establishing an Automatic Investment Plan, which
have $500 minimums. If you need assistance with the Account Application Form or
have any questions about the Fund, please call Investor Information at
1-800-221-4268.
Subsequent investments may be made by mail ($50 minimum), telephone ($500
minimum), wire ($1,000 minimum) or Express Service (a system of electronic funds
transfer from your bank account).
___________________
Purchasing By Mail:
Complete and sign the enclosed Account Application Form
NEW ACCOUNT
Please include the amount of your initial investment on the Application Form,
make your check payable to The REvest Growth & Income Fund, and mail to:
The Royce Funds
P.O. Box 419012
Kansas City, MO 64141-6012
For express or registered mail, send to:
The Royce Funds
c/o National Financial Data Services
1004 Baltimore, 5th Floor
Kansas City, MO 64105
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-Mail remittance form
attached to your Fund confirmation statements. Please make your check payable
to The REvest Growth & Income Fund, write your account number on your check and,
using the return envelope provided, mail to the address indicated on the Invest-
by-Mail form.
All written requests should be mailed to one of the addresses indicated for new
accounts.
___________________
Purchasing By Telephone:
To open an account by telephone, you should call Investor Information (1-800-
221-4268) before 4:00 p.m., Eastern time. You will be given a confirming order
number for your purchase. This number must be placed on your completed
Application before mailing. If a completed and signed Application is not
received on an account opened by telephone, the account may be subject to backup
withholding of Federal income taxes.
Subsequent telephone purchases ($500 minimum) may also be made by calling
Investor Information. For all telephone purchases, payment is due within three
business days and may be made by wire or personal, business or bank check,
subject to collection.
___________________
Purchasing By Wire:
Before Wiring: - For a new account, please contact Investor Services at 1-800-
221-4268.
Money should be wired to:
State Street Bank and Trust Company
ABA 011000028 DDA 9904-712-8
Ref: The REvest Growth & Income Fund
Order Number or Account Number
Account Name
To ensure proper receipt, please be sure your bank includes the name of the Fund
and your order number (for
<PAGE>
telephone purchases) or account number. If you are opening a new account, you
must call Investor Information to obtain an order number, complete the Account
Application Form and mail it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire purchase orders will be
accepted only when the Fund and Custodian are open for business.
___________________
Purchasing By Express Service:
You can purchase shares automatically or at your discretion through the
following options:
Expedited Purchase Option permits you, at your discretion, to transfer funds
($100 minimum and $200,000 maximum) from your bank account to purchase shares in
your Royce Fund account by telephone.
Automatic Investment Plan allows you to make regular, automatic transfers ($50
minimum) from your bank account to purchase shares in your Royce Fund account on
the monthly schedule you select.
To establish the Expedited Purchase Option and/or Automatic Investment Plan,
please provide the appropriate information on the Account Application Form and
attach a voided check. We will send you a confirmation of Express Service
activation. Please wait three weeks before using the service.
To make an Expedited Purchase, please call Shareholder Services at 1-800-841-
1180 before 4:00 p.m., Eastern time.
Payroll Direct Deposit Plan and Government Direct Deposit Plan let you have
investments ($50 minimum) made from your net payroll or government check into
your existing Royce Fund account each pay period. Your employer must have
direct deposit capabilities through ACH (Automated Clearing House) available to
its employees. You may terminate participation in these programs by giving
written notice to your employer or government agency, as appropriate. The Fund
is not responsible for the efficiency of the employer or government agency
making the payment or any financial institution transmitting payments.
To initiate a Direct Deposit Plan, you must complete an Authorization for Direct
Deposit form, which may be ob-tained from Investor Information by calling 1-800-
221-4268.
______________________________________________
CHOOSING A DISTRIBUTION OPTION
You may select one of three distribution options:
1. Automatic Reinvestment Option--Both net investment income dividends and
capital gains distributions will be reinvested in additional Fund shares. This
option will be selected for you automatically unless you specify one of the
other options.
2. Cash Dividend Option--Your dividends will be paid in cash and your capital
gains distributions will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains distributions will be
paid in cash.
You may change your option by calling Shareholder Services at 1-800-841-1180.
______________________________________________
IMPORTANT ACCOUNT INFORMATION
The easiest way to establish optional services on your account is to select the
options you desire when you complete your Account Application Form. If you want
to add shareholder options later, you may need to provide additional information
and a signature guarantee. Please call Share-holder Services at 1-800-841-1180
for further assistance.
Signature Guarantees
For our mutual protection, we may require a signature guarantee on certain
written transaction requests. A signature guarantee verifies the authenticity
of your signature and may be obtained from banks, brokerage firms and any other
guarantor that our transfer agent deems acceptable. A signature guarantee
cannot be provided by a notary public.
Certificates
Certificates for whole shares will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
<PAGE>
Broker/Dealer Purchases
If you purchase Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge a service fee.
Telephone Transactions
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The transfer agent uses certain procedures to confirm that telephone
instructions are genuine, which may include requiring some form of personal
identification prior to acting on the instructions, providing written
confirmation of the transaction and/or recording incoming calls, and if it does
not follow such procedures, the Fund or the transfer agent may be liable for any
losses due to unauthorized or fraudulent instructions.
Nonpayment
If your check or wire does not clear, or if payment is not received for any
telephone purchase, the transaction will be cancelled and you will be
responsible for any loss the Fund incurs. If you are already a shareholder, the
Fund can redeem shares from any identically registered account in the Fund as
reimbursement for any loss incurred.
Trade Date for Purchases
Your trade date is the date on which share purchases are credited to your
account. If your purchase is made by telephone, check, Federal Funds wire or
exchange and is received by the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m., Eastern time), your trade date is the date of
receipt. If your purchase is received after the close of regular trading on the
Exchange, your trade date is the next business day. Your shares are purchased at
the net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of foreign
checks, the Fund will accept only a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a United States correspondent
bank.
The Trust reserves the right to suspend the offering of Fund shares to new
investors. The Trust also reserves the right to reject any specific purchase
request.
______________________________________________
REDEEMING YOUR SHARES
You may redeem any portion of your account at any time. You may request a
redemption in writing or by telephone. Redemption proceeds normally will be
sent within two business days after the receipt of the request in Good Order.
___________________
Redeeming By Mail
Requests should be mailed to The Royce Funds, c/o NFDS, P.O. Box 419012, Kansas
City, MO 64141-6012. (For express or registered mail, send your request to The
Royce Funds, c/o National Financial Data Services, 1004 Baltimore, 5th Floor,
Kansas City, MO 64105.) The redemption price of shares will be their net asset
value next determined after NFDS has received all required documents in Good
Order.
Definition of Good Order
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. Signatures of all owners exactly as they are registered on the account.
4. Signature guarantees if the value of the shares being redeemed exceeds
$50,000 or if the payment is to be sent to an address other than the address of
record or is to be made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be required, in the case of
retirement plans, corporations, trusts, estates and certain other accounts.
If you have any questions about what is required as it pertains to your request,
please call Shareholder Services at 1-800-841-1180.
<PAGE>
___________________
Redeeming By Telephone
Shareholders who have not established Express Service may redeem up to $50,000
of their Fund shares by telephone, provided the proceeds are mailed to their
address of record. To redeem shares by telephone, you or your pre-authorized
representative may call Shareholder Services at 1-800-841-1180. Redemption
requests received by telephone prior to the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m., Eastern time) are processed on the day
of receipt; redemption requests received by telephone after the close of regular
trading on the Exchange are processed on the business day following receipt.
Telephone redemption service is not available for Trust-sponsored retirement
plan accounts or if certificates are held. Telephone redemptions will not be
permitted for a period of sixty days after a change in the address of record.
See also "Important Account Information - Telephone Transactions."
___________________
Redeeming By Express Service
If you select the Express Service Automatic Withdrawal option, shares will be
automatically redeemed from your Fund account and the proceeds transferred to
your bank account according to the schedule you have selected. You must have at
least $25,000 in your Fund account to establish the Automatic Withdrawal option.
The Expedited Redemption option lets you redeem up to $50,000 of shares from
your Fund account by telephone and transfer the proceeds directly to your bank
account. You may elect Express Service on the Account Application Form or call
Shareholder Services at 1-800-841-1180 for an Express Service application.
___________________
Important Redemption Information
If you are redeeming shares recently purchased by check, Express Service
Expedited Purchase or Automatic Investment Plan, the proceeds of the redemption
may not be sent until payment for the purchase is collected, which may take up
to fifteen calendar days. Otherwise, redemption proceeds must be sent to you
within seven days of receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption during periods of
drastic economic or market changes, your redemption request may be made by
regular or express mail. It will be processed at the net asset value next
determined after your request has been received by the Transfer Agent in Good
Order. The Trust reserves the right to revise or terminate the telephone
redemption privilege at any time.
The Trust may suspend the redemption right or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the Securities and Exchange Commission.
Although redemptions have always been made in cash, the Fund may redeem in kind
under certain circumstances.
___________________
Early Redemption Fee
In order to discourage short-term trading, an early redemption fee of 1% of the
net asset value of the shares being redeemed is imposed if a shareholder redeems
shares of the Fund less than one year after becoming a shareholder. The fee is
payable to the Fund out of the redemption proceeds otherwise payable to the
shareholder and is used to offset the costs associated with redemptions. No
redemption fee will be payable on an exchange into another Royce Fund or by
shareholders who are: (a) employees or representatives of the Trust or RE&A or
members of their immediate families or employee benefit plans for them, (b)
participants in the Automatic Withdrawal Plan, (c) certain Trust-approved Group
Investment Plans and charitable organizations, or (d) omnibus and other similar
account customers of certain Trust-approved broker-dealers and other
institutions.
___________________
Minimum Account Balance Requirement
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to involuntarily redeem shares in any Fund account that falls
below the minimum initial investment due to redemptions by the shareholder. If
at any time the balance in an account does
<PAGE>
not have a value at least equal to the minimum initial investment or if an
Automatic Investment Plan is discontinued before an account reaches the minimum
initial investment that would otherwise be required, you may be notified that
the value of your account is below the Fund's minimum account balance
requirement. You would then have sixty days to increase your account balance
before the account is liquidated. Proceeds would be promptly paid to the
shareholder.
______________________________________________
EXCHANGE PRIVILEGE
Exchanges between series of the Trust and with other open-end Royce funds are
permitted by telephone or by mail. An exchange is treated as a redemption and
purchase; therefore, you could realize a taxable gain or loss on the
transaction. Exchanges are accepted only if the registrations and the tax
identification numbers of the two accounts are identical. Minimum investment
requirements must be met when opening a new account by exchange, and exchanges
may be made only for shares of a series or fund then offering its shares for
sale in your state of residence. The Trust reserves the right to revise or
terminate the exchange privilege at any time.
______________________________________________
TRANSFERRING OWNERSHIP
You may transfer the ownership of any of your Fund shares to another person by
writing to: The Royce Funds, c/o NFDS, P.O. Box 419012, Kansas City, MO 64141-
6012. The request must be in Good Order (see "Redeeming Your Shares -
Definition of Good Order"). Before mailing your request, please contact
Shareholder Services (1-800-841-1180) for full instructions.
______________________________________________
OTHER SERVICES
For more information about any of these services, please call Investor
Information at 1-800-221-4268.
Statements and Reports
A statement will be sent to you each time you have a transaction in your account
and at year-end. Financial reports will be mailed semi-annually. To reduce
expenses, only one copy of most shareholder reports may be mailed to a
household. Please call Investor Information if you need additional copies.
Tax-Sheltered Retirement Plans
Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including Individual Retirement Accounts
(IRA's) for individuals and 403(b)(7) Plans for employees of certain tax-exempt
organizations.
These plans should be established with the Trust only after an investor has
consulted with a tax adviser or attorney. In-formation about the plans and the
appropriate forms may be obtained from Investor Information at 1-800-221-4268.
______________________________________________
THE ROYCE FUND
1414 Avenue of the Americas
New York, NY 10019
INVESTMENT ADVISER
Royce, Ebright & Associates, Inc.
Jennifer E. Goff, President
50 Portland Pier
Portland, ME 04101
DISTRIBUTOR
Royce Fund Services, Inc.
1414 Avenue of the Americas
New York, NY 10019
TRANSFER AGENT
State Street Bank and Trust Company
c/o National Financial Data Services
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
OFFICERS
Charles M. Royce, President and Treasurer
Jack E. Fockler, Jr. Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and Asst. Secretary
John E. Denneen, Secretary
<PAGE> THE REVEST GROWTH & INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
The REvest Growth & Income Fund (the "Fund") is one of nine
professionally-managed portfolios or series of THE ROYCE FUND
(the "Trust"), a Delaware business trust and an open-end
registered investment company. Two of the nine series,
Pennsylvania Mutual Fund and Royce GiftShares Fund, offer two
classes of their shares, an Investment Class and a Consultant
Class. Each series has distinct investment objectives, policies
for investing, and a shareholder's interest is limited to the
series in which the shareholder owns shares. The nine series
are:
Pennsylvania Mutual Fund
Royce Premier Fund
Royce Micro-Cap Fund
Royce Low-Priced Stock Fund
Royce GiftShares Fund
Royce Total Return Fund
Royce Financial Services Fund
PMF II
The REvest Growth & Income Fund
This Statement of Additional Information relates only to the
Fund. The other series are covered by their own separate
Statement of Additional Information.
The Fund is designed for long-term investors, including
those who wish to use its shares 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 Prospectus for the Fund (dated February 27, 1998).
Please retain this document for future reference. The audited
financial statements included in the Annual Report to
Shareholders of the Fund for the fiscal period ended December 31,
1997 are incorporated herein by reference. To obtain an
additional copy of the Fund's Prospectus or Annual Report or a
copy of the Prospectus or Annual Report to Shareholders for any
of the Trust's other series, please call Investor Information at
1-800-221-4268.
Investment Adviser Transfer Agent
Royce, Ebright and Associates, Inc.("RE&A") 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
February 27, 1998
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND LIMITATIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 3
MANAGEMENT OF THE TRUST 7
PRINCIPAL HOLDERS OF SHARES 9
INVESTMENT ADVISORY SERVICES 10
DISTRIBUTOR 11
CUSTODIAN 11
INDEPENDENT ACCOUNTANTS 12
PORTFOLIO TRANSACTIONS 12
PRICING OF SHARES BEING OFFERED 13
REDEMPTIONS IN KIND 13
TAXATION 13
DESCRIPTION OF THE TRUST 17
PERFORMANCE DATA 18
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement those set
forth in the Fund's Prospectus. Unless otherwise noted, whenever an investment
policy or limitation states a maximum percentage of the 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.
The 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 the Fund.
The Fund may not, 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 from banks as a temporary measure for
extraordinary or emergency purposes in an amount not exceeding
5% of its total assets;
5. Underwrite the securities of other issuers;
6. Invest more than 5% of its total assets in the
securities of foreign issuers;
7. Invest in restricted securities or in repurchase
agreements which mature in more than seven days;
8. Invest more than 10% of its assets in securities
without readily available market quotations (i.e., illiquid
securities);
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;
11. Acquire 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;
<PAGE>
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 the Fund may loan up to 5% 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;
or
18. Purchase any warrants, rights or options, except that
the Fund may, if no value is assigned thereto, acquire warrants
in units with or attached to debt securities or non-convertible
preferred stock.
The Fund may not, as a matter of operating policy:
1. Invest more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities; or
2. Enter into repurchase agreements with any party other
than the custodian of its assets or having a term of more than
seven days.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Fund's Rights as Stockholder
As noted above, the Fund may not invest in a company for the purpose of
exercising control of management. However, the 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 RE&A 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 the Fund may
engage in, either individually or in conjunction with others, may include, among
others, supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's board of
directors or management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of a company or a portion of its assets; or
supporting or opposing third party takeover attempts. This area of corporate
activity is increasingly prone to litigation, and it is possible that the Fund
could be involved
in lawsuits related to such activities. RE&A will monitor such activities with
a view to mitigating, to the extent possible, the risk of litigation against the
Fund and the risk of actual liability if the Fund is involved
<PAGE>
in litigation. However, no guarantee can be made that litigation against the
Fund will not be undertaken or liabilities incurred.
The 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 RE&A and the Trust's Board of
Trustees determine this to be in the best interests of the Fund's shareholders.
Securities Lending
The Fund may lend up to 5% 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 Fund's custodian and who are deemed by it to be of good
standing. Furthermore, such loans will be made only if, in RE&A's judgment, the
consideration to be earned from such loans would justify the risk.
RE&A understands that it is the current view of the staff of the Securities
and Exchange Commission that the 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
The Fund may invest up to 5% of its net assets in lower-rated (high-risk)
non-convertible debt securities. They may be rated from Ba to Ca by Moody's
Investors Service, Inc. or from BB to D by Standard & Poor's Corporation or may
be unrated. These securities have poor protection with respect to the payment
of interest and repayment of principal and may be in default as to the payment
of principal or interest. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated (high-risk) debt
securities may fluctuate more than those of higher-rated debt securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of the high-
yield/high-risk bond market, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated (high-risk) debt
securities that defaulted rose significantly above prior levels.
<PAGE>
The market for lower-rated (high-risk) debt securities may be thinner and
less active than that for higher-rated debt securities, which can adversely
affect the prices at which the former are sold. If market quotations cease to
be readily available for a lower-rated (high-risk) debt security in which the
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 the 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, RE&A's research and credit analysis may play an important part in
managing securities of this type for the Fund. In considering such investments
for the Fund, RE&A 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. RE&A'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
The Fund may invest up to 5% of its total assets in the securities of
foreign issuers. Foreign investments can involve significant risks in addition
to the risks inherent in U.S. investments. The value of securities denominated
in or indexed to foreign currencies and of dividends and interest from such
securities can change significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets generally have less
trading volume and less liquidity than U.S. markets, and prices on some foreign
markets can be highly volatile. Many foreign countries lack uniform accounting
and disclosure standards comparable to those applicable to U.S. companies, and
it may be more difficult to obtain reliable information regarding an issuer's
financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and custodial
costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest or adverse diplomatic
developments. There is no assurance that RE&A will be able to anticipate these
potential events or counter their effects.
The considerations noted above are generally intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities.
<PAGE>
American Depositary Receipts (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.
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, the 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 Fund may engage in repurchase agreements with respect to any U.S.
Government security. The Fund's repurchase 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.
Portfolio Turnover
The Fund will not trade in securities for short-term profits, but, when
circumstances warrant, securities may be sold without regard to the length of
time held. For the years ended December 31, 1997, 1996 and 1995, the Fund's
portfolio turnover rates were 54%, 64% and 53%, respectively. Higher portfolio
turnover rates will increase the Fund's transaction costs, including brokerage
commissions.
* * *
<PAGE>
RE&A believes that the Fund is suitable for investment only by persons who
are in a financial position to assume above-average investment risks in search
for long-term capital appreciation.
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee and
officer of the Trust:
Position
Name and Address Held Principal Occupations During Past 5
with the Years
Trust
- ----------------- --------- ------------------------------------
Charles M. Royce* Trustee, President, Managing Director (since
(58) President April 1997), Secretary, Treasurer,
1414 Avenue of the and sole director and sole voting
Americas Treasurer shareholder of Royce & Associates,
New York, NY 10019 Inc. ("Royce"), formerly named
Quest Advisory Corp., the Trust's
and its predecessors' principal
investment adviser; Trustee,
President and Treasurer of the
Trust and its predecessors;
Director, President and Treasurer
of Royce Value Trust, Inc. ("RVT"),
Royce Micro-Cap Trust, Inc.
("OTCM") (since September 1993)
and, Royce Global Trust, Inc.
("RGT") (since October 1996),
closed-end diversified management
investment companies of which Royce
is the investment adviser; Trustee,
President and Treasurer of Royce
Capital Fund ("RCF") (since
December 1996), an open-end
diversified management investment
company of which Royce is the
investment adviser (the Trust, RVT,
OTCM, RGT and RCF collectively,
"The Royce Funds"); Secretary and
sole director and shareholder of
Royce Fund Services, Inc. ("RFS"),
formerly named Quest Distributors,
Inc., the distributor of the
Trust's shares; and managing
general partner of Royce Management
Company ("RMC"), formerly named
Quest Management Company, a
registered investment adviser, and
its predecessor.
Hubert L. Cafritz Trustee Financial Consultant.
(74)
9421 Crosby Road
Silver Spring, MD
20910
Richard M. Galkin Trustee Private investor and President of
(59) Richard M. Galkin Associates, Inc.,
5284 Boca Marina tele-communications consultants.
Boca Raton, FL
33487
Stephen L. Isaacs Trustee President of The Center for Health
(58) and Social Policy since September
65 Harmon Avenue 1996; President of Stephen L.
Pelham, NY 10803 Isaacs Associates, Consultants; and
Director of Columbia University
Development Law and Policy Program;
Professor at Columbia University
until August 1996.
<PAGE>
Position
Name and Address Held Principal Occupations During Past 5
with the Years
Trust
- ----------------- --------- ------------------------------------
William L. Koke Trustee Registered investment adviser and
(63) financial planner with Shoreline
73 Pointina Road Financial Consultants.
Westport, CT 06498
David L. Meister Trustee Consultant to the communications
(57) industry since January 1993 and
111 Marquez Place Executive officer of Digital Planet
Pacific Palisades, Inc. from April 1991 to December
CA 90272 1992.
Jack E. Fockler, Vice Managing Director (since April
Jr.* (39) President 1997) and Vice President (since
1414 Avenue of the August 1993) of Royce, having been
Americas employed by Royce since October
New York, NY 10019 1989; Vice President of RGT (since
October 1996), RCF (since December
1996) and the other Royce Funds
(since April 1995); Vice President
of RFS (since November 1995); and
general partner of RMC since July
1993.
W. Whitney George* Vice Managing Director (since April
(39) President 1997) and Vice President (since
1414 Avenue of the August 1993) of Royce, having been
Americas employed by Royce since October
New York, NY 10019 1991; Trustee and Vice President of
RCF (since December 1996); Vice
President of RGT (since October
1996) and of the other Royce Funds
(since April 1995); and general
partner of RMC and its predecessor
since January 1992.
Daniel A. O'Byrne* Vice Vice President of Royce (since May
(35) President 1994), having been employed by
1414 Avenue of the and Royce since October 1986; and Vice
Americas Assistant President of RGT (since October
New York, NY 10019 Secretary 1996), of RCF (since December 1996)
and of the other Royce Funds (since
July 1994).
John E. Denneen* Secretary Associate General Counsel and Chief
(30) Compliance Officer of Royce (since
1414 Avenue of the May 1996); Secretary of RGT (since
Americas New York, October 1996), of RCF (since
NY 10019 December 1996) and of the other
Royce Funds (since June 1996); and
Associate of Seward & Kissel from
1992 to May 1996.
*An "interested person" of the Trust and/or Royce under Section 2(a)(19) of
the 1940 Act.
All of the Trust's trustees, other than Messr. Cafritz and Koke are also
directors of RVT and OTCM.
The Board of Trustees has an Audit Committee, comprised of Hubert L.
Cafritz, Richard M. Galkin, Stephen L. Isaacs, William L. Koke and David L.
Meister. The Audit Committee is responsible for
<PAGE>
recommending the selection and nomination of independent accountants for the
Fund and for conducting post-audit reviews of its financial condition with such
accountants.
For the year ended December 31, 1997, the following trustees and affiliated
persons of the Trust received compensation from the Trust and/or the other funds
in the group of registered investment companies comprising The Royce Funds:
Aggregate Pension or Total
Compensation Retirement Compensation
Name From Trust Benefits from The Royce
Accrued As Funds
Part of Trust paid to
Expenses Trustee/Directors
- ---- ------------ ------------- -----------------
Hubert L. $ 37,000 N/A $37,000
Cafritz,
Trustee
Richard M. $ 37,000 N/A $65,000
Galkin,
Trustee
Stephen L. $ 37,000 N/A $65,000
Isaacs,
Trustee
William L. $ 37,000 N/A $38,125
Koke,
Trustee
David L. $ 37,000 N/A $65,000
Meister,
Trustee
John D. $106,590 $10,032 N/A
Diederich
Director of
Administration
PRINCIPAL HOLDERS OF SHARES
As of February 11, 1998, the following persons were known to the Trust to
be the beneficial owners of 5% or more of the outstanding shares of the Fund:
Number Type of Percentage of
Name and Address of Ownership Outstanding Shares
Shares
- ---------------- ------ --------- ------------------
Charles Schwab & Co. 612,039 Record 20.9%
Inc.
Reinvest Account
Attn: Mutual Fund
Dept.
101 Montgomery St.
San Francisco, CA 94104-
4122
<PAGE>
The Carlisle Companies 470,733 Beneficial 16.1%
Defined Benefit
Retirement Plan
250 South Clinton
Street
Suite 201
Syracuse, NY 13202
As of such date, all of the trustees and officers of the Trust as a group
owned approximately 2.98% of the Fund's outstanding shares, and all of the
directors, officers and employees of the Fund's investment adviser owned
approximately 3.02% of the Fund's outstanding shares.
INVESTMENT ADVISORY SERVICES
As compensation for its services to the Fund, RE&A is entitled to receive
advisory fees equal to 1% per annum of the first $50,000,000 of the Fund's
average net assets and 0.75% per annum of any additional average net assets over
$50,000,000. These fees are payable monthly from the assets of the Fund. For
1996, the fees paid to RE&A by the Fund were 1.00% of its average net assets.
Under the Investment Advisory Agreement, RE&A (i) determines the
composition of the Fund's portfolio, the nature and timing of the changes in it
and the manner of implementing such changes, subject to any directions it may
receive from the Trust's Board of Trustees; (ii) provides the Fund with
investment advisory, research and related services for the investment of its
funds; (iii) furnishes, without expense to the Trust, the services of such
members of its organization as may be duly elected executive officers or
Trustees of the Trust; and (iv) pays all executive officers' salaries and
executive expenses and all expenses incurred in performing its investment
advisory duties under the Investment Advisory Agreement.
The Trust pays all administrative and other costs and expenses attributable
to its operations and transactions, including, without limitation, transfer
agent and custodian fees; legal, administrative and clerical services; rent for
its office space and facilities; auditing; preparation, printing and
distribution of its prospectuses, proxy statements, shareholders reports and
notices; supplies and postage; Federal and state registration fees; Federal,
state and local taxes; non-affiliated trustees' fees; and brokerage commissions.
For the years ended December 31, 1997, 1996 and 1995, RE&A received
advisory fees from the Fund of $447,437, $375,493 and $320,761, respectively.
Portfolio Management
The Trust's business and affairs are managed under the direction of its
Board of Trustees. RE&A, the Fund's investment adviser, is responsible for the
management of the Fund's portfolio, subject to the authority of the Board of
Trustees. RE&A was organized in June 1994, and became the Fund's investment
adviser on August 1, 1994, when the Fund commenced operations. The Fund's
portfolio is managed by Mrs. Jennifer E. Goff, President of RE&A, who is solely
responsible for RE&A's investment management activities. Mrs. Goff has been a
director and a shareholder of RE&A since its inception. Prior to assuming the
office of President in July 1997, upon the death of her father, Thomas R.
Ebright, Mrs. Goff was Vice President and Assistant Portfolio Manager. Mr.
Ebright was the President and Treasurer, a director and the principal
shareholder of RE&A since its inception. Mrs. Goff completed
<PAGE>
her undergraduate education at Dartmouth College (BA `93), worked full-time as a
security analyst at Royce & Associates, Inc. from July 1993 to August 1994, and
completed her graduate studies in Finance at Columbia University (MBA `96). The
Estate of Thomas R. Ebright and Ellen S. Ebright, Mrs. Goff's sister, are also
shareholders of RE&A.
Neither Royce & Associates, Inc. nor any of its directors, officers or
employees, as such, furnishes any investment advice to the Fund or to RE&A.
Proposed Joint Venture
On December 30, 1997, RE&A signed a Letter of Intent with Gouws Capital
Management, Inc. ("GCMI") and Acadia Trust, N.A. ("AT") to share resources in
managing and growing the Fund. The proposed transaction, which is described
below, is subject to both Board of Trustee and shareholder approvals which are
expected to be solicited in March and June 1998, respectively.
The Letter of Intent contemplates that RE&A would remain the investment
adviser to the Fund, with GCMI becoming a sub-adviser. GCMI would be
responsible for providing sub-investment advisory services and marketing support
to RE&A in exchange for a sub-advisory fee and an ownership stake in RE&A.
There would be no change in the investment objectives, strategies or policies of
the Fund. The Letter of Intent also contemplates a reorganization of the Fund,
so that it would become a series of a newly organized Delaware business trust
and no longer part of The Royce Fund. A new Board of Trustees would be elected,
and new service providers would be employed (including AT as the Fund's
custodian).
GCMI is a registered investment adviser, and AT is an affiliated national
bank. GCMI provides investment advisory services to its own clients and to AT,
who acts as custodian for GCMI's approximately $1 billion in client assets. Not
unlike RE&A, GCMI has a value orientation, and emphasizes in-depth analysis and
company visitation. Both GCMI and AT are based in Portland, Maine.
DISTRIBUTOR
Royce Fund Services, Inc. ("RFS"), which is wholly-owned by Charles M.
Royce, acts as distributor of the Fund's shares. RE&A may pay up to 25% of its
advisory fee to unaffiliated broker-dealers who introduce investors to the Fund
and provide certain administrative services to those of their customers who are
Fund shareholders. Any such arrangements will be obligations of RE&A and not of
the Fund or RFS.
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the custodian for
the securities, cash and other assets of the Fund and the transfer agent and
dividend disbursing agent for the Fund's shares, but it does not participate in
the 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.
<PAGE>
State Street is responsible for the calculation of the Fund's daily net
asset value per share and for the maintenance of its portfolio and general
accounting records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office Square, Boston,
Massachusetts 02109, are the independent accountants of the Trust.
PORTFOLIO TRANSACTIONS
RE&A is responsible for selecting the brokers who, as agents for the Fund,
effect the purchases and sales of the Fund's portfolio securities. No broker is
selected to effect a securities transaction for the Fund unless such broker is
believed by RE&A to be capable of obtaining the best price and execution for the
security involved in the transaction. In addition to considering a broker's
execution capability, RE&A generally considers the brokerage and research
services which the broker has provided to it, including any research relating to
the security involved in the transaction and/or to other securities. Such
services may include general economic research, market and statistical
information, industry and technical research, strategy and company research, and
may be written or oral. RE&A determines the overall reasonableness of brokerage
commissions paid, after considering the amount another broker might have charged
for effecting the transaction and the value placed by RE&A upon the brokerage
and/or research services provided by such broker.
RE&A is authorized, under Section 28(e) of the Securities Exchange Act of
1934 and under its Investment Advisory Agreement for the Fund, 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.
RE&A may also place the Fund's brokerage business with firms which promote
the sale of the Fund's shares, consistent with achieving the best price and
execution. In no event will the Fund's brokerage business be placed with RFS.
RE&A's purchase and sale orders for the Fund's portfolio securities are
generally placed with broker-dealers through Royce, and RE&A is obligated to
reimburse Royce for any additional out-of-pocket costs and expenses incurred by
Royce in rendering this service.
Even though investment decisions for the Fund are made by RE&A
independently from those made by Royce and/or RMC for their managed accounts,
securities of the same issuer may be purchased, held or sold by more than one of
such accounts. When the Fund and one or more of the Royce and/or RMC managed
accounts are simultaneously engaged in the purchase or sale of the same
security, Royce seeks to average the transactions as to price and allocate them
as to amount in a manner believed by Royce to be equitable to each. In some
cases, this procedures may adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund.
For the years ended December 31, 1997, 1996 and 1995, the Fund paid
brokerage commissions of $95,045, $87,201 and $120,862, respectively. For the
same periods, the aggregate amounts of brokerage
<PAGE>
transactions of the Fund having a research component were $20,281,837,
$21,876,92 and, $23,404,622, respectively, and the amounts of commissions paid
by the Fund for such transactions were $55,612, $66,890 and $87,718,
respectively.
The Fund did not acquire any securities of its regular brokers and dealers,
as defined in the 1940 Act, or of their parents, during the year ended December
31, 1997.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of the Fund's shares is based on its
current net asset value per share. See "Net Asset Value Per Share" in the
Fund's Prospectus.
As set forth under "Net Asset Value Per Share," the Fund's custodian
determines the net asset value per Fund share 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.
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 the
Fund to pay for all redemptions in cash. In such cases, payment may be made in
portfolio securities or other property of the Fund. However, the Trust has
obligated itself under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to $250,000 (or 1% of the Trust's net
assets if that is less) in any 90-day period. Securities delivered in payment
of redemptions would be valued at the same value assigned to them in computing
the net asset value per share for purposes of such redemption. Shareholders
receiving such securities would incur brokerage costs when these securities are
sold.
TAXATION
The 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, the
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, the 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 the Fund to the extent
that it 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, the Fund will endeavor to
<PAGE>
distribute substantially all of its ordinary income and capital gain net income
during the calendar year in which such income is earned and such gains are
recognized.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. Federal income tax purposes. Investments calculated by
reference to foreign currencies will not necessarily correspond to the 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 the Fund's investments in foreign
securities, such regulations could restrict the 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 the 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
the Fund's cash available for distribution to shareholders. It is currently
anticipated that the Fund will not be eligible to elect to "pass through" such
taxes to its shareholders for purposes of enabling them to claim foreign tax
credits or other U.S. income tax benefits with respect to such taxes.
If the Fund invests in stock of a so-called passive foreign investment
company ("PFIC"), it 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.
The Fund may be able to make an election, in lieu of being taxable in the
manner described above, to include annually in income its pro rata share of the
ordinary earnings and net capital gain (whether or not distributed) of the PFIC.
In order to make this election, the Fund would be required to obtain annual
information from the PFICs in which it invests, which in many cases may be
difficult to obtain. Alternatively, if eligible, the Fund may be able to elect
to mark to market its PFIC stock, resulting in the stock being treated as sold
at fair market value on the last business day of each taxable year. Any
resulting gain would be reported as ordinary income, and any resulting loss
would not be recognized. The Fund may make either of these elections with
respect to its investments (if any) in PFICs.
Investments of the Fund in securities issued at a discount or providing for
deferred interest payments or payments of interest in kind (which investment are
subject to special tax rules under the Code) will affect the amount, timing and
character of distributions to shareholders. For example, if the Fund were to
acquire securities issued at a discount, the Fund would 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.
<PAGE>
Distributions
For Federal income tax purposes, distributions by the 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 or long-term capital gains) may qualify in part
for the 70% dividends received deduction for purposes of determining their
regular taxable income. (However, the 70% dividends received deduction is not
allowable in determining a corporate shareholder's alternative minimum taxable
income.) The amount qualifying for the dividends received deduction generally
will be limited to the aggregate dividends received by the Fund from domestic
corporations and to an amount so designated by the Fund. 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 the Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, distributions by the Fund from net
capital gains will be taxable whether received in cash or reinvested in shares
and regardless of how long a shareholder has held his or its Fund shares. Such
distributions are not eligible for the dividends received deduction. 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 the Fund in excess of its current and accumulated earnings
and profits will reduce a shareholder's basis in Fund shares (and, 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 the 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 distributions would be taxable to the shareholders in the
taxable year in which they were 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
<PAGE>
shareholder who does not certify to the Trust that such shareholder is not
subject to back-up withholding due to notification by the Internal Revenue
Service that such shareholder has under-reported interest or dividend income.
When establishing an account, an investor must certify under penalties of
perjury that such investor's taxpayer identification number is correct and that
such investor is not subject to or is exempt from back-up withholding.
Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities will be subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under an applicable treaty. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the United States consequences to them
of investing in the Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, the 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 non-corporate shareholders will be taxed at a
maximum Federal rate of 20% (long-term rate) for shares held more than 18
months; 28% (mid-term rate) for shares held for more than 12 months but for 18
months or less; and 39.6% (short-term 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 shares upon the reinvestment of distributions) within a
period of 61 days, beginning 30 days before and ending 30 days after the sale of
the shares. In such a case, the basis of the shares acquired will be increased
to reflect the disallowed loss. A loss recognized upon the sale, redemption or
other taxable disposition of shares held for 6 months or less will be treated as
a long-term capital loss to the extent of any long-term capital gain
distributions received with respect to such shares. A shareholder's exchange of
shares between Funds will be treated for tax purposes as a redemption of the
Fund shares surrendered in the exchange, and may result in the shareholder's
recognizing a taxable gain or loss.
* * *
The foregoing relates to Federal income taxation. Distributions, as well
as any gains from a sale, redemption or other taxable disposition of Fund
shares, also may be subject to state and local taxes.
Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.
<PAGE>
DESCRIPTION OF THE TRUST
Trust Organization
The Trust was organized in April 1996 as a Delaware business trust. It is
the successor by mergers to The Royce Fund, a Massachusetts business trust (the
"Predecessor"), and Pennsylvania Mutual Fund, a Delaware business trust. The
mergers were effected on June 28, 1996, under an Agreement and Plan of Merger
pursuant to which the Predecessor and Pennsylvania Mutual Fund merged into the
Trust, with each Fund of the Predecessor and Pennsylvania Mutual Fund becoming
an identical counterpart series of the Trust, Royce and RE&A continuing as the
Funds' investment advisers under their pre-merger Investment Advisory Agreements
and RFS continuing as the Trust's distributor. A copy of the Trust's
Certificate of Trust is on file with the Secretary of State of Delaware, and a
copy of the Trust Instrument, its principal governing document, is available for
inspection by shareholders as the Trust's offices in New York.
The Trust has an unlimited authorized number of shares of beneficial
interest, which may be divided into an unlimited number of series and/or classes
without shareholder approval. (Each Fund presently has only one class of
shares.) These shares are entitled to one vote per share (with proportional
voting for fractional shares). Shares vote by individual series except as
otherwise required by the 1940 Act or when the Trustees determine that the
matter affects shareholders of more than one series.
Each of the Trustees currently in office were elected by the Trust's
predecessor's shareholders. There will normally be no meeting of shareholders
for the election of Trustees until less than a majority of such Trustees remain
in office, at which time the Trustees will call a shareholders' meeting for the
election of Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the outstanding shares
of the Trust and filed with the Trust's custodian or by a vote of the holders of
a majority of the outstanding shares of the Trust at a meeting duly called for
this purpose upon the written request of holders of at least 10% of the Trust's
outstanding shares. Upon the written request of 10 or more shareholders of the
Trust, who have been shareholders for at least 6 months and who hold shares
constituting at least 1% of the Trust's outstanding shares, stating that such
shareholders wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting to consider
the removal of a Trustee, the Trust is required (at the expense of the
requesting shareholders) to provide a list of shareholders or to distribute
appropriate materials. Except as provided above, the Trustees may continue to
hold office and appointing their successors.
Shares are freely transferable, are entitled to distributions as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive net
assets of their series. Shareholders have no preemptive rights. The Trust's
fiscal year ends on December 31.
Shareholder Liability
Generally, shareholders will not be personally liable for the obligations
of their Fund or of the Trust under Delaware law. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust is entitled to the
same limited liability extended to shareholders 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
<PAGE>
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 Fund's performance may be quoted in various ways. All performance
information supplied for the Fund is historical and is not intended to indicate
future returns. The Fund's share price and total returns fluctuate in response
to market conditions and other factors, and the value of the Fund's shares when
redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of the 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 the Fund's performance
is not constant over time, but changes from year to year, and that average
annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
In addition to average annual total returns, the Fund's unaveraged or
cumulative total return, 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 the Fund's total returns for the periods
indicated. Such total returns reflect all income earned by the Fund, any
appreciation or depreciation of its assets and all expenses incurred by the Fund
for the stated periods. The table compares the Fund's total returns to the
records of the Russell 2000 Index (Russell 2000) and the Standard & Poor's 500
Composite Stock Price Index (S&P 500) over the same periods. The comparison to
the Russell 2000 shows how the Fund's total returns compared to the record of a
broad index of small capitalization stocks. The S&P 500 comparison is provided
to show
<PAGE>
how the Fund's total returns compared to the record of a broad average of common
stock prices. The Fund has the ability to invest in securities not included in
the indices, and its investment portfolio 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 Fund, their returns do not include
the effect of paying brokerage commissions and other costs and expenses of
investing in a mutual fund.
Period Ended
December 31, Russell S&P
1997 2000 500
1 Year Total Return 23.5% 22.4% 33.4%
Average Annual Total Return 16.9% 20.5 % 27.5%
since 8-1-94
(commencement of operations)
A hypothetical $10,000 initial investment in the Fund on August 1, 1994
(commencement of operations) through December 31, 1996 would have grown to
$13,798, assuming all distributions were reinvested.
The Fund's performance 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 and
ranks the performance of registered investment companies. 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 Growth & Income Fund Index is an equally-weighted 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 S&P 500 Composite Stock Price Index is an unmanaged list 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 Russell 2000, prepared by the Frank Russell Company, tracks the return
of the common stocks of the 2,000 smallest out of the 3,000 largest publicly
traded U.S.-domiciled companies by market capitalization. The Russell 2000
tracks the return based on price appreciation or depreciation and includes
dividends.
RE&A may, from time to time, compare the performance of common stocks,
especially small and medium capitalization stocks, to the performance of other
forms of investment over periods of time.
From time to time, in reports and promotional literature, the Fund's
performance 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
<PAGE>
JOURNAL. In addition, financial or business publications and periodicals, as
they relate to fund management, investment philosophy and investment techniques,
may be quoted.
The Fund's performance may also be compared to those of other compilations
or indices.
Advertising for the Fund 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 Fund 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.
<PAGE>
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS PROVIDED IN ITEM 22
This Schedule illustrates the growth of a $1,000 initial investment in The
REvest Growth & Income Fund of the Trust by applying the "Annual Total Return"
and the "Average Annual Total Return" percentages set forth in Item 22 of this
Registration Statement to the following total return formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 investment made at the beginning of the 1, 5 or 10
year or other periods at the end of the 1, 5 or 10 year or
other periods.
The REvest Growth & Income Fund
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .2350)(1) = $1,235.00 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on August 1, 1994 through December
31, 1997:
$1,000 (1+ 16.89)(3.4167) = $1,704.20 ERV
<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 and 43 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.
(11) Consent of Coopers & Lybrand L.L.P. relating to The Royce Fund.
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 February 11, 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 21,156
Royce Premier Fund 13,501
Royce Micro-Cap Fund 7,306
Royce Low-Priced Stock Fund 931
Royce Total Return Fund 4,581
Royce Financial Services Fund 71
The REvest Growth and Income Fund 416
Royce GiftShares Fund 523
PMF II 1,012
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant provides as follows:
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons contracting with or
having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such
contract or claim; and neither the Trustees nor any other Trust's
officers, employees or agents, whether past, present or future, shall
be personally liable therefor. Every written instrument or obligation
on behalf of the Trust or any Series shall contain a statement to the
foregoing effect, but the absence of such statement shall not operate
to make any Trustee or officers of the trust liable thereunder. None
of the Trustees or officers of the Trust shall be responsible or
liable for any act or omission or for neglect or wrongdoing by him or
any agent, employee, investment adviser or independent contractor of
the Trust, but nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of the Trust against
liability to the Trust or to Shareholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his or her office.
<PAGE>
INDEMNIFICATION
Section 2.
(a) Subject to the exceptions and limitations contained in
Section 2(b) below:
(i) Every person who is, or has been, a Trustee or
officer of the Trust (including persons who serve at the Trust's
request as directors, officers or trustees of another entity in which
the Trust has any interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") shall be indemnified
by the appropriate Fund to the fullest extent not prohibited by law
against liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof; and
(ii) The words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal, administrative, investigatory or other, including appeals), actual or
threatened, while in office or thereafter, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) Who shall, in respect of the matter or
matters involved, have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to
the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence in the performance
of his duties or reckless disregard of the obligations and
duties involved in the conduct of his office or (B) not to
have acted in the belief that his action was in the best
interest of the Trust; or
(ii) In the event of a settlement, unless there has
been a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office,
(A) By the court or other body approving the
settlement;
(B) By a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the matter,
based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or
(C) By written opinion of independent legal
counsel, based upon a review of readily available facts (as opposed to
a full trial-type inquiry).
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights to
which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Trust personnel, other
than Trustees and officers, and other persons may be entitled by
contract or otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the type
described in subsection (a) of this Section 2 may be paid by the applicable Fund
from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be paid
over by him to the applicable Fund if and when it is ultimately determined that
he is not entitled to indemnification under this Section 2; provided, however,
that either (i) such Covered Person shall have
<PAGE>
provided appropriate security for such undertaking, (ii) the Trust is insured
against losses arising out of any such advance payments or (iii) either a
majority of the Trustees who are neither Interested Persons of the Trust nor
parties to the matter, or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
trial-type inquiry or full investigation), that there is reason to believe that
such Covered Person will be found entitled to indemnification under this Section
2."
(b)(1) Paragraph 8 of the Investment Advisory Agreements by
and between the Registrant and Royce & Associates, Inc. (formerly named
Quest Advisory Corp.) provides as follows:
"8. Protection of the Adviser. The Adviser shall not be liable
to the Fund or to any portfolio series thereof for any action taken or omitted
to be taken by the Adviser in connection with the performance of any of its
duties or obligations under this Agreement or otherwise as an investment adviser
of the Fund or such series, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the Adviser and hold it harmless
from and against all damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement) incurred
by the Adviser in or by reason of any pending, threatened or completed action,
suit, investigation or other proceeding (including an action or suit by or in
the right of the Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or allegedly taken or
omitted to be taken by the Adviser in connection with the performance of any of
its duties or obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to entitle the
Adviser to indemnification in respect of, any liability to the Fund or to any
portfolio series thereof or its security holders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its duties and obligations under this Agreement.
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and fair
means, including (a) a final decision on the merits by a court or other body
before whom the action, suit or other proceeding was brought that the Adviser
was not liable by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority of a
quorum of the Trustees of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Investment Company Act of 1940)
nor parties to the action, suit or other proceeding or (ii) an independent legal
counsel in a written opinion."
(b)(2) Paragraph 8 of the Investment Advisory Agreement by and
between the Registrant and Royce, Ebright & Associates, Inc. provides as
follows:
"8. Protection of the Adviser. The Adviser shall not be
liable to the Fund or to any portfolio series thereof for any action
taken or omitted to be taken by the Adviser in connection with the
performance of any of its duties or obligations under this Agreement
or otherwise as an investment adviser of the Fund or such series, and
the Fund or each portfolio series thereof involved, as the case may
be, shall indemnify the Adviser and hold it harmless from and against
all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by
the Adviser in or by reason of any pending, threatened or completed
action, suit, investigation or other proceeding (including an action
or suit by or in the right of the Fund or any portfolio series thereof
or its security holders) arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be taken by the
Adviser in connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment adviser
of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall
protect or be deemed to protect the Adviser against or entitle or be
deemed to entitle the Adviser to indemnification in respect of, any
liability to the Fund or to any portfolio series thereof or its
security holders to which the Adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of
its duties and obligations under this Agreement.
<PAGE>
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and
fair means, including (a) a final decision on the merits by a court or
other body before whom the action, suit or other proceeding was
brought that the Adviser was not liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
duties or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority
of a quorum of the Trustees of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of the Investment
Company Act of 1940) nor parties to the action, suit or other
proceeding or (ii) an independent legal counsel in a written opinion."
(c) Paragraph 9 of the Distribution Agreement made October 31,
1985 by and between the Registrant and Royce Fund Services, Inc. (formerly
named Quest Distributors, Inc.) provides as follows:
"9. Protection of the Distributor. The Distributor shall
not be liable to the Fund or to any series thereof for any action
taken or omitted to be taken by the Distributor in connection with the
performance of any of its duties or obligations under this Agreement
or otherwise as an underwriter of the Shares, and the Fund or each
portfolio series thereof involved, as the case may be, shall indemnify
the Distributor and hold it harmless from and against all damages,
liabilities, costs and expenses (including reasonable attorneys' fees
and amounts reasonably paid in settlement) incurred by the Distributor
in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or
in the right of the Fund or any series thereof or its security
holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Distributor in
connection with the performance of any of its duties or obligations
under this Agreement or otherwise as an underwriter of the Shares.
Notwithstanding the preceding sentences of this Paragraph 9 to the
contrary, nothing contained herein shall protect or be deemed to
protect the Distributor against, or entitle or be deemed to entitle
the Distributor to indemnification in respect of, any liability to the
Fund or to any portfolio series thereof or its security holders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its duties and
obligations under this Agreement.
Determinations of whether and to the extent to which the
Distributor is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or other
proceeding was brought that the Distributor was not liable by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the
Distributor was not liable by reason of such misconduct by (a) the
vote of a majority of a quorum of the Trustees of the Fund who are
neither "interested persons" of the Fund (as defined in Section
2(a)(19) of the 1940 Act) nor parties to the action, suit or other
proceeding or (b) an independent legal counsel in a written opinion."
Item 28. Business and Other Connections of Investment Advisers
Reference is made to the filings on Schedule D to the
Applications on Form ADV, as amended, of Royce & Associates, Inc. and
Royce, Ebright & Associates, Inc. for Registration as Investment Advisers
under the Investment Advisers Act of 1940.
Item 29. Principal Underwriters
Inapplicable. The Registrant does not have any principal
underwriters.
<PAGE>
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 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York on the 26th day of February, 1998.
The Registrant represents that this Post-Effective Amendment is filed
solely for one or more of the purposes set forth in paragraph (b)(1) of Rule 485
under the Securities Act of 1933 and that no material event requiring disclosure
in the prospectus, other than on listed in paragraph (b)(1) of such Rule or one
for which the commission approved a filing under paragraph (b)(1)(ix) of the
Rule, has occurred since the latest of the following three dates: (i) the
effective date of the Registrant's Registration Statement; (ii) the effective
date of the Registrant's most recent Post-Effective Amendment to its
Registration Statement which included a prospectus; or (iii) the filing date of
a post-effective amendment filed under paragraph (a) of Rule 485 which has not
become effective.
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post-Effective Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Charles M. Royce President, Treasurer and 2/26/98
Charles M. Royce Trustee
(Principal Executive,
Accounting
and Financial Officer)
/s/ Hubert L. Cafritz Trustee 2/24/98
Hubert L. Cafritz
/s/ Richard M. Galkin Trustee 2/26/98
Richard M. Galkin
/s/ Richard M. Galkin Trustee 2/26/98
Stephen L. Isaacs
/s/ William L. Koke Trustee 2/26/98
William L. Koke
/s/ David L. Meister Trustee 2/26/98
David L. Meister
NOTICE
A copy of the Declaration of Trust of The Royce Fund is on file with the
Secretary of State of Delaware, and notice is hereby given that this instrument
is executed on behalf of the Registrant by an officer of the Registrant as an
officer and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Registrant
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of The Royce Fund and
Shareholders of The REvest Growth and Income Fund:
We consent to the reference to our Firm in Post-Effective Amendment No. 44 to
the Registration Statement of The REvest Growth & Income Fund a series of The
Royce Fund on Form N-1A (File No. 2-80348) under the Securities Act of 1933 and
Post-Effective Amendment No. 46 (File No. 811-3599) under the Investment Company
Act of 1940. We further consent to the reference to our Firm under the heading
"Independent Accountants" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P
Boston, Massachusetts
February 25, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000709364
<NAME> THE ROYCE FUND
<SERIES>
<NUMBER> 9
<NAME> REVEST GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 29517229
<INVESTMENTS-AT-VALUE> 39206820
<RECEIVABLES> 101853
<ASSETS-OTHER> 21033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39329706
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 444166
<TOTAL-LIABILITIES> 444166
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29173877
<SHARES-COMMON-STOCK> 2992
<SHARES-COMMON-PRIOR> 3448
<ACCUMULATED-NII-CURRENT> 5877
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13203
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9689591
<NET-ASSETS> 38885540
<DIVIDEND-INCOME> 747181
<INTEREST-INCOME> 541654
<OTHER-INCOME> 0
<EXPENSES-NET> 568420
<NET-INVESTMENT-INCOME> 720415
<REALIZED-GAINS-CURRENT> 7205644
<APPREC-INCREASE-CURRENT> 2357022
<NET-CHANGE-FROM-OPS> 10283081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 647033
<DISTRIBUTIONS-OF-GAINS> 4933401
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18205535
<NUMBER-OF-SHARES-REDEEMED> 31286540
<SHARES-REINVESTED> 5165051
<NET-CHANGE-IN-ASSETS> (3213307)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 11703
<OVERDIST-NET-GAINS-PRIOR> 14842
<GROSS-ADVISORY-FEES> 447437
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 568420
<AVERAGE-NET-ASSETS> 44980143
<PER-SHARE-NAV-BEGIN> 12.21
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 2.64
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> 1.87
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.00
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
